People will often compare today’s housing marketing to 2007. It’s stressful, prices are rising… but this time, values are growing for very real reasons. Our situation is similar, but different in very important ways. In 2007, things were a lot different. There were so many (too many!) loan options, and I would even see people get money ON TOP of purchasing a home… yup. I’m talking 110% loans. So of course, people were buying more than one home. This was a systemic issue that happened across the board, across the U.S. And then suddenly, things changed.
So what’s going on today?
- Supply and demand dictate value in a healthy market. Today, we have demand and a shortage of supply occurring in Seattle, and we can take comfort in that.
- Getting a loan is not easy anymore. Not only are there none of those crazy loan programs anymore, but you have to document everything now. During the last housing catastrophe, our bubble was popped because banks were handing loans to anyone who asked, and that created demand. Once those loans could not be paid, all of our fun ended.
- Interest rates are hovering around 4% which is historically low. This is in part the cause of rapidly increasing home values. Our potential issues arise with the Fed and what interest rates will be doing in the future. Left alone, our home prices would naturally level off once affordability and prices hit equilibrium. However, if the Fed begins to increase interest rates, which they have alluded to, affordability will decrease. It’s how affordability decreases that can cause the bubble to burst or slowly deflate. If the Fed works this right (which in my opinion would be a slow increase as to not shock the market), affordability will meet with pricing sooner and our market will begin to look like a fair and equitable market for both sellers and buyers.
- These days, most buyers are buying with 20% or more down. This is because mortgage insurance has been very expensive as of late (although they have gone down recently), but even still, getting a loan with less than 20% down is difficult (not impossible, but difficult). And of course nobody is getting a loan without documentation.
- Lending practices have completely reversed from 2007. Today, you have to show income, stability, savings, and a credit score sufficient to get the loan. Before, we were letting the banks do whatever they wanted, and then we realized: “Oh right… banks are greedy. They won’t be able to help themselves—they’ll sell as many of these terribles loans they can before they devastate the world economy.” Now, there are practices put in place that limit their ability to lie, cheat and steal. As a result we have lending that is difficult, but not impossible. And now we also have people buying homes who can afford them!
- Our job market in Seattle is HOT. We have low unemployment rate and high incomes. Places like San Francisco and New York only make slightly more than the median Seattleites, and yet their real estate is double or triple what Seattle is. So our home prices are going up because Seattleites can afford it.
- We also had a building moratorium for about 5 years, from approximately 2008 to 2013. We had hardly any new construction for single-family homes and still do not for condos. The result, we have a lot of people looking and not a lot of people selling. Then there’s the issue of move-ups. Sellers aren’t selling—they’re unsure there’s anything else out there for them to buy.
In summary, prices may stop increasing dramatically, but we won’t see values retreating. I see evidence already that the Fed is trying to find ways of easing the market into higher rates. Rates have already increased by a full 1% since May 2014 and our market has not collapsed!
Nationwide instability keeps out interest rates down. Bond purchasers flee from other markets where they feel things are unstable, and they buy American bonds. The Fed can increase the yield, but it’s my prediction that they’ll do it slowly—they’ll ease us into it.
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