Dear Buyers-
There is growing concern about another housing bubble. What will the future hold? Is now a good time to buy or should you wait? Since I’ve been getting so many bubble emails lately, I wanted to offer some perspective and give you some things to think about. I hope this helps.
Timing the market perfectly: The truth is markets go up and down, and everyone wants to sell at the top and buy at the bottom, but so few actually pull that off. In fact, most of the time when I ask people if they bought on purpose in 2012 at the bottom they say, “Nope, I just got lucky.” This reminds us timing the market isn’t as easy as it sounds.
Riding down the market: If the market did crash, which neighborhood do you want to ride down the market in? This is a very relevant question that I heard last year from Mike Gobbi. Remember, the equity in our homes means very little unless we are taking money out or selling.
No bubble formula & real estate cycles: There is no formula for how a real estate bubble has to pop. For example, the median price in Sacramento County in 2005 was $392K and we’re about 10% lower than that right now. In short, it doesn’t mean the market will “pop” if we get back up to $392K. The same thing holds true for national metrics like the Case-Shiller index. Others say there is a 7-year cycle in real estate, but let’s remember the market does not have to behave a certain way every seven years. Granted, there is something to be said about a cycle, and it does feel like we are toward the higher end of a cycle, but it’s still a guess to say how much the market might change in the future.
Spotting bubbles: It seems easy to predict a real estate bubble, but it’s actually not. Freddie Mac has a thoughtful article called “The ‘B’ Word” that might be worth a read. I know, you might be thinking, “It’s so obvious we’re in another housing bubble because of how high prices are.” I get that, and it’s not that I deny prices are inflated because I think they are. But when people talk so definitively about the future of the market, I like to ask two questions: 1) When exactly is the bubble going to pop?; and 2) What is going to cause the pop?; In my mind it’s not enough to simply say the market is going to change in the future because that’s a very soft non-specific prediction. Of course it’s going to change.
False prophets: There are countless examples online of people saying the market was going to start declining in 2013, 2014, 2015, 2016, 2017, and now 2018 or 2019. It’s as if the prediction keeps getting pushed back when the market doesn’t pop. That alone ought to give us pause and evoke humility in our ability to predict the future. The irony though is if a person keeps making the same prediction every year, at some point that person could be right.
It does feel inflated: One of the reasons why many people feel concerned about the market is because we’ve seen expansive price growth that reminds us of the way the market felt from 2003 to 2007 in many parts of the country. Thankfully we haven’t seen growth like Bitcoin that’s up 1000%+ over the past year, but home prices are still much higher than they used to be. My big concern about the past five years is price growth is due in large part to investor activity, less new construction for a decade, and historically low interest rates – as opposed to the local job market and economy (for Sacramento at least). In short, there is less room to see prices rise without more wage and economic / job growth.Different than 2005: Let’s remember the climate of today’s market is different from what it was in 2005 when unqualified buyers were given loans with adjustable rate mortgages. If you’ve tried to get a loan recently, you know it’s a different ballgame because lenders scrutinize your income and assets.
The power of lenders: Part of looking to the future is wondering how creative lenders will get with financing. If values did begin to soften at some point, lenders could easily compensate for that by offering more creative products to help buyers artificially afford higher prices (and therefore keep prices high). Sounds healthy, right? What lenders do is going to make all the difference.
So should you buy right now? Honestly, that’s a personal issue and it would be presumptuous for me to answer for you. But I do have a few questions. Are you comfortable with the mortgage payment? If the market did correct in the future, would you still be okay with the payment? Does it make sense for your lifestyle to move? What do you think of all of the issues above?
Flipper & Appraiser Conversation: Last week I was on the Six Figure Flipper podcast. Here’s an hour-long conversation about flipping homes, choosing comps, and all sorts of things.
Questions: Anything to add to the conversation? What if anything concerns you about this current market? I’d love to hear your take.
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Great article Ryan. Well stated. Will be interesting to watch what happens the next couple of years. Unless something crazy happens, can’t see us falling down the hole this time because of the much stronger loan underwriting since the last downturn.
Thank you Joe. I appreciate it. There is so much obsession and fear about a bubble. Let’s take a step back, think through the issues, and watch what the market does.
I keep watching for Ryan to make a prediction and it never happens, but eventually it will 😀 Joking aside, I like the neutral narrative you take on the future. The future is difficult to predict, but I can say that big swings are not as common. A safe prediction is to say next year will be a lot like this year, but maybe slight changes in blank due to blank.
Thanks Gary. Yeah, you probably won’t catch me making many predictions. That’s on purpose. I like to stick to the current market and be in tune with what is making value move. I definitely keep an eye on the future though and watch trends that are going to take years to play out, but I’m realistic about my crystal ball being broken. Though at the same time I’m never afraid to say things like it looks like we’re poised for a normal spring next year in 2018. That’s a safe prediction so to speak because it’s rooted in the way the market is currently moving. I’ve heard some locals say the market has shifted and maybe started to decline, but I don’t see that. It seems like all the signs and stats are showing we’re having a normal slower fall, which will be a foundation for a normal spring market.
