Why this Market is not 2007-2012

This market will not be a reincarnation of 2007. I know my Crystal Ball is just as foggy as everyone else’s, but I’m going off of market statistics and historical evidence, not fear. I want to explain…

We have seen in recent memory, paper fortunes ruined by housing. Pricing across the country was down, and in Las Vegas, we went from one of the most robust markets in the country to the leader in foreclosures, seemingly overnight. When the rest of the country bounced back in a few years, it took us more than a decade to do so; which is a GOOD thing. The steady growth back up is what I like to see. Don’t believe me? Take a look at this chart.

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Here’s what you’re looking at. We have 14 years of data on this chart, with the MONTHLY MEDIAN HOME PRICE for single family homes plotted. I am only using Single Family Homes, not condos or townhomes, in this chart, but if I used all types of property, the chart looks similar. Our market hit an all time high in June, 2006 when the Median Home Price was $317,500. We then tailed off, and started the nose dive in September, 2007, not fully bottoming out until January, 2012, when the Median Price dropped all the way down to $118,000! Since January 2012, we have steadily increased, rising 168% in 8 years!

So, Geoff, why do you not think we are heading back this way? GREAT QUESTION!

1) This was, and still is, the ONLY time we have ever had a recession that was CAUSED BY HOUSING in the history of our economy. Ever. Is housing causing our crisis today? No, the cause today is over panic from a microscopic virus no one can see! While we are facing a situation we haven’t faced in a long time, this is not unchartered territory. In fact, we’re right about 100 years since the Spanish Flu killed out MILLIONS AND MILLIONS of people. Historically, since the end of the Great Depression, we usually see Home prices remain strong during Recession. In fact, most of the time, especially since 1980, other than 2007 as shown above, we have seen home prices remain flat or slightly IMPROVE during a Recession. Don’t believe me? Take a look at this chart:

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So, removing the last Recession (The Great Recession), we have had 4 Recessions. One showed housing prices drop by less than 1%, and the other three Recessions showed an INCREASE in housing prices. The reasoning is Real Estate is a SAFE HAVEN! People look to put their money elsewhere when the Stock Market is all over the place. And if you’ve been watching the Stock Market lately, it’s been a Roller Coaster, to say the least!

2) Interest Rates are at Record Lows. Money is still cheap, and interest rates are what we REALLY should focus on. Instead of worrying if you should buy a home at $350,000 or wait to see if the price drops, think about it another way. Think about locking an interest rate NOW at 4% or so. Because historically, interest rates are more directly related to home affordability than the price of the property. For instance, say you have an interest rate of 4% and you’re borrowing $350,000 as outlined above. Your monthly payment would be (Principal and Interest) about $1670/mo. Now, pretend you wanted to wait for the market to drop! And say the market does drop, by 3%. So that $350,000 home (and loan) is now $339,500. Not a big difference in the price, right? But what if during this drop, Interest rates went from 4% to just 5%? You waited, and bought at a lower price… good for you, but your payments now would be $1,823 per month! An extra $150 payment, per month, because you wanted to wait for the home value to go down. And what if rates went from 4-6%? Your payment would go up to $2,035 per month!!!!!

Let’s extrapolate further. Let’s say the home value goes down 10%! That’s a big drop, bigger than we have seen in almost every Recession but the last one (which again, is the only one caused by a housing crisis). Let’s use the same examples. So you buy NOW at 4% for payments of $1670/mo, or wait. If the home can be had for $315,000, 10% less, but rates went to 5% from 4%, your payment would be $1691/mo, HIGHER than buying it at $350,000 at 4%! If rates jumped to 6%, your payments would be $1,889/mo!

One more way to put this… again, let’s use $350,000 and 4%. I have some clients getting a tad higher, and some lower than this, so it’s safe to say that this is a good number. With this example, your monthly payment would be $1670/mo as we have said. Pretend you want to roll the dice and think the market is going to go down, but we do know rates can and will go up. If rates jumped to 6.5%, which is a rate that we had as recently as the early 2000’s (so it’s not out of the ordinary), the $350,000 home that you could buy at 4% today would have to drop ALL THE WAY DOWN TO $264,000 - just to keep you at the same payment! Going from $350,000 down to $264,000 would be a drop in housing of 24.5%!!!!

My point on this… Interest Rates should matter to you FAR MORE than the price of the home. If you think that home values are going to drop dramatically, again, I do not see us having this type of market.

3) The long haul. Look, Real Estate shouldn’t be considered a short term type of investment. Some people flip, but those individuals (we have had experience) have secondary sets of skills and study the markets, just like a stock or bond trader does. They have risk involved that most people do not want to consider. For the most part, people who buy Real Estate buy for the long haul. Again, going back to our market history here. Pretend for a minute that you purchased a home in June of 2006, at the ALL TIME HIGH! Things got ugly and scary. If you looked at what your home was worth every month, it probably made you cringe. But for this exercise, pretend you ignored the monthly value because you knew this was your HOME. The property brought you shelter. The property brought you and your family a place of togetherness. You rode out the storm. Every year, you were able to deduct that Mortgage Interest Expense on your Taxes. Every year you watched your kids grow up. You did projects to improve your home. You loved your home. Now, the property value is back to where it was before; probably higher for most of us. But you also have now paid down close to 14 years of your Mortgage. Each month, you’ve been knocking down the principal balance. So maybe you only owe $175,000 on a home that’s worth $350,000. You may not have ‘gained’ on the property, but you’ve had a home for 14 years, and now one that you owe substantially less on! Congrats, you weathered the storm, and you can do it again!

Closing:

Look, I know people are frightened, and I am not making light of this situation. We will get through this. I’ve been saying this is an opportunity to keep things together, which it is. If you’ve been ‘on the fence’ about buying a home, now is not the time to jump off the fence, for the reasons I listed above. Interest Rates are in a situation that is super advantageous to both BUYERS AND SELLERS. Think about it, Sellers. If you want to sell your home at $350,000 - it’s better to have rates at 4% than 6.5%. If Rates jump to 6.5%, it will cost a buyer significantly more money every month to buy a home, and that will drop the number of qualified buyers for your home. It’s still a good time to take advantage of this market. Blue Skies will be here again - be ready.

-GZ