Is This Real Estate Recovery a New Bubble?

by | Mar 19, 2013 | How to Guides, Uncategorized

If you’ve watched the news or read the paper lately then you know the real estate market in Portland is on it’s way back up. Inventory remains at new lows not seen since 2006 and the median price in the metro area is up around 10% since we hit the bottom at the beginning of 2012. Why then are some people asking if we’re in a new bubble? For one thing many people got burned in the last downturn and that memory is very recent. At that time optimism was at all time highs when the market came to a skidding halt. I don’t think we’re in a new bubble and here’s why:

1. Affordability, interest rates are almost half of what they were in 2006:

In 2006 a $300,000 loan at 6.5% would put you back $1,896 a month not including taxes and insurance. My first home loan in 2006 was 7.25%

in 2013 a $300,000 loan at 3.5% will put you back $1,347 a month not including taxes and insurance. That’s a $549 a month savings!

 

2. No zero down or “exotic” loans are out there anymore:

Much of the price run up in 2005-2007 was from speculation. This speculation was fueled by the ability for people to buy multiple homes and investment properties with no money down. This meant that when things got hard many owners had no “skin in the game” and little incentive to try to hold on through the down turn. Now investors need 20% down and loans are very carefully checked by banks.

 

3. Rents are WAY up:

In 2006 if you got a new job out of state and wanted or needed to rent your house because it was underwater the rent typically didn’t cover the mortgage. Remember, interest rates were twice as high and rents were at 70% of where they are now. In 2013 if you need to move it is very likely that the higher market rents will cover the lower sub 4% mortgage expense. This means people have more flexibility and all the incentive in the world to keep their home that is not only appreciating but also making a net profit along the way.

 

Given the affordability, quality of borrowers and higher rents, this recovery looks a whole lot more sustainable than the last big run up in real estate

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