The 2020 real estate market has been surprising in more ways than one. No one could have predicted that the market would not only survive, but thrive during an unprecedented global pandemic. If we look back at predictions earlier in the year and even pre-pandemic, a market crash was certainly on all our minds.
Like any other area of the news cycle, we see that real estate is vulnerable to its fair share of doomsaying and catastrophizing. For real estate investors, keeping up with this news can be anxiety-provoking. After all, we want to protect our finances and our future.
Real estate has always been unpredictable to a certain degree and it seems all the more true this year. One of the scariest phrases we hear uttered is “housing bubble.” After all, the last housing bubble during the Great Recession was deeply impactful on households across the United States. Rampant foreclosures, underwater mortgages, and financial crises were at the forefront of the fallout.
It’s important, however, that we understand what a potential housing bubble means — in the context of real estate in general and in an investing context. You’ll soon see that changing market conditions — even “bad” changes — are nothing for real estate investors to fear.
What is a Housing Bubble?
“Housing bubble” has become somewhat of a buzzword in the past few years. We have some very specific (and often very bad) connotations associated with it. But what exactly is a housing bubble? We like how Investopedia describes it.
In short, a housing bubble is a phenomenon in which property prices rise to unsustainable levels due to demand, speculation, high levels of investment, or excess liquidity. Those unsustainable levels eventually lead to the bubble bursting — resulting in a severe drop in home values. Historically, housing bubbles bursting have an enormous economic impact on the population, resulting often in difficulties paying mortgages (being “underwater” with their home equity). This can lead homeowners to dip into savings and retirement accounts to keep their homes.
So yes — housing bubbles can be scary. However, housing bubbles are also a fairly common phenomenon. Not every bubble will be to the same degree and severity as that of the Great Recession. And even then, there’s contention over whether or not we’re even in a housing bubble.
Experts are saying…
There IS a housing bubble.
Realtor.com poses speculation with the assumption of “if we’re in a housing bubble, then…” and draws conclusions based on its supposed existence. They point to a few statistics that could indicate a housing bubble: namely, the national 10.1 percent year-over-year rise in median prices. In some metropolitan areas, those gains have been somewhere in the neighborhood of 20 percent.
The issue they point to is that we are indeed in the middle of a recession. Americans are, by and large, struggling economically. Home prices cannot continue to push upwards sustainably in face of this reality.
However, they also suggest that we’re less likely to see the bubble “pop” and more likely to see it deflate to course-correct. After all, any bubble we’re in now is nothing compared to the bubble created by the subprime mortgage crisis. Price corrections — not a crash — are more likely. The only reason we have not yet seen price corrections in face of this new recession is that interest rates are so low that they continue to incentivize buying despite rising prices.
There ISN’T a housing bubble.
By contrast, HousingWire has a different take. They propose that even though the real estate market is hot, we’re not actually in the midst of a bubble. As we’ve often said, they recommend not to listen to doom-and-gloom headlines. Regardless of a bubble or lack thereof, buyers and investors need not panic over market corrections.
One of the issues we saw during the Great Recession was lax lending standards and a surplus of inventory. That’s simply not the case today, where a lack of inventory and low interest rates with higher lending standards define the real estate market.
The real estate market moves in natural, predictable cycles. So as owners and investors, there’s no real reason to panic as the market ebbs and flows.
There MIGHT be a housing bubble.
The Motley Fool provides a case both for and against the existence of a housing bubble in an even-keeled take. In the case for a housing bubble, they point to economic conditions. A lack of affordability combined with economic hardships do make a compelling case for an inevitable crash. Home values far outpace inflation, wages aren’t keeping up, and unemployment is high.
By contrast, in a case made for no housing bubble, the varied factors driving prices compared to the subprime mortgage crisis are pointed out. Not only that, but mortgage rates are at an all-time low and a house payment is still under that of a typical rent payment.
What Investors Should Do Regardless of a Housing Bubble
To summarize, opinions are mixed when it comes to the state of the housing market. This comes as no surprise, as we often see conflicting predictions regarding real estate. In times like these, that speculation only becomes more evident.
For the real estate investor, a successful portfolio can be managed and maintained regardless of the real estate cycle. If you craft your portfolio with care and thought, with the help of your advisor and management team, you can weather any economic storm. The beauty of buy-and-hold real estate investing is that it is designed to thrive throughout the real estate cycle.
Pick your markets with care, though — a housing bubble will have more impact in certain markets than others. As we saw in 2009, hot California markets crashed hard where the more evenly balanced Houston market bounced back in short order. At the same time, investors saw an unprecedented number of opportunities nationwide in the wake of the Great Recession.
Be mindful of every investment decision you make and no housing bubble or market crash can stop you. You can leverage every season of the real estate cycle for your success!
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