Is There A Real Estate Crash Coming???
There’s a lot of chatter out there with the market showing a frenzy of activity that is somewhat reminiscent of 2006 and it raises the question about a bubble or the potential to see another painful crash. In short, there’s NO comparison and here’s why:
Mortgages: Back in 2006 it was all about “sub-prime lending” or no-doc loans where income verification oftentimes wasn’t required and furthermore, we saw a lot of adjustable rate mortgages which eventually pushed the boundaries of many buyers’ budgets as the payments increased. Today, mortgages are much tougher to get when compared to the “great recession” and buyers are taking out 30 year fixed rate mortgages with more friendly payments.
Inventory: Back then there were 3.8 million homes listed for sale and builders were constructing up to about 2 million new units during that time. Today, inventory is only about 1.5 million homes and builders are underproducing when compared to historical averages. This is a problem that will not change over night with supply chain issues and rising costs thus limiting the chance of a quick over-supply type situation.
Equity: The conditions that led to the 2008 market collapse and foreclosure crisis were in large part due to high volumes of cashed-out equity thus leaving many borrowers owing more on their homes than they could afford. As a result when the market turned, mass foreclosures followed suit. Today we have record levels of existing equity but yet we’re not tapping into them like our own personal piggy banks like we did back then and furthermore, even 91% of homeowners in forbearance have at least 11% equity.
Home Appreciation: Although we’ve seen quite a bit of home appreciation in what has become the longest increasing market in history, it still lags by comparison when looking at the appreciation numbers leading up to the “great recession”. Historically home prices have appreciated by about 5% per year.
Please, let’s not forget that this is a health crisis we’re currently going through and not a financial one. There is no real symptom or sign that leads us to believe that our SWFL market has imminent trouble or turbulence ahead. To that point, our market is showing strong sustainability and we have every right to remain optimistic.
Things to Keep Our Eyes On:
Rapid Appreciation / Affordability Issues: One of the downsides to the strong housing market is the rapid increase in home prices which can begin to shut out first-time home buyers or raise questions of future sustainability. Only when home prices rise roughly in line with income growth can we say that the market is in equilibrium.
Insurance Costs: As a direct result of natural disasters such as wildfires and hurricanes, combined with higher costs for reinsurance and litigation, some insurance companies asked the FL Office of Insurance Regulation for increases of more than 30% this coming year. Expect to see “non-renewals”, scaled back coverage, and rising premiums happening now and this coming year.
Stimulus Talks: Talks have been ongoing but hit another stalemate regarding the “chance” of a $900 billion stimulus bill to be included in the government funding package this month. At risk are the 12 million Americans who could lose their unemployment benefits the day after Christmas and the economy could slip back into a downturn if Congress doesn’t pass a new stimulus.
Inflation: The devaluation of our currency is a very real thing, especially at the rate we’ve been printing and introducing new financial relief to the economy. In times of economic inflation it’s not uncommon for investors to find more comfort and confidence putting their investments into real estate and gold.
Commercial Market: This is a very important sector to keep our eyes on as we haven’t realized the full impact of what COVID-19 and how the economic shutdowns will correlate to the commercial market. Many experts are showing a decrease in value of 5% to 10% in value, with a few projecting 10%+. The expectation is to see the commercial sector back on track in 2021, plan to see a lot of repurposing, and the retail sector would be the worst hit as some investors project up to a crazy 40% value decline and expect to see 25% less retail space by 2025.
Area Growth: The high migration rate to FL is great for many reasons but this also means we’ll experience continual strains on roads, water systems, school systems, and the destruction/erosion of natural places. Infrastructure improvements and preserving our natural habitats are a must.
Where Does the Market Go From Here?
Economy: The labor market has recovered stronger than most experts predicted and the widespread vaccine distribution will eventually help lift up the economy further as businesses are allowed to re-open and confidence instilled back in the world. This is the key to it all and unfortunately it’s too early to say with any level of certainty. Locally, our market operates to its own set of circumstances and we can expect more bullish projections than other areas of the country.
Interest Rates: The Fed has already cut its key short-term interest rate near zero and is committed to keeping them at this level until the economy returns to full employment and the inflation level goes above 2%, a target that could take some time. Some experts believe that as the economy recovers, bond yields will also rise, thus resulting in higher mortgage rates while potentially cooling down the market. This would be reminiscent to what we saw in 2013-2014 and 2018-2019 to a certain degree.
Home Values/Median Price: Modestly speaking, most experts expect slowed appreciation in 2021 with Mortgage Bankers Association projecting as little as 2% appreciation whereas NAR is showing 4.5%. On the flip side Realtor.com expects home sales/values to increase anywhere from 5% to 7% in 2021. Of course here locally with such high demand, the latter of the two seems more probable.
Overall, in the midst of a global pandemic and economic shutdowns, we somehow have a real estate market that has not only thrived but we’re about to close the doors on what’s been a record breaking year. Expect these same trends to continue as we make our way into 2021, a market best summarized by high buyer demand, low interest rates, a very limited inventory, the desire to be in SWFL more than ever. Regardless of the challenges we endure along the way, one certain fact remains, and that is we all have lots to be grateful for doing what we do here in our paradise called home.
Happy Holiday’s my friends and I wish you nothing but the best in the New Year, let’s start 2021 on the right foot!
Cheers to you and yours!