Has dramatically increasing home real estate prices affected your ability or your motivation to purchase a home recently? Are we experiencing another real estate bubble? Good questions. I hear these concerns every day. Rising home prices and continued competitive home purchase market has affected most of my real estate clients. This article will attempt to answer this question so to better prepare you and people you care about for a home purchase in this current real estate market.
Some of us have experienced two real estate bubbles in the last thirty years – once in 1992 and then again in 2008. Many reasons can be given for the 1992 real estate bubble. But one common contributing factor to both the 1992 and the 2008 real estate bubbles are flawed real estate values. Stated income loans were birthed by World Savings and Loan back in 1987. Unfortunately, rampant falsely stated income resulted in a pandemic of unaffordable home mortgages. Every incremental 1% of false income skewed the appraised values by 1%. False incomes created false real estate market values.
Yes, this is ancient history – almost ten years ago. What does the false market place of the great recession have to do with our real estate market today? Homebuyers today must financially qualify for their real estate purchase. Our real estate market today is supported by buyers who can afford the sales prices. Then why are real estate asking prices dramatically increasing annually? Are homebuyer incomes rising at the same pace as home prices? No, wages are not increasing at the same explosive rate of home price increases of the past several years. What is causing today’s rapid home price increases is lack of supply. We have a home supply problem – a housing shortage. Burdensome regulations and a public “I have mine and do not want you to have yours” sentiment have contributed to a housing shortage that shows no signs of abating. Yes, potential home buyers who make enough money to qualify for today’s home prices are few. Unfortunately, the numbers of homes available for sale are even fewer than the number of two income families who can afford these sales prices.
So am I telling you that we will eventually run out of buyers who can afford current rising home prices which will lead to home price decreases? No. The housing shortage is severe. It took decades of regulation and bad real estate market cycles to get to our current housing shortage. It will take decades to build our way out of our current housing shortage. I believe we will see a series of rising prices, plateauing home prices, muddling through the plateaus and then a new rising home price cycle.
Two good reasons why you would want to purchase a home in today’s market: 1) Rent Inflation, and 2) Home Price Inflation. The inflation dragon is not dead – just in a deep sleep. While sleeping, the inflation dragon has been fed a monster $19,000,000,000,000 government debt diet (just in case you were wondering where all those 2008 toxic assets disappeared). Who or what is going to wake the sleeping dragon in our future? When this creature awakes you want to be prepared. If you are renting, your monthly rent will start rising – perhaps at rate of increases substantially larger than the recent tech Bay Area rent increases of the last few years. However, if you buy a house today on a thirty year fixed mortgage your housing expense (rent) will remain fixed while your home value will rise with the awoken inflation dragon. Real estate is an excellent inflation hedge.
Will we continue to experience sharply increasing home real estate prices? Yes and no. All markets are man-made fictions subject to rise and fall. The real estate market is no exception and can fall – but not in our near term future. In our near term future real estate prices will experience a few plateaus and muddles cycles. Today it is the middle of summer 2017 and I feel a slight breeze of change – an approaching, maybe short lived, real estate price plateau. Prices will muddle along for a time until the “continuing to worsen” home shortages will stoke home prices upward to another plateau. Home real estate in California has always taken a higher percentage of our incomes. And for a while, as we muddle at least into the next decade, California home prices will require an even higher percentage of our incomes.