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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!

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