There’s a lot to learn from history, but lucky for you there’s no 300 page assigned reading on the recent real estate market. Here are the Cliff-notes:
1999-2006: The Boom Years
Remember the dot-com bubble and bust? That fallout led to many seeking real estate as an investment and the housing market got hot. Everyone wanted a piece of it, especially as interest rates remained steady at around 6.5%. The insatiable levels of demand led to a boom in the subprime lending market and mortgaged backed securities. We all know where this led. The movie, “The Big Short” is fun to watch and does a great job explaining what caused the housing collapse.
2007-2009: Housing Bubble Burst and Great Recession
When the monthly payments for subprime mortgages reset, many borrowers could no longer make their payments and their homes went into foreclosure. As a result of all the foreclosures, supply skyrocketed, demand waned and prices dropped. The 30-year fixed rates declined from 6% to as low as 4.5% by the end of 2008.
2010-2012: The Trough
Foreclosures peaked in 2010. The Fed kept interest rates low as unemployment remained high. Thanks to the “first time home buyer tax credit” buyers previously priced out of the market could now buy a home with none of their own money. This encouraged buying and housing prices slowly began to stabilize. During this periods the 30-year fixed rate hovered around 4-5% and housing supply remained high; demand was tempered by the struggling economy and tighter lending standards.
2013-2015: Early Recovery
Would you believe we thought we had an inventory shortage during these years? As real estate prices and the economy improved, the demand for entry level houses picked up significantly. The demand increased as interest rates remained low and the first wave of millennials started buying. The 30-year fixed rate fluctuated a bit, but generally stayed in the 4% range. As buyers returned to the market the supply began to moderate.
2015-2017: Continued Recovery
As demand continued to increase the supply of entry level homes tightened even as interest rates slowly started to climb up towards 5%. Increasing home prices caused many to be priced out of the market and rents rose significantly. The Fed enacted stricter lending laws to prevent a future housing bubble.
2018-2019: Market Cooling
Interest rates continued to rise and home price appreciation slowed. Inventory remained tight at the entry level. By the end of 2019 some economists were predicting a buyer’s market for 2020. The 30-year fixed rate peaked around 5% in 2018.
2020-2021: Pandemic Era
When the pandemic hit the housing market froze. Then, to everyone’s surprise, the real estate market took off like a rocket ship. Home prices surged and historically low interest rates kept housing affordable. There was a big demand shift from cities and condos to suburbs and houses as people wanted more space. The 30-year fixed rate fell to a record low below 3% encouraging many homeowners to refinance. Supply dwindled as homeowners didn’t want to give up their 3% mortgage rate.
The Fed began raising interest rates in the second half of 2022 to tame inflation. Buyers took a breather expecting home prices to cool off. We were all caught by surprise when the 2023 market got more competitive than ever and prices continued to climb while inventory remained near historic lows. The current 30-year rate is at around 7.3%. Few homeowners are willing to give up their 3% rate and buy at a 7% rate. This “married to your mortgage” phenomenon” is causing historically low inventory and keeping prices stable.