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Sam Gendusa August 8, 2018

Newsletter - August 2018

Back in May, Zillow released a report predicting the next U.S. recession would begin by the end of 2020. It also forecasted that the uptrend in home values — which have been climbing at a steady clip for the last 6 years — would slow significantly between now and then.

It does seem that the market is due for a correction. From 2012-2017, housing prices in prime coastal markets like Seattle, San Francisco, and Los Angeles rose at a rate of more than 15 percent annually. Now they’re so high that a family in those markets making the median salary can no longer afford the median mortgage.

In San Francisco, for example, the median income is up about 20 percent (to $90,000) since 2011, while housing prices are up more than 80 percent (to $900,000).

Some experts predict that as interest rates rise (as they are expected to do), homes will become even less affordable, which will dry up demand — and that in order to stabilize the market, housing prices will fall 7 percent for every 1 percent increase in mortgage rates.

Adding to concerns, DTI ratios are up (as we wrote about in June). While this has enabled more homebuyers to enter the market, it has also increased the likelihood that when the economy does take a downturn, more people will be unable to make their mortgage payments.

But not everyone agrees that this will play out within the next two years.

Eddie Wilson, CEO of Affinity Worldwide (which includes more than 80 companies in the Real Estate Investment Industry), had a different take in a recent article on Forbes.com.

He believes the current market lacks the harbingers of an imminent correction and that home values could easily continue their upward trend much longer than is being forecast.

While the traditional housing market cycle lasts a decade, a longer cycle is far from unheard of. In plenty of cases — especially if you look beyond the last 40 or 50 years — the economy and real estate markets flourished and fell on longer cycles. Wilson also suggests we view U.S. real estate through “the lens of land sales and construction activity as 18-year cycles instead of the conventional decade measure.”

To properly assess the current state of the U.S. housing market, he recommends we ask the following questions:

  • Are we engaged in reckless lending?
  • Are we in the midst of economic instability?
  • Are we setting up the circumstances for housing market overexpansion?

“If the answers to these three questions are no,” he writes, “then I would propose that the national housing market (and a number of hot regional ones as well) may have longer legs than we’re currently expecting.”

Whatever lies ahead, it’s important to ensure you have everything you need to protect your portfolio, and Blue Streak Docs can help. Plus, if you haven’t worked with us before, give us a try and get your 5th order FREE!

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