Risks Are Rising
Lovers like to think that memories last a lifetime - but in dealing
with market risk, that isn't the case with property owners.
They are optimistic when housing prices are highly elevated -
and pessimistic when they are depressed. However, if they were to
remember past booms and busts - and learn from them - they would think
(and act) differently.
People who were afraid to buy houses at depressed prices at the market lows between 2010 to 2012 (it varied city-by-city) are now willing to engage in bidding wars to become the lucky owner at double the price.
How investors treat history was described well by economist John Kenneth Galbraith:
Contributing to . . . euphoria are two further factors little
noted in our time or in past times. The first is the extreme brevity
of the financial memory. In consequence, financial disaster is
In further consequence, when the same or closely similar circumstances
occur again, sometimes in only a few years, they are hailed by a new, often
youthful, and always supremely self-confident generation as a brilliantly
innovative discovery in the financial and larger economic world.
There can be few fields of human endeavor in which history counts for
so little as in the world of finance. Past experience, to the extent that it is part
of memory at all, is dismissed as the primitive refuge of those who do not have
the insight to appreciate the incredible wonders of the present.”
The real estate pendulum has always swung from over-optimism to over-pessimism --
and in doing so creates spectacular opportunities for both making and losing money.
If you ignore this cyclical phenomena, you are more likely to fall prey to major turning points in the market as opposed to profiting from them.
Real Estate Risks - Where We Are Today
With data through April 2017, the chart below shows (1) that both U.S. housing prices and U.S. commercial real estate prices are both in rising trends; and (2) that both property types currently reside at price levels that are above their excessive 2006-2007 bubble market peaks.
Commercial real estate prices have risen a remarkable 106% off their 2010 market cycle lows. They are now 22% higher their 2007 bubble market peak, which was followed by a 40% crash.
While U.S. housing prices have risen less spectacularly than commercial prices, they too have climbed above 2006 peak bubble prices (2%).
I'm not going to divine how high prices will ultimately go before the boom turns into a bust because as I explained here, that's not a good use of time. But please know that U.S. real estate prices are high (which means risk is high) and that real estate downturns are inevitable.
I don't provide market timing signals for the commercial real estate market - however the above chart shows that it has been statistically well-correlated (86%) with the U.S. housing market since 2001. So when prices for one property type eventually peak out and start to fall, don't be surprised if prices for the other property type soon do the same.
Nobody knows what will trigger the next real estate downturn. It could be the result of any number of economic or geopolitical events that are impossible to predict in advance.
But to your benefit, if you study the past and follow the key market indicators I have carefully researched, you don't need to have any fortune-telling talents if you want to stay ahead of the real estate curve.
Most people have probably forgotten the financial and emotional pain that a real estate downturn brings - however there will come a time when you should focus on capital preservation as opposed to growth.
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Comments/questions are always welcome -
and you can send them to Robert@RealEstateTiming.com