This piece is contributed by Dr. Edward Graham, Professor of Finance and Real Estate within CSB.

The real estate market (as illustrated in the figures that follow) continues to attract attention in the daily and financial press. Evidence suggests that housing prices are as gravely extended now as with the months prior to the bursting of the real estate bubble in 2007 or 2008. However, some additional review is necessary.

Background
In the year prior to the financial crisis and bursting of the real estate bubble, lenders extended credit to the least credit-worthy across the US. Lending standards were abandoned during this time of “liar loans.” The movie The Big Short comes to mind. Today’s leaders are far more cautious and that caution, alongside rising interest rates, contributes to the decline in home sales. This also increases “days-on-the-market” for the homes for sale today. 

The figure above portrays additional stress in the real estate markets at the end of 2024. Housing affordability in the first graph is echoed in the graph above with a dramatic fall in single-family home sales. Fewer homes are being sold with inflated prices and higher interest rates confronting current home buyers.

Today’s Housing Market
Several years ago, a $250,000 30-year mortgage at 3% would yield a monthly principal and interest payment just over $1,050. Because of today’s 6.5% + rate, the monthly principal and interest payment would be almost $1,600 per month. The additional out of pocket expense of over $6,000 per year for the typical homebuyer has resulted in the patterns of falling home sales and table, or even falling, home prices. 

However, an observer of these patterns must recall that little in today’s market suggests a collapse like the one observed 12-15 years ago. The bursting of that real estate bubble was preceded by over-lending, lax underwriting, and the broad softening of the economy at large. Patterns today simply echo the macro-economic artifacts of the federal response to Covid. Inordinately low mortgage rates, elevated household liquidity, and the ability of homeowners to “move up” or refinance at low rates contributed to today’s market conditions. Many current homeowners do not wish to lose their low-cost mortgages with a home sale. Other homeowners or new home buyers cannot afford today’s higher prices and higher costs of mortgage borrowing.

Housing Markets in the Future… And Recent Past
It is common for the real estate investing public to underscore the importance of “location, location, location” as the foundation of a successful real estate investor and as the centerpiece for a wise homebuyer. Less common – but offering far more meaning to the truly successful real estate investor or homebuyer – is “timing, timing, timing.” The homebuyer at the beginning of the pandemic four or five years ago has been amply rewarded for their timing, largely independent of the home’s location. 

Similar lessons will likely be learned in the years ahead.