Real Estate Market Predictions: A Bubble to Pop or Room to Grow?

Lately, I’ve been asked more than once; “Do you think the real estate market is going to collapse?” When I ask why someone would ask such a question or by what measurement did they come to such a conclusion their response is always "It’s been almost 10 years since the last real estate fall out and there seems to be one every decade" It’s something to consider, especially if you adhere to the logic that if we don’t pay attention to history we are bound to repeat it. But if we look closer at the reasons for variations in the real estate market we will have a better idea of what to expect in the future.
 
While it may be true there has been a market correction approximately every ten years, it would be beneficial to understand the underlying causes of past drops and compare them to today if we are to accept the theory that we are prime for another drop in values. 
 
Reason #1 – Credit Crisis
The most notable fallout was due to the credit crisis of 2007/2008. If you have read previous posts you will remember I noted this fall out was due in large part to government interference; lending criteria imposed on banks, building restrictions that did not allow for increases of inventory and prices to skyrocket, and a mantra that every American should be able to own their own home.  For a complete understanding of the crisis and what caused it read Dr. Thomas Sowells book ‘The Housing Boom & Bust’.  There were causes for the bubble bursting in ‘07/’08 but the overriding factor was the result of many poor policies instituted by local and federal government as it related to the housing industry and over a period of decades this had built up to such a feverish level there was nothing left to do but burst.  However, today’s market resembles that market as closely as a horse resembles a chicken, at least in the Low country; Hilton Head Island and the surrounding areas of Bluffton and Okatie.
 
Steady as she goes
What we have seen since the ‘07/’08 fall out is slow and steady growth. Depending on how someone gathers, puts together and presents these numbers, this growth for the Low country has seen approximately a 3%-6% increase in values per year.  Some would argue this number is too high and maybe distorted by the fact the area sells in waves with one category of properties selling at a higher rate of appreciation while other areas remain stagnant. But, the stagnant areas also catch their wave in due time; often within 9-18 months, and their values increase as well.  There are also discrepancies within categories of homes that may cause some to feel the prescribed appreciation level is off. For example, the high-end category ($1M+) has seen polar extremes in its inventory and values. On one end, you have new homes or recently remodeled homes that are selling for more money, with less time on the market than homes that have not had anything updated.  Those that have remodeled or are selling new say this market is booming. Those that have dated properties say it’s been stagnant. However, the point remains that across the board in the Low country properties values have steadily increased for almost a decade. More importantly they have done so without major spikes; i.e. bubbles.
 
Red Flags
When anything grows to quickly it should raise a red flag and cause for concern. The real estate industry is no different. However, the current market has had slow steady growth leaving one to wonder where a collapse or drop might come from? I am not a licensed investor, nor do I play one on tv, but if you look around the various markets for things that may send a shock wave through the country, and thus a readjustment of values for everything (not just real estate), you may find a couple of things.
 
The two most obvious red flags would be the stock market and the college loan system. The stock market and Dow Jones Industrial Averages have seen exceptional increases the past decade (from lows of under 10,000 almost a decade ago to 20,000+ today).  Tuition at today’s universities has skyrocketed (higher demand = higher prices) The college loan system closely resembles the mortgage industry of a decade ago.  It has been raging out of control for many years and resembles a ticking time bomb.  Should one of these entities experience a major shock; a stock market readjustment or a credit fallout from the federally backed college loans, there would be a ripple effect throughout the country effecting everything; prices of goods, services, and even real estate. 
 
Where some go awry
Throughout history there have been some very educated and smart people that have tried to time the market in all industries; real estate, stocks, etc. to no avail.  Knowing this, buyers and sellers still try to pick the best time to buy/sell but this is often at a cost. If there’s an added variable to prediction it is that today’s market is continually changing. (Read my prior post on ‘List now, List later, Could it cost you?’). Most homeowners or buyers don’t have the time or wherewithal to study the market daily. If those that do study things regularly cannot predict the market correctly why would those that don’t study it at all be able to?
 
Tangents
Too often people get caught up in tangents; i.e. symptoms, which push them away from the cause or main reason of the thing they want. When someone wants to buy or sell a property fear is something that drives them off on a tangent and they ask, ‘What about…?’, ‘What if…’, ‘Is there a decade long drop coming?’ For buyers, they forget the real reason they’re buying, especially here in the Low country; 1) a place to live and/or 2) a place they and their family can enjoy for years to come.
 
The Low country has always fallen into the long-term strategy category as far as real estate is concerned. You’re not necessarily going to make money flipping property but it is a phenomenal place to live, enjoy on vacation all while maintaining a solid return on your investment; financially and memorably.  It’s an invest and hold type model utilized by those that play the long game instead of the get rich quick scheme.  If you keep this in mind and understand that markets ebb and flow but are always on a continual rise, it may just ease your mind and allow you to enjoy that piece of property you have been waiting to buy/sell.  Besides, are there not other things in life to do than worry if today or next month is a better time to do something? Time is the only resource that once spent can never be recovered. If you carelessly waste it on the minutia of trying to time the market, you may end up losing more than you gain.