by Penny Sheppard
You probably have heard people say things like “I don’t want to buy now, the prices will drop and I will lose money”, “This crazy market is going to change soon” and any other statement about how this market is false like the housing market was before the recession. Actually, this market is completely different from the housing bubble burst in 2006/2007.
In the years leading up to the last recession, there were very different lending regulations in the mortgage industry. Consumers got “no income documentation loans”, adjustable rate mortgages with dangerous interest rate increases and appraisals were being written to match the contract price. Prices were artificially inflated and buyers with lower credit scores (risky) were approved to purchase homes. “Days on market” for homes were 30 + days. Agents did not worry about discussing price reductions with their sellers until at least 3 weeks into the active sale. There was plenty of inventory for buyers to choose from.
It was a train wreck waiting to happen.
The reality of those no income documentation loans and low credit score buyers started showing itself when homeowners could not afford their mortgage payments. They started to fall behind in large numbers. When homeowners aren’t making their payments, the pool of money for new loans starts to disappear. Lenders started foreclosing with little to no notice and home inventory poured on to the market in record numbers. “Days on market” became a year or more and there was no money for qualified buyers to get a loan. The avalanche of the recession started and there was no stopping it.
In July 2010, the Dodd-Frank Act was signed into law. New lending requirements were initiated, no income documentation loans were eliminated and the foreclosure process was slowed down. In 2012, the big 5 lenders were hit with a $25 billion penalty for unlawful foreclosure actions and the assistance and recovery period began. Prices have been going up consistently since 2013. Some years they climb dramatically, some years they stay neutral and there are periods where they slightly fall.
During the recession, the homeowners that were able to keep their homes could not necessarily sell them (they were “upside down” in their home value to loan balance ratio). By 2017, home values in many areas had started to climb back to pre-recession values.
What is different about today?
*6 months of inventory is considered a balanced housing market. We have 1 month of inventory.
*Buyers need higher credit scores to borrow money for a mortgage.
*Buyers must show adequate, reliable income and their maximum “debt to income” ratio must be lower.
*The appraisal industry has new, strict regulations to ensure neutrality in appraisals.
*Interest rates are historically low, making home affordability higher.
Until 2020, the market was “recovered” and booming. With low interest rates, monthly mortgage payments became more affordable for lots of people.
Once the pandemic hit, the expectation was that the housing market would grind to a halt, but the opposite happened. Unemployment rates jumped, but they were mostly in the leisure and service sectors. This sector of the economy pays the lowest salaries; they are most likely tenants, not homeowners. The lenders and government now have the experience to help struggling homeowners who were falling behind on payments. There are extensive work out avenues for homeowners past due on their mortgages and unlike 2007, foreclosure rates have not jumped up.
Alternatively, the pandemic forced people to adapt. People discovered they can work from home, school can be done virtually and that they want more space for entertaining their family at home. So, bigger homes with outdoor space became desirable. However, people are afraid to sell, worried about the risk of exposure to COVID and many need to sell before they can purchase their next home. In addition, buyers are moving out of cities in droves and our feeder markets remain strong. Low inventory + low interest rates = higher home prices. 2021 has been the year of buyers forgoing all their protections in a contract in order to ensure they win in a multiple offer situation. They are waiving the appraisal contingency and paying the difference between the contract price and the appraisal in cash. As these homes close, they reset the market price for the homes around them.
Are we seeing a “cool down” – that answer is YES. Is it dramatic – no.
Homes are starting to list at elevated prices and are now supported by the comparable closed sales. Our inventory is 84% below a balanced market. Today, 26 new listings appeared on the market. 58 went under contract or sold. It may take years for this market to balance out. Homes are projected to continue to appreciate over the next 5 years.
None of this means don’t try. It means don’t wait. All we need to do is adapt. We must make decisions differently than we ever have before; we need to look at options from every angle and we have to be creative when writing offers. We can do it.
If you have had thoughts of selling, now is the time. Prices are projected to go up, but we don’t have a crystal ball. What we do know is if you keep your affordability comfortable and you can financially weather a negative housing storm, your home is likely to go up an average of 4% per year over a 10 year window.
Jump in, the water is fine.