Some perspective as real estate “bubble” conversations emerge

Lots of real estate “bubble” talk lately. Have you noticed? It’s a hot topic for the public and real estate community as housing affordability is becoming more of an issue since values have been on the rise for the past four years. Even Hollywood is getting in on the action with movies hitting the screen about the bursting of the “bubble” ten years ago (thanks Jonathan Miller for the heads-up). Anyway, this isn’t another post on whether we are in a bubble or not, but rather some things to keep in mind for the real estate community as bubbly conversations emerge. I’d love to hear your take in the comments below.

real estate bubble - image bought and used with permission from 123rf dot com by sacramento appraisal blog

Enjoy the tips. Anything you’d add?

Things to keep in mind during real estate “bubble” conversations:

  1. Predicting is Dangerous: Predicting the future of real estate is sort of like predicting what Justin Bieber is going to do next. What will the Biebs do next month or next year? Nobody knows. The same is true in real estate, and it’s okay for real estate professionals to simply say, “I don’t know what the market is going to do. My crystal ball is broken. But I can tell you what the market is doing right now and what it seems poised to do.” Seriously, if you work in real estate, this is probably the best and most honest answer you can give.
  2. Remember that markets change: At some point in the future values are going to decline, and at some point in the future they are going to increase. Of course we want to avoid incredibly steep declines, but otherwise it’s normal for real estate values to go up and down, and we should therefore expect that. We seem to have a mindset that prices should only increase, but that’s just not realistic. That would be like saying every day should be sunny or each day of a marriage should be only positive and filled with bliss (nothing is always positive).
  3. Be in tune with the slow fall season: When the market slows during the fall, it only exacerbates bubble talk. The past three years have seen a very definitive dull market in the fall (at least in the Sacramento area), and we need to respect and embrace that slow seasonal reality (and price accordingly). It’s sort of like when work is slow, it’s easy to get depressed or even think the business is going under. Well, it’s the same deal with the cyclical real estate market.
  4. Never promise equity: It’s easy to say things like, “This house will be worth much more in two years, so it’s a good time to buy,” but can anyone really guarantee that? If you never promise value to your clients, they can never come back and say, “You told me the market was going to increase and it didn’t”. This was exactly what many real estate pros told buyers using 100% financing last decade. “Hey, the market is going to increase, so don’t worry about that adjustable rate. You can refinance out of it in two years.” Interestingly enough, today’s FHA buyers are sometimes told, “You can get in the market with FHA now, and just refinance into a conventional loan when the market increases.”
  5. Focus on affordability: Everyone wants to buy at the lowest point in a market, but very few people actually pull that off. In fact, many times it’s simply an accident when it does happen. Ultimately people ought to buy when it makes sense for their wallet and lifestyle, and that is a fantastic point to emphasize because it respects where people are at in life rather than telling people when they should do something. If you have clients who want to buy, then honor their desires by helping them understand what affordability looks like with whatever market is in front of them.
  6. Become great at explaining the cake: Value in real estate is like a multi-layered cake since there are many “layers” in a market that impact prices. See my cake image here and use it (I love this analogy). It’s easy to think of real estate in terms of being only about supply and demand, but it’s also about interest rates, the economy, cash investors, financing, affordability, jobs, consumer confidence and so many other “layers”. In short, when one layer of the cake changes (such as inventory or financing), it can change the entire cake (the market).
  7. Hone your pricing skills:  How can you get better at pricing, pulling comps, or making value adjustments this year? It can be challenging to price when a market slows or declines because values might actually be lower than the most recent sales and listings indicate. Thus I recommend getting some training this year, taking some stellar CE, or connecting with some locals who you think are getting it right (By the way, if you’re local, I teach a 2 or 3-hour class called “How to Think Like an Appraiser”. May I do a training in your office?)
  8. Change what you say about the market as the market changes: It’s easy to speak fluently in clichés or say the same thing about the market for years. Agents do this by saying “it’s a good time to buy and sell” even if it isn’t, and appraisers do this by always indicating in their reports that values are “stable” with a “balanced” supply of inventory (even if that’s not the case). When we look closely at trends and begin to see what the market is doing, we can change what we say to our contacts and clients. Moreover, we might even price more effectively and give better real estate advice.
  9. Bubble Obsession: Values were massively inflated ten years ago, yet we still have this obsession about getting back to “the good ‘ol days”. Was it really that good to see huge price increases only to have the housing market collapse around us? Do we want to get back there? Nah, I think we can do better. This is why I recommend real estate professionals to be aware of bubble issues, but also find other interesting things to talk about and share. I’m absolutely not saying to ignore the market or be dishonest, but only find a balance so we don’t perpetuate a fear or worry about what may or may not happen to values in the future.
  10. Consider your future clients: One of the best things to do when considering the future of real estate is to think about who your clients might be as the market changes. Based on the way the market is moving, who do you think your clients are going to be in 2016 and 2017? What will your database need over the next two years? Are they going to be looking to buy, sell, rent, get married, get divorced, invest, do a short sale, get back in the market, remove PMI, sell a parent’s home, move up, build an accessory dwelling for an aging parent, downsize, settle an estate….?

