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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The market has continued to soften, though it’s not really all that soft. Inventory is up, price reductions have increased, sales volume has been dropping, it took three days longer to sell last month in the region, and price metrics are down about 1% from the height of summer. Overall the market is clearly slowing down for the season, though it’s not painfully dull like it was in 2013 or 2014 during the fall. This is a key to understand because when saying values are “softening” some interpret that to mean the market is really slow or crashing. But that’s not what I’m saying.
Glowing and slowing. That’s a good way to sum up the market. The stats are generally glowing, but we’re starting to see subtle signs of a seasonal slowing. Price stats in Sacramento County increased by about 1% last month and they’re up 8-10% from last year (that doesn’t mean actual values are up that much in every neighborhood and price range). Though if we look closely, especially in the region as a whole, prices dipped by 1% last month, inventory is up slightly, and sales volume sloughed off last month (which isn’t a surprise). Properties have been selling very quickly still in only 9 median days in Sacramento County and 11 in the region. For perspective, on average it was taking about a week longer to sell a home last year. The market actually tends to normally show a slowness in days on market between June and July, but we didn’t see that this year, which is a reminder the market feels a bit more aggressive right now compared to last year. Overall housing inventory increased last month, but the bigger story is it’s down about 14% in the region from last year. Despite all the glorious stats, the market is still price sensitive, which means buyers aren’t willing to pull the trigger at any price (did you hear that sellers?). Oh, and by the way, the median price in Sacramento County is now 10% from the peak in 2005. I could go on and on with words, but let me share some graphs to show the market visually.
