"I just don't want to be upside down $50,000 on this house like my parents were back in the real estate crash!"
This was the comment one of my buyers made to me a couple of days ago and it echoes an entire generation of first time and millennial home buyers that have many of the same worries. They didn't grow up like I did with people telling them, "real estate is always going to go up, it's never gone down." Instead, they grew up in their middle school and high school years watching their parents fight and struggle to cope with the biggest housing bust the nation had ever seen.
They sat at the dinner table and watched as their parents tried to understand why the variable rate mortgage was now $600 more per month on their payment than it had been just a few months prior. They had to help move the family 3 times in 6 years every time the house they were renting either went into foreclosure or the owner decided he finally had gained back enough equity to sell. Weird random men and women coming by with clipboards and taking pictures of the house. This was a really really bad span of 5-6 years and so I understand that there might be a little bit of PTSD!
I have to remember all of this when I'm working with buyers from this age demographic and I have been screaming since 2011 that it has never been a better time to buy investment real estate. About 3 years ago it seemed like people started to listen. For those that are still worried about a crash though, this article is for you. And I will start by saying I apologize for not helping cure your fears 4-5 years ago cause it has already cost you 25-35% equity in whatever house or property you would have bought.I've been trying to articulate to people for years just how crazy the 2008 real estate market was. I could tell about the time I was a sales pitch meeting with about 200 people and a man from Chase bank stood up and told every single person there he could personally guarantee them a line of credit with the bank for $50,000, no questions asked. I could talk about the kid in High School that came to me to buy a house and he ended up getting a mortgage and flipping it and making around $10,000 (To this day I don't know how he qualified for the loan and I never asked. He had less than $1000 in his bank account the day he signed on those loan docs though).
I could talk about the escorts that did their accounting with a man that worked in the same building I did and how they were each buying multiple rental properties every month. No, I didn't steal that from the movie "The Big Short", this was my real life and Michael Lewis could not have described this mess more accurately! If you have only seen the movie and want more details on exactly how it all happened then I encourage you to read the book, it's amazing! And it was real life in the housing industry in 2006-2007.
The story that I will tell what will really describe just how bad it was is a little less sexy and not nearly as fun to recall. I was working with For Sale By Owners a lot in those days because I was still young and didn't have a huge network and also because everyone was upside down or close to it on his or her mortgage and so he or she were trying to save every penny they could in selling their house. Let's just say I never ran out of people to call. On this particular day, a couple in their early 40's called me to come see 2 properties they owned in Herriman Cove that they wanted to sell. After sitting with the couple for a few minutes they quickly realized that they were very much so upside down on their mortgages. The details are a little hazy but if I recall they owed about $425-450k on each home and my values had them selling at or around $330,000 each.
These were good people that meant well. The husband was a mailman and made about $55,000 per year. The mortgage on each house was about $2800/ house every month. You can do the math. He wasn't qualified to buy the homes and never should have been able to buy them. But back then you could get 100% loan with nothing down. You could tell the bank or lender what you made and that was somehow good enough. And if you made that number a little bigger than it actually was you could be pulling in about $4600/mo at work and have mortgages totaling about $5600/mo on 2 vacant homes that you could rent for around $1600/mo each. This was 2005-2008. And this all stopped in one day.
With this particular couple, they didn't want to believe me or the comps so I decided to play a little game. Their house sat at the end of a long street on top of a hill so I had them walk into the garage with me and I asked them to point out the first house on their street that they could see that didn't have a for sale sign in front of it. They couldn't. I then showed them the market stats and the fact was of 138 homes listed in their area and their price range, only 1 had gone under contract in the past 60 days. It was time to short sale or foreclose. With the wife crying and the husband fuming, somehow assuming I had brought this grand injustice to him, they told me to leave and not come back.
Now that I have painted the picture of 2008 and now that you can understand why my client was apprehensive to dive into this retirement plan that we call real estate, let me tell you why there is a 0% chance this is going to happen again anytime soon.First, let me start by showing what was going on in 2008 that you flat out can't do in 2018...
I. Buying an investment property with nothing down. This was all the craze back in 2008. You'd get a loan for 80% on a first mortgage at a rate of 6.5% and then you'd get a 20% loan on the second mortgage that was usually about an 8.5% rate if you had decent credit. You can do the math, that's a high payment.
