Being in the real estate industry in 2005 made it easy to see the housing crash coming. What drove it home for me was how many times respectable agents would lose business trying to do the right thing. Buyers would jump ship because they didn’t want totally decent homes they could afford within their budget. It would all be going great and the honest broker would lose the sale to an agent who could get those same buyers into a brand new 2,500 square foot model home in a fashionable subdivision that was way beyond their means. Liar loans, wrap-around mortgages and other financing tricks were common and it didn’t take a genius to know that kind of artificial market couldn’t last.
Fast forward a decade and the housing market we’re looking at today looks very similar in some ways but the dynamics that underlie the housing market today are built upon a much firmer foundation. So, while prices continue to push higher, this time it appears to be good old fashioned market forces at work and not an artificial bubble created by unsustainable financing tricks.
Builders Are Taking Their Time
New housing starts are running behind historical normal levels as builders, many of whom were stuck holding the bag during the last housing crash, are cautious about adding inventory until they’re confident buyers are ready to upgrade.
Foreclosure Overhang Easing
The problem with houses is they’ll stand a long time. During the run up to 2007/2008 builders went on a free money building junket that still hangs over the market nearly a decade later. That overhang has finally started to dry up and is likely the key driver behind the sudden surge in prices. Starting in 2012 housing prices increased sharply; in 2013 prices went nuts.
Current Owners Are Not Selling
Before entry level houses come on the market, the people living in them have to be able to move up. Before those sellers can put their houses on the market, there have to be upgraded homes available. That whole train has to move at once and, right now, people are not selling. Perhaps it’s the difficulty of obtaining financing under new, stricter lending standards that’s discouraging the traditional migration or the fact that more people are sending their kids to private schools, making school district boundaries less significant. Whatever the reason, until the logjam breaks, it’s going to be tough to get that cycle rolling again.
Tough Winter Weather
It’s always a surprise how, even in the modern world, that winter has a depressing effect on economic activity. Nowhere is that seasonal impact more apparent than the housing market. People are just not motivated to trudge through the snow to look at new homes and no one wants to think about moving in the dead of winter. This winter was a particularly tough environment for builders and the real estate industry. We’re just getting into prime time for buying a new home and moving and we won’t know how 2015 is really shaping up until fall when today’s numbers start rolling in. Winter may be making the housing market look tougher than it really is right now.
Do be aware that sudden corrections are possible, even in solid markets. We see that all the time in the stock market and the housing market is no different in that regard. Given the current market dynamics one would expect a correction to be routine rather than catastrophic. What magnified the last housing crash was a near total freeze of the credit markets accompanied by waves of mass layoffs. As long as the job market stays healthy and credit continues to flow, we may see seasonal price corrections in real estate, but we won’t see the total market collapse we experienced in 2007.
Yes, prices are higher and there may indeed be a correction in home prices but we’re not looking at a market collapse like we saw the last time. Nationally, the U.S. housing market is on firmer ground and all signs point to better days ahead.