Are we in a real estate bubble?
Updated: Jan 25, 2019
This is perhaps the most common question asked to realtors right now. Is there an economic recession coming up that will bring real estate prices down?
This is a very complex issue and I don’t intent to have the answer. However, after surviving two recessions and still being able to make a living in the real estate and mortgage industry let me give you my take on it along with some facts and you decide by yourself.
Starting in 1997/1998 thru 2008 real estate prices rose significantly due mainly to some very loose lending standards. Stated income, stated assets, Zero down payment, NINA.
All you needed to buy a home was to have a decent FICO score and as little as two thousand dollars and you had a home!
Most of these loans were adjustable requiring a very low payment for a couple of years, payments so low that some times did not even cover the interest due on the loan or loans since there were two loans on a property. Once they started to adjust to higher payments many owners were unable to make these higher payments and soon an avalanche of foreclosures brought about a dramatic drop in real estate values sometimes by as much 40%.
Thousands of people lost their jobs and their homes from 2008 through 2012 during this recession known as the great recession.
In 2013 an economic recovery began which combined with historically low interest rates spurred a recovery in real estate prices. Now after 6 years of having a very strong economy home prices not only recovered the lost values but they even went higher than the previous records highs due in part to these low interest rates and a relatively low inventory in the middle of a great demand for homes.
In the current real estate market when a home comes to the market if its priced right it will have multiple offers within the first couple of weeks. Many of these offers will have substantial down payments ranging from 20 to 40% and some will even be cash offers.
In the last couple of months the market has softened a little and we don’t know for sure if this is the typical holiday slow down or if the market has finally plateaued and it beginning to shift.
It’s note worthy that many homeowners who would like to move up to a larger home are staying put due to the higher prices and many of them are choosing to remodel their existing homes and staying put instead.
Consider also the wave or baby boomers that will be retiring in the next few years and who instead of moving will likely modify their homes to age in place.
All of this has exacerbated the already low inventory and seemingly will continue to do so in years to come.
Now let’s go back to economic cycles. Expert economists predict another economic recession within the next couple of years. This time around however the impact on real estate values is uncertain at best given all the factors already mentioned.
That some people will lose their jobs is perhaps inevitable and while some will may lose their homes, the likelihood of a wave a foreclosures similar to 2008 thru 2012 is rather low. Those who bought with low down payments would be the first affected and they would have a lower incentive to keep their homes. Those who came in with higher down payments, which as mentioned, have been many will not let go of their homes easily.
Based on all this the impact the recession will have on the real estate market will probably won’t be as severe as it was during the last recession.
Some analyst predict that 2019 could be the year we see the real estate market peak and that 2020 will be the year we are in a recession.
So what do we make of all this?
What I have learned is that people buy a home when they can. If you can buy a home now do so and it would be a very good idea to have at least 3 months of reserves to cover all your expenses to avoid being in a tight situation. 6 months of reserves would be the ideal savings amount.Also be very conservative with your home purchase and don’t spend on things you don’t need.
If you would like to buy a home but you can’t right now due to some of the reasons we discussed in the previous video work on whatever is keeping you from being able to buy since times ahead might be more favorable for buyers and you want to be ready to buy when this time comes. Many people were unable to take advantage of the low prices or real estate during the great recession because they were not prepared.