"When Will the Bubble Burst?"
This is the question that I have been getting from almost everyone who finds out I am in Real Estate. There is a strong sense of doom and gloom that we are going to relive the real estate downfall of 2008. So let me take some time to address this question.
In 2008 we had the financial crisis which saw the home values crash. So many people lost their homes or found themselves underwater. The recent movie the Big Short did a good job trying to explain all the many contributors to the crisis. One of the main reasons that stands out is the deregulation of banks and private lending institutions. This caused an increase in lending to people who would normally not qualify for a loan. This flooded the market with new buyers and saw housing prices skyrocket. The market became unbalanced and falsely inflated because of this. In a stable market home ownership is around 60% in the years leading up to the crash home ownership was around 70%. This was another indicator that things were out of balance. This huge correction took many investors and home buyers by surprise and many are very leery of getting trapped in the same situation in today’s market.
Here are some of the reasons why I do not believe we are in a “housing bubble” situation.
To start many regulations have been put in place that has greatly restricted lending practices. It is more difficult for many buyers to get qualified for loans now than it has ever been before. This means that we do not have the same situation, many buyers find it difficult to get approved for a loan and if they are approved the qualifying amount is far more conservative than in past years. The buyers on the market today have gone through rigorous financial checks by the lending institutions. This was not the case before the financial crisis, where a verbal confirmation was enough to get you qualified for a loan.
Another reason why we are not in the same situations is the fact that home prices are on the rise due to a thriving economy here in Denver Metro area and in many other cities around the country. Denver is one of the fastest growing cities in the country. People are drawn here by the amazing weather, outdoor activities, and job opportunities. The state continues to attract companies from around the country who appreciate the relatively low cost of living compared to areas like San Francisco, L.A., and New York. They are also attracted to Colorado by the highly educated workforce that is already in place. The influx of people moving to the Denver Metro area has contributed to a huge number of new buyers hitting the market. The problem is there have not been enough homes on the market or being built to even scratch the surface of the demand created by all these buyers.
This gets me to my third reason why we are not in a bubble situation here in the Denver Metro area, the basic idea of supply and demand. We have had such a large supply of buyers come on the market in the past few years due to population growth, the millennials age group finally getting ready to buy their first homes and the pressure of ever increasing rent prices. The problem is that there are not near enough homes for sale to meet this growing demand. Usually, home builders would have caught up by now and oversupplied the market with new homes, leveling things out, but builders were hit hard by the crash. Many builders went out of business and those in the workforce had to pursue other career options. This is why it has taken so long for many new projects to get up and running. Builders have also been more cautious this time around and have not been bringing as many residential homes on the market. The condo defect laws in Colorado have caused many builders to focus on luxury apartment buildings instead of condos or townhomes. This has all left buyers without many options and thus homes that do come on the market get multiple offers over asking price. Home prices have increased in some areas of the Denver Metro at around 11% a year for the past four years.
Another leading factor for the market we currently find ourselves in, have been the record low-interest rates. The past couple of years we have seen rates in the 2.5% to 4.35% range. This has allowed many buyers to stay in the market, as low-interest rates mean lower monthly payments. This allows many buyers to stretch into the higher price ranges.
All in all, we have had a perfect market storm creating continue home price increases, but not a bubble. There is not a glut of bad mortgages on the market or buyers who do not have the income to qualify for their home payments. So if this is not a bubble then what does the future hold? Will home prices just keep increasing without check? What is the breaking point?
What I see happening in the next couple years is a leveling off. As interest rates rise closer to 5% or 6% many buyers will either be pushed out of the market or will have to settle for lower priced homes. In the higher price ranges we may see some decrease in prices, but nothing major. For the most part, I predict that home prices will level off. This also may encourage more homeowners to place their homes on the market and ease some of the demand. It is hard to completely predict the future, but there is no need to panic or think we will have another crash. That is just not the case, it does mean it is time to plan for your future and your needs. When approaching buying it really comes down to what your personal goals are. Trying to time a market works out for very few people, but buying or selling a home because it makes sense for your current needs is the best way to approach the investment of real estate. People will always need a place to live and land is one of the few things that we are not making more of, well unless you have enough money to build yourself an island in Dubai.
As always I am happy to sit down with you and discuss any questions regarding real estate.