As a Realtor, I hear some of the same questions over and over…. How’s the market? How’s business? Keeping busy? The housing market dictates so many other industries, so people are always wanting to hear from a professional. Here’s one I’ve been hearing for the past six months or so… So, do you think we’re in a bubble?
…so I thought I would give you my professional opinion.
The real estate market is strong… Our year to date amount of sales has been outperforming itself every year since 2011. Business is good… Our annual appreciation based on monthly price per square foot is at a 5-7% increase year over year for the past 3 years.
I don’t believe 2017 is like the 2005 bubble, and here’s why:
- The first wave of foreclosures we had was due to false demand (no intent to occupy). We had investors needing a place to park their money, and they bought up homes by the dozen, without the population to live in them… (the second wave in 2009 was due to job losses).
- We had a large number of buyers using 100% financing – no equity from the start. Today, the market is dominated by down payments, so even if it’s a small down payment, buyers have equity in their property.
- 2005 was dominated by Interest-Only financing (no equity being built). Today, we have Principal & Interest payments (building equity).
- 2005 we had adjustable rate mortgages (payments adjust with the rate) and today we are primarily fixed rates (payments don’t adjust)
- In 2005, we had a smaller amount of cash transactions. Even if buyers had the cash, they were opting to finance so they could use their cash for other things. Today we are seeing more cash transactions, and not always from investors.
- Back in 2005, appraisers were pressured by commissioned parties for valuation. Today appraisers answer to underwriters on valuations, and are separated from commissioned parties.
- In 2005 the market was dominated by unstable buyers – no credit, no problem. We joked that if you could fog up a mirror, you could get a loan! Today we have buyers improving their credit and demonstrating to be more stable buyers.
- In 2005 we had the false demand I mentioned earlier. Today the majority of buyers have the intent to occupy with a renter or owner.
- In 2005 we saw double escrows frequently (buying and selling the same property on the same day). For example, a buyer A would buy a home for $200k and while buyer A was in escrow to purchase the home, he would sell it to buyer B for $235k, and BOTH transactions would close on the same day… netting buyer A some extra cash in his pocket! Today double escrows are highly scrutinized and require full disclosure of all parties, if allowed at all! I’ve had transactions where the seller requires a deed restriction on the property so that the buyer isn’t allowed to sell the property for 90 days, and for no more than 120% of the sales price. For example, if I buy a house for $100k, I can’t sell it for more than $120k in the first 90 days.
The last reason I don’t think we are in a bubble, is because in 2005, the job growth was focused on cyclical industries. Industries that go up and down, such as real estate, construction and tourism industries. When the economy is slow, the first industry to suffer is tourism. Today, job growth has been focused on health, financial and technical industries, which are more diversified and less cyclical.
This valuable insight comes from The Cromford Report, the brainchild of Michael Orr, the Director of the Center for Real Estate at ASU, and is a reliable resource that I follow for my most current view of the market. I don’t just make this stuff up! If you are waiting for the media to tell you how the real estate market is headed, you will be behind 6 months.
Based on Michael Orr’s statistics, considering the last 30 days, our supply is a bit low, the demand is just about perfect, continuing to give a total market leaning towards a sellers market.
Inventory has increased in the $150-200k price range in the past 30 days which is actually a good thing for first time home buyers, because this is a good entry-level price-point. Absorption Rate is about 2.6 months, which again leans to a sellers market. This means that if no new listings were to come on the market, at the current rate, inventory would run out in 2.6 months. 80% of all listings are successfully closing escrow and in our area, about 33% of buyers are getting assistance with their closing costs!
There are always trends that we need to consider, and now is no different. Some trends and issues that could affect our future growth are:
- Huge increases in retirees as a percentage of our population
- Downsizing is a growing trend
- People are moving away from rural areas towards urban areas
- Construction labor costs are increasing
- Land costs are as high as they were in 2006
- FHA mortgage insurance costs are falling
- Natural population growth is stalling, which could be a serious long term risk
- For many people, pets are the new children, further declining our population growth.
If you want to know more about your local market, or know of a referral who can benefit from our services, we hope you’ll think of Ravenswood Realty!