What does it mean? This time is different than the last time.

I hope your summer has been going well! Here is your July update on the real estate market.

The talk of the real estate market slowing down from the fast-paced market of the last couple years has been going on since the beginning of the year. Now in the last month or two, we have certainly begun to see what everyone is calling a “shift.” Along with this shift, you’ve likely heard, “this time is different than the last time!” This phrase has been used to calm fears of a large downturn in the real estate market.

This email walks through why this market slowdown is different and much less severe than the last time.

In short:

The downturn in 2007 was caused by sub-prime mortgages being written with out much, if any, asset verification. When these mortgages begin to go into default as interest rates were increased on many of the adjustable-rate mortgages, borrowers begin losing their properties as the higher payments became less affordable. The investors that held these notes were unable to recoup their losses as the insurance company that insured these mortgages did not have the funds to cover all the mortgages that were in default. This coupled with how these mortgages were used as financial instruments brought the housing market and other financial markets down.

Today, the market slow down is being caused by rapid appreciation coupled with rising interest rates making it more expensive to buy.

Something to keep in mind:

A recession does not equate to a fall in the real estate market. Most recessions have not led to falls in the real estate market.

Why is the real estate market remaining strong?

Outside of the fundamental differences between today and 2007, a large factor in the health of today’s real estate market in comparison to 2007 is the nature of the demand and the supply and demand economics.

The generation that everyone thought would not buy houses, as it turns out, are buying houses! Millennials have created a spike in “new households” being created. A new household is created when someone who has not previously owned a home buys a home. There are currently 200,000 less homes being built than there are buyers for these homes in the US. There is still a large demand for homes. This demand is coming from the necessity of a place to live and not the desire for a second/vacation home.

A couple quick stats to illustrate the different market condition of today and 2007:

• Available inventory in the Twin Cities: Today: 7,708 | June of 2007: 36,943
• 14,000,000 more households were created in 2021 compared to 2007 in the US while there are 3,000,000 less homes for sale today versus 2007.

Have any questions? Don’t hesitate to reach out.