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Looking to Buy a Home? How the Housing Market has Changed Since the Crash

By Lisa Pastushok, CFP®August 1, 2019Economy

It’s nearly impossible to live in the Bay Area without hearing about the exorbitant cost of living and shortage of housing. Now more than 10 years after the 2008 market crash and the collapse of the US housing market, a lot has changed. But how exactly does today’s housing market compare with that of the 2000’s housing boom and subsequent bust?

Overall, median home prices nationwide are up more than 50 percent since bottoming out during the Great Recession, forcing many to question whether we are in the midst of another housing bubble. However, unlike the lead-up to the housing crisis when subprime loans were often being made to borrowers who didn’t have the ability to repay, today’s lending environment has tightened with the introduction of stricter federal lending regulations. This has included changes to one of the many villains of the housing crisis – the Adjustable Rate Mortgage (ARM). In the early 2000’s as interest rates rose, unqualified borrowers with unsustainable ARMs couldn’t afford their mortgage payments, leading to delinquencies, foreclosures, and eventually a collapse in prices. ARMs made up roughly 30% of loan applications in 2004 compared to just 6.5% in late 2018, according to the National Association of Realtors.

In addition, today’s housing supply is tighter than it was prior to the great housing crash. In December 2008, for example, it would have taken nearly a year for all of the homes on the market to sell based on the sales rate at the time. As of June 2019, it would take just 6 months. This is up from January 2013’s 4 month supply but still markedly lower than many of the peaks preceding prior recessions. The housing supply is even tighter throughout the Bay Area. With strict zoning rules, high construction costs and a booming tech-driven economy, demand has far outpaced supply. In short, compared with the mid-2000’s, high housing prices today, especially in the Bay Area, look more like a supply problem and less like a bubble.

That’s not to say that we couldn’t see a decline in the housing market. In fact, many of the nation’s fasting growing markets have already seen year-over-year declines in prices. The median single family home price in Santa Clara County, for example, declined 3.6% this June compared to June of last year, according to the California Association of Realtors. At $1.35 million, the median price is down 7.2% from the peak in April of 2018 but still at a level that leaves home ownership out of reach for many. In fact, just 20% of Santa Clara County households can currently afford a median-priced home, according to the California Association of Realtors. This is higher than the 11% reached at the peak of the housing bubble but lower than the long-term average of 26% (since 1991).

So, if you’re currently deciding whether or not to buy, what should you do? Unfortunately, there is no one-size-fits-all answer. With many moving parts, the decision must come down to an individual’s unique set of circumstances. How long do you plan on staying in the house? What rate of return could you otherwise achieve on the down payment? What are the current tax benefits of owning a home? How would your monthly payment compare to the rent on a comparable house? To simplify this analysis, many websites provide tools that attempt to quantify the decision making process. The New York Times, for example, provides a Rent vs. Buy calculator that takes the most important costs associated with buying a house and computes the equivalent monthly rent. For example, if you plan on buying a house for $1 million (20% down payment with a 30-year mortgage at 4%) and staying there for 5 years, the equivalent rent would be $4,123 per month. In other words, if you can find rent for less than that, it is projected that you would be better off renting. This calculation is based on assumed values for things like inflation, investment rate of return, etc., and you can change these values as you see fit.

After years of steady gains in home prices following the recession, with many parts of the Bay Area leading the recovery, are we finally at a crossroads? It’s hard to say. While price declines could very well continue, the recent drop in mortgage rates could also bring more buyers back into the market. Similar to the difficulty in timing the stock market, it is nearly impossible to pick the perfect entry into or exit from the housing market. Rather than speculate, you should analyze available data in the context or your own unique situation and make the decision that ultimately makes you feel the most comfortable.

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