I've Seen That Movie Too--The '08 Meltdown Again?

Question

I like watching a lot of youtube videos on real estate, the markets, etc. Some forecasters are claiming we will have a meltdown similar to '08. I do not agree. In '08 we did not have the same type of market. We had insanity ruling and liar loans were the norm. Not today. Yes, we have insane buyers, but many are paying cash. Those buyers, unless they have a life event such as death, divorce, illness, won't typically be forced to sell and therefore won't be selling for pennies on the dollar. Yes we have 3.5% loans today, but those loans are written with strict guidelines. Yes, some of those owners will default leading to foreclosure, but I suspect the majority will not fall into that category. In SW Florida, almost 50% of buyers are cash buyers. If the market drops, but it is their primary, no big deal unless that life event occurs. The market WILL correct, as it always does, but that won't happen until a few million new units are built. As long as there is a shortage, we will continue to have a strong market. When we get a correction, it will NOT be a meltdown of 30% or more. I don't see that happening today. If I am wrong, tell me why.

Marcus Auerbach · Answer

I agree with you John, and a lot of researchers and analysts agree too. The only part I am not sure about if the market will "correct"; I believe it is much more likely that it will level off.

The reason I believe that is affordability - the NAR publishes an affordability index; basically how much of a median household incoem is needed to buy a median home with 10% down. The index has risen over the last years, but is still well below most of the last 30 years' average.

2021 is the year of rising wages. Combined with low interest rates (anything under 5%) that means affordability will further improve. How long this can go really depends on where you are in the counrty - the coast are already very high. Prices in San Francisco are already ultra high - almost 10x of my home town Milwaukee - and they are still going up.

Now of course Milwaukee does not have a silicone valley (even though a very robust economy) so real estate will probably never be anywhere close to those levels. But is it impossible that we will see Milwaukee prices double from today's median of 215k?  future? It seems like a crazy idea, because housing has always been relativley cheap in Milwaukee and the last 6 years are the first time in history that we have seen significant apprciation (12% currently).

The other benchmark I look at is the cost of new construction. Milwaukee has been taken advanatage of material and labor costs from the 1920s and the 1960s when pricing houses. Now we have a situation where we need to build a huge amount of new units just to keep up with demand - we simply have more people than roofs - and so the cost of existing homes has to creep up closer to the cost of new construction plus land. Historically used homes have always been sold at a 20% - 30% discount vs new construction, so I believe as the market is balancing out of the next decade it will restablish this ratio, which means existing homes will increase substanicially in price.

At that point prices should level off and stop increasing faster than inflation. Which brings me to another reason - home prices are currently not going up as fast as we think - inflation is currently at 4.2% per the CPI, but there are many experts who say the real inflation is higher. So, are house prices going up, or is the dollar going down. Probably a combination of both I think.

Jaron Walling · Answer

@John Thedford I'm addicted to YouTube. I'm addicted to YouTube. There I said it. Wow I feel better now. Anyways I completely agree with your statement "As long as there is a shortage, we will continue to have a strong market".

I love equity and appraisals coming in way over what I expected but the rapid increase in prices needs to cool off before it does more damage than good. It's making some new homeowners "house poor" already because we all know wages are not keeping up.