I hear a lot of sentiment from buyers and agents that the current housing market is the same as 2007.
In essence, are we on the verge of another financial crash?
Is 2018 just 2007 all over again? Are we looking at a new real estate bubble?
Well, I can’t tell you if we are going to have another housing correction, but I can tell you that if we do, it will not be because of the same market dynamics as 2007.
As a matter of fact, many believe now is a very good time to purchase residential real estate because of today’s economic environment.
The mortgage market and collateralization of homes is simply different today then it was back then.
I’d invite you to check out a few resources to find out more – Mike Nelson at Efficient Lending and The Motley Fool
A Real Estate Bubble?
A bubble is simply a sudden escalation in the price of an asset class, such as housing, due to increased demand or speculation.
Per The Motley Fool…“In real estate, bubbles take place in the housing market, commercial property, or, simply, land, and all have been a popular target for speculators over U.S. history since there’s a constant need for real estate and housing, banks are generally†willing to lend money for real estate and housing purchases, and its high value can allow for large profits.”
Though housing prices are on the rise today and are outpacing wage growth and inflation, it’s nothing like the housing bubble of the 2000’s as the economy is continuing to expand and stocks are growing at an even faster pace.
In reality, the last six years have not seen the kind of explosive rise in home prices that impacted cities like Las Vegas and Miami a decade ago.
In Las Vegas, for example, home prices jumped 130% from 2000 to 2006, surging a whopping 46% in 2004 alone. Meanwhile, in Miami, home prices skyrocketed 165% from 2000 to 2006, but especially heated up the last two years of that time frame rising 62%.
Even in the hottest real estate markets today like San Francisco and Seattle, prices have not accelerated like this. That’s a sign that the market is not falling victim to the type of euphoria and speculation that causes asset prices to skyrocket.
Mortgage Rates and Their Impact
There may be no more impact factor in influencing home prices than interest rates, as low interest rates encourage homebuying as the majority of homebuyers use a mortgage to a buy a new home. The lower the mortgage rate, the less the actual cost of their monthly payment would be, effectively making the home cheaper to buy for them.
According to most analysts, mortgage rates will likely cool off the housing market and slow the increase in housing prices down.
During the housing bubble of a decade ago, mortgage rates were lower than average, hovering around 6%, but still above today’s lows. In other words, low mortgage rates can encourage a bubble-like atmosphere, but it is just one of many factors that come into play.
Some experts believe that rising mortgage rates have encouraged home buying, as homebuyers w
ant to lock in low rates while they still can. If that proves to be the case, higher mortgage rates will eventually cool off the housing market.
Therefore, real estate prices are more likely to go up when rates are low or falling, while rising rates are likely to tighten the market or cool off home purchasing, assuming all other things remain equal.
To Buy or Not To Buy
It’s almost impossible to say when the real estate market will peak, and homebuyers and investors are best off monitoring the local economic climate in their areas.
Some speculation is a normal part of the real estate market, but the rampant home-flipping we saw during the housing bubble of the 2000’s was a clear sign of something not right as was the expansion in subprime lending.
Home prices will pull back at some point just as the economy will eventually slow.
However, many of the factors that led to the last bubble such as lax lending standards, excess supply, and rampant home flipping, seem to be mostly absent from today’s real estate market.
Sources: Mike Nelson at Efficient Lending and The Motley Fool
