IS THERE A CRASH COMING?
WHY YOU SHOULDN’T BE WORRIED ABOUT A HOUSING MARKET BUBBLE POPPING
There’s no doubt the real estate market has changed dramatically in recent years. Skyrocketing prices, huge increases in interest rates, eviction moratoria during the pandemic, and changes in lenders’ comfort and flexibility have all made it significantly more difficult for real estate investors to enjoy the successes that were commonplace as recently as five years ago. So what does this all mean? If houses are on the market for shorter than ever and sellers are still getting upwards of $40,000 to $50,000 over asking price, how does this end? How is it different from the recklessness, inflated prices, and subsequent bubble that burst in 2008 and led to 6 million people losing their homes?
[LEARN MORE: HOW REAL ESTATE INVESTMENT IS GETTING MORE EXPENSIVE…FOR NOW]
A LOOK BACK AT THE 2008 HOUSING CRISIS
Although the recession didn’t officially begin until July, 2008, there were signs as early as October, 2006 that the housing market was slowing down. The Department of Housing and Urban Development saw that new housing permits were 25% lower than they’d been the previous year. Less new construction should have triggered market forces to adjust accordingly but there was a counterbalance that had become a more central focus for lenders: mortgage-backed securities. The banks were all in on these derivatives and the costs would be disastrous.
Initially, the general idea was to bundle mortgages in a way that mitigated risk and increased investment, but as the supply of healthy mortgages out there decreased, riskier mortgages, known as subprime mortgages, were included. Despite the increased likelihood that these subprime mortgages could default and consumers would be unable to afford them, America’s ratings agencies continued to blindly offer top ratings, so the system appeared strong. The reality was that the banks, the mortgage lenders, the ratings agencies, and the government, were all asleep at the wheel.
Several key components to the failure of these subprime mortgages are important to note. At that time, it was very difficult not to get a mortgage loan approved. Low credit scores? Not a problem. You can’t verify your income? No worries, we’ll take your word for it. And why don’t you sign on for this adjustable rate while you’re at it? Sure it’ll jack way up down the road, but you’ll end up refinancing before then anyway and this way you can afford this house that’s way out of your price range. The road to home ownership and real estate investment was fully paved in aligned self-interest.
Then…in 2007, defaults on these loans triggered the subprime mortgage crisis and the bottom fell out. Credit default swapping pulled all the big banks in further and like a linked chain, as one fell, the others fell hard with them. The stock market crashed in September, 2008, the U.S. ended up in recession for two years and the world economy was decimated.
[LEARN MORE: WHAT CAUSED THE GREAT RECESSION AND WHAT CAN WE LEARN FROM IT]
WHERE ARE WE NOW?
Prior to Covid, it was safe to say the housing market had largely recovered, but with the expectation of some market corrections. Those corrections were expedited by Covid and we’ve since seen housing prices skyrocket as supply has struggled to keep up with demand. As noted in our previous discussion about tax assessments and interest rates, lenders and governments are actively working to balance the market. This isn’t great news for investors: the price to play continues to rise, but the existence of guardrails to better guide the market and help avoid another catastrophe allows the game to continue.
Importantly, it is much more difficult to get a mortgage loan today than it was prior to 2008. As Greg puts it in the video above, “they were handing them out like candy”. Appropriately, applicants are now held to a much higher standard. This includes minimum credit scores, a full employment history, acceptable debt-to-income ratios, and other metrics that will decrease the chance of offering loans to those vulnerable of defaulting.
[ LEARN MORE: HOW THE MORTGAGE MARKET HAS CHANGED SINCE 2008 ]
THE BEST WAY TO AVOID A CRASH = SLOWING DOWN
Big yellow signs indicate there’s a sharp turn ahead on the highway and it’s just about rush hour…you don’t want to crash…you tap the breaks. You’re having a couple drinks with colleagues after work…you’re feeling a bit more tipsy than is ideal around a boss you’re upset with (we’ve all been there!)…you grab a water and slow down. No matter what the situation, if there’s any likelihood of going off the rails, the best next step is to slow down.
If you’re worried about a housing market crash it’s important to realize that the breaks are being tapped already. Yes, there is a lot of money in the system and prices are inflated, but interest rates are going up as well. The Fed is taking actions to make money more expensive, to slow the markets, and to stabilize the industry. During Covid, we saw mortgage interest rates as low as 1.99%. Today we’re looking at 6-7%. Great for investors? No…but signal that the grown ups are in charge this time around? Yes.
Those increased interest rates are likely to slow down the selling frenzy that’s become the norm, and that’s OK. Markets are cyclical and the balance will tip back toward investors in time. As people begin selling less, we’ll see supply even out and there could be a log jam. Again, no big deal…just slowing the market, which isn’t the worst thing in the world when you’re dedicated to the long game.
[ LEARN MORE: UNDERSTANDING THE FOUR PHASES OF THE REAL ESTATE CYCLE ]
WHEN THE GOING GETS TOUGH, PHONE A FRIEND
For obvious reasons, we’d usually recommend that property owners work with a professional property management company. Although returns might not be as great as they once were, now is actually the best time to have an expert in your corner. A flooded market can be difficult to navigate on your own and Nexus’ Nvest® buyer’s agency program has helped countless clients acquire profitable new properties. Contact our team to become an Nvestor today.
[ LEARN MORE: 3 REASONS IT PAYS TO HAVE AN EXPERT IN YOUR CORNER ]
TO SUMMARIZE: ALL IS GOOD, IT’S JUST A CHANGING SEASON
As real estate investors we’re looking for opportunities to add to our portfolios and increase the value of our holdings. Sometimes those opportunities are abundant, and sometimes, like now, they are not. We rely on lenders and government for proper “risk management” and this period is a part of a corrective cycle. Back in the first decade of the 2000s, tons of mortgages were given to people who would never be able to pay them back. Today, the barrier to entry is much higher. If you’re qualified and can get in, get in. If you’re qualified and can’t, hang in there until the carousel comes back around. If you’re not qualified…you’ve got some time to rent and build up your financial resume.
If you have any questions or thoughts, please reach out to our team. Nexus Property Management® is the largest residential property manager in Southern New England and we take great pride in our efforts to revolutionize the industry. Nexus Franchises are also available from coast to coast.
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Mick Lefort is the Vice President of Operations for Nexus Property Management®. A National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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