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How Long Will the Real Estate Boom Last… This Time?

Media reports and some experts suggest that the real estate industry is again becoming a bubble that may burst. But how true is this? Let’s look at the facts…

Fact #1: The Real Estate Economy Is Local, Not Global

housing bubbleUnlike the stock market, which is based on the national and world economy, the real estate market is very much a locally-based economy.

What does this mean?

This means that while the stock market is influenced by economic rise and fall of industry all over the nation, the real estate market is not.

Real estate prices in California may not influence prices in New York, and that’s that.

In real estate, a broad analysis of what is happening around the nation does not always reflect what is happening in your hometown.

While there are national factors such as interest rates, tax deductions, and national bank policies on lending, it is more often the case that a collapse of a local economy causes a bust.

For example, my market in Denver did not “bust” like Phoenix did in 2007 – 2010. It simply “fizzled” by about 15%. Hardly a bust.

Fact #2: When There’s a Demand, There’s a Supply

buy and hold real estateAs long as there is a demand for real estate, there will be a supply to meet it. Real estate is about real people who need homes, and there will always be people buying homes because people need to live somewhere.

If you look to the future, you’ll see that there’s an ever-increasing demand for real estate.

Take, for example, the fact that millions of migrants are arriving in the United States each year. This movement translates to a need for real estate.

People are getting married much later, which means that they’ll probably buy a home while still single.

Unlike the stock market, which is less concrete, home buying is a concrete need. In the stock market buying and selling happens at the snap of a finger. In real estate, economic activity is less volatile. The industry is inherently more stable in the short-run.

Fact #3: Supply Is Extremely Low in Most Markets

houseAfter the crash of 2007, home builders all but packed up and went home. Until recently, there was no mass building of new homes. In most markets, it will be several years before inventory of new homes catches up.

As a real estate investor, you’re likely going to focus on middle to lower-income existing homes, which are not only in short supply–there’s virtually zero building of these “starter” homes.

Builders can’t make a profit constructing 1,200 square-foot homes when the marginal cost of materials dictates a larger, more expensive one. In short, demand for small, lower-middle-income homes will outstrip supply in nearly every market.

Like the stock market, the real estate market will rise and fall, but, in general, real estate prices rise over the long term. So, if you are investing, simply hold onto your purchase for the long term, and you’ll see that there’s no issue with “bursting bubbles.”

And if you hit a trough in the market, simply buy more and wait for it to come back!

Do keep your eyes on local economic factors, such as net in-migration, job growth, and governmental fiscal policies. If see a trough coming in the local market, simply: Sell at the top, wait for the bottom, and then buy more!

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About the Author...

William Bronchick, J.D. is a nationally-known attorney, author, and speaker. He has been practicing law and investing in real estate since 1990 and has been involved in over 2,000 real estate transactions.

Bill has served as President of the Colorado Association of Real Estate Investors since 1996. He is the author of many excellent real estate investing courses.

You can visit Bill Bronchick at his web site: LegalWiz.com

Comments

  1. chuck wilson says:

    I started selling properties I owned on the central coast of California in 2006, I remember real estate agents and title company people asking me why I would sell ? Prices are going up, its California, why are you selling ? Within 2 years most property values were cut in half.
    What has really changed in my local market now ? Nothing has changed from 3 years ago when property was sitting on the market for 6 months. Now everything is snapped up within hours. Dont tell me the economy is that much better. Thats BS. Its all about psychology. Self fulfilling prophecy. People think its good so they buy. This is a classic bubble. Its going to change nationwide soon !! Especially when you have a complete idiot running the country.

    • Craig Haskell says:

      Hello…

      Real estate goes in cycles as most people know. These cycles are driven by real estate and economic fundamentals. Each year when there is overbuilding of the supply of rental space without the demand to absorb that space (negative absorption), then the market nears a top. If the economy has grown so fast where stupid capital chases poor investment assets, the market is nearing a top. Capital drives cycles because it influences capitalism.

      At this point in the cycle, the general real estate market is not overbuilt in most markets. In fact, there are many markets where you can still buy real estate below replacement cost.

      Construction loans (capital) are the most risky loans to get, especially on the commercial real estate side. Most high end buildings are being built by the big players who are either the low risk borrows or use cash off their balance sheets to finance their deals.

      The middle market players (the biggest pool) struggle because of lack of capital. This produces less new development of inventory (supply), keeping downward pressure on overbuilding. This is great for real estate. We grow slowly until capital can catch up to start the next big development phase in this cycle.

      There is no real estate bubble. Having been through 4 real estate cycles, we are not even close to over inflated pricing. The last really hard hit real estate bottom I participated in was during the Savings and Loan crisis in the late 80’s and early 90’s where the Federal Government set up the RTC to liquidate thousands and thousands of real estate properties throughout the U.S.

