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The Real Estate Market: Now vs. 2008

It's Called a Shift, Not a Downturn

The market is in a bubble on the verge of bursting!

This is going to be 2008 all over again!

Sensational much? Despite the headlines, we're seeing a market correction, not a crash or downturn. Over the last couple of years, buyers have enjoyed mortgage rates hovering around the 2% mark, and sellers have reaped the rewards of low inventory—fast sales and multiple offers, often well over the asking price and without typical necessities like an inspection and appraisal.

The problem is that this environment was never sustainable. Everyone just got used to the market conditions—so much so that they became expected to last. 

While inflation and the economy and global unrest (etc. etc.) have driven up interest rates faster and higher than industry experts predicted, what's happening in the 2022 real estate market is a return to normalcy. Rates are putting the brakes on a blistering pace that had to slow down at some point even though it never seemed like it would. And even though one of the key factors in real estate—inventory—is nowhere near normal levels. 

While there are multiple factors that are in play right now and no way to 100% predict the future, there doesn't seem to be a substantial reason to believe today's news hype about the housing market being in a bubble on the verge of bursting.

The 2008 Housing Bubble vs. Today

According to Investopedia:

"A housing bubble, or real estate bubble, is a run-up in housing prices fueled by demand, speculation, and exuberant spending to the point of collapse. Housing bubbles usually start with an increase in demand, in the face of limited supply, which takes a relatively extended period to replenish and increase. Speculators pour money into the market, further driving up demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices—and the bubble bursts."

Sure, there are a lot of similarities between what's happening now and the housing bubble leading to the burst/crash/meltdown of 2008. However, “demand decreases or stagnates at the same time supply increases” is not happening right now. Nor are other indicators that led to the previous housing market crisis. Here are five factors that differentiate now versus then:

  1. In just the last year, owners and new buyers have banked double-digit equity gains. That’s a lot of padding even if home values dip in the near future or down the road. Just looking at the Denver metro data for June 2022, average prices for detached single-family homes were up 11.5% year-over-year, and prices for attached properties (condos, townhomes) increased 15.7%. All this despite the rising interest rates and some buyers (demand) being priced out. 

  2. According to Freddie Mac data, the average annual interest rate back in 1981 skyrocketed to 16.63%. And in 2018, the average rate for the year was 4.54% which is about where 2022 stands right now. Meanwhile, the unprecedented low rates of mid-2020 and 2021 were part of the fed's effort to stimulate the economy during the pandemic. Not only did it provide more buying power, but millions of existing homeowners were able to refinance into mortgages with much lower rates.

  3. Prices are potentially still rising because current inventory levels are just over one month, and we need around six to achieve a balanced market. While Denver has hovered under one month's worth of inventory for quite a while, there's currently around 1.3 months of inventory despite a rush of sellers trying to get on the market before rates go higher. Not a marked improvement. And with so many homeowners comfortably refinanced at lower interest rates, many won't have reason to sell anytime soon.  

  4. After the housing market crashed in 2008, the number of new homes being built dropped and has since continued to lag. Now, with new builds facing labor shortages, rising lumber and materials costs, plus supply chain issues (causing shortages on doors, windows, fixtures, etc.) delaying completion, Moody's Analytics projects the U.S. shortfall for new construction is about 1.5 million homes. And while lumber prices are down 48% compared to one year ago, rising interest rates and less buyer demand are making it even less affordable for developers to ramp up building enough homes to close the gap on the shortfall. 

  5. Finally, buyers right now are scrutinized like never before and less likely to default or go into foreclosure. In 2008, just 25% of buyers had credit scores of 720 or higher. Currently, that figure is 75%. Plus, buyers have far less debt compared to disposable income these days, making them more capable of weathering any economic downturn. In addition, predatory lending has been curtailed with just 2% of the market using high-risk, adjustable-rate mortgages (ARM) compared to 21% in 2006—a practice that left financially maxed-out buyers exposed to fluctuating interest rates.

So, yes, we saw an increase in demand and low inventory drive up prices. And yes, now high interest/mortgage rates are pricing out buyers and creating a decrease in demand. However, there's plenty of pent-up demand, buyers who are still on the hunt.

And because they will typically no longer need to bid thousands over the asking price, skip inspections and pay for repairs out of pocket, or possibly cover a gap between their offer price and a home's appraised value, many buyers could actually end up paying not that much more than if rates were low.

Should You Buy a House Right Now?

With rising interest rates, the real estate market is correcting and coming back down to earth, making 2022 a good time to buy a home if it makes sense for your needs and finances. 

Prices and values will continue to change in response to the economy, but historically over the long-term, they always increase. So, if you decide to buy now, you'll start gaining equity now and start building wealth now. If you wait, you'll pay more later. 

Here are a few more reasons why you should consider buying now:

  • You've found the right house and can afford it comfortably—that includes having several months of money saved in an emergency fund in case of an unexpected financial hit such as the loss of a job.
  • While some buyers have unfortunately been priced out due to rising interest rates, those still looking for a home will likely face less competition, have more homes to choose from, and even see price improvements on homes that don't get snapped up right away.
  • Fewer buyers give you more time to find the right house. While traditional hour-long home showings were reduced to 15-minute jog-throughs last year and even in 2020, they're far less common now. You'll have more time to think before making an offer on the right house and the right long-term investment.
  • Sellers are more willing to cut a deal which could offset higher rates. There's less need to cover appraisal gaps, pay for inspection repairs out of pocket, or simply bid huge amounts over the asking price. 
  • Equity is in the double digits now, and even if that dips to the single digits, that's completely normal. Historically, equity is gained in a slow and steady fashion. National appreciation values average around 3.5-3.8% annually. 
  • Buying a home is a 30-year investment, so you'll want to focus on the potential long-term gains. The national average home price in 1992 was $119,500. Today, it's $428,700 or if you were to sell, a $309,200 return on investment. 
  • You can always refinance to a lower rate down the road even when a global pandemic doesn't bring the rates down to rock-bottom lows. Take a look at our charts comparing different payments at different rates.

Take a Deep Breath and Carry On

Whether you're looking to buy or sell a home in 2022, it's absolutely possible to achieve your goals. The key is having the right real estate agent by your side. At PorchLight, our experienced agents are not phased by fluctuations like this. They've seen it and guided their clients through it before. As client advocates, neighborhood experts, and market analysts, they'll ensure you achieve an optimal outcome.

So, take what the news says with a grain of salt and don't let it deter you from making a big move. We're here to help!

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