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Three Lessons from the Housing Bubble

Reblogger
Real Estate Agent with Keller Williams

This is great information concerning the housing market.  Boy, we really run into some bad advice and number through the media and the markets can be very dependent on location.  We always should focus on what we can learn from what the last 4 years have meant to us!

Original content by Dave Roberts

Houses are great investments! They always go up in value!

Ever hear that before? Maybe in 2004 or 2005? Real estate agents may have been collectively insane, asleep at the wheel, or just oblivious to the reality of housing values, but the run-up in prices known as the housing bubble took almost everyone in the real estate industry by surprise. Plenty of my colleagues were busy upgrading to larger homes, taking out bigger mortgages, and betting on the inevitable rise in the market. Oops. 

In hindsight, there are plenty of clues to indicate we should have understood the nature of the bubble. In hindsight, we all see signs that we should have listened to. However, the understanding that we made serious mistakes will only be useful to us if we learn some fundamental lessons that we can share with buyers today. 

Housing Bubble Lessons for Today's Buyers

History of Home Values

There is a long term trend in housing value that can't be ignored.

The long term trend in housing value is one of the most important principles to understand about real estate. For well over a hundred years, the appreciation in the housing market has hovered around 1% above the rate of inflation. Individual markets have gone up and down, up and down again, but the long term trend is a steady, slow appreciation over decades. Any careful observer of the housing market in the mid 2000's who understood the long term trends should have been able to predict the bubble. It's very easy to see on this useful chart (data updated to early 2011. Click on the chart to go to the original site and larger graphic). 

Housing prices are not independent from the rental market.

Every potential home buyer has the option to rent. If buying a house is significantly more expensive than the cost of renting, more people will want to rent, driving up demand for rental housing. Investors want a return on their invested capital, so rents will reflect the cost of buying the house, paying property tax, carrying insurance, allowing for vacancies, etc. Historic ratios between rents and the cost of owning a house will find a new balance reflecting today's market. If you start to see a disconnect between housing values and rents, something is wrong. Check out this great Rent vs. Buy Calculator from the New York Times to check on whether renting or buying makes the most sense for you.

Sonoma County Home Affordability IndexHousing affordability matters.

In late 2006 and 2007, the California Affordability Index for Sonoma County was 9. That meant than 9% of households could afford to buy the median priced home. Today the index stands at 46. You could call it a healthy balance when nearly half of households can afford the median priced home.

Buyers sitting on the sidelines need to understand that giant mistakes in perception were made during the housing bubble by tens of thousand of professional real estate agents. We were caught up in the hype of a rising market and the easy (too easy) availability of credit. Wall Street threw so much money at the market with liar loans, no doc loans, zero down financing, and other crappy products that it's no wonder that the market was flooded with excess demand and rising prices. Still, if we had looked at the fundamentals we would have understood we were in a bubble. 

We may make mistakes in the future when we recommend a purchase or try to determine a trend, but the three lessons I outlined are going to help keep us in tune with the longer rhythms of the market. What I see now is a tentative housing market with pent up demand by buyers, an excess REO inventory held by the banks, and a still large group of underwater homeowners. Prices seem much more realistic, but as the chart at the top shows, it's possible there may still be some market corrections ahead of us. Use the rent vs. buy calculator to see if buying, even with declining or soft prices, makes sense for your situation.

In some respects it's a new world, but in the most fundamental sense, we are back to real estate as usual. 

 

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