Someone the other day asked me in a piece I wrote elsewhere to give a value prediction for 10 years out for a particular city. There is an area of the county that has tens of thousands of units scheduled to be built, and it will dramatically change the population of the city. Anyway, this person wanted me to explain what the market was going to be like in the brand new area and how these tens of thousands of homes would impact the existing area of town too. I gave him a few ideas and thoughts based on this scenario playing out in other areas, but I also told him I’d give him more details and the full truth in 10 years. 🙂 The reality is when a market doesn’t yet exist, we only have ideas for what value might be like in the future. We don’t yet have all the details or even know yet how the public were perceive a planned area.
Anyway, that was my long-winded comment back. Thanks as always for your thoughts. 🙂
Good article Ryan, better than the fanny pack piece. haha JK.
Your points are valid and I for one thought this market would have cratered last year. I admit that I was way off, I did not think this market had steam for 2017, and alas, it did, in spades.
I am very very disappointed in this tax bill though. This move to 5 of 8 from 2 of 5 for primary tax exemption is terrible IMO. That is a decent segment of the marketplace including myself who have utilized that not as ‘flippers’ but for flexibility to live in different areas or pursue different business opportunities etc.
I had heard (just verbally from someone) that there were some loopholes to capture that gain tax free with the Senate plan if the move was for a job or for medical reasons etc., do you know if there is any truth to that?
I really hope that the 5 of 8 is not adopted and if it is there are exceptions that allow a person to move sooner than the 5 yr. tax free. I think it will further restrict inventory and make for a very unhealthy market with even more constraints in terms of fluidity.
Thanks for article and maybe it’s time I adopt your more ‘neutral’ market stance in terms of predictions. I was right and made a lot of $ in 04/05 spotting the trend, but this one I called way too early and maybe was wrong altogether. Only time will tell. Cheers Danielson, -Mr. Miyagi
Mr. Miyagi. It is great to hear from you. If we ever meet in person, now I know you’re probably not going to be sporting a fanny pack. Have no fear though my friend because I’ve matured things up a bit more in this post. No mention of fanny packs. 🙂
I do not know anything yet about the tax bill for certain. It seems like information is not very clear yet and there are all these ideas about what it could or could not contain and how that might or might not impact the market. I will say though what strikes me as incredibly ironic from a housing standpoint is we have a sincere housing shortage in many locations throughout the country, and changing rules for capital gains can potentially keep people in their homes for longer rather than see these homes hit the market for sale. I find it disheartening to see a law come to fruition that would seemingly go against addressing a huge need in America right now – more inventory.
Let’s keep watching the market carefully. We have some really interesting trends to watch in coming time. I’ll have a new monthly market update out next week too, so I look forward to sharing the latest stats and graphs soon.
Sayonara, Miyagi Sensei.
I agree that extending the primary residence exemption is terrible for the marketplace. I am firmly against that and hope that it does not materialize.
A good friend of mine (who will remain unnamed) is a top agent in Nor Cal and saying that the market has just shifted.
It will be very interesting to see what is in store for next spring and summer. I have been really off on this cycle thus far, I thought we would be in tatters by now. Thanks Ryan.
I somehow deleted the sentence after stating that my friend ‘said the market has just shifted.’ My sentence after that was, “Anecdotal, but interesting, however I have not seen what he has and believe that low inventory will continue to drive prices, and even more if this tax bill slows down transaction volumes.”
I’ve gone for one year ago thinking this market was headed for a big crash to now thinking it has legs and will keep running.
Arigatoo Sensei. I was going to ask you what your friend was basing that on. I would love to hear. The thing is that markets first change and we see it in what buyers are sellers are saying / doing before it really shows up in the sales stats. That’s why the word on the street from agents, appraisers, loan officers, title officers, etc… is so important. As of this time it looks normal to me in terms of the stats. Whether we are looking at sales volume, price changes, days on market…. The stats are all doing exactly what we’d expect them to do at this time of year. Inventory actually is higher than last year at the same time, but it’s still really low. If you end up hearing the reasoning, I’m open ears.
I do think one thing to watch is the psyche of sellers. If sellers sense the top is near, that could lead to more people putting their homes on the market. This is definitely a factor to watch.
On that note, if any onlookers have a take, speak on. Nobody has a corner on the absolute truth of market trends, so all thoughts are welcome.
My usual question to homebuyers who are on the fence about buying a home is:
“Over the next 5 years, would you rather pay $90,000 down on your mortgage? Or someone else’s?”
