Housing Boom Is No Bubble

It's different this time around, largely because of low interest rates and tighter lending rules.


Sings like these are unlikely to reappear.


Anytime a blog post or news story appears that cites the skyrocketing cost of Bay Area real estate, some readers in the online comments section point to signs of a housing bubble such as the one that burst in late 2008.

What are the chances that the current run-up in prices will end in another crash, sending prices in many parts of the Bay Area plummeting, with some values in outlying areas dropping by one-half or more?

A couple of local industry insiders argue that, despite median price increases of 23 percent in the past year, a repeat of the 2008-09 downturn is unlikely under current conditions.

Continued low borrowing costs, tighter lending guidelines, a proliferation of all-cash offers and higher down payments, and continued low inventory make this market much more insulated from a steep price crash than the one seven or eight years ago, said Adam Betta, an agent and partner with Highland Partners in Piedmont.

A survey from DataQuick Research, a key source of information about real estate industry trends, backs this point.

According to DataQuick, Bay Area homebuyers committed to paying an average of $2,303 per month on new mortgages in March. That figure was 20 percent below the figure for spring of 1989, adjusted for inflation, and 40.7 percent below the average in July 2007, the month when real estate prices peaked before the crash.

Rates on 30-year loans are as low as 4 1/8 percent, compared with about 6 1/2 percent at the previous peak in prices in June 2007, lowering borrowing costs by about 40 percent, Betta said.

“Because of low interest rates, it is more affordable to buy now,” Betta said. “You’re not seeing people stretching to get into these loans the way they were before.”

Today’s buyers are also better qualified because of tighter loan underwriting rules, said Dave Salita, a mortgage broker with Land Home Financial Services in Walnut Creek.

Lenders are enforcing a maximum of 43 percent total debt-to-income ratio on conventional loans, including debt on credit cards, student loans, auto loans, home owners’ association dues, proposed principal, and interest payments, Salita said.

“The lending market is doing the due diligence that it wasn’t doing before in making sure that borrowers can truly afford the home,” he said. “That’s the new underwriting.”

Betta said higher percentages of all-cash transactions and large down payments mean that buyers have larger personal stakes in their purchases and are more likely to ride out gyrations in the market.

Bay Area homebuyers put $1.9 billion of their own money into home purchases in March, representing historically high rates, according to the DataQuick survey.

“There were a lot of distressed loans in places like Las Vegas, Arizona, and the Central Valley,” Betta said. “People were financing the whole thing, but those are not the buyers we are seeing right now.”

Low inventory, although frustrating to buyers, also has a positive effect on keeping prices stable, Betta said, with continuing tight supply mitigating any effects from a future drop in demand.

A total of 6,308 new and resale houses and condos sold in the nine-county Bay Area in March, down 12.9 percent from 7,243 at the same time last year, according to DataQuick.

“Demand has increased in the last three years, but supply hasn’t changed,” Betta said. “There isn’t enough new building to have an effect on the overall value.”

All told, the two observers say, prices that may seem over the top, particularly in more desirable Bay Area locations, are still likely to be prudent purchases.