I recently received an email from one of my friends who works in real estate. He fears we are in a bubble and it could collapse at any time. The following is his message.
I had a good call with my friend John today – he and his son, Luke, have been doing very well flipping houses to retail in the Phoenix area. Their price points have been on the rise, of course, and their profit margins have been decreasing due to bureaucratic regulation, permitting, licensing etc. We have come into a real estate bubble, one that looks to burst all too soon.
The bubble effect that I am referring to is evidenced by the fact that prices have gone up in virtually all markets in the past 3 years – along with rents. That increase in housing prices has not been due to new homebuyer demand – first time homebuyers – where the upward progression starts in an organic market increase.
Because I believe we are running into this bubble market, especially at the higher price points in their area of Arizona, and because there is strong investor demand for such houses, I advised John to consider looking at wholesaling more of their leads and really cherry-picking what they keep to rehab.
Our whole economy is full of air – money injected into the markets by the Fed. The day will come when it will re-set (or crash). I don’t want to be caught in that trap.
Thanks very much!
Although I respect my friend greatly, and even though he is a very successful investor, I had to disagree. I feel this could be one of the best times ever to buy cash-flowing turnkey real estate investments!
If you look at history, real estate follows one law: supply and demand. It does not always follow economic data- and certainly not the stock market. I do believe the stock market is very volatile, but until there is no demand for housing or unless banks change their policy, I do not see a major bubble in real estate. This could be partly due to my insulation in the Midwest, or it could be me being naïve, however history tells me we are in a 30% growth stage that should be followed by a 200% growth span of about 6-8 years.
In my opinion, turnkey rentals are a great hedge in this time because if the prices go down, you are still cash flowing and who cares! However, if we have major growth in prices, it’s like owning a super-dividend stock that massively appreciates!
While fears of a bubble have some merit, the thing people are overlooking is that all those homeowners who had their homes foreclosed on in 2009 are going to be able to buy houses again here in 2016-2017.
I think the first time homebuyer market is still a little scared so I think the next jump in prices will be in the second tier of market: people moving into their second house. Once this happens this should give the first time home buyer the confidence again to buy.
Looking at history, this is what has happened in the past. If you look back in history when we inflated the market with printed phony dollars, it has always been followed by a huge period of time of real estate inflation of price. I actually think that because the economy is so propped up at this time, this could make the rise in real estate prices even more dramatic than ever before. Some people are predicting real estate values to grow 700% by 2025!
I know this is not the most likely scenario, however I do believe it is very possible. In fact, if history repeats what it has done the last 4 times we inflated the market like this, then it is very possible.
This is why I am buying cash-flowing turnkey properties, even in the midst of an unsure market. The upside is just too great to ignore.
Written by: Tom Olson