The Real Estate Bubble Fallacyby Michael Setz
There has been a lot of talk lately about the "Real Estate Bubble", and a lot
of folks are asking the question: "When it is going to burst"?
They are saying that the market just can't sustain this level of growth and
appreciation much longer, and I heat them say that it is inevitable that it must
come crashing down soon. People are worried. They don't think it can last; That
whatever goes up, must come down.
These folks have been conditioned to believe what they believe most likely
from the experience of the stock market bubble of 2000, and maybe the 1990's
when the real estate market was hit hard in many large metropolitan areas across
the country.
Its human nature to feel this way. We all know the saying (or the 80's tune
for you big hair folks), "Once Bitten, Twice Shy". Or what about, "All good
things must come to an end."? Its how we react to almost everything that affects
our well being and general safety. Its a subconscious reaction at the gut level.
Just like in the stock market, there are bulls and bears. Bulls are typically
more optimistic about the market and expect it go up, and bears are generally
more pessimistic and expect the market to go down. They will always be there to
provide free advice and "expert consulting". Remember though, who you decide to
listen to will certainly have an effect on your decision making, and ultimately
your success.
Well, I'm here to say that there is no real estate bubble! There never was a
real estate bubble. Its a complete and utter fallacy.
"How can I say that?" you ask. I can say that because the real estate market
is in reality, a Wave. Its a cycle, and we just happen to be riding the big
swells, or the crest of this long, consistent, and fairly predictable pattern.
There is no doubt that real estate has been a rock solid investment for
decades, and will continue to be for the foreseeable future and for many reasons
that I would like to demonstrate here and now. Because you, as a real estate
investor, must be able to move forward with confidence when deciding which
projects and properties you want to buy and sell. That is the purpose of my
website, www.realestateinvestment.net, to provide you timely information,
strategies and techniques to help you succeed.
But first, what is a bubble? In terms of economics and markets, the best
definition is probably something along the lines of "an isolated or ephemeral
situation or condition with little support or substantiation from external
conditions".
The best example, and the one foremost in the minds of us all, is the stock
market tech bubble of 1999 and 2000. We all rushed into the tech stocks and the
stock market in general as we saw the .com millionaires being made.
Y2K was a big factor in the tech bubble. People were buying new systems at a
unprecedented rate in order to prepare for doomsday. People were also buying
consumable goods to stock up for the dreadful event that never came.
So what was holding up, or supporting the "irrational exuberance" as Alan
Greenspan characterized it? Well, we learned soon afterward, not much. It was an
isolated, temporary incident that had little support from the other conditions.
It was indeed like a bubble that burst.
And it has had little support since then. Historically speaking, after the
stock market crash of 1929 and 1987, it took decades for the market to recover,
although it did eventually recover. Just look at the Dow average and the S&P
average for the last hundred years and see the pattern of recovery. You can be
sure that a slow steady rise for stocks is in progress.
Now back to real estate. Let me explain why this is not a bubble.
Real Estate is Cyclic
Real estate has had its ups and downs over the years, but it is generally
stable, with no drastic swings per se. If you were to look at the cycles on a
chart you would see a clear pattern of gently rolling swells. This pattern is
consistent across cities and regions all across the United states, although
slightly varied in degree.
In addition, the cycles tend to favor the ups rather than the downs. It is
not uncommon to see large cycles of appreciation and much smaller downward
cycles. In other words, the current double-digit growth we've all come to know
and love in recent years will likely be followed by downturns of single digit
declines. Its like taking two steps forward and one step back.
In the big picture you will still be further ahead than when you started. You
may see slower growth, but it will still be growth.
Real Estate is a Basic Necessity
People need to live somewhere. They need a roof over their head and their
children's heads. Like food and clothing we must have a home. People don't need
stocks or bonds. Therefore, you can be sure that whether the market is high or
low in growth, whether interest rates are up or down, people will be buying,
renting, leasing, and selling homes. It is as perennial as the years.
This Real Estate Wave Has Been Around Awhile
I don't know when you first realized we were in an up market in real estate,
but it has been on a solid upward trend for at least the last 3-4 years. It
didn't just happen yesterday. Of course like anything else, awareness of the
general public is a bit latent, and dependant upon the media. It has only been
lately that the media has really focused on it and thrust it onto the front
page.
The old adage "Success breeds success" is also true. The momentum will grow
as other more traditional investors continue to jump on the band wagon and pour
their money and resources into real estate investment. It tends to create a
perpetual, self-feeding market that is ideal for more seasoned investors.
Real Estate is Local and Regional
It is true that even in today's real estate boom, there are areas in the
United States that are not enjoying the high rates of return that others are
experiencing. California is a fantastic place to invest, so is Arizona and a
host of other places. But, the Rust Belt states are not as fortunate. Watch what
happens to Florida home values after this horrendous hurricane season. This is
because real estate is driven by the primary capitalistic force of Supply and
Demand.
Generally speaking, property values increase in areas where the job market is
strong, and where there are more people moving into than away from. Of course
there are other factors to consider; including interest rates, availability of
funding, climate, and governmental policies. These are all important and you
must be cognizant of their impacts to your strategy.
However, it is true no that matter what the rates are or how nice the climate
is, people will continue to migrate where there are abundant job markets and
affordable housing. If you can stay just slightly ahead of that migration, you
will profit immensely.
Real Estate Investing is Diverse
You can invest in so many different ways, from foreclosures and fix and
flips, to buy and hold and everything in between. Right now the commercial space
is relatively soft. It will recover no doubt, but people investing in single
family homes are probably doing slightly better in returns. Vacancies are up and
rents are down for commercial properties, but fortunately, the forecast is for
this sector to improve over the next few years.
The key to successful real estate investing is to understand the forces,
trends, and conditions that are driving the market. BE AWARE of your
surroundings; Read articles and stay on top of industry news; Look in your own
area at the job market and forecasts. Check my website www.realestateinvestment.net for all the news and information you
need to help you succeed in your real estate investing career.
There is no real estate bubble, but there is a real estate wave. Like any
dedicated surfer, when the surf's up, get in the water and catch a wave! But
watch for danger, be flexible, and be smart. Invest wisely and you can prosper
in any real estate market.
About
the Author
Michael Setz is an author and the founder of www.realestateinvestment.net - The network for successful real
estate investors. |