Is the bubble going to burst?

IS THE BUBBLE GOING TO

So going back to wonderfully written and poignant article Holmes on Homes – we have a clear understanding of what we’re looking at – a crazy shortage of listing inventory and very strong demand creating a very high priced market. So what happens next?

To be quite honest, I don’t know and nobody really does. We can talk over the factors that will create change so in watching those, you’ll be able to better predict what will indeed happen next. With that, here are a few concepts or indicators to watch:

LISTING INVENTORY Starting with the age-old soap box. Where’s the inventory! You saw a drop in inventory from 2015 to 2017 and then it steadied out around 9,500 listings. 2020 chaos ensued and we’re down to 6,500 listings. So what happens when the chaos ends: election is over, vaccine and better treatments for covid and if we can find a way to all play nice in the sandbox together – people will be more comfortable selling their home. So the shadow inventory of people waiting for 2020 to be in the rearview is out there. If we go back to 9500 listings next spring.. watch out. This is nearly 50% more than what we have now and exactly what we did have in 2019 so it’s plausible it’ll go higher than that with the shadow inventory waiting.

INTEREST RATES When we work with buyers, I ask a question in reverse order. Instead of asking a client the price range they are looking in – I ask instead “What is your goal or comfort level for a monthly payment?” The reason I ask that is when buying a home – it’s rarely done in concept of overall price but instead what the monthly payment will be. We have historically low interest rates at 2.75% for a 30 year fixed! This means more buying power. $100,000 at 2.75% over 30 years = $408/mo. So does it matter when a buyer has to go $25,000 over list price to secure a home – not too much as it’s only $100/ mo. If you’re shopping at $500,000.. thinking of a $600,000 price is relatively doable as it’s only $400/mo. This allows appreciation to go through the roof. And it has! So what will happen when interests go up. What happens when we see 3.75% as a rate? What about 4%. Taking away buying power WITH increased inventory – pop!

NEW CONSTRUCTION Where does new construction play into this? Great question. I see it as the ultimate balancing act between existing construction and demand. Of course there’ll always be people that gravitate towards a new home but with an inventory shortage and great rates, new construction volume is off the charts. So what to watch for – that balancing act. The cost of new construction has skyrocketed. The cost of lumber has gone up 30% - 40% in the last 5 months alone. Combine that with wildfires out west, shortage of skilled labor and you have a recipe for inflated new construction prices. As those prices grow – existing homes will look more attractive. If those costs even out a bit, people will still head this direction. It’s no doubt a balancing act.

FORECLOSURE Yup..I just dropped the f-bomb. Can it come back? Will it be allowed to come back? This is difficult to really know. There are plenty of homeowners that are on hard times due to Covid. So what happens with those mortgages that will be in default because of this? What happens to the mom’s and pop’s investor out there with a tenant that’s not paying rent because they’re furloughed or they’ve been laid off and they can’t evict them. What’s the consequence to all of the rent and mortgage not getting paid due to a global pandemic? Will there be government intervention to offset this? Will there be loan forgiveness or balances put on the back-end of the loan? Given our government and how things are going – let’s just say this concept could get interesting but certainly watch for this inventory as a possibility in the months and year ahead.

So do we have a bubble.. Hmm, does a bear shit in the woods? We do but it’s size and scope is really based on price, geography and style of home.

Take for example a home we sold recently in White Bear Lake – 2347 Dorothy Ave. One story, nicely remodeled, a little over 2,000 sq ft. If we would have listed that in January 2020, I would have suggested $325,000. We listed that in May at $349,900 and it sold a month later at $376,000. That’s a bubble!

The other end of the conversation is our listing at 11433 Kingsborough Trail in Cottage Grove. We’ve been working on this listing for 3 years. We started that listing in September of 2017 at $895,000. Today we’re priced at $849,000. We’ve had more activity in the last 3 months on this listing than the previous 2+ years combined. That’s certainly not a bubble but the current market has put that home IN the market to sell. And it will! By the way.. go see that home. Seriously it’s the absolute steal of the Twin Cities.

In between those 2 examples are 1,000’s of homes and markets and it’s evident that the lower price on that spectrum, the more possibility of a bubble. Will it pop? Will it burst? Or simply deflate and level off? I don’t know but I’ll be watching all the pieces to this puzzle in the months ahead and I suggest you should too! Or you can just call me for the cliff notes version anytime!