Real estate isn’t always predictable. Given changing conditions, language used to describe housing is rife with lingo from other industries that experience constantly shifting events—some catastrophic—like aviation. While housing is axiomatically ‘grounded’ compared to the aircraft industry, from time to time Oregon real estate market activity is described as akin to a ‘bumpy recovery,’ ‘hard ride,’ ‘crash,’ or ‘soft landing.’ This raises the question among those buying or selling a home of how real estate crashes are avoided and what does a ‘soft landing’ mean? Find out more in this edition of the Oregon Real Estate Podcast!
Predictability in our daily lives is something most of us appreciate. This is especially true in the world of real estate. Extreme changes, like rapid home value appreciation suggest opportunity, but when the reverse happens, like when home prices drop fast, the alternative is heightened risk. Lenders have a lot of impact on real estate and dislike risk.
What’s A Soft Landing?
When home prices increase considerably, one concern is a later ‘correction.’ This can be impacted by a sudden glut of homes on the market, higher interest rates, or a spike in unemployment, among other factors. Yet after a ‘runup’ in home values, instead of a dramatic downturn, sometimes statistics point to a gradual leveling off, instead of a crash. One example of a ‘soft landing’ is when a good real estate market gradually slows over time, not suddenly.
One reason for a real estate downturn involves inventory, or housing supply. Instead of the usual 3 to 6 month backlog of homes, the housing inventory figure beginning around 2008 during the Great Recession was in excess of 20 months. That kind of massive oversupply can take years to work through, especially with many foreclosures and ‘short sales’ where lenders ended up losing money, too.
Another cause for a real estate crash landing is the loosening of lending guidelines. Leading up to the Great Recession, some lenders were so flexible that stories were told of people’s pets receiving mailed loan offers. Once the US approached ‘peak home ownership,’ the combination of an oversupply of homes, plus lax loan standards set up a perfect storm for the nationwide real estate market decline.
Several differences exist now compared to the Great Recession. Lending guidelines are stricter than prior to that downturn. This includes a firewall of sorts between appraisers and lenders, to ensure appraisals are objective and above board. Since the Great Recession, home inventory hasn’t reached such high levels.
These kinds of safety devices have helped us transition to more of a soft landing than a crash. One part of a soft landing is a tempered shift in home price changes, also evident over the past year or so. Instead of double digit home price appreciation, the most recent price change for homes surrounding greater Portland has been a modest 1.1%.
The Bottom Line
Whether you’re buying or selling, it’s helpful to know that the likelihood of a market crash is significantly reduced when housing inventory is balanced.
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