(image by Tierra Mallorca on unsplash.com)
Perhaps the question shouldn’t be “Will the Bubble Burst?” but “When Will it Burst” and whom will it hurt the most? As I’ve previously reported, affordable housing is becoming harder and harder to find in Boise and the surrounding Treasure Valley area. The rise in rental rates is outpacing that of the national average, to say nothing of the rapidly rising housing prices.
A recent article by John Sowell in the Idaho Statesman, the leading newspaper in all of Idaho, reported that home prices have risen almost 21% in a year. That number has outpaced the annual price increase of 18% that preceded the housing market crash in 2008.
“Does that huge increase foretell another crash?”
Two unnamed economists said in that same article that there are differences between the 2008 housing boom and crash, and the recent boom. The 2008 nationwide housing crisis that hit the Boise area very hard was initially fueled by banking practices that were shown to be “shoddy” at best. Unscrupulous and illegal are better adjectives to describe what some lenders were doing back then. And some financial institutions paid a heavy price for their actions.
Three large investment banks -- Lehman Brothers, Bear Stearns, and AIG -- collapsed as a result of their lending practices. These collapses combined with other market forces, according to Boise real estate agent Mike Turner, to then send the entire housing market into a tailspin.
“It’s Different this time”
Turner continues by saying, “This time, it’s different. We’re in a much better position. Banks and [other] financial institutions are not over-leveraged like they were back then.”
If you’ve read my previous articles on the Boise housing market, you know that prices are going up and up and up. That 21% increase mentioned earlier is only a snapshot of aggregated data from the largest county in the state. The county that contains the state capital as well as main industry and corporate headquarters.
(image from Precondo CA on unsplash.com)
Low interest rates have contributed to the housing boom, both in number of housing purchases as well as the increase in housing prices. With interest rates as low as 2%, buyers can afford a larger mortgage for the same monthly payment. Here is an example that should make you shake your head back and forth; you know the smh in popular texting jargon.
Let’s say a family feels they can afford a $2,000 monthly mortgage payment for principal and interest. When interest rates were 6%, that family would have been able to afford a mortgage of $335,211. Depending on what part of town they were looking in, that financed amount would have gotten them a nice home.
With today’s interest rates at 2%, that same $2,000 monthly mortgage payment would allow them to borrow $541,999 -- a 61% increase in the amount borrowed. Would that family necessarily be looking at half-million dollar (and higher) homes? Maybe not. But what that increased borrowing power does is to enable to offer a higher price when they find a home they really want.
(image from Google on zillow.com)
Paying more than listing price is not unusual. It happens here in Boise and all over the country. Back to that mythical Boise family. Let’s say that they find “the perfect home” -- it has the right amount of bedrooms and bathrooms; it has a nice backyard for family fun and entertaining; it is in the school district where they want their children to attend. In other words, it’s “the perfect home.” Their agent told them it just went on the market for $465,000. It’s more than they wanted to pay, but they’re tired of paying rent, and so they decide to “take the plunge” into the housing market.
The couple had heard stories from their parents of starting with a low offer and coming up only as necessary. “That doesn’t work anymore,” their agent told them as they drove from the house back to the real estate office to write up an offer. “The listing agent said he’s heard from two other agents that are submitting offers today. If you really want this house, I’d suggest you offer them at least ten thousand over the listing; the more the better.”
After reviewing all the positive aspects of the house, the couple wrote an offer for $525,000, still within their budgeted amount. They got the house, and they lived happily ever after.
“Increasing demand without corresponding increasing supply”
In addition borrowing power from lowered interest rates, the demand for housing has outpaced the increase in the supply of houses. New houses are being built, but of course they are farther out from town as large tracts of buildable land in the city are very scarce (and very expensive).
Will the bubble burst in Boise’s housing market growth? No, because there is more than enough demand to absorb the slowly growing supply, and the Federal Reserve has said that interest rates will continue to stay low at least through this year. If you want to buy a larger home, this is the time to do it. But be ready to pay more than the listing price.