Want my opinion on whether we are headed for another housing crash? Well, either way you are about to get it. Today’s post is just that, my opinion. It is my opinion based on my own perceptions, experiences, view points and profession. When you are done reading this I would love to get your opinion. So don’t be shy. Tell me what you really think in the comments below.
I am often asked by potential home buyers whether I think we are in another housing bubble. Whether the market is going to crash again in the near future. No one knows for sure, of course but let’s look at what some people have to say:
MarketWatch posted on May 2016 about the signs of the next housing crisis. Citing such anecdotes as TV commercials on flipping houses, price appreciation reports in the Bronx, NY, and ads about “quick mortgages”.
CNBC posted in March 2016 claiming that we are headed for a crash based on NY apartment prices, expanding time for those apartment units to sell and the world’s tallest building being built which historically has been associated with being at the top of the market.
Television, radio and news agencies do one thing, and they do it very well. They get your attention. They create an emotional response, such as fear or anxiety. They want you coming back to see if what they predicted was true and if it wasn’t, why not. They do this to keep you coming back so they can sell ad space.
I don’t know about you but I think today’s housing market is a bit crazy. Homes go on the market one day, 30 people go to visit, 10 offers are made and the seller gets to choose which offer they will accept. Normally that offer is over the asking price with additional provisions that are slanted toward the benefit of the seller. Hey, why not, right? If you are a seller and you have a pool of buyers who want to buy from you take advantage of your situation. It is certainly a seller’s market right now.
Home prices are going up. Simple supply and demand economics state that when supply is down and demand is up prices will rise. And that is exactly what they are doing.
The average sales price in Denver Metro in May 2015 was $324,250. Compare that to May 2016 and we are now at $356,000. That is a 10% increase in home prices in a year!
Some claim that this appreciation rate is not sustainable. I would agree. But just because an appreciate rate is not sustainable does not mean that we are in a bubble, does it? I don’t think so. Markets go in ebbs and flows, ups and downs, hot and cold. Right now we are hot.
I went back a few years to May 2009 compared to May 2010 just to see how the Denver metro market was doing. In May 2009 we had an average sales price of $199,900 compared to May 2010 which was at $212,000. That was a 6% increase in price.
I don’t know what a good versus a bad market is. I guess bad would be negative like we saw in 2007 and 2008. But is 6% normal? I’m not sure. What I can say is that 10% is more than 6%. Right now we are in a hot market. Hotter than we were in 2009/2010. We will likely not see sustained 10% appreciation in the Denver housing market long term. But I will say that I do not believe that a 10% appreciate rate means that we are in a bubble and that the market is about to crash.
If we go back a few years to the housing crash of in 2008 and look at what I believe contributed to the crash I can identify a few troubling areas:
- No income verification mortgages
- No asset verification mortgages
- Stated income mortgages
- Interest Only mortgages
- 120% loan-to-value mortgages
- Credit scores to 580 or lower
These are the types of options that were available back then. In some cases you could even combine these types of options. You could get a 100% loan-to-value, stated income with a 580 credit score on a two year adjustable rate mortgage (ARM). Now, does that sound like trouble? Yep!
The mortgage industry was feeling good. Their mortgages seemed to be performing despite these very loose guidelines. The market appreciate was doing great so even if someone didn’t pay the mortgage they could quickly turn around and sell the home while likely making a profit. The risk seemed extremely low. I keep using the word “seemed” because was it looked like on the surface was not actually what was happening. There are a few good books and movies out there if you want to know more about the housing and economic collapse in 2008.
Now, let’s look at how the mortgage loan programs have changed from the previous housing crash:
- No income verification mortgages are GONE
- No asset verification mortgages are GONE
- Stated income mortgages are GONE
- Interest Only mortgages are GONE
- Maximum loan-to-value is now at 97% for most conventional mortgages
- Minimum credit scores are normally about 620
Unlike the previous options most of the expanded criteria options (such as low down payment or low credit score loans) can not be combined.
Hopefully by now you are seeing what I am seeing.
We are in a strong housing market with very good appreciation. That appreciation is likely not sustainable but is a temporary up-tick in the housing market.
The mortgage lending environment has changed. It has changed drastically. Between the loan program and guideline changes mentioned along with licensing requirements and an entire government entity created as a result of the housing crash there is more oversight and governing than every before.
The media is working to get your attention. From the questions I am asked it seems to be working. They are just doing their job – selling ads!
My message to you is that I truly believe that our housing market is just fine. We might see a cool down, sure. We might not see double-digit appreciate rates long term. The market may return to a buyers market instead of a sellers market in time. All of this is normal. I do not believe there is a need to panic or worry about the housing market.
And, if after all of that you don’t believe me, maybe you will trust a guy like Warren Buffet.
But what do you think? Comment below…I would love to hear what you think.