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Bursting the Housing Bubble Myth

By Bob Schultz

Everyone has heard relentless talk of a housing bubble recently. Financial “evangelists” are all over TV, newspapers and business magazines warning of what’s to come, and the hype has contributed to a very confused marketplace. Here are seven things, often overlooked, that were primary factors that caused the hot market we have all enjoyed over the last few years:

  1. Interest rates have been the lowest, on average, that they have been in 50 years.

  2. Hordes of Baby Boomers have been moving through the marketplace, with money and a desire to have more and better of everything.

  3. More demand than supply.

  4. A volatile stock market drove many investors and “flippers” into the housing market.

  5. A massive number of people have been immigrating to the United States and buying homes.

  6. Advances in technology allowed people to have homes far away from where they worked. Because of e-mail and other Internet conveniences, people began to be able to live and work in completely different places. This allowed people to buy second homes in the places where they always wanted to live but couldn’t.

  7. The press was constantly promoting how hot the market was.

These conditions created the perception that the thing to do was buy a new house (or two or three or more). Everybody was doing it. The over-enthusiastic demand drove prices too quickly and artificially. Former Federal Reserve Chairman Alan Greenspan said during the so-called “dot-com” boom that he feared the American investor and Wall Street were “suffering from irrational exuberance.”

If you take a step back and look at conditions pragmatically, you will see that five of the elements that drove the hot market are still in place, and the absence of one of the elements is a good thing. Let’s evaluate the seven conditions that caused the hot market once more:

  1. Interest rates are still the lowest, on average, that they have been in 50 years.

  2. Hordes of Baby Boomers are still moving through the marketplace, with money and a desire to have more and better of everything.

  3. Supply and demand will always be present, just at different levels across various markets. Temporarily, there are markets where, because of recent investor and flipper sales, current inventory is high. But demand will continue. Think about this: Because of increasing unavailability in most markets of readily developable land in good locations, and continuing cost increases for many construction materials, the demand will soon again outpace the supply.

  4. The stock market is no longer as volatile as it was during the hot market, and investors and flippers are on their way out. Investors, for a time, seemed to be very good for the housing market. They created extra demand, which allowed us to increase supply and raise prices. But the demand was artificial, and the houses that investors purchased ultimately became competing inventory. Eventually the supply of new homes outpaced real demand, and that’s part of what is causing the housing market to cool. Additionally, many investors are desperate to sell their “inventory” as the market cools, and are willing to sell homes for any price that is greater than what they paid months or even a few years ago. This devalues the new homes that builders are trying to sell at today’s prices, especially when those homes are in the same communities where investors have inventory. As soon as investors’ remaining inventory is sold, the market will begin to stabilize. And, if the stock market remains stable, consumer confidence will increase.

  5. Immigration to the United States is on the rise and will only continue to increase, and home buying is a priority for immigrants. Michael Lee, a recognized authority on multicultural home buying, noted that a University of North Carolina study estimates that 80 percent of all first-time homebuyers in 2010 will be immigrants. “While the new home market may be cooling, multicultural buyers are heating up,” Michael said.

  6. E-mail, online databases, Blackberries, remote desktop access and all sorts of other technical conveniences still allow people the freedom to live far away from work. Brand new devices and capabilities continue to crop up and make it easier to work away from the office, and more and more people are working from home, so this trend will continue.

  7. The press will always sensationalize things. Now, instead of raving about a hot market, the media are touting a cooling market, and that is part of what’s driving the slowdown. Things are never as great or as bad as the press says they are, and, when a customer comes into your sales office, you have the opportunity to help them understand that this is not a bad market and that now is still a better time to buy than later.

In reality, there is no housing bubble. Most markets are not bad. They are simply returning to normal after a long period of “irrational exuberance.” In a normal market we cannot expect a sale to automatically materialize every time a customer walks through the door. But the good news is that we can still sell houses. The fact that people show up at your sales office means that they’re thinking about buying – but they are confused. We have to cause them to think it through – to un-confuse them and help them realize that now is still a better time to buy than later. We have to get back to a sound process where discovery, presentation and closing skills are paramount. In extraordinary markets, builders and salespeople can be ordinary and still look good. But, in ordinary markets, we all must be extraordinary to do well.

Read other articles and learn more about Bob Schultz.

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