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Is This A Bubble? Buyer Tips from The Ladd Group

IS THIS A BUBBLE?

We’ve heard this million dollar question repeatedly over the last 12 months. The bottom line is that although the price increases make it feel reminiscent of the mid-2000s, the reasons for the increasing prices differ greatly from what they were 15 years ago.

These are the two biggest reasons we don’t expect a market collapse.

1) Lending standards are very different now than they were back then. A good example of this is that there were $376Billion in loan originations in 2006 that were for buyers with a FICO score of less than 620. In 2020, this number was $74Billion.

2) Lack of supply accompanied and helped fuel the recent price appreciation, while home supply hit historic highs in 2008. When the buyers slowed, there were way too many homes available, pushing prices down further. In August 2008, we reached twenty-three months of supply compared to approximately one month of supply now (six months represents a balanced market).

TIMING THE MARKET

Given people’s concern over rising prices, we have heard from many buyers that they will sit on the sidelines and wait for things to come down. Although this sounds great on paper, it is a risky proposition. There is no question that the run- up in pricing over the last 12 months has been historic, we do not expect that it will continue at this pace. We expect to see some price reductions from the sellers who were too ambitious and pushed prices too far. We expect price reductions from people who have already found their replacement property and just need to finalize the sale of their current home. But timing it just right and waiting for an

overall market pullback is often impossible to do. Moving forward, the analysts are expecting continued but slowed appreciation. A survey of various real estate groups including Fannie Mae, Freddie Mac, National Association of Realtors, among others, has the average expected national appreciation at approximately 8% for 2021, 5% for 2022, and about 3% by 2025. The other factor is the risk of interest rate changes. Although rates are expected to stay relatively low, increases in interest rates will diminish your buying power and, although the price may be lower, you may actually spend more money in the long run. Given this, being too selective and waiting for the absolute “perfect time” could have you watching a market continue to get further out of reach.

BUYING FOR THE LONG RUN

Although a home is likely the largest investment many people will make in their life, for most, it should not be treated as just any other investment. Home provides a place to raise kids, enjoy retirement, work, relax, entertain, etc. In the last year, what a home can provide has become even more significant, and is giving homeowners more than just a return on their investment. Some of the price appreciation from the last year was because of the urgency of people wanting to enjoy their home and surroundings immediately and they were willing to pay a premium to do it. Although paying a premium to have something now doesn’t make sense for most people, being discerning and looking at the future benefits of ownership in conjunction with price is a wise decision. Most people are in their homes for an average of eight years, and so slight differences in the sale price nowseem more inconsequential as the years go on. Work with your broker on weighing these factors so you can make the best decision.

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