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No Bursting Bubbles

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The 2008 recession took everyone by surprise when it took a 40% bite out of local real estate equity before bottoming out in 2011. The market has been on a stable run since. In most markets, values recovered and are above prerecession levels. Sales are gradually slowing—waterfront is up just 5% and non-waterfront is up 2% from last year, while values and closed volume continue to rise.

Knowing that markets run in cycles, buyers are wondering what lies ahead. When will we see the next market correction? How bad will it be? Understanding some key signals will help us understand what to expect.

The severity of the last market downturn was driven by extreme lending and financial market conditions that, with new regulations and scrutiny, will not be present in the next market slowdown.

Hypersupply is one of the key signals to watch for in predicting a bursting bubble. Hypersupply is the result of overdevelopment where both vacancy rates and unsold real estate inventory rise to extreme levels.

Heading into the last recession, available inventory had grown to three-times normal levels. Then during the recession, development completely stopped and a significant number of homes were removed from supply after becoming uninhabitable.

Since 2009 and through the recovery years as demand increased, available inventory levels continued to fall. Today, supply levels in all but a few select markets (i.e. high-end Traverse City and Detroit condo markets) remain below average and stable. With the exception of a few specific segments, local markets are far from a state of hypersupply.

Heading into the last recession, both homeowners and investors were speculating on real estate. It was a feeding frenzy as buyers scrambled to grab as much home as they could. Ironically, first-time investors were
willing to pay premiums for fixer-uppers and flips that they thought provided profit potential. Everything was a sure bet and financing was easy.

The conditions that lead to the last market crash don’t exist in the same way or scale. Inventory levels remain low and there is still a shortage of affordable move-in-ready homes. Through the recent recovery, values have
been growing at slower, more sustainable rates. Lending practices are more restrained and buyers are more rational in their purchases.

The market is leveling in a healthy way where when its time comes, it is more likely to just slow or even drop a few points before moving on to the next growth cycle.

Purchasing now has advantages. There is less competition from other buyers when purchasing in a slower market. Purchasing during a lull ensures a buyer will be able to take full advantage of the growth phase of the next cycle. Assessed property tax values, which lag a couple of years behind property values, will lock in with lower tax caps today than in the future. And interest rates remain remarkable.

Although sales and appreciation rates have gradually been slowing and inventory is increasing compared to recent years, local markets remain stable and in good health with no bursting bubbles in sight.

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