By almost every indicator, the residential real estate market continues to thrive as we head towards the hot spring selling and buying season. However, that doesn’t mean there aren’t threats on the horizon that investors, buyers, and sellers alike should be keeping an eye on. The very recent stock market correction is a reminder that no market sustains rapid growth indefinitely. Eventually, there has to be a correction or a plateau period for stability.
It’s impossible to foresee everything that might cause a slowdown in the real estate market. We’ve seen $100 a barrel oil suck enough cash out of people’s pockets to cause economic slowdowns as well as market uncertainty when military conflict unexpectedly breaks out in another part of the globe. Certainly we know the global economy is unconditionally intertwined. Or it could be a more mundane reason such as buyers shying away from a market they perceive as overheated or the average buyer simply no longer having the financial capability to close the deal. Or lenders may pullback out of fear that the market is over heated. And we are yet to see the consequences of the tax law changes that reduce the value of the mortgage interest and property tax deductions. The possible reasons for a real estate market correction are almost endless.
But not all is doom and gloom. There are almost as many positive indicators that the real estate market will continue expanding at least near term. The overall economy is strong with very little unemployment and wages on the upswing. The housing shortage is still real. Foreign buyers continue investing and there is plenty of rising optimism and confidence.
Although the future will always bring change, history is a good teacher. Homeownership has almost always been a great way to store and build wealth. That has certainly been true for the six or seven years since housing prices hit bottom after the foreclosure crisis. Today, on average, prices are up more than 30 percent nationwide and much more in some places. Keeping in mind that much of this was recovery of lost equity, new territory is now being charted as prices in much of the country have now risen above what they were at the height of the previous housing bubble.
There is plenty of motivation to own a home for those that can still afford to buy in. There is no such thing as an “average Joe” but the typical homeowner has a mortgage for half the value of his or her house with the other half of the value being owner equity. Homeownership entitles the owner to 100 percent of the appreciated value regardless of equity owned. The 30 percent increase in value over the past six or seven years means the average owner (50 percent equity) has earned a 60 percent return on investment. Those with less equity enjoy an even greater ROI. This far exceeds average stock market gains.
That’s great news for those already owning a home but first time buyers, investors, and those in the market to buy up should keep history in mind. The most obvious lesson from the foreclosure crisis too big a mortgage is toxic to an owner without an income during an economic down turn. The cautious homeowner will maintain an affordable mortgage while steadily building equity.
The possibility of the economy overheating is real given the four percent unemployment rate. Even in this age of automation, low unemployment limits how fast the economy can grow. Although inflation has not yet been an issue, we are about to find out if it will materialize and how fast the Federal Reserve will raise rates to avoid over stimulating the economy. It should go without saying that high rates will dampen the real estate market. The question is how much?
Although improving slowly, creditworthy borrowers continue having trouble qualifying for a mortgage. Freddie and Fannie are making efforts to make more low down payment loans. The tight rental market has driven rents well above making it financially sensible to buy rather than rent. Demand continues to far outstrip new construction. The current number of homeowners remains below its peak from more than a decade ago. Low-income ownership is lower than it has been in more than a generation. Any one of these alone can drive more buyers into the market and continue applying upward pressure on prices. But even that isn’t the whole picture of what might be pushing prices closer to bursting the bubble.
The millennial and baby boomers are the two largest generations we’ve ever had (millennials now outnumber baby boomers). And both have growing housing needs. Millennials have come of age as first-time buyers and move up homeownership. Baby boomers are retiring in never seen before numbers, creating record demand for planned and over 55 communities. All of this is creating a demand the market is ill prepared for.
The common definition of the Great Recession is that it officially lasted from December 2007 to June 2009. It began with the bursting of an $8 trillion housing bubble. However, if you’re concerned a new housing bubble is on the horizon, you want to compare today with the pre-recession conditions. In 2005, experts began talking about housing values reaching extreme valuations. However, consumer psychology and behavior remained excessive and in denial that values couldn’t rapidly rise indefinitely. Today isn’t much different than 2005. Homebuyers going into the spring market don’t want to hear or listen to the possibility that prices just might be pushing on the edge of the bubble.
Certainly, you have thoughts on the possibility of a real estate bubble. Please leave a comment.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.