The housing market is on continuing its upward pattern and prices are surpassing the hot market of the past. It tends to make us all a little nervous as to what the future holds, but we’ve taken a step back to compare these two periods in time: the market 10 years ago and the market now.
What’s the same as before? Well, we’ve already mentioned the continuous rise in home prices. Another similarity: buyers clamoring for a home, writing offers with no contingencies. And finally, investors, newbie and experienced alike, on the hunt for a deal to flip. While the temper of the times looks eerily the same on the surface, there are several differences to point out.
Chief economist for realtor.com®, Danielle Hale, reminds, “As we compare today’s market dynamics to those of a decade ago, it’s important to remember rising prices didn’t cause the housing crash. It was rising prices stoked by subprime and low-documentation mortgages, as well as people looking for short-term gains—versus today’s truer market vitality—that created the environment for the crash.”
In contrast to the market 10 years ago, the housing market today is characterized by much tighter lending standards. The Dodd-Frank Act was passed in 2010 as a response to the financial crisis of 2007–2008. The Act tamps down the risky lending that led to the bubble and its collapse. It requires loan originators to show convincing proof that a borrower can repay the loan. Take these new standards of practice and pair it with historically low for-sale inventory and you make it difficult for people to buy new homes.
Investors and Flips
Fueled by the mindset that prices only rise in real estate, people were buying what they believed were a “no risk” investments left and right. But when the housing market crashed it exposed this fallacy big-time. In 2006, the share of flipped homes exceeded 20% of all sales in some metro areas. Many flippers were taking out multiple loans to afford their properties but with today’s tighter lending environment, it’s limiting their borrowing power. Flipping accounted for a more reasonable 5% of sales in 2016.
Another contributing factor to the frenzy in the market is the mismatch between significant job and household growth. “The healthy economy is creating more jobs and households, but not giving these people enough places to live,” Hale said. “Rapid price increases will not last forever. We expect a gradual tapering as buyers are priced out of the market—not a market correction, but an easing of demand and price growth as renting or adding roommates becomes a more affordable alternative.” Millennials made up 52% of home shoppers last spring, and with the largest cohort of millennials expected to turn 30 in 2020, their demand for homes is only expected to increase.
And there you have it, what broke the market 10 years ago is what’s upholding our market today. There’s a lot riding on lending practices which is why it’s so important to choose proven creditors for your largest investments. Karen Richardson Group works only with the best! Email us today for our recommendations: Karen@karenrichardsongroup.com
Sources: realtor.com® & investopedia.com