When baking, there are different ingredients that are used that will make the dough rise. Typically, yeast is the ingredient used to make bread rise. How does yeast work? Here’s a little video to explain how.
Interestingly, yeast is not the only ingredient that can cause the dough to rise. For instance, sourdough. Sourdough is fermented dough, thus the name sourdough. It is retained from prior baking and is used as leaven, instead of yeast. Leaven is the substance that causes fermentation, which makes the bread rise. So, yeast or sourdough can both be leaven. Different types of leaven can create different flavors.
By the way, did you know that there are many types of sourdough? Check out this video of the world’s only sourdough library!
Pretty cool! Speaking of things rising, home prices, as well as the prices of most other things, are rising rapidly. Recently, some of my well-intentioned clients have asked if it is possible to appraise a home, based upon a “normal market”. Others have expressed concerns that we are headed for a housing crash, like in 2008.
Just as different types of leaven can be used to make bread rise, and even change the flavor of the bread, increasing home prices can result from different situations. Let’s talk about the difference between today’s market and the one during the years leading up to the bursting of the housing bubble in the Great Recession of 2008.
THE RISE IN HOME PRICES IN THE YEARS LEADING TO 2008
My slowest years were the years leading up to 2008. Why? On many of my appraisals at that time, my opinion of value would not support the contract price. Instead of the buyer and seller renegotiating the contract price, or the buyers bringing money to the table, the bank or mortgage company would just find another appraiser, who was “morally flexible”, as my friend and colleague Jonathan Miller would say, and would appraise the home at the purchase price, despite there being no market support for that agreed-upon price. Perhaps they were drinking the Kool-Aid that some are drinking today, that market value is whatever the purchase price is.
Once closed, that sale, with its artificially high price, became a closed sale that other honest appraisers would use when determining the market value of other comparable homes in that area. It only takes a few bad appraisers doing this kind of thing to cause home prices to artificially inflate. At that time, the handful of bad appraisers doing this kind of thing were also getting a lot of business from lenders and mortgage companies, because they were hitting the numbers, while honest appraisers were beginning to lose business. Honest appraisers were called “conservative”, which to me is code for being honest.
I remember loan officers telling me that I needed to be “creative” with my appraisals. To “think outside of the box” when valuing a property. I kid you not! They soon realized that I wasn’t going to play their game when they received my report, which reflected the market value of the property, not their wishful number.
Back then, as hot as that market was, I don’t remember the bidding wars that we see in today’s market, because at that time, the levels of housing supply were not nearly as low as they are today. It is interesting that inventory levels were increasing rapidly in the years leading up to 2008. While at the same time, home prices were surging.
So, the price increases leading up to 2008 were not due to a shortage of supply. (See charts below) That market was also not driven by historically low-interest rates. Granted, mortgage rates were not terrible. And they would fluctuate, which did create some demand. But as you can see from the chart below, prior to 2008, those rates did not drop like they have within the past year and a half.
Another issue that led to the housing crash of 2008, was unqualified buyers who were able to secure mortgages on homes they couldn’t really afford. Stated incomes (Liar loans), adjustable-rate mortgages, and loose underwriting all played a role in the rapid increase of home prices in the years leading up to 2008.
TODAY’S RISING HOME PRICES
Now, let’s talk about what is causing home prices to rise in today’s market. I can tell you that this market has a much different flavor to it. Before the pandemic, there was already a shortage of housing inventory in many parts of the country, including in Northeast Ohio.
Typically, when there is a shortage of inventory, with high demand, prices increase. And, home prices were already increasing in the years leading up to the pandemic.
Then the pandemic hit, and everything was in lockdown. The shortage of housing inventory we were already experiencing, became much worse because people were not able to, or not willing to sell their homes. This created an even more severe shortage of available housing for buyers to choose from.
Around that time, the Feds lowered the mortgage interest rates to such a low level, to keep the economy going, that it created a huge surge of demand. After all, lower interest rates mean more buying power.
Severely low housing inventory and historically low mortgage interest rates are the two key ingredients that have created much of the surge in home prices that we are seeing today.
Unlike the years leading up to 2008, today’s market has been filled with excessive bidding wars. And what happens when the contract price is above the market value? Unlike the years leading up to 2008, this time, buyers and sellers are renegotiating prices, or buyers are bringing money to make up the difference between what the home’s market value is and what they are willing to pay to buy the home they want. Or buyers are walking away from the deal. I’ve heard from some agents that, as the months go on, more buyers are willing to walk away if the price gets too high. So, there is a cap on what buyers are willing to spend.
Does that mean that the market will not see a decline in the future? No. No one knows what the future holds. Who would have predicted the events of 2020-2021? And the saga continues. What would have happened if mortgage rates had not been drastically lowered? We’ll never know. There are so many possible variables that can affect the housing market. All we can do is wait and see.
In the meantime, whether we’re in a housing bubble or not, appraisers must reflect on what is happening in our respective markets. If home prices are rapidly increasing, we should be reflecting this in our reports. Even if things are increasing at an uncomfortable pace. If this is what the data shows, this is what we reflect.
I think that when my clients ask me if it is possible to appraise a home as though we were in a “normal” market, I think what they really mean is a more balanced market. But it’s not a balanced market right now. In our reports, we must reflect what the market is doing as of the effective date, whether it is good or bad or even weird. An appraiser’s job is to develop an opinion of value based upon what is happening today, not what may or may not happen in the future, because we don’t know.
Whatever may happen in the future, the best advice I can offer is to make decisions that are based on the facts and not on speculation of what may happen in the future, either good or bad. Educate yourself before making any big purchase. Hope for the best but be prepared for the worst.
I recently sat down with appraiser extraordinaire, Jonathan Miller, to discuss whether he felt we are in a housing bubble. He shares some excellent insights on the subject. You can listen here or on my podcast at Home Value Stories.
A big thank you again to Jonathan for being on my show!
Since we’re on the topic of things rising, this week I leave you with a fun little experiment you can try at home using yeast and balloons. Enjoy!
Have a great weekend!
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Here are some links to other articles I’ve enjoyed recently! I hope you will also…
Black Dog; The Manhattan Housing Market Moonshot – Housing Notes by Jonathan Miller
The Stories We Tell Ourselves – The Brian Buffini Show (PODCAST)
How close is the housing market to normal? – Sacramento Appraisal Blog
Palo Pinto County, Taxes – Did you know? – DW Slater Company Blog
How Does Data Become Information? – George Dell’s Analogue Blog
What Is Your Source for Square Footage When Listing a Home? – Birmingham Appraisal Blog
The Beans are Just the Means – Part 1 – The Real Value Podcast
What is Included in Appraisal GLA (sq. ft.) – APPRAISAL TODAY
Is Sketching Really Necessary? – The Appraiser Coach (PODCAST)