Are We Experiencing a Real Estate Bubble?

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Real Estate

Are we experiencing a real estate ‘BUBBLE’??

… This is a common question right now. Your memory may be taking you back to 2007 when we all experienced a life-changing economic crash. For the years following that event, the mortgage meltdown caused property values to fall almost 50%. Buyers were purchasing homes with little to no down payment and in most cases, obtaining an adjustable rate mortgage. That’s not at all what’s happening now! Fixed rate mortgages are amazingly low. Buyers many times are putting significant amounts of money down on their homes. Buyers have made money in the stock market or their 401K and are putting it into the real estate market. We don’t see signs of this changing anytime soon.

Are all homes getting over asking price and is that happening everywhere??

…This is by far the craziest market that I’ve ever seen in my nearly 30 years of selling real estate. In other parts of California, buyers are paying hundreds of thousands of dollars over asking price to get their offers accepted. Here in our four-county region we’re seeing multiple offers and perhaps $100K over in some instances, but the higher the price range, obviously the more money (cash) that they have to throw at the seller to be chosen, in addition to removing appraisal contingencies, etc.

Is this sustainable?

...I think (hope) we’ll begin to see a gradual increase in inventory for sale as we move further away from the Covid restrictions. I think the fact that interest rates are remaining low is what’s allowing buyers to continue to jump into the market. Homeowners are selling their home for much more than expected, which allows them to spend more than they’d expected. It’s always about the basic principle of supply and demand. Right now the demand is off the charts and the supply is very slim.

What’s different on the financial side of this market vs. the last fast-paced market??

…In the early 2000’s, that market was fueled by a mortgage industry that gave borrowers money with little to no down payment and what I then referred to as the “fog a mirror” qualifications. You could literally get a home loan without a job! If you ‘anticipated’ getting a raise, great! They would take your word for it and loan you more money with no regard for how you’d pay it back. Another issue was that homeowners were using their home’s increase in value as an ATM, cashing out their equity to make other purchases. When prices fell, they were left upside down on their mortgage. With little to nothing invested, many made the decision to walk …leaving a tremendous number of homes in short sale or foreclosure. Thankfully, today lenders are much more stringent on their guidelines.

What about transferring the current property tax base to another home??

…California voters passed Proposition 19 in November of 2020 which now allows homeowners who qualify (age 55+, Severely Disabled, Families, and Victims of Wildfire or Natural Disasters) to purchase a home anywhere in California and carry their current property tax base to the new home. For details, go to › prop19 You can move without an increase in property taxes!

Is it time to invest in states other than California??

...While some are leaving California, the majority of people can’t pull up their roots and move; however, when it comes to investing, some are looking for equity and income from rental properties in other states. We have had significant appreciation -- 20% over the past 12 months. I anticipate that once the eviction moratorium expires on June 30, 2021 that we’ll see some investors selling their California rentals and going to states with lower taxes and less regulations like Texas, Florida, Idaho, Arizona and many other states that are pro-growth. While 20% appreciation isn’t ‘normal’ in most years, it may cause some to take their equity and run.

Why is supply so incredibly low?

…Now that many people can work from home, they’re choosing to make a move to more desirable locations. Sacramento and the surrounding areas are seeing some of that migration. With Covid, the cost of materials for builders, coupled with extreme regulations has caused a slow-down in new construction. It takes a long time for builders to respond to demand, which is why we’re not seeing much new construction going on. Because supply is so low, people are not risking being literally homeless by selling before they can find something to purchase. Even the rental market has been significantly impacted. There are creative ways to do it, but most homeowners are obviously fine where they are and don’t have the desire to make a move… hence our housing shortage dilemma!

What’s on the horizon??

…Once again, my crystal ball is broken! But what I do know about a BUBBLE is this:

It’s not a BUBBLE if buyers are putting significant amounts of cash down
(down payments are up 50% over the past 18 months in the U.S.)

When a buyer puts their own cash down, there’s little to no risk for the banks
(banks will many times waive the appraisal if their loan to value is low)

Bubbles burst when homeowners can’t pay their mortgage and have no equity
(if you have equity and a fixed monthly payment, odds are you won’t stop paying)

If you or someone you know is considering a move, I’m happy to help!

Carol Kellogg