What Housing Bubble?

Our experience from 2007 tells us that when prices reach crazy high levels, the market implodes under the pressure put on systems that weren’t sustainable to begin with. But that was then, and this is now. This clearly isn’t the same housing market, since at the Berkshire Hathaway’s 2016 annual meeting Warren Buffett remarked that he doesn’t see a nationwide bubble in real estate right now at all. In fact, he recommends buying real estate as a safe long term investment.

So what has changed since the ‘07 crash to give strength to our present day housing market with prices that are now at or above their peak prices? And what indicators are the experts looking at to conclude we aren’t heading for another crisis?

Back in the early 2000’s, far too many people qualified for homes they could never afford. Subprime and adjustable rate mortgages were not designed to protect a borrower’s best interest of long term affordability, and the low requirements for application (such as no income verification) and compromised regulatory conditions made predatory lending big business. It is now known some lenders had “art rooms” where application documents were tampered with.

Before the mortgage crisis, borrowers would come to the closing table to find their rate and fee structure was dramatically different than at time of application and their home was going to cost far more than they had planned for. But since the nation was in a frenzy to buy homes, people signed and purchased anyway.

After borrowers started defaulting in high numbers, the bubble burst and the recession began. As a result of the crisis, the government overhauled the system and set out to protect consumers.

The enactment of the Housing and Economic Recovery Act of 2008 bailed out many banks and left many others to fail. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was intended to consolidate regulatory agencies, implement comprehensive regulation of financial markets and create the Consumer Financial Protection Bureau (CFPB).

In 2013, the CFPB enacted new mortgage rules called the Truth in Lending Act. If you have spoken with a lender these days, you know that ‘credit is tight’ (translation: banks will only fund loans to people who are in strong financial position to actually pay back the loan in the future). So if a borrower wants to purchase a property, they will need a high credit score and documented income and source of funds to bring to the closing table before getting the pre-approval letter necessary for getting a seller to accept an offer.

And to ensure borrowers are not taken advantage of during the lending process, borrowers are now required to electronically receive a disclosure of loan costs (which stay locked), accept them and then are given three days to back out of the loan if they change their mind. Luckily for mortgagees, mortgagors can no longer “pull a fast one” at the closing table.

This disclosure period, combined with increased threshold for credit scores and more scrutiny during the appraisal process means the only buyers competing for homes are those that are highly qualified. Then consider that over a quarter of sales nationally are to cash buyers (on Bainbridge Island that number is about a third), and you have only the strongest players on the field of the purchasing game.

Speaking of Bainbridge Island, how does this affect us since housing bubbles can be hyper local?

It may be easier to understand as low inventory of available homes rather than what your tax assessment says, but land values have contributed more to the inflated prices than has the cost of the actual home. There is no room for our market to sprawl since “they aren’t making any more dirt”, so the available properties here come at a premium price. Both retirees and tech workers flocking here from around the nation frequently comment how affordable Bainbridge is. Heck, even the people moving here from Seattle comment how cheap it is.

So in a gorgeous place that has a finite amount of dirt (low supply) and competition amongst strong buyers (high demand) the result is simple economics- rising prices.

And speaking of economics, there are certain market indicators that were far out of whack in 2005 but are now back in line with the healthy levels of 2001. They are Price-to-Rent Ratio, Price-to-Income Ratio, Mortgage Transactions and House Flipping. In 2005, the greatest evidence of speculation was the 6% of annual transactions being made by house flippers who were gambling on prices that would only rise (and their ability to sell to buyers obtaining mortgages on loose credit); that number is down 50% to a more sustainable 4%.

Though I am not licensed to practice with a crystal ball, I will say that it does not appear that we are in a housing bubble- the conditions in this decade support sustained purchasing power and affordability from buyers. Rather than being fueled by speculation, this housing boom is powered by the engine of technological innovation that is our local economy as well as a lifestyle attractive to cash-flush retirees.

This region is full of buyers that can afford to pay these high prices, and they are paying them. We are in Silicon Seattle. And I recommend getting used to it.

To learn about housing statistics on Bainbridge, click here and check out my monthly infographics about sales on the island. And to learn more about the market’s impact on your next transaction, contact me at 206.399.3641 or jason@mrshutt.com.