My very smart friend, Dave Stark, of Stark Realtors in Wisconsin, has written the following comment on the question of where we are in the real estate cycle:
It is no secret that the supply-demand imbalance has caused prices to rise at the fastest rate since the 1970’s. For the first three months of 2022, the median residential price is up roughly 10.5% from a year ago. The median was up 11% for all of 2021. Bidding wars remain the norm so far this year in Dane County, with 89% of properties selling for an average of 6-8% over list price. Sauk/Columbia prices are up a still brisk 6.2%.
More so than last year, the media is filled with stories asking if we are in a housing bubble. While we certainly don’t like to see prices increase this fast, we continue to believe that the answer to the bubble question is still “no.”
concern about a bubble
The concern about a bubble is another example of re-fighting the last war. Remember, in 2006 inventories were 15 times higher than now. That bubble was created because lenders were passing out money in unlimited quantities without any regard for ability to repay. That is the very definition of artificial demand. Today’s lenders are underwriting borrowers responsibly, and buyers are buying within their means with the intention of living in the home, not making a quick buck. But most importantly, when supply is this far behind demand, prices can only go up. The only parallel between now and 2006 is that prices are rising, but the reasons could not be more different. Unless and until inventories rise substantially, prices will be supported. Another simple way to think about it: housing has become a scarce resource. As long as it remains scarce, it will remain expensive.
While I do agree with him to some large extent, especially for Connecticut, where prices have been so depressed for so long (see earlier blog post about affordability). Where I differ is in his assessment that banks are not overlending to people who cannot afford the homes they are buying. I’m not so sure about that. In the terrible recession in the late 80s, I repaid every penny that I had borrowed from my bank, with the idea that my credit would be better when I needed to borrow again in the next downturn. By the time that happened in 2008, the bankers were all replaced by new lenders, who remembered nothing from the last time, including which people did or didn’t pay them back. I decided not to borrow that time at all.
Even though that was commercial lending, and we are talking about mortgages, I think there is always a risk of a bubble when the basic checks and balances are skipped. Bankers now are almost all new, meaning that they haven’t gone through a complete cycle before. They are eager to makes loans, and are often incentivized to do so. If banks forego the appraisals, which is happening, how do we know that they are not overlending? And if inspections are waived, how do we know that repairs and other issues might cause a borrower to stretch too far on a purchase? I’m hoping that these things are just signs of a heated and fast-paced market, but let’s not forget what happened many hundreds of years ago, with tulips in Holland. Sometimes, there just isn’t a good enough explanation for a feeding frenzy that keeps accelerating.
There are still many rationales for getting into the current market, and life events and circumstances are strong reasons. But real estate isn’t a liquid assets, and buyers should put on their own brakes when they get out of their comfort zone, and not count on lenders to do it for them.