Since 2008 there hasn't been a single investment property purchased with a loan where the buyer didn't bring down at least 10% and in 99% of the cases, they brought in at least 20% down. The programs flat out don't exist. This means of all the investment properties that could potentially hit the market in a downturn, none of the owners of these homes are going to be upside down and need to fire sell quickly. To me, this is the single most important reason that the real estate market in 2018 will not crash. Even if something crazy happens there won't be a need to sell off because of the equity in the units and because of reason number 2
II. Interest Rates- Just for your entertainment, I'm going to share with you a chart that tracks the history of interest rates so that you can see just how crazy low they have been for anyone buying a home in the past 7-8 years.
Why do rates matter so much? For most people it is obvious, but for the sake of those that aren't familiar, I am going to make it super clear. It has to do with one word, "Affordability". How much house can I qualify for with the amount of money I make each month? This is the one question that every home buyer has to ask themselves and it is the one question that entirely depends upon interest rates. Let me give you an example of an investment property scenario: $300,000 house on a 30-year mortgage with a 20% down payment and a 4% interest rate= $1394/mo with taxes and insurance included.The same scenario now but we make it a 6.5% interest rate and the exact same house at the exact same price will jump to a payment of $1765/mo.
So you can see that when it comes to being able to afford a house, interest rates play a huge role. If you are buying a $300,000 house that rents for $1900/mo. then the answer to whether or not you should buy it changes dramatically based on these 2 mortgage amounts and cash flow. Since about 2009 over 40% of the investment properties purchased in the United States were done so with cash. Of the remaining 60%, the avg mortgage on these investment home is right around 4%. The purpose in all of this is simply that anyone that has bought a home for themselves or an investment property is currently sitting on a very nice cash flow and will have no incentive to sell even if the market turns. They will simply rent it out and keep making their cash flow income each month.
III. Rents- That brings us to our next point and that is the cost of rent and how it has increased over the past several years. In Utah alone you can see the chart below and even in poor economic times, we saw growth in the avg household rent. What this means for a housing crisis is that it is going to be a lot cheaper to stay in your home with a mortgage than it is going to be to rent a new place if you decide to panic and sell without the intent to buy a new house.
In 2008 if all of your neighbors were selling low and because half of them quit making payments to the bank you could rent any house in the neighborhood for $800 below market value, they didn't care. It was a vacant house that the bank was foreclosing on so anything the owner was gonna get was a bonus. Oh and in case you are wondering, here in Utah we are at an all time low in vacancy rates and we need a lot more homes than are available! IV. Inventory shortage- One way to tell if the market is healthy or not is the avg days on market that homes are currently sitting. And on the Wasatch Front MLS, it is currently the shortest supply of inventory I have seen in my 13 years as an agent. I just looked at the exact numbers and in Salt Lake County right now there are 1659 homes active on the MLS. There are 2490 under contract! This is insane. This means we have a .78 supply of homes available. We literally have no inventory to buy. What does this mean? At worst, even if the market crashed tomorrow it would take 7-8 months just to have enough homes come available to meet the need for the supply we have. So it is a lot more likely with a shortage like this that we will have another increase of 5-20% over the next few years as predicted by Forbes Magazine and Zillow, as opposed to having a decline in the home prices here in Utah. V. Utah's Economy- This brings me to my last point. Here in Utah, we have one of the best economies, if not the very best economy in the entire country. Job growth is best in the country, unemployment is basically at zero, and every economic factor that truly matters is pointing to green pastures ahead. Yes, I am aware that something crazy could happen and could ruin a lot of this amazing growth that we have seen in real estate since it bottomed out at the end of 2010. We are in the second longest bull run the U.S. economy has seen since the turn of last century. But if you are worried about a crash I just gave you 5 really good reasons that it is a lot more likely we are going to go up another 20% then it is we are going to go down another 20%. The BIG crash you worry about what happened in 2007-2008 saw Utah drop as much as 27% in some areas! Well, guess what... If the market does half as well as all the indicators show it will over the next 4-5 years, and let's say there is a crash, you will turn on the news to hear, "Home prices almost back to 2018 levels!" Wouldn't it be nice to be in the house you want for those next 5 years? For more information on the housing market please check me out on YouTube at my page Rex Real Estate Team or check us out online at www.TheRexRealEstateTeam.com