AUG NIBJ: Barta col: 'History doesn't repeat itself, but it does rhyme'

We are in a real estate market crisis. It’s been 12 years since the last real estate crisis: that one was brought on by the sub-prime mortgage mess.

If you recall, it was triggered by a loss of investor confidence in a multi-billion dollar mortgage fund from the investment bank Bear Stearns. The underlying value of the homes in the fund was not supporting the mortgage debt, and once this became increasingly obvious, negative momentum set in. The cracks began appearing in August 2007, but it took almost five years for the meltdown to play out and recovery to resume. The euphoria that created the bubble then was lax standards in mortgage lending practices which drove unsustainable home valuations. We find ourselves in a parallel situation today, with the pandemic buying demand fueled by historically low interest rates that drove frenzy-buying to the point where house prices effectively doubled over the past five years.

We are faced once again with unsustainable home valuations. The current median list price in Bonner County is $780,000. That’s a number the household income for Bonner County doesn’t support, so if these lofty prices are to be sustained, it will have to be from demand by out of state migration, and even the flow of those new buyers has slowed down considerably. We are in the early innings of the correction (that’s a word that sounds better than crisis.) What triggered the crisis this time is the steep increase in interest rates.  

Since the Federal Reserve began its aggressive interest rate program to bring down the inflation rate about 18 months ago, the real estate sector has been in turmoil. Real estate is one area of the economy that is especially sensitive to interest rates, and not just the residential market: commercial and industrial properties are also highly reactive to interest rates, and there are major challenges in both those sectors right now. There is no clear indication where the markets are headed, but for sure we are not in a market that favors sellers. At the same time it does not favor buyers either. The government organization that oversees the mortgage market, the Federal National Mortgage Association, aka “Fannie Mae,” conducts a survey of homeownership sentiment. The most recent survey indicated 95% of respondents did not believe this was a good time to buy a house. That’s about as far as an emotional pendulum can swing.    

It's not just new homebuyers who are dealing with the market turmoil: homeowners who bought years ago face challenges as rising property taxes and other holding costs continue to escalate. This especially affects people dependent on fixed incomes, the age demographic of 60+ of which Bonner County is heavily weighted. Home insurance costs have skyrocketed and in many cases, it’s impossible to get fire or flood insurance. The cost of home repairs — labor and materials — has also risen, so while the underlying value of the property has appreciated, it’s getting harder and harder to remain in place for many seniors.

The market does not just have an interest rate problem: it has an affordability problem, an inventory problem, an infrastructure problem, a zoning and bureaucracy problem, and a lack of creative problem-solving approaches. Hence, a crisis. But “within crisis are the seeds of opportunity!” And while much of the market is caught up with the deer-in-the-headlights response, there are definite opportunities surfacing for getting in on the next recovery before it becomes obvious. I don’t want to be another Chicken Little pundit: I personally do not believe the sky is falling, so in my next article, I will suggest several winning strategies (so long as you can navigate through my paywall subscription service!).

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Raphael Barta is an Associate Broker with an active practice in residential, vacant land and commercial/investment properties (raphaelb@sandpoint.com). The title quote is from Mark Twain. The “seeds in a crisis” quote is from Marilyn Monroe!