In many of the hottest real estate markets around the country the housing market is now in its fifth year of growth. Although there are still pockets of recovery here and there, the largest markets from San Francisco to New York have pretty much gone back to their 2006 or 2007 highs, or beyond. As with all long-term growth markets, homebuyers get wary. They begin to question when the market will drop and when they’ll be able to get a “deal.”
The quick answer could be “never,” but that’s a bit unrealistic and harsh. The real answer is that the deal they want, from that period of Home Buyer Fantasy Land from 2008-2010, is never, ever, going to come back. Your buyer, frustrated by a lack of inventory, is hoping to see a little light at the end of the tunnel. You just need to be able to explain why the light won’t be quite as bright as they’d like.
Lending isn’t an issue
The primary reason for the original housing crisis that created so many opportunities was the ridiculous lending practices of the time. I recall a story told by the checking clerk at my local grocery store who proudly proclaimed she had bought three houses on a salary ill-suited to buy one. It’s a sure bet the banks won’t be making that mistake again. So, the false demand created by loose lending is no longer possible.
It was that same loose lending that inspired excessive construction. The loose lending created a significant demand that builders stepped in to fill. When foreclosures started cropping up in 2006 and 2007, there were more homes than people could buy. The result was price drops that we’ll very likely never see again.
Housing starts matter
In December 2005, at the height of the construction boom, seasonally adjusted housing starts were at 1.93 million units. The same figure for December 2014 was 1.08 million. Within lies the difference between how much housing is available then versus now. Construction is only meeting demand, not exceeding it, or meeting some fictional demand a year in the future.
That eliminates the potential for a sudden flood of inventory that would create a market correction. With that in mind, buyers should consider that wherever they look, the available inventory is going to be relatively predictable. Just look at how much new construction there is in an area, and add in the usual 3-4 percent inventory turn for any given neighborhood.
Eternal cheap money
The Fed has been trying to raise interest rates for a long time. The premise is that by making the cost to borrow money more expensive, fewer buyers can afford to buy, which slows demand. That shifts the market over to sellers who might, for various reasons, have to sell, which creates more supply. In that model, prices tend to drop.
Although homebuyers don’t want interest rates to rise because it impacts affordability, even if interest rates rise 1-2 points money is still cheap. We’ve grown spoiled by 30-year loans at 4 percent when for a long time we were happy to get 6 percent. Could rising interest rates ease buying and raise inventory? Sure, but not to the same extreme as happened in the crash. You’ll see a few buyers fall out of the market but not the tens of thousands it would take for a crash.
My advice to homebuyers is to invest in their home, not focus on speculation. They can either buy and hold for a decade or more, which almost always works in their favor, or make improvements that build equity. Either way, counting on another crash isn’t going to happen. Barring a disaster, there are no economic factors in place now to set the stage for a repeat of 2008.
Bryan Robertson is the co-founder and managing broker of Catarra Real Estate.
