Prices in real estate feel like they are sky high. And they keep on rising. This has to end otherwise it’s going to come crashing down like 2008 right? Well actually no. This is nothing like the rise and fall in 2008. I’m going to break this down into 6 simple reasons on why this is not 2008 all over again.
Getting a Loan is Tough!
So reason #1 is going to be the fact that mortgage standards are nothing, like not even close, to like they were back then in the early 2000’s. Anyone could basically qualify for a home mortgage back then. Then amount of home loan default risk the lenders were willing to take on was borderline absurd. If you compare that to today, it’s not even close. It is difficult to get approved for a home loan today. What I mean by difficult is you have to actually qualify for the loan amount you are seeking. The lender will do that background work to make sure you are in fact qualified for the assets you claim. If you say you make $150,000 annually in salary, you better be making $150,0000 annually salary because they are going to check. That didn’t always happen in year leading up to 2008. It always happens in 2021. Lending standards are tough in 2021.
Price Appreciation is Sustainable
Reason #2 is that in 2021, home prices are not soaring out of control. I know what your thinking. Wes, are you crazy? Home prices sky rocketed last year. This is true, I do agree with this. We had a nice little run last year but prices are so far from accelerating out of control. This chart does a fantastic job of illustrating exactly what I am talking about. Clearly we had some serious price appreciation in 2021. But check out what the early 2000 years looked like. Now compare that to the years preceding 2021. See the difference? 02’, 03’, 04, and 05’ was pure madness. If you take the average for these last few years, we fall right around 6.3%. Hardly uncontrolled appreciation. If you take the average for those early 2000’s you get an annual average of about 10.2%. Double digits? See my point? As those prices were skyrocketing year after year, housing inventory was also increasing, not decreasing. Yes, increasing! Basically more supply equaled higher prices. It isn’t supposed to work like that. That leads me right into reason #3.
Massive Shortage in Resale Homes
We don’t have a surplus of homes on the market. We have a shortage. We need about 5 to 6 months’ worth of homes on market to reach a balanced market. Just about every major market throughout the entire country right now is dealing with a massive shortage of homes for buyers to buy, somewhere in 1 – 2 month range. That is what they call a severe sellers’ market. It will take a massive influx on homes for sale to satisfy the current shortage. At some point this will swing but I believe we have a long way to go. Not even a massive forbearance or foreclosure event could fill this void with enough inventory. Its staggering to conceptualize just how few of homes for sale there are out there. So tough to be a home buyer right now.
New Home Construction is Behind for 2021
So if inventory is so low, we are is all the new construction makeup the difference in inventor? The crash of 2008 is really the reason we still have such a shortage in new homes. In 2002, 03, 04, 05, builders were building new homes at a fantastic pace. This is part of the reason we had some many homes. Supply was plentiful. And prices were skyrocketing. It made no sense. It seems like such a no brainer n hindsight. If we only knew then what we know now. Bottom line if builders were extremely gun-shy form building anything for a long time. Can you blame them. They are stepping up big time now but it tales years often times to start, plan, approve, build, sell. We are way behind on this. More new construction is coming to market everyday but we have a long way to go to fill the current demand void.
Affordability is Outpacing Home Price Appreciation
Reason # 5 is that houses aren’t becoming too expensive to buy. I know this sounds strange. The average home in San Diego for example is pretty close to $750,000 at the time of the recording of this video. That’s affordable. Here’s the deal. So prices are high and they are climbing. However, you need to understand wage increases have been increasing and with lowest of our lifetime mortgage rates happening, affordability is still outpacing the price increases. Basically you pay less of your income towards your overall mortgage. As mortgage rates start to rise, and that is already starting to happen, this will change. As of right now, this is about as affordable as it gets.
People Have Equity
Reason #6 is a night and day difference from 2008. People are so equity rich in 2021, not even close to what happened in 2008. Simply put, we learned and we got smarter. In the run-up to the housing bubble, homeowners were used their homes like ATM machines. During the 2008 crash, home values began to fall, and sellers found themselves in a negative equity situation (where the amount of the mortgage they owed was greater than the value of their home). Some decided to walk away from their homes, and that led to the foreclosures and short sales, which usually sold at huge discounts, thus lowering the value of other homes in the area. In recent years, especially 2020, home prices have risen nicely, with over 50% of homes in the country having greater than 50% equity – and owners have not been tapping into it this time around.
Hopefully that alleviates some of your concerns as to whether this is 2008 all over again. I don’t think it’s even remotely close when you break it down into its parts.