A year ago I bought my home for $260k, and there will still plenty running around like chicken little claiming the sky was falling and the bubble is about to burst…
My next door neighbor (who just so happens to be a near perfect comp) is about to sell his home for $320k… and my home looks twice as nice on the inside 🙂
Even a stopped clock is right twice a day, and these bubble warners just keep moving back the time frame when they realize they were wrong.
Thanks Wes. I always appreciate your take. I was actually thinking about you a couple days ago because I saw that one pending next door you’re talking about. 🙂
Ryan, I would like to know (so would you!) if there is going to be another 15% bump in home prices in 2018. When we know it 2018 is going to be another big year for equity growth? Or if the tax law (or some black swan) will curb the large rate of growth?
Hi Gilqq. Thanks so much for the comment. Please pitch in your thoughts any time. Now that you have an approved comment too you can comment on any post without moderation.
In the Sacramento market value increases were more aggressive at the lower end this past year. So the lower end saw upward increases at 10% easily and maybe even 10-15%. But other prices ranges were definitely more subdued. For instance, I appraised something in the 95841 zip code this week and it looks like over the past two years in this pocket of housing that the market has increased by about 7% each year. I know I’m getting technical, but I wanted to clarify that the market as a whole did not increase by 15% in value last year. When all the stats come in and are crunched in January I wouldn’t be surprised to see price metrics up again anywhere from 8-10% for the year. That’s about what it has been up all year long, so that’s why I wouldn’t bat an eye over metrics as such. Of course we have to remember the median price changing by 8-10% doesn’t necessarily mean value changed that much.
Anyway, there is still upward pressure on the market for the time being and there is no quick solution on the horizon for more inventory. Thus it’s plausible to see value increases again this next year. I think there is room to see increases too, though it’s getting crowded for growth also without much change in wages and the economy. However, what will happen with the new tax laws, Trump, North Korea, interest rates, Bay Area buyers, etc…? There are always so many factors to consider, and any of these layers of the market could end up impacting the direction of value or speed of the market. Thus we are right to be humble and cautious when it comes to predicting. There is definitely still price pressure on the entry-level market in most neighborhoods though because of the lack of inventory, so unless something happens to cause more inventory to come on the market, it wouldn’t be surprising to see value upticks again. How much though? Well, that’s a guess. The market has been finding a rhythm over the past few years, so on one hand it wouldn’t be surprising to see what we saw last year because that’s become our new normal so to speak. Though that’s still a guess…
Another great article. I love bubbles, but only when they are in Champagne or car washes. I am hopeful you can predict when I will receive both!
Thank you. Too good Barb. I predict when that bathroom remodel you mentioned on Facebook is finished you will have a couple different kinds of bubbles. 🙂
Great article, Ryan. I have always found the Sacramento area interesting due to the investor activity and how it affects your market. I think it will be key how the banks will act. I know that banks have been a little stingy with the money they loan to builders so it has been difficult for them to increase the housing supply. That, coupled with a dwindling supply of existing homes, has caused the price increases. As in the past, the Birmingham area does not typically see huge spikes in appreciation like in other areas so our market is not as volatile. It would be so much easier if our crystal balls did work and we could predict the market better. Keep up the great work!
Thanks Tom. It’s always good to hear your perspective. I know on paper that markets exist where there is not huge appreciation, but it’s such a foreign thing to me because we like big in California – even in real estate. If values increased last year in some neighborhoods by 5%, I call that modest or fairly normal. But that “modest” amount over the course of 5-7 years can really add up.
Nice info Ryan. You’re always providing useful information. Thanks!
Thanks so much Austin. I really appreciate you. Sorry for the slight delay in response here as I was away from my desk. Happy New Year!!
Thanks for the info. Always appreciate your perspective.
I’ve read Porter Stanberry’s prediction that lenders are doing the same/similar with car loans as they did with home mortgages (loaning to those who can’t afford the payment and bundling then selling the loans by misrepresenting their quality).
Because of this, we’re going to have a jubliee and massive debt restructuring.
What are your thoughts? Is he a nut or should I apply for every credit card I can get?
Thanks Vicki. I really appreciate you. I think this is something to continue to watch, but I don’t really have a take since I’m not a car or credit card specialist. I wish I had some deep insight, but I don’t. 🙂 Bundling didn’t work out so well last time around with housing though. It seems like such a bad idea. Though I suppose if the loans are actually good, it could be a way to make money. If they’re junk though….
Thanks Ryan. I haven’t read much about the guy, but the prediction sounds pretty crazy.
Vicki, that was the question I wanted to ask
I guess you have to go with your gut when you’re trying to figure out what’s fake. And do a lot of research!
So true. We live in a world starving for attention. Everyone wants clicks, so there is so much hype out there. We have to sift through information and weigh it. Some of it matters and some of it doesn’t.
So if you don’t buy, you have to pay rent or live with your parents or in-laws. It’s a no brainer for primary residence with mortgage in the 4’s for 30 year mortgage. That is if you have the income that comes with home ownership. Livelong and prosper!