Is Our Real Estate Market a Bubble?

I have a client who insists the current real estate market is a major bubble getting ready to burst. He believes that the lending practices are still unstable, which will cause people to default on their loans and drive us back into the depths of foreclosures and short sales. He also asserts that unemployment is going to skyrocket and that the volatility of the global economy is going to cause housing prices to tumble.

After watching the real estate market closely over the last 12 years and witnessing the ups and downs, I completely disagree with his assessment. What’s currently happening is not indicative of a tumultuous market and what I’ve been seeing over the last 3 years has been solid growth and stability based on low inventory and stringent lending practices. To say that what’s happening with the economies of countries around the world, gas prices, the stock market, unemployment and the election doesn’t or isn’t going to affect the real estate market would be ignorant, so I’d like to make it clear that I’m not ignoring any indicators from any of those things. I am taking everything into consideration and watching how they influence our real estate market (or not) over months and years. Unemployment has continued to decline and is only 3.2% in Marin and 3.8% in Sonoma, which is the lowest it has been in 8 years. This means that people have jobs and are overall fairly confident in the economy and their current situation. When we have this stability, we have people that are ready to buy. The difficult thing with the current market, however, is that there isn’t enough inventory for the number of buyers.

One of the most important aspects of the real estate market is how property is financed and the equity owners have in what they own. The rigorous financial assessment that each buyer goes through before they’re given a loan by a bank is the single best reason I can give to explain why the current market in no way mirrors the bubble we were in before the housing crash. The lending practices are drastically different today, which means that everyone who buys a house is financially capable of affording that house. I would even take it a step further and say that banks have been so tight in their lending that they’re actually approving people for less than what they are capable of affording, however, this is a good thing since it will keep us from having a boom and bust like we had in the past. In addition, investors have been snatching up property since the crash and a lot of houses have been bought with cash, which gives the owner 100% equity and means that, even if property values go down, there’s no loan from a bank to default on. The investors could lose money, but that loss would be recognized by them individually and not collectively as a country like we saw with the crash and subsequent bailout.

Not only is this what I’m seeing while working with clients, but my wife and I have experienced this for ourselves with our own investment properties over the last few years. Most recently, we were able to capitalize on the market last spring with the successful sale of a renovation project. We quickly utilized part of that gain to invest in another property. That new property, with a lot of sweat equity, and decent appreciation has proved to be a solid investment. In addition, we’re looking to purchase another property in the first half of 2016. I raise these points so that I’m not just preaching but actually practicing. I want my clients to know that I am actively involved in our market and putting my own money on the line so they know that I truly believe what I’m telling them. Nobody wants to hear a sales pitch about how the best time to buy is NOW, although I do believe that now is a better time than it will be a year from now and probably a year after that.

There are always plenty of reasons to convince yourself to not do something–that’s why some people are doers and others are watchers. Overwhelming negativity can be stifling and a sky-is-falling attitude will render you forever stagnant. Buying a home for your family or investing in real estate is always a risk, but you can limit your exposure by making smart and informed decisions. On the other hand, if you’re going to lose sleep every night by putting your money into a property, then real estate is probably not for you and you would be better served putting your money into something else.

The bottom line is that either I’m going to be very wrong or my client is going to be very wrong, but I’m pretty sure it’s not going to be me.PointCounterPoint

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