Is This a Real Estate Bubble?

Loan Standards Have Improved

We have returned to more conservative lending policies. During the last bubble leading up to the great recession, it seemed like all common sense went out the window. Banks were handing out sub-prime mortgages like candy at Halloween. Unqualified buyers were given low teaser rate mortgages that caused them to default when payments ballooned. Many financial institutions turned a blind eye to weak underwriting practices. I think the motto in the financial sector back then was “greed is good” and we all know how that turned out. Today, although we’ve been in a super-hot market, loan standards are much tighter now. Buyers must show good credit, proper documents, and a sizeable down payment. All of these safeguards are designed to protect the banks, but they protect everyone in the housing market.

Builders Can’t Keep Up with Current Demand

The second reason I believe this is not a bubble, is that our last boom was driven by a surge in home construction which caused a glut of new homes coming on the market all at once. When supply far outpaces demand, prices fall drastically. As a result, many builders went bankrupt in the great recession. Those that survived were very cautious about starting new projects. That has led to a significant building shortage over the past decade. This problem won’t be fixed overnight. There are so many barriers to new construction that it will be years before we catch up with demand. The high cost of labor and materials due to supply-chain issues and inflation, cumbersome zoning restrictions, and time-consuming approval processes make it very difficult to build affordably. We need government to step in and speed up the approval process.

Rising Interest Rates Should Stabilize the Market

Recent low interest rates have meant that buyers could afford the monthly payments despite the high prices. As rates rise, it will make purchasing a house more expensive, taking some buyers out of the market. In Canada, the government has been concerned about rising interest rates for a while now, so they make buyers qualify for a mortgage that is 2% above the going rate to ensure they can afford the payments if rates increase. Economists in both the US and Canada are predicting rates will increase in 2022. If rates don’t increase too quickly, it will cool the market down slowly rather than forcing it to a screeching halt.

BABY BOOMERS did very well in the stock market during the pandemic. They have most of the country’s wealth and they are using that money to buy larger homes and vacation properties. I suggest you prospect financial planners. They often work with wealthy baby boomers and have clients who are considering restructuring their portfolios to include more real estate.

MILLENNIALS are now in their peak buying years. Those with good incomes are diving into the market. Consider putting together a series of short video tips for first-time home buyers to attract millennials. Promote them on social media which is their preferred communication platform.

As house values increase, many prospective buyers have been priced out of the market. This means there is more demand for rental units. It is a great time for INVESTORS to buy up homes in sought-after neighborhoods and rent them to families who can’t afford to buy. If you are interested in working with investors, one of our coaches, Craig O’Rourke, has an amazing course called “Learn It, List It, Sell It: Investment Property Specialist Program”. I highly recommend it for anyone looking to sell residential income-producing properties.