I hope this was helpful.

Thank you sincerely for reading. I cannot tell you how much I appreciate you letting me share a few thoughts each week.

Questions: What is point #11? Which one resonated with you the most? Do you think we’re in a “bubble”? (I’ll share my thoughts if someone asks)

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Comments

  1. says

    Thank you for this post Ryan. We are hearing the same thing in our markets as inventories are low, demand is high and price appreciation is everywhere. I truly love the layered cake analogy!

    • says

      Thanks Shannon. It’s definitely the season for doom and gloom articles, not only because it’s fall, but because values have been increasing for several years. I also really like that analogy. I find it to be so useful to explain the market. Last week I went out for tacos with a group of real estate friends, and we were talking about the market. It’s just so rarely about only one metric such as inventory or even interest rates. There are so many factors that go into driving real estate values……. and that makes our job so interesting.

  2. says

    Great post Ryan and you nicely sidestepped having to make any predictions about the real estate market. Lately, in my area, I have been hearing appraisers say we’re in a bubble and agents say that we’re not. I’m an appraiser and I personally do not think we are to that point of a bubble yet in my area given that affordability is still good, the economy is good and getting better, inventory is low, and there is little new construction in relation to the last bubble. I’m concerned that there is not more wage increases that relate to the increases in home prices that we have been seeing. However, I’m hoping for a little more inventory and maybe higher interest rates to keep us out of the bubble zone in my area, but these are really just hopes and not predictions. I will make the prediction that Bieber is not going to crash his Lamborghini.

    • says

      Thank you Gary. I like the word “sidestepped” you used. I wanted to come at this conversation from a different angle. Moreover, we have to be honest about trends and what we can know. Even the best economists and minds in the country mostly missed predicting the last “bubble” when now it seems so obvious (ah, everyone can be an expert with the benefit of hindsight). I did have someone ask me point blank if we are in a “bubble” in a Q&A interview I did last week, so it’s always interesting to talk through that in writing for the world to see (I’m glad to have that conversation here too if anyone wants to do so). This time of year really does exacerbate bubble conversations, so we need to be in tune with that. I love hearing about your market. I share concerns for my market too when it comes to wage growth.

      I can always count on you for solid comments and some humor too. I love the Bieber prediction. That made me laugh. I think you’re right. I will also predict he will not egg his neighbor’s house this year. 🙂

  3. says

    11. Each market is different. Most real estate bubbles are local, not national. What’s happening in San Francisco, LA, Seattle or Vancouver doesn’t have a lot of impact outside those areas. When you read news stories about real estate bubbles, make sure you notice where they’re talking about.

    • says

      Excellent point, John. I’m so glad you said that. Very true. Moreover, even a local market might have some areas that are inflated while other local areas are not. Additionally, when reading the articles, I always like to see if the reporter unpacks what is meant by “values”. For instance, if we read, “Values increased by 10% last year”, what does that mean? The median price? Avg price per sq ft? What months are we comparing? So many questions.

  4. says

    Someone left a thoughtful comment regarding this topic on a different post this morning (http://sacramentoappraisalblog.com/2013/09/11/the-multi-layered-cake-analogy-in-real-estate/), and I wanted to share my response for context and conversation:

    In today’s market I appreciate that we don’t have the ticking time-bomb of adjustable rate mortgages, and lending guidelines have been much stricter. However, we do see a trend of FHA loans increasing, and that brings pause since buