You may have noticed more than one mention–at least in the financial press–that the current U.S. housing market resembles 2006, just before the housing crisis. “Bubble 2.0” it’s been called. But, in our view, the worries about rising real estate values are just that. In fact, fear of another housing crisis could be a good sign for real estate investors. At the market top a decade ago, worry was scarce–homeowners and investors were confident prices would keep climbing.
Market bubbles tend to be characterized by irrational exuberance–the opposite of concern. Another term for a bubble is a “mania”. Here in 2017, though, indications of speculative mania in the current housing market are few and far between. In case anyone has forgotten, the months leading up to the bursting of the housing bubble last decade saw run-away speculation on the part of homeowners, real estate investors and the banking industry. At the core of the bubble was the main belief that housing prices would continue to rise. Why wouldn’t they? Real estate prices had risen mostly uninterrupted for nearly three decades. An entire generation of investors had barely seen a housing bear market. It was a law of nature–housing prices went up. It seemed the housing market was untouchable and to anticipate anything but growth was unheard of.
By the mid-2000s, the relentless rise in home values attracted more less credit-worthy investors into real estate, all of them believing they could sell their recently bought properties at ever-increasing prices. Needless to say, many people bought properties who could not afford them. Low documentation loans made getting a mortgage about as difficult as withdrawing money from your ATM. Banks underwrote mortgages, which were promptly securitized and disappeared from their books, leaving the bank with little to no risk at all. The banking system drowned itself in subprime mortgages disguised as low risk debt. Now that was a market bubble.
In contrast, we think today’s housing market displays few signs of speculative excess: less credit worthy borrowers do not have access to easy money and better-qualified home buyers are making larger down payments. According to the Washington Post, in Miami, where condominium investments drove the last real estate boom, buyers are averaging 50% down payments, compared to the 10 to 20% during the last buildup. In Las Vegas, where out-of-state investors drove prices to nosebleed levels a decade ago, price gains are moderate and driven by the local market. Overheating in cities like Seattle, Portland, the Bay Area and Denver is predominantly a result of rapidly expanding economies, not investors and foreign buyers.
In the real estate markets Aloha Capital primarily focuses on–Minneapolis, Indianapolis, Kansas City, and Washington D.C./Maryland–housing price gains over the last several years have generally been moderate but steady, with single-digit annual growth that is ideally sustainable. In these markets, like most in the U.S., there hasn’t been enough growth to generate anything close to a frenzy like before. These markets are typically exhibiting a balanced combination of positive returns and a reasonable level of risk for the investor.
When it comes to housing, most Americans remember the financial pain of a decade ago, and the lessons learned from it are fortunately still on their minds. Having learned so much in 2008 and beyond, we are anything but naïve to the next big shift in the markets. By trying to anticipate the inevitable next turn, we can better prepare by adjusting acquisition and exit strategies in advance. Awareness of how fickle the housing market can be, should lead to smarter investing decisions and better results in the long run. In our view, it’s going to take a more extended period of rising home prices before real estate investors have to contemplate whether it’s a housing mania like a decade ago. We think Bubble 2.0 is a long way off, but we’re on the watch for it. In the meantime, Aloha is confident in the stability of its markets and continues to see positive turnover and exits from our partners.
Please get in touch with us about financing your deals, or to discuss a specific deal. We offer competitive rates, creative solutions, efficient loan servicing and quick turn-around times for closings.