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.