What is really different about the current real estate boom? What isn’t different?
Is the current market just like 2006 again? Or is it really “different this time?” Some individuals are questioning whether the current boom in the US property market is a little too much like the run up before the last correction. Others swear it is different this time around. So what’s the real deal?
It is important to understand the reality of the current market in order to accurately assess where we are in the real estate cycle. This is critical for avoiding poor decision making, as well as ensuring that individual investors aren’t missing out and are optimizing the moment to invest and elevate their financial futures.
Similarities Between The 2016 And 2006 Real Estate Markets
Most real estate investors recognize that there is a lot of optimism in the current marketplace. This – along with the pressure some feel they are under to act now before prices go up – further has them fiercely and emotionally bidding on properties, with some ultimately overpaying. Some are cutting corners, skimping on important due diligence, and are rushing into deals without the right protections. In some cases, this may be worse. Many are forgoing inspections and are considering going without title insurance, and more. Sellers are optimistic too and are listing properties high. Some may be a little too optimistic and are aggressively pricing their properties far above real comparable, even though they have failed to sell since 2006.
People saying “it’s different this time” is probably the most common similarity. There are some similarities in the current market from back in 2006 that investors aren’t seeing. Mortgage fraud and relaxed lending are two of these. Make no mistake that the market is rife with fraud, and that lenders have been finding ways to make loans easier to get. While the names may be different, and some still struggle to deal with quirky underwriting demands, some programs today really aren’t that far from subprime lending. There are ‘alternative’ income documentation loans, loans for bad credit, 100 percent financing programs, and even essentially no doc loans for wholesalers. Then there are individuals and bankers falsifying mortgage loan applications and documents to gain high LTVs and more attractive rates, on properties they couldn’t otherwise finance or afford.
Some are also overestimating how much equity is in the market. Easy to obtain adjustable rate home equity loans are being used by lenders to get more money working, without committing to low long term interest rates, while cashing out buyers and enabling them to max out their home equity and purchase more properties for ‘cash’.
Differences Between The 2016 And 2006 Real Estate Markets
At the same time, there are distinct differences between the market in 2006 and 2016. Perhaps the most notable difference is the low interest rates and payments that buyers have been locking in over the last few years. What bankrupted so many in 2006 was that they had 7 to 12 percent interest rate mortgage loans, and many of those were adjusting higher. Their payments escalated higher, after they had maxed themselves out with payments that were already exceeding 50 or 60 percent of their monthly incomes. And their wages began declining or stalled at the same time. Now we’ve got a strong homeowner pool with 3 to 5 percent 30 year fixed loans and monthly payments. And, for the most part, these loans were given at low debt-to-income ratios, and on homes sold at lower prices than before. Even if the economy doesn’t take off, most simply can’t ever expect to find cheaper properties or payments, not ever, and certainly not as renters. That means incredible personal and national sustainability.
There is also more equity in the US property market. Yes, prices have been rising, but in many places, they still haven’t topped what they were in 2006. Those that know their cycles and data know that there still ought to be a significant growth period ahead. In fact, many markets aren’t really booming yet; they are still in recovery phase. Those that have bought in the last 7 years have seen equity rising, even if they didn’t pay all cash for their properties. There may not be as much equity as some think, but new construction condos which have demanded virtually all cash transactions and private equity activity does mean we are far less leveraged than before.
Compared to 2006, we still have a lot more room for growth. This applies to rents, as well as the economy, and wages; all which really haven’t kicked in to top gear yet. There is even a major shortage of properties in many areas which should keep values up.
Summary
Know the real deal on how the current market is different than before, so you don’t make mistakes, but don’t miss out either. Look for the right opportunities and find value. The market is different than 2006 for now, but watch the turns, and make sure you are investing in a way that will remain profitable no matter what.
