How scared should investors be that we're headed for another real estate crash as we approach the 10-year anniversary of the infamous 2006-2007 housing bubble? Not at all.
Although buyers are paying spectacular prices for commercial properties and trophy homes, just as they did then, this time price increases are being fueled by foreign investors seeking diversification and a haven for their funds, as well as investors on the hunt for a low interest-rate environment. Real estate is still a favorite life raft for nervous investors, who are seeking safety amid market volatility.
This has led to record real estate prices, which some have interpreted as a sign that the U.S. real estate market is once again climbing into bubble territory and headed for another crash. But a repeat of the 2009 real estate implosion that followed the collapse of the equities market in 2008 is highly unlikely this time.
Here are the top 10 reasons why:
1. Most Americans Have Refinanced to Fixed Rate Loans
Most Americans who could refinance to a fixed-rate mortgage have already done it. As a result, the impact of interest-rate shock when short-term ARMs readjust will be minor, compared with what happened in 2008-2009. During that period, many Americans could no longer afford their new mortgage payments and defaulted.
2. Bank Repossessions are Flushing Out Old Distress
Bank repossessions recently rose to the highest levels in more than two years, signaling that banks are dealing with properties in default and flushing out old distress, rather than ingesting more.
3. Loans in Foreclosure Are at the Lowest Level Since 2007
Despite an increase in bank repossessions, the percentage of loans in foreclosure nationwide is just 2.1% -- the lowest level since 2007, according to the Mortgage Bankers Association.
4. There's Less Risk of a New Mortgage Bubble
The market is no longer fueled by a surge in new housing loans based on loose credit standards. Tighter requirements for loan approvals that followed the 2009 mortgage meltdown reduced the number of foreclosures nationwide to a 10-year low. This tempers the number of real estate bubbles that can pop and, if the market slows down, there may be a contraction, rather than a pop.
5. Interest Rates Are Likely to Remain Low for the Foreseeable Future
The likelihood the Federal Reserve will raise key interest rates recently lessened, following the economic disruption coming out of China. As a result of recent market volatility around the globe, rates have not climbed as expected and the risk of higher rates has diminished for the foreseeable future. It's also important to mention that China's slowdown could also positively impact U.S. property values, as global funds seek relative stability in the U.S. real estate market.