The Real Estate Bubble Fallacy

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. 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. 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.