Monday, November 30, 2015

8 More reasons why we're absolutely not looking at another real estate crash

It may seem like just yesterday that we were in the midst of the dark days of the real estate market with little reason for hope, but things are looking downright rosy now. While it’s true that these cycles usually go through 7-10 year trends, we’re here to tell you with 100% certainty that we’re not looking at another real estate crash like in the mid 2000s.

In part one of this blog we spelled out the first five reasons why we’re absolutely not looking at another impending real estate crash.

Here are reasons five through seven:

6. The Millenials are coming as first time buyers
The demographics of homebuyers will change dramatically in the next years and decade, but it’s not just the Baby Boomer selling, retiring, downsizing, and facing new needs that will change the face of real estate. In fact, there are about 80 million Millenials – those aged 18-34 who will make a significant impact on housing. So far, they have been reluctant to buy, perhaps jaded by what happened to their parents during the Great Recession and, more likely, saddled with unprecedented levels of student loan debt. But as time goes on, their jobs will stabilize, incomes increase, and the black hole of rent payments will swing them to home ownership en masse.

7. Housing affordability is solid – and a realistic goal
Not only are interest rates still hovering at very enviable levels, but also banks are lending money again. The strength of loans sponsored by the Federal Housing Administration still allow borrowers to put far less than 20 percent down for a home. Additionally, the FHA reduced its annual mortgage insurance premiums by up to $900 per year, a smart chess move that will most likely spur first time and younger buyers. The National Association of Realtors predicts the dropping of FHA premiums alone will increase sales by up to 5.6 million homes and lure 140,00 new buyers into the market – a diversification that points to cash, not crash.

8. New-home construction remains low
We’ve come a long way, baby, but the levels of single-family new home starts still remain 60 percent below where they stood at the peak of the market in 2006. Those numbers aren’t just anomalies – our current new home inventory is also about 25% less than the average for the last 15 years. Add to that the fact that the supply of existing home sales is lower than it was in 2000 despite a 14 percent increase in population and you have a heavy indication of demand without over-supply.

9. Our banking system is recapitalized, re-regulated, and reloaded
The circus of bank affairs before the mortgage meltdown and financial crash fired most of it clowns and started over. These days, banks are on a much tighter leash, no longer allowed to rapidly grow their balance sheets and make risky bets with borrowed money. A key indicator of the new and improved of the banking system is the fact that credit losses are running at generational lows and U.S. banks are enjoying unprecedented liquidity. If the banking industry hasn’t learned their lesson then the people watching them has, and we won’t see reckless and wanton abuse of the system that facilitated the house of cards collapse again.

10. Savings down, debt up
At the peak of the real estate bubble, the American personal savings rate fell to an all-time low of 1.9%. Those numbers were equally as bleak after the bubble burst and into the financial crisis in the late-2000s. But now, our savings rate has more than doubled to a rate of 4.8%.

While this is still small potatoes compared to the average national savings rates in through past decades and then 10% financial advisors suggest, more personal savings means more money for down payments, mortgage instead of rent, and paying down debt – all key elements of home ownership.

11. Stocks may be in for a bumpy ride
The stock market and real estate market are usually like two trains running on opposite tracks – when one is speeding ahead full throttle, the other is chugging along in the opposite direction. Right now, there are signs of some volatility and over valuation in the stock market, with near record-high corporate profit margins and a slow down in earnings growth something to keep our eye on, as well as the threat of trouble in foreign markets like Europe and China sending shock waves through stocks.  In fact, the S&P 500 has now retraced about 17 percent of its gain since the Great Recession trough of March 2009. All of that is good news for bonds, mortgage rates, and the real estate market – a train that looks to keep its momentum and not be derailed.

12. Our economy has stabilized
Overall, we don’t have much to indicate any sort of crash or volatility to come. The economy is growing at 2 to 2.5 percent per year, jobs numbers are up, debt is down, fuel and energy costs are low, housing affordability is up, and interest rates are still low, with the Fed expected to start a gradual increase of rates to temper inflation. Like we said, there will always be ebbs and flows to the real estate market just like any market or our overall economy, but looking ahead they appear to be gentle hills, not sharp cliffs.  

Bonus: How sound is our real estate market in Sacramento?

Certainly the economic and market factors we just outlined still apply in Sacramento, with some even more pronounced. Right now, the Sacramento region has one of the lowest new construction rates in the country, which is putting huge upwards pressure on rents. Homes have risen in value over the last five years but are still within realistic ranges compared to other areas and options in California. Furthermore, the new down town arena project is likely to boost the economy in coming years – or at least invigorate it enough where a real estate crash is highly unlikely.

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