I remember our bemusement with other areas of the country as they went through the boom/bust cycle associated with real estate bubbles. "How does that happen?", we wondered. "Tsk tsk", we said smugly, shaking our heads.
We've had higher and lower rates of appreciation, and times of stagnation, but prices were never driven to levels that generated a collapse of home values when economic conditions changed. We were immune, and we congratulated ourselves on our good sense.
Now, I'm sitting here watching a bubble form, and it's like watching a slow motion train wreck. High demand from a strong regional economy and job growth has collided with low inventory brought on by a lack of consumer confidence and a disinclination by potential sellers to re-enter the market as buyers, post-sale. Prices are climbing rapidly, as the law of supply and demand would suggest.
What makes this a bubble is that it is probably unsustainable. Price increases are driven by unsound practices, as buyer competition generates offers with waived appraisals and inspections, for prices well over listing price. So far in 2015, 33% of home sales in the affordable category - under $250K for our market - have been for cash. But we're also seeing waived appraisals in loan sales, with the buyers making up any differences between sales price and appraised value. Values are ratcheting up, since every closed deal like this creates a new and higher comp, and the cycle continues - with no slowdown in sight.
Here's what has been happening in two typical - and homogeneous - neighborhoods representing what were entry- and mid-range homes:
So we're generating a lot of value in the housing stock. But this value is, in my opinion, very fragile. A bump in the economy, regional job losses, any kind of financial crisis, or your choice of many other factors, could put these new homeowners at risk. And so could higher interest rates, which we're all reasonably certain we'll be seeing in the future. Higher rates will decrease the buyer pool for homes in each and every price range.
A drop in demand is going to cool the market considerably, and if it's large enough, the bubble will collapse, prices will begin falling, and homeowners may find themselves upside down in a buyer's market.
The only way to be optimistic about this is to assume constant growth and continued good economic news. You can draw your own conclusions about the likelihood of that.
So, here's the question we're grappling with: How do we protect our business while protecting the interests of our clients?
In regards to our clients, we're vigorously counseling good sense in making offers, and strongly advising against waiving contingencies while noting that, in the midst of heavy competition, that's not generally a winning strategy for a particular home.
But we're also racking our brains looking for a strategy that will help our clients, and our business, benefit both now and if things start to turn ugly. There's always money to be made when market conditions change - we're trying to find a few that work first for our clients - doing that will take care of us as well. And any suggestions from you folks in BubbleLand would be greatly appreciated.
Mary & Dick Greenberg
Data Source: IRES MLS