As people look at the current market conditions for real estate, a lot of them are asking if it’s still a good time to buy a home? Prices of homes continue to rise, inventory is low and inflation is rising.
Those that are old enough to remember the housing bubble of 2008 are wondering if what’s happening now is similar to what happened then. A flood of new buyers were coming into the market in the 00s, which resulted in quickly rising prices, followed by a crash, or quick drop in prices and little to no activity in the buying and selling of real estate afterward.
Even though some people are pointing to the ’08 housing bubble and resulting crash while saying that we are headed there again, I disagree. I believe there are different conditions at play this time around.
Lending Practices Have Changed
First off, during the last housing boom, overly-lenient lending practices and an abundance of adjustable rate mortgages caught people in a financial vise as the interest rates rose and, consequently, their mortgage payments increased significantly. This created a situation where many homeowners could no longer afford their mortgage payments and were forced to give their homes back to the banks. (For a more complete explanation of the ’08 situation, check out this video:
Buyer Qualification Has Improved
The housing bubble of ’08 was partially caused by adjustable rate mortgages that required interest-only payments during the first 3 to 10 years of a mortgage, along with an oversupply of new housing, and a lack of proper screening of loan applicants–creating a perfect storm of conditions for a housing bubble. As a result of too many unqualified borrowers purchasing homes, legislation was introduced to protect consumers of home mortgages. In 2010, The Dodd-Frank Act was passed which, among other things, requires lenders to ensure that homeowners can repay their loans. This legislation is another factor in preventing a housing bubble today.
My Story of ’08
During the crash of ’08, I was the property manager of multiple multi-family projects (i.e. apartment buildings) and I witnessed a constant flow of renters breaking their leases and moving out. They said they were buying houses. I was gobsmacked that so many of them were qualifying for mortgages as many of them struggled to make their rent payments. I actually had tenants tell me, as they handed me their notices, “My realtor told me not to worry about breaking my lease. By the time this catches up to your credit, you’ll already be in your house”.
Yeah. That was fun.
I highly recommend watching the movie “The Big Short” to get a better understanding of what was going on that time. A great—albeit somewhat sobering—movie.
Back to market conditions today. (Face slap.)
Basically, The Dodd-Frank Act implemented a series of mortgage reforms to protect consumers. These reforms require things, such as requiring lenders to ensure that homeowners can repay their loans, and to disclose the maximum a consumer could pay on a variable rate mortgage. It removed financial incentives used by lenders to pressure borrowers into more costly loans and penalizes lenders that violate federal standards by prohibiting them from foreclosing on non-compliant mortgages, or allowing the borrowers to recover damages as high as 3 years worth of interest payments. It also prohibits pre-payment penalties and allows borrowers with high-cost loans to lower their interest rates.
https://www.findlaw.com/consumer/securities-law/what-is-the-dodd-frank-act.html
We’re Spending More Time At Home
Another vast difference between then and now is, in general, people weren’t spending as much of their time at home in 2008. On the contrary, the Covid shutdowns of 2020 caused many of us to look at where we’re spending all our time—and many of us aren’t happy about what we’re seeing. Since so many people are now working from home, exercising at home and some even schooling their children at home, quite a few renters and homeowners alike have determined that they simply need more space. Many people also now realize that they can probably work at home full-time (or at least part-time), thus eliminating the need for a short commute to their places of work. Distance to work is no longer such a major consideration on where to live. They realize that they can move further out from the city centers, thereby getting more space for their real estate dollars.
Interest Rates Are Much Better
Another difference is that the interest rate in 2008 was much higher—6 to 6-1/2%. In comparison, the interest rate today is only about 3%, making it much easier to afford a home. For now, the interest rates are still favorable. But, unfortunately, the biggest change coming before too long will likely be rising interest rates, which doubtlessly will result in the flattening of home prices—as opposed to crashing the market, like in ’08.
All-cash Investors Are Contributing To Rising Prices
As far as the rising prices of housing today, one factor affecting this is the increase in all-cash investors (individuals and institutions alike) looking for a good place to park their money. Real estate at the lower price points has been an appealing option for many of them, resulting in the elevation of home prices at the entry-level market—making it difficult for first-time home-buyers to enter the arena due to even stiffer competition.
Inventory Levels Are Much Lower Today
Another difference between the ’08 bubble and today’s market is inventory levels. In 2008, the ratio of homes for sale to houses sold was 11:2. Whereas today, that ratio is only 5:6, meaning there aren’t enough houses for sale today to match the demand to buy them.
https://fred.stlouisfed.org/series/MSACSR
This situation of high demand and low inventory creates a true market demand for housing.
Unlike the Beanie Baby craze of the 90s 
where the manufacturer realized the incredible demand
for Beanie Babies and drastically ramped up production, which resulted in making the collectible stuffed animals less valuable due to a now
oversupply of Beanie Babies.
Not the greatest example, I know. But you get the idea!
In a nutshell, Yes! It’s still a good time to buy a house!
So I hope to see you at the fence post. I’ll have a coffee ready for ya.
