It is shocking how quickly things are changing in the local real estate market. Is it time to accept that the real estate bubble has officially burst and that we are heading for another collapse like the one in 2007-2008? I can see impatient investors now, licking their lips and rubbing their hands excitedly, waiting for values to crash so they can rush in and cash in trades, like before. Well, don’t start drooling while waiting for an accident; I think we are seeing a housing correction.
There are important differences between today’s market and that of 2007-2008 that we need to understand. Here are a few:
In 2007 and 2008, lending standards were much looser while lenders offered mortgages to almost anyone who wanted one, regardless of their down payment or credit history. Prior to the Great Recession of 2007-2008, lenders offered stated, no-income loans that were used by borrowers with bad or no credit to secure mortgages. Some lenders were not required to verify employment, income, or assets, and borrowers could obtain mortgages for amounts they had no means of repaying. A number of loans allowed people to borrow up to 125% of the value of the house and as a result house prices soared. As millions of borrowers defaulted on their loans, the market crashed, plunging the entire economy into recession.
In recent years, borrowers are more creditworthy than ever. Ask anyone who recently got a mortgage. Lending standards remain strict as lenders exercise due diligence, ensuring borrowers can afford and repay their loan.
Not many seizures
Homeowners today have more equity in their homes than ever before. It’s hard to imagine someone with $150,000 in equity losing their home to foreclosure when they can hire a real estate agent and sell it for market value. In the past year, 31% of single-family homes were purchased with cash (they will not be seized).
There is always an underlying demand to buy houses. When rates rose in March of this year, it was like the Fed throwing a bucket of ice water into the burning housing market. Higher interest rates meant a high monthly cost of homes, excluding many buyers and lowering overall demand. These buyers still want to buy homes, but with higher interest rates and record house prices, many have been squeezed out of the market.
Was the appreciation we’ve seen over the past two years and the sale of homes at tens of thousands of dollars above appraised value just a bubble?
Over the past two years, prices have appreciated by about 30%. The fundamentals were there: strong demand for homeownership combined with limited supply and historically low interest rates all contributed to a boiling housing market in Las Vegas in July.
Change any of these factors and the same fundamentals will work in reverse. As a result, and on purpose, the Fed raised rates to calm a housing market that was pushing the limits of affordability.
Has the real estate bubble burst, will it be another crash of 2007-2008?
Las Vegas housing supply has increased more than 300% since the Fed raised rates in March. The “decline in demand”, the increase in supply and the increase in prices will put downward pressure on house prices. The Las Vegas housing market is rapidly changing from a vibrant seller’s market to an atmosphere where buyers have more choices of homes and can even make enquiries; however, this is not a crash, but a fix. We are witnessing a collapse and a loss of dynamism in the local real estate market. The frequent price increases of the past two years could not be sustained. As a result, prices may fall and stabilize, but will not collapse.
Current market conditions are approaching stability and are a great time for buyers and sellers to trade like the good old days. For sellers, values are still historically high and if you have plenty of equity, why not cash in? For buyers, the market is changing, more homes are available and sellers are reducing prices. Yesterday, a seller I represent opened an escrow on his house after six counter-offers, and yes, both buyer and seller are happy.
Las Vegas is a city that needs no introduction and is unquestionably a world-class tourist destination for dining, entertainment and now, sports. People, young and old, move here every day for new opportunities. Whether you move here to retire and enjoy our countless attractions and the absence of state income tax; or to join our thriving and diverse job market, getting a home is a necessity.
Understanding current local market conditions and knowing the difference with past market events will help you and your loved ones make the right decision today. There are a lot of opportunities in our current market, just be well informed and speak with a professional.
Shannon Smith is a broker/salesperson for Realty One Group.