Today I want to take a look at the top three myths about our current real estate market:
1. We are headed toward another housing bubble. Home prices have appreciated year-over-year for the past seventy-six straight months. We are near the peak prices that we saw before the bubble burst previously and many people are worried it will happen again. The reality is, though, that there is a lack of homes for sale and a strong demand for them.
Historically, a normal market requires six months of inventory for prices to rise with the rate of inflation. Currently, there is only 4.3 months of inventory available, which means that there is still upward pressure on pricing, especially in lower price points. If we see a downturn in the economy with weakening demand, the market will normalize and price gains will be in line with inflation.
2. The rumored recession will lead to another housing market crash. Economists and analysts know that there has been economic growth for nearly a decade, making this the second largest expansion in America’s history. They also know that when this happens, a recession can’t be too far off.
A recession is generally identified by a fall in the GDP for two consecutive quarters and does not equal a housing crisis. However, many people group them together because the last time there was a recession it caused the housing crisis. According the the Federal Reserve, home values appreciated after five of the last six recessions.
3. There is an affordability crisis. The monthly cost of a home is determined by the price that is paid and the interest rate of the mortgage. Even with the current interest rate of 4.59%, according to Zillow, the percentage of median income necessary to buy a home in today’s market is much lower than previously seen. Today’s average of 17.1% is lower than 1985 to 2000’s 21% and lower still than 2006’s 25.4%. Interest rates would have to increase to 6% before buying a home would be less affordable than historic norms.