      For example in Phoenix at the top of the market in 1988 where many S&L’s financed deals, they built 32,000 apartment units and they only rented 4,000 (negative absorption). The vacancy rate peaked at 20%+ in some local markets. In 1990, they built “zero” new units and rented 2,000 units (positive absorption), very modestly reducing the vacancy rate. Most cycles in Phoenix last 6 to 7 years. We got so beat up in real estate during this time period, and got so low, the market need over 14 years to go through this cycle.

      Again, because the housing market got so beat up during the last cycle that started in late 2006, I expect the upturn to again last longer than normal.

      In most markets, we are a few year away from starting the overbuilding process. This overbuilding with high asset prices, creates a top in the real estate cycle. I think we are in the middle innings of the real estate cycle game.

      My comments are aimed at the general real estate market. Some local markets are farther along in their cycle while other markets are lagging.

      Hope this gives you something to chew on.
      Craig Haskell

      • David Lindstedt says:

        Here in Hudson, FL zip 34667, we have yet to return to the peak of 2006! But the same is true of many parts of America. Problem is wages. Older working Americans haven seen a pay raise since 1993! Donald Trump saw this, before he ran. Now if everyone will just give him a little breathing room, we will finally see a massive recovery. But that will take an 8% inflation rate and an end to endless no win war.
        But buy and hold and rent will move those who invest in real estate out of the wage slave game. It has for me, bought my first rental Feb 1973. Retired from day job April 1993 at age 56. Yes no shortage of aggravation but many great tenants over the years. And it sure beats working for someone else.

  2. Love it. You got more?

  3. Bernard Reisz says:

    Craig,

    Love the insight from an industry vet!

  4. Todd Hoffman says:

    Per Mr. Bronchick’s point, Denver has been fortunate and continued to see economic growth and increased population. However, it appears, at least within multifamily, supply has started to outpace demand (or at least affordability) in the Denver Metro Area. According to the Apartment Association of Metro Denver, “For the second quarter in a row the average cost of renting an apartment in Denver has decreased, according to the Denver Metro Area Apartment Vacancy and Rent Report…” (1).

    When you look at single family homes, it seems prices are outstripping wages. Affordability may cap price appreciation in the near term…

    Personal income rose from the start of 2009 to the start 2014 in Denver by approximately 18% (2). That time period probably captures or nearly captures to the low point from the financial crisis.

    Even if that trend continued [linearly] through the start of 2016, it would mean that personal income rose by less than 25% during that period.
    According to Zillow Denver median home prices from January 2009 to January 2016, went from 212K to 331K (3). An increase of ~56%.

    Income rising by <25%, but 56% median price increases, make continued substantial price increases seem non sustainable for a long period…
    Freddie Mac indicated that 30 Year loans have gone on average from 5.05% with 0.7% origination to 3.83% and 0.6% Origination (commitment numbers) during that same period
    (
    4). And rates since then have been rising.

    If my quick calculations are right, the monthly payment on home with a median price with 15K down has up by about 39% using those January 2016 rates (yes this is an oversimplified model and approximation for affordability). Again, income has gone up by much less and rates have increased since January 2016.
    All of these calculations are back of the envelope and have not been verified and represent an oversimplification and the data from the different sources probably have different scopes, but I think affordability ratio is probably directionally correct.

    Given a strong economy it is hard see a hard landing for residential real estate in Denver in the next year. However it seems very unlikely that Denver will continue in the near term to see substantial increases in median home prices unless there is substantial inflation. As a Colorado hard money lender, when asked, I present my
    personal opinion
    not to count on appreciation in the short term.

    This is a cursory analysis. I make no claims, promises or guarantees about the accuracy, completeness, suitability or adequacy of the information or analysis contained herein. Everything contained herein should be considered a preliminary draft, and potentially flawed personal opinion, which comes without warranties.

    Cited Sources:
    (1) Dean, C. (2017, January 18). Denver Metro Rents Decrease Following Completion of Nearly 10,000 New Apartments. Retrieved from Apartment Association of Metro Denver: https://www.aamdhq.org/index.php?src=news&srctype=detail&category=Industry%20News&refno=87
    (2) Personal Income Data from the St. Louis Fed website checked on April 16, 2016 (Annual, Not Seasonally Adjusted, DENV708PCPI, Updated: 2015-11-19 9:41 AM CST)
    (3) Median home price Zillow data from http://www.zillow.com/ checked on April 16, 2016
    (4) Interest Rates based on Monthly Average Commitment Rate And Points On 30-Year Fixed-Rate Mortgage at http://www.freddiemac.com/pmms/pmms30.htm checked on April 30, 2016.

    • William Bronchick says:

      I think that’s accurate as a whole, but the lower end of the market has not slowed a bit. My cheap rentals keep going up and up and up. The new building is generally “A” class apartments, which is getting saturated for sure.

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