It’s Summer time! Let’s talk about “Bubbles”

Dean Laird — Thu, 06 Jul 2017 19:06:04 +0000

“Are we back to the bubble of 2007?” is a common question that we are asked as real estate professionals. It’s a tough question to answer because we don’t have a crystal ball, however we can look at the contributing factors of the prior bubble and subsequent burst, and attempt to make some professional conclusions. In general, my answer is “yes perhaps, but I’m hoping we are more insulated or protected than we were during the previous bubble so the burst doesn’t hit us so hard. “

But to dig a bit deeper, we need to consider if the question relates to the Steamboat market or the macro US market. If the macro market experiences a burst, Steamboat WILL experience the effects, albeit a tad delayed, which is historically typical. So, what contributed to the ‘07 bubble nationally? Experts contribute it to 4 factors;

Low mortgage interest rates, fueled further by foreign investor confidence.
Low short-term interest rates which contributed to more ARM loans and extreme leveraging
Relaxed standards for mortgage loans, encouraging subprime loans and other problems…. Prior standards expected that most mortgages were 30-year fixed rate loans requiring a down payment of at least 20 percent or mortgage insurance if the 20 percent down payment requirement were not met. The borrowers also had to prove that their income was sufficient to ensure that the monthly mortgage payments would be manageable.
“Irrational Exuberance” – A term defined by Robert Shiller as “a heightened state of speculative fervor.” “In practice, all the participants who contributed to the housing bubble (government regulators, mortgage lenders, investment bankers, credit rating agencies, foreign investors, insurance companies, and home buyers) acted on the assumption that home prices would continue to rise.

The combination of all four causes created a type of “perfect storm” causing the housing bubble to be extreme and the resulting credit crisis to be severe.” But, according to an article written by Jeff Holt*, the primary contributor was factor 4. Irrational Exuberance. “The housing bubble would not have occurred without the widespread belief that home prices would continue to rise. Irrational exuberance contributed to the other three causes. Mortgage interest rates would not have been so low if foreign investors and credit rating agencies had not believed that U.S. home prices would keep rising. Low short-term interest rates would not have led to such extensive use of ARMs and such a high degree of leveraging without irrational exuberance. And relaxed standards for mortgage loans would not have led to such a large increase in subprime mortgages without irrational exuberance.”

I, for one, got caught up in the “Irrational Exuberance” and I know that I am far more conservative in my thinking, spending and investing than when I wore my invincible armor of 2007. I’d like to think we all are more conservative and thus, more protected from the effects of a burst.
Source: https://www.uvu.edu/woodbury/docs/summaryoftheprimarycauseofthehousingbubble.pdf

To contact Dean, call at 970-846-8284.

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Steamboat springs real estate bubble Archives - Steamboat Springs Luxury Homes

It’s Summer time! Let’s talk about “Bubbles”