This economy feels like 2007. Am I wrong?

[Josh Magnus]

Hello BP community,

 Is it me or do the sky high valuations on homes seem similar to the run-up during 2006-2007? It seems like the market is due for a valuation correction, maybe relatively substantial (10-20%)? Economy looks really good, but wages haven't increased enough to support home prices imo. 

 In Denver, home prices have flattened over the last 4-5 months and I've seen a lot of Zillow listings reducing prices. Plus there are a ton of new builds in progress. Anybody think staying on the sideline is better in this environment? Would love to hear what you think.. 

 Although I've owned a duplex since 2012, I've very recently returned to the real estate investing community with the goal of buying a single/multi family distressed property to rehab and rent. Am trying to find my bearings. Thanks.

[Mike D'Arrigo]

@Josh Magnus I totally disagree. High prices alone don't lead to the crash we had in 2008 and the factors that did cause the crash don't exist today.

1. We don't have the absurdly loose lending standards we had in "08". Back then there were all the subprime loans where anyone who could fog a mirror got a loan. There were also the adjustable rate, interest only and negative amortization loans that got a lot of people in trouble.

2. We don't have the growth in the money supply in the economy that we did then. The average annual growth rate in the money supply is 6.5%. Just prior to the crash it was over 10%. Today, the growth rate is just 3-4%. At the time of the crash, the supply of money lead to over development of new construction which leads to the 3rd point.

3. New housing starts are down 40% since their peak in 2005. At that time, their were 2.1M new housing starts. Today, that number is about 1.2M new housing starts. 

The reason that so many markets have been seeing so much price appreciation is that there is a real shortage of housing. We've seen that big time in Kansas City and Indianapolis where we operate. Keep in mind that 27% of all markets are still below their 2006 level and many are only at their 2006 peak. You have to look at where prices are today in relation to their 2006 high and not how much they've gone up from their bottom. Some markets lost 50% of their value. That means it takes a 100% increase just to reach their previous peak.

Lastly, you have to consider affordability. In spite of higher prices, all 4 of the regions of the country are still considered affordable to anyone making the median income. That's due to extremely low interest rates. Interest rates were 6.5% at the time of the crash, compared to less than 4% today.

Personally, I think we'll see moderation in prices, and deceleration of the appreciation rate  which we're starting to see now, but I don't see a crash.