by Attorney William Bronchick
Media reports and some expert 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 No. 1: The real estate economy is local, not global
Unlike 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 that causes a bust. For example, my market in Denver, Colorado did not “bust” like Phoenix did in 2007 – 2010; it simple “fizzled” about 15%. Hardly a bust.
Fact No. 2: When there’s a demand, there’s a supply
So 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 people will always be 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 into a need for real estate. People also get married much later, which means that they’ll probably be buying a home while still single.
Home buying is a concrete need, unlike the stock market, which is less concrete. 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 No. 3: Supply is extremely low in most markets
Following the crash of 2007, homebuilder 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 an investor, you’re likely going to focus on middle to lower income existing homes, which are not only in short supply, there is virtually zero building of these “starter” homes. Builders cannot 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 this is no issue with “bursting bubbles”. 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!