Are We Headed Toward Another Housing Crash?

There are many people who feel we are headed toward another real estate bubble. With scare inventory, increasing prices, bidding wars, multiple offer situations, governmental programs falsely inflating prices, and buyers willing to pay over appraised value to purchase a home, it is easy to see why many feel this way.

Today’s market is very different from that of the early 2000s. Let’s look at the differences to determine if a crash is likely:

1. Scarce inventory. The lack of inventory is problematic, and it is the biggest issue amongst buyers’ agents. It has led to some desperate measures on behalf of many borrowers in order to get their offers accepted in multiple offer situations, which are common (see below). Back in the early 2000s we did not have inventory issues. People were selling homes right and left, moving up. The ease at getting loans made it simple for almost anyone with a job to jump into the game and purchase a home. Today’s scarce inventory is definitely driving demand, but there are other factors that prevent the frenzy we witnessed years ago.

2. Tighter lending standards Back in the early 2000s, lenders were heavy players in handing out loans to anyone, even those who were not really qualified. Inventory was not scarce like it is today, and loans were very easy to obtain, with no-doc loans that bypassed employment and income verification – types of loans that are pretty much impossible to get today (unless one wants to go through a private lender and pay a very high interest rate). Today it is not easy to get a loan; even with strong employment history and good credit would-be borrowers  have to jump through hoops.

3. Stricter appraisal standards. In the early 2000s appraisal standards were very loose – we saw drive by appraisals, and basically many appraisers were just gold stamping contract prices without deep scrutiny. Today appraisers will not do so, and must adhere to strict guidelines. Prices have increased in most areas, and appraisers do take this into consideration, but it is no longer a free for all when it comes to appraisals. The appraisers with whom I have spoken say they are not 100% caught up with what is happening in the market, and guidelines prohibit them from looking at only the last sale, which may be tens of thousands of dollars higher than other sales in the neighborhood in the last 6 months…thus they have to look at both in order to assess value.

For example, let’s say in your neighborhood 4 similar homes sold in the last 6 months at close to $450,000. A fifth home, also similar to the other four, then closes escrow at $500,000 (there could be many reasons for this – bidding wars, cash buyers, buyers paid over appraisal value, or a government agency could have falsely inflated the price – click here for more information on this.) You decide to list  your home now, based on the $500,000 sale, and you do so. A buyer comes along who offers that price, but the home appraises lower. This is because the appraiser will look at all five sold properties, not just the last sale.

4. Buyers paying over appraised value. Many buyers don’t care what the appraised value is, and they are willing to pay the cash difference between it and their loan amount. This has been common in many areas, and is a factor in increasing comparable value. This tactic puts those buyers in the most expensive homes in their neighborhoods (which is never a goal, but what many feel they have to do to get their contracts accepted today). Back in the heyday of the early 2000s we didn’t really see this issue because we didn’t have appraisal issues. So this time around it is the buyers who are driving the prices higher due to the lack of inventory and the high demand.

I believe that we will not see another housing crash, based on the above factors. What I think will happen is that we will see the higher prices and lower inventory for a while, possibly until the end of this year, and then at some point things will level off. Many homeowners who have been underwater (their home is worth less than their mortgage balances) will find themselves no longer so due to rising prices. This will allow them to sell their homes, creating more inventory and less distressed property. At that point prices will simmer and stop escalating, and we will finally see a return to “normal” market trends.