All Things Real Estate: Will there ever be a bubble?

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If you have noticed, there have been sporadic reports of a bubble in real estate and then other reports that there is no bubble in real estate. How would one determine the future of real estate? Did you read the real estate column in the Sunday, May 16, Newsday? It talked about bidding wars, lack of adequate inventory, and the intense and passionate fervor of purchasers who are all in on competing for their next place to call home.

Prices have increased by over 16 percent year over year throughout the U.S. Looking at my crystal ball and pinpointing and coming up with an exact answer over the next 10 years would be way too difficult. However, over the next few years, I see things will continue as we are currently experiencing them, but hopefully increases will not be as much. However, there are three variables in determining the market and housing values. First it’s inventory, and if it was a normal six to seven months. then sales would still be good or could potentially be even higher than today due to the excessive demand sucking up all the availability.

But if inventory were to be even higher for 10 to 11 months like in 2008, (when interest rates were much higher), that could make demand as well as prices substantially lower; as in Las Vegas and California where prices fell 30 percent or more. The Case-Shiller report in 2008 saw prices drop as low as in 2004 and were down for 27 months in a row. December 2008 saw a decrease of 18 percent year over year. Here is the link to the article: https://money.cnn.com/2008/12/30/real_estate/October_Case_Shiller/index.htm

One other important factor today is the Dodd-Frank law that made banks scrutinize their loan requirements and eliminate “no-doc” subprime/low down payment loans to those who would be most affected by downturns and subjected to “underwater” mortgages. So today’s financing requirements are much more strict and the environment is the complete opposite of what it was in 2008. If you had a pulse and were breathing back then, banks would provide you financing. Today you have to qualify with an adequate debt/income ratio and no doc loans of the past have morphed into stated-income, verified-asset loans. However, monthly self-employment business income can also be used to qualify for a mortgage.

Fortunately, we are very far away from those higher inventory numbers and interest rates are so much lower now than then. Rates back then were as follows:
2006 6.41%
2007 6.34%
2008 6.03%
2009 5.04%

Depending on the sale price the cost of financing is far less than 13 years ago. Also, there are purchasers who have greater equity in their current homes to be able to move up and their salaries and/or businesses have a higher income than back in 2008. Read the statistics by RealtyTrac: https://www.realtytrac.com/news/why-the-2021-real-estate-recession-will-be-different-from-2008/

Foreclosures will be considerably less even after forbearance ends due to the majority of properties having positive equity that has built up over the last 10 years. In three out of the last five recessions real estate had positive increases (see article).

It would be much easier to sell today and leave with cash in your pocket compared to 2008 when millions of mortgages were underwater with zero or negative equity and families just walked away from their homes. The scenario for a bubble currently does not exist and I don’t see this happening for many years. So the supply-and-demand economics comes into play, meaning further increases in prices will continue. I am not quite sure how builders can increase the required inventory to satisfy demand today into the future, as land values have also increased as well as lumber and the component costs to be able to build homes. We are experiencing a perfect storm for both sellers and qualified purchasers.

Over the last 10 years, more and more millennials and others have been entering a market with decreasing inventory and then all of a sudden the Covid-19 pandemic hit us, making many leave cities to purchase single-family homes in less dense locations. Maybe looking back this will have been the most historic time in real estate selling, purchasing and investing. I would call this a win/win environment where everyone who is selling will be making money and those who are buying will do so with still bargain interest rates. I see the tipping point when prices go beyond the reach of a greater number of buyers (and possibly higher interest rates), creating a cooling-off period.

Unless there is some catastrophic event, I don’t see prices going down any time soon. I do not see interest rates approaching what they were back in 2008. Otherwise, if that were to occur, then the third variable, demand, would be adversely affected as well as the cost of U.S. domestic and international debt, which would truly be unsustainable! That would change the mindset of the market (some due to financial costs and some due to psychological reasons) and a great many purchasers would pull back and either stay where they are or more would consider renting, which would be beneficial to landlords and investors.

Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck. He has 39 years of experience in the Real Estate industry and has earned designations as a Graduate of the Realtor Institute (G.R.I.) and also as a Certified International Property Specialist (C.I.P.S). For a “FREE” 15 minute consultation, a value analysis of your home, or to answer any of your questions or concerns he can be reached by cell: (516) 647-4289 or by email: Phil@TurnKeyRealEstate.Com Just email or snail mail (regular mail) with your ideas or suggestions on future columns with your name, email and cell number and he will call or email you back.

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