There are some similarities between now and 2006-2007, like multiple-offer situations, people offering well over asking price when bidding on a home and a low inventory of available homes. There are, however, even more differences between now and then.
With housing prices continuing to rise — making it a strong seller’s market, a question a lot of homebuyers are asking is, “Are we in another housing bubble?”
The question is valid and the answer is multifaceted.
There are some similarities between now and 2006-2007, like multiple-offer situations, people offering well over asking price when bidding on a home and a low inventory of available homes. There are, however, even more differences between now and then.
Remember 10 years ago when you asked yourself, “How can that person possibly afford that home?” Well, we soon found out they couldn’t. Back in the mid-first decade of the new century, lending standards were lax or, in some cases, non-existent. (To get the full picture, watch “The Big Short.”)
There were lenders lending to people with no credit checks, no income verification and zero down payment. The subprime market went from $20 billion to $150 billion in five years with many of the bad loans hidden in bundled mortgage packages that were sold to other lenders. Fraud and predatory lending was rampant. This allowed many people to “qualify” for homes they couldn’t afford — which in turn caused home values to artificially inflate. We were not just in a housing bubble, we were in a credit bubble. This led to a flood of foreclosures, short sales and plummeting home prices. Thank goodness this is not the case today.
Thankfully, lending standards have tightened and today’s buyers are not the same people we saw back then. People buying homes today can actually afford to buy them, so people can really move into the market with more confidence that prices will not experience a severe dip.
So why are housing prices going up so fast? There are a few reasons:
First, interest rates remain low, which has really been a boon for homebuyers. As a result, people want to get into the market now before interest rates begin to climb. The Fed has indicated it will raise interest rates as soon as it deems the economy can handle it.
Historically, this remains one of the most affordable times to buy a home, even with increasing home values. Did you know that with each percentage point your interest rate goes down you gain around 11 percent purchasing power? So when people ask if today’s market makes it a good time to buy a home, the answer is yes. Buying a home is a long-term investment and low interest rates mean a lot of money can be saved over the long term.
Second, rental rates are going up. Did you know that the average rent in Salt Lake County went up 6.5 percent from February 2015 to February 2016 — even though the inflation rate actually decreased in 2015? These rent hikes are making many young people want to stop throwing away their money and start investing in an appreciating asset that they actually own. Many people now understand when they rent they are paying someone else’s mortgage. That’s a good long-term investment for the landlord but not so great for their tenants.
So now we have to ask ourselves, “Over the long term, what do we think will happen with Utah real estate values?” Utah has one of the strongest economies in the country. New, high-paying tech jobs are being created and those jobs are attracting new talent to our state. Having an expanding workforce and new skilled labor will help Utah homes maintain their values into the future.
Geography is another consideration. The Wasatch Front is landlocked between two mountain ranges, which means that a finite amount of land is available for building. Have you noticed that the average lot size keeps shrinking? This is due to the escalating land prices. Builders are paying such a high premium for land, they have to utilize as much space as they can to keep sustainable profit margins and still build affordable homes.
If you do want to buy but want to make sure that you make a good investment, even in this hot market, here are a few tips:
1. Buy a home with good bones. Always get a home inspection using a licensed inspector before you buy a home. A good home inspection will save you a lot of grief if major issues are discovered. The last thing you need is a money pit. As funny as that movie was, the reality can be a nightmare. It’s important to not only get a structural inspection but a meth inspection as well. Meth is more common than you think and the cleanup can take you into the $15,000-to-$20,000 range to mitigate.
2. Location, location, location. At the end of the day, you want to buy in a good location. Location means different things to different people. Some people want to be close to work. Some people like the hustle and bustle of the city. Some people like the quiet found in a suburban or rural area. Understand what location means to you. If you are buying in the Salt Lake area, I would recommend staying away from busy roads, especially if you have children. Do a little investigating. Find out what is going to be built on any nearby empty plots. If you plan on using public transportation, talk to the city to see if they have any plans for road or TRAX expansions that could affect the value of your home. Walk the neighborhood, visit the local shops, talk to people in the area and find out if this is a place you really want to live. Moving is expensive, so you want to find a place you can see yourself living in for at least five to seven years.
3. Act fast. The market is moving quickly, so you want to make sure you have a good Realtor who can get you into a home the day it comes on the market, so you have a chance at getting it. You want someone who knows how to write an attractive offer, who stays in touch with the seller’s agent and who is friendly. Making friends with a seller’s agent can go a long way with helping your offer get to the top. Adding a personal letter can also make the difference between your offer and someone else’s being chosen. Remember, it’s a seller’s market right now.
4. Don’t get caught up in emotions. I understand that when 10 other people are trying to get the same home you want, it can feel like a game you want to win. Bidding wars are a seller’s dream but could be a buyer’s nightmare. In the end, it’s important to take a step back and look at things objectively — make the best decision for you.
Emily Hayes is a residential real estate agent and consultant with Keller Williams South Valley. She specializes in educating buyers and sellers on the ever-changing market conditions.