As more and
more buyers gain awareness (and first-hand experience) of our red hot
sellers' market, the question is coming more and more often: “Are we headed for another bubble?”
It’s a great
question, and one that deserves some discussion.
First of
all, I know there are things we can never know.
We can never know what global events lie around the corner. We can never know what the stock market is
going to do. We can never know if some
major employer will pack up and leave town.
All we can
do, as we have always done, is make the best decisions we can with the
information we have.
I have
outlined repeatedly in this blog over the past several months the factors that
are driving our market: 1) no more
foreclosures; 2) little new construction, especially below $300k; 3) low
interest rates; 4) the return of some percentage of 83,000 Denver area
households that lost homes in foreclosure between 2005 – 2008; 4) significant in-state migration, especially Millennials who will be aggressively pursing entry-level housing; 6) and first-time
buyers who are being implored to buy homes by their Baby Boomer parents who see
the obvious value in today’s market.
So how do we
know when the water is getting too deep, when values are rising too fast?
Because I
lived through a bubble market (and, in fact, left California because of it in
2005), I have a benchmark I call the “Hierarchy of Buyers”.
It’s a
little complicated, but what it boils down to is this. I will know when this market is at its apex
based on the quality of the buyers sitting in my car.
In other
words, as long as most buyers have 20% down, stable employment, 780 credit
scores and money in the bank… we are nowhere near a top.
When those
buyers have little or no money down (often borrowed money), with minimal reserves and credit scores
in the low 600s… time to get out.
I often talk
with my sellers about the “Hierarchy of Buyers”, about how a 100% cash offer
always beats a financed offer (no appraisal, no loan objection deadline, etc);
how a 20% down buyer beats a 10% down buyer (no mortgage insurance, no
secondary underwriting by the PMI company, etc); how a 10% down buyer beats an
FHA buyer (FHA can be a crapshoot for all sorts of reasons), etc.
What it
boils down to is this. Generally
speaking, cash buyers were cherry-picking homes in 2010, 2011 and the beginning
of 2012 with aggressive offers at really low prices. They were often beating out financed buyers
to get these homes. Most cash buyers
have already pocketed a lot of equity in 2-3 short years.
There are
not as many cash buyers anymore, because with prices up 10% to 15%, the value
is not as great. So now here come the
20% down buyers, making sizable down payments and locking in interest rates in
the 3’s that will set them up beautifully for the next decade or more.
These 20%
down buyers are often beating out lower down payment buyers, who continue
having to fight harder and be more creative in getting their offers
accepted.
Once the 20%
down buyers clear out, the market opens up for 10% down buyers… then 5% down
buyers… until finally, when there’s nothing left by FHA or low down payment
buyers, the cycle ends.
It’s just a
theory, and there certainly are countless individual exceptions to it. But it’s the benchmark I use in gauging where
the market is as we work through this dramatic season of change.
If the
buyers have money and credit, we’re good.
When the
buyers have no money and no credit, it’s time to think about your options.
Based on what I see with my eyes, we are a long, long way from having to worry about a hitting a top any time soon.
You should not fear this market. The much greater fear is missing out on it.
