Why we are NOT headed towards another housing bubble

Double-digit price appreciation has taken place for over 3 years now, so prices are up. Way up. In fact, in just the last year we have seen prices rise 14% year-over-year. When talking with people about our real estate market, the conversation often involves the question, “are we headed toward a bubble?” I get asked this question often, and I can understand why. With the Great Recession not too far back in our rear-view mirror, the fear that surrounds the bottom dropping out in our home values is real. The large price gains might seem familiar to the gains of the previous up market of 2004-2007, but the environment is much different, and that is why we are not headed toward a housing collapse.

Lending Requirements & Down Payments
Previous lending practices allowed people to get into homes with high debt-to-income ratios, low credit scores, risky loan programs, and undocumented incomes. They called this sub-prime lending. This led to the housing bubble bursting 10 years ago – because people received mortgages they were not equipped to handle. Borrowers were not properly qualified for their monthly payments, and with minimal down payments they had no skin in the game. There were also a ton of adjustable rate mortgages and interest-only loans, which created negative equity positions. In July 2007, the sub-prime loan products disappeared and literally became history overnight. This eliminated a large part of the buyer pool creating over supply, not to mention the foreclosures that followed due to these ill-equipped homeowners walking away. The combination of these two factors caused prices to plummet.

Conversely, in March of this year, the average credit score for an approved conventional loan according to Ellie Mae was 752. Banks are scrutinizing their borrowers much more thoroughly than in the past. Credit scores are only the start; solid documentation of employment, assets, and debt are all passed through strict underwriting standards before closing. During the days of sub-prime lending, banks were funding loans with scores as low as 560! This, coupled with many zero-down loan programs and the risky terms mentioned above, left many new homeowners with little to no equity. When you have little or no equity it is very easy to bail.

In addition to heartier credit scores, down payments have increased significantly. According to Attom Data Solutions the average down payment is 18%. To put this in perspective, the median price in Seattle Metro in the first quarter of 2018 was $775,000. 18% of that is $139,500! There is a marked difference in the connection to one’s investment with such a large amount on the line versus the common 0% down loans of the sub-prime era. When people have high equity levels they are not likely to abandon their home or miss payments.

Our Thriving Local Economy, Job Creation & Californians
According to Matthew Gardner, Windermere’s Chief Economist, it is forecasted that there will be 46,000 more jobs in the Seattle Metro area in 2018. This has created high numbers of residual migration into our area from other states. In 2016 there were 50,000 people that moved here, and 47,000 in 2017. Many of these new Washingtonians are former Californians, specifically from the Bay Area. Unbelievably, our prices are attractive to this group, as they can take a similar tech job here and make the same income with a lower cost of living. If untethered and up for a move, it’s a no-brainer.

The most influential factor that has led the run on prices has been low inventory levels coupled with high housing demand. It’s simply the concept of supply and demand. The growth of companies like Amazon, Google, and Facebook in our area has created increased demand, especially for homes closer to job centers resulting in shorter commutes. When you have increased demand and not enough homes to absorb the buyers, prices go up. Over the last three years we have easily seen a 10%+ increase in prices year-over-year. That is above the norm, and will slow down once inventory increases. That slowdown will be welcomed and it will not be a collapse in values or a bubble bursting.

Interest Rates
Interest rates are increasing, and it is predicted they will reach close to 4.95% by the end of the year. This will naturally curtail price growth because it will not be as cheap to borrow money, which will cause buyers to temper their pricing ceilings. Bear in mind, that an interest rate of 4.95% is still historically low, we’ve just been incredibly fortunate to be able to secure long term loans with minimal debt service. The average interest rate over the last 30 years is 7%.

I understand that the recent increase in home prices has been big and that it might remind you of the previous up market before the crash. I hope that digging into the topics above has shed some light on how it is different. I always welcome the opportunity to have a conversation about these hot topics and discern how they relate to you. As always, it is my goal to help keep my clients informed and empower strong decisions. Please let me know if I can answer any questions or help you or anyone you know with their real estate needs.