Is The Fargo/Moorhead Area In A Real Estate Bubble?

As full time real estate professionals we talk to hundreds of people every day and folks are constantly asking the same question, “are we in a real estate bubble in the FM area?”  That’s a great question, and one that does not necessarily have an easy answer.

Let’s break it down and analyze exactly how we define a bubble.  The Oxford Dictionary defines a bubble as “a good or fortunate situation that is isolated from reality or unlikely to last.”   Two of the most common reasons for a bubble, whether it be in the stock market, commodities, real estate, or any other asset, are speculation and supply & demand.  At some point the bubble will burst, and the asset will significantly depreciate in value, usually at a much faster rate than it appreciated.

In order to assess whether the FM area is in a bubble we must compare and contrast what is happening now in the area to the real estate crash of 2008.  As you all remember, there wasn’t much speculation in the real estate market in ND leading up to the crash, and there was very little, if any, downside to the local economy or real estate market during the crash.  Why? That’s another great question.  ND has historically been a conservative state with very conservative lending practices and this remained the case for the period of time leading up to the crash of 2008.  While the rest of the nation was riding the wave, we were standing on shore asking ourselves how anyone can afford to pay such outrageous prices for real estate.  We got an answer to our question in 2008, and the answer was, they couldn’t.  Lending practices were so loose in the period of time leading up to the crash that just about anyone could qualify for a loan.  While there were a number of different entities involved, subprime lenders were a significant part of the problem.  They were offering loans with no money down and stated income, with absolutely no verification of employment!  Lenders were writing loans to consumers knowing full well that the consumer would never be able to pay back the loan, and consumers were more than happy to accept, finally getting the chance to live in the dream home they’ve always wanted.  Everyone wins, right? Wrong!  Long story short, the crash happened, now let’s fast forward to the FM real estate market in 2016.

While home prices have been going up considerably over the last 3-5 years in the FM area, they have been going up with strict lending practices.  Buyers have to go through extremely stringent underwriting in order to qualify for a loan.  If they can’t qualify for a loan, guess what, they’re renting, which plays a big role with increasing rents in Fargo and the rest of the country.  So if it’s so hard to qualify for a loan, why do prices keep going up and up?  You really do have some great questions!  In Fargo/Moorhead, it really boils down to supply and demand.  The local economy is one of the best economies in the country with a very low unemployment rate.  Supply hasn’t been able to keep up with demand.  The demand for starter homes in the $100,000-$175,000 price range in the FM area significantly outweighs the supply, which is why the price of many starter homes has priced many first time home buyers out of the market.  Prices continue to go up in that price range simply because there is not enough supply.

The short of it is that if you can’t afford to buy a house in Fargo/Moorhead, you won’t be buying a house.  What causes a real estate bubble to burst is when homeowners stop paying their mortgage payments, which definitely isn’t the case in the FM area.  How do we know this, because the foreclosure rate is almost non-existent.  While we don’t anticipate home values to continue to go up 8-12% per year, we do believe 3-5% growth every year for the foreseeable future is a realistic expectation.

Please leave any questions or comments below.  We would love to hear your thoughts!

Cheers!