Typically, we use our blog to provide legal analysis or comments. However, we have received a deluge of questions pertaining to our opinion of the real estate market and whether we are headed toward another “bubble.” It is our opinion that the recent growth in the real estate market does not carry with it the problems that fueled the rapid growth experienced several years ago. If one recalls, that growth was fueled by speculators who were putting very little, if any cash into properties. Those purchases were typically financed by loans that required little or no money down, required little or no documentation, and contained loan terms that allowed borrowers with little or no means to acquire property and make extremely low monthly payments, at least temporarily (such as negative amortization loans, teaser rates, and the like). In other words, the prior bubble was fueled by speculators who were enticed to make purchases that they may not have otherwise made due to loan programs that were probably not in their best interests.
The current market is drastically different, and the driving forces behind this market involve much stronger buyers. Based upon our experience, most of the buyers who are fueling the recent market are either (a) cash buyers, or (b) buyers that are putting significant money down. These buyers are not nearly as sensitive to short term forces, and have the wherewithal (and the equity) to weather any type of short term “correction.” The bubble burst occurred several years ago because purchasers had no equity to begin with, and therefore were entirely dependent on short term price appreciation. As that appreciation slowed down or even stalled, there was a domino effect as owners had no choice but to default on their short term loans (as they could not sell their property for an amount sufficient to pay them off). That is no longer really the case. As we have seen, the current market is being driven by purchases that involve substantial equity, whether it is a cash buyer or a borrower who is financing transactions upon much more reasonable and customary terms.
The moral of the story, beware of those who will try to sensationalize the recent market uptick by trying to compare this market to the market of old simply because prices are on the rise. In a healthy market, that is what occurs. This is a drastically different market, with strong buyers, most of whom did not get caught up in the frenzy several years ago, and each of whom appear to have the resources to acquire, and (more importantly) hold property. Long gone are the days of onerous financing terms that forced owners into short term decisions or, worse yet, forced owners into foreclosure.
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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