Are we at the Top Yet?

Over the past couple weeks I have been asked this question by a multiple of friends, clients and business people that I respect. How much higher can the market go? Having sold lots of listings his year with multiple offers and bidding wars, even I am starting to wonder. Is this 2004, 2005, 2006 all over again? Déjà vu.

My honest answer is I do not know. What I do know is that the underlying financing for most homes sold after 2008 is fundamentally sound. In other words, the only way these home owners will face foreclosure is if there is a major change in their lives or financial situation. Foreclosures will not start up simply because of interest rate adjustments on variable rate teaser loans that were given away 12 or 13 years ago.

Also, our area is growing and the economy seems to be strong. People are moving to the area, which is creating demand for more housing. This can also be seen in rental rates increasing. So for now, the economy seems positive.

I have lived through 2 real estate market crashes. In the early 1990’s the market dropped. The cause was a recession coupled with the closure of the Army Depot, Mather Air Force Base and McClellan Air Force Base. All resulted in high unemployment for the area.

Then in 2006 & 2007 the market really crashed primarily due to the easy money banks and mortgage lender were willing to give away. The result, people buying homes they could not afford under traditional lending standards.

In both cases, builders were going gang busters. They were building everywhere. This created an over supply problem when demand suddenly slowed down or stopped.

The question I have been rustling with is, “if the real estate market does crash, what will cause it?” What is the spark that will cause demand to suddenly slow down or stop?

Here are a couple possibilities, and there could be more:

Interest rates – Rates are still low and I have to believe the Federal Reserve is not going to dramatically increase them. But if rates do go up 1 or 2%, it will have a dramatic impact on affordability, especially at the price levels we have today.

Over Building – Are the builders providing supply at too fast of a rate? This is hard to say. For the most part, builders are not suppling homes under the $400,000 price point in Placer County. So for Placer County, even if the $400,000 price range and up slows down, there is still a lot of demand for the sub $400,000 price point. I do see some builders with a few Move-In ready homes (unsold inventory). But I have to believe that after the recent market crash hangover, builders will be very cautious about over building.

Hedge Fund Investors – Let’s not forget the 1,000s of homes hedge funds bought up when the market bottomed out.  Those homes are still out there and could potentially come onto the market when these funds decide to liquidate.  I have not heard of any doing so at this time, but it is something to keep in eye on.

Who knows what will happen. My 10 cents worth of advice:
1. Look at your long range plans. If you plan to own the home for 5 or more years, then you should be safe. Real estate has a history of appreciating over time. As the saying, God ain’t making any more.
2. Never put yourself in the position that you HAVE TO SELL. If you have to sell and the market is not in your favor, you lose. If you are in a position to ride the market, over time you will win.
3. If you are making a local move up or down, it really does not mater. Your home’s value will change relative to other home values within the region.

Have a great week,

Chris DeMattei