A woman is holding a magnifying glass over a wooden houses. Real estate appraiser. Property valuation / appraisal. Find a house. Search for housing. Real estate market analysis. Selective focus

Herb is in the market for a new home and his Realtor found the perfect one. It’s priced right on the money, it’s move-in ready, and there’s even an American flag in the front yard, but there is one big problem.  

Herb remembers the foreclosure crisis of 2010 like it happened yesterday. He read somewhere that the valley housing market typically cycles every 10 years, and that home prices have exceeded their pre-crash high. Herb believes this indicates a bubble market, primed to pop.

Not wanting to be a sucker, Herb instructs his Realtor to write an offer $5,000 under list price. Herb’s offer is immediately rejected in favor of one that is $5,000 over list price. 

Herb’s story is a theme played out frequently in today’s Valley real estate market. Many of us were hurt badly in the last crash and are terrified that it could happen again. Expansion and contraction are expected cycles in a free market, but this time it’s different. 

In the lead-up to the great recession, the real estate market experienced a tetrad of irresponsibility.

 First, our government made policy decisions that encouraged extremely lax lending standards. They essentially promised to guarantee any loan a bank would make.  Second, realizing that they were in a no-lose situation, banks capitalized and lent money to anyone with a pulse. Third, consumers convinced themselves that if a bank would lend them money, they must be able to afford it. 

Fourth, builders raced to a gold rush, believing “if you build it they will come,” and they built and built and kept on building. The result of this tsunami of irresponsibility was a cataclysmic real estate market crash on a scale never before seen.  

What’s different this time? Everything!

Government removed the carrots that encouraged bad behavior and established the Consumer Financial Protection Bureau to place checks on predatory lending. While they are staying out of the rewarding-bad-behavior business, they implemented new controls to ensure banks retain enough liquidity to ride out a correction. 

Banks responded with stricter lending standards and the pre-crash loan products are mostly gone. Today you can choose between a fixed-rate loan or an ARM, and even the ARM’s have interest rate caps to keep them from moving too high, too fast. 

Loans today are fully documented and require a minimum of 3.5 percent versus the stated-income, no-money-down nonsense of the pre-crash era. If you don’t have a 760 or higher credit score, you pay a higher interest rate, and if it’s below 620 you’re not likely to even get a loan. Finally, the appraisers aren’t messing around either. If they can’t prove value, the appraisals are coming in low.  

Consumers are putting real money down on their homes. Even with only 3.5 percent down in a market that is appreciating at 6.5 percent per year, everyone can sell their home after one year in it without coming out of pocket.

 Investors are still in the game, but they are using cash to buy the homes vs. the pre-crash era practice of total leverage. This means that there is more real equity in the local market than at any time in our history. 

It also means that when there is a correction, owners won’t be trapped if they need to sell and thus, the crazy downward spiral of the crash is far less likely.

Builders were among the worst hurt in the crash. 

In the last ten years, our population grew by 15 percent, but our builders have produced a fraction of what is needed to support the growth. Thanks to a booming economy in the last two years, our growth rate has accelerated. 

Our home building is increasing but not nearly fast enough to keep up with population growth, much less the deficit created in the past 10 years.

John Crow is CEO of Century 21 Northwest.

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