2007 All Over Again?

June 19, 2012 15:18

Is this 2007 all over again?

Some of the statistics that are coming out regarding Real Estate are looking eerily familiar. For example, pending sales in Portland, Oregon reached their highest number since 2007, and unsold inventory is at its lowest level since, you guessed it, 2007.

Low inventory is the new norm in many US cities: Oakland, San Francisco, San Jose, Seattle, Phoenix, Atlanta & Tampa have seen their inventory drop by 38 to 57% over the past year. Why is inventory low in these cities? Many homeowners do not want to sell their homes at this time because prices are still depressed.

According to the Case-Schiller 20 city index, current prices are down about 33% from their peak in 2006. The only new inventory seems to be coming on the market is from people who “have to sell” and banks. According to Case-Schiller, prices are currently at about the same levels as November 2002, so it is no wonder, that people are holding on to their real estate, if they can.

Low inventory and uber low interest rates have created an environment where prices in many markets are poised to move higher. In Portland, for example, average prices are up about 7.2% over the past 12 months and the number of homes sold is up over 20% during this time period.

So, are we experiencing the same type of real estate market as in 2007? Not really. This time, things are different. In 2007 if you had a pulse you could get a loan, NINJA (No Income, No Job or Assets) loans were common, but in February of that year, Freddie Mac announced that they would no longer buy risky subprime mortgages. Now you have to meet stringent underwriting criteria to get a loan, and even qualified buyers have challenges in presenting the necessary paperwork to get loans.

The speculators are gone. In 2007, many professional and non-professional speculators got burned when the market turned, and currently it is so difficult to get loans that many speculators are not able to get financing.  The mindset that real estate only moves in one direction (up) has changed. Buyers now realized that buying a home might not be such a great investment… especially in the short run. In 2007, most buyers did not understand that real estate prices can drop rather suddenly.

The economic recovery is tepid, and this is keeping prices in check. Yes, some geographic areas are experiencing a real estate recovery, but the recovery is nothing like the boom. This time, people are wiser, banks are tougher and the economy is weaker. This is not 2007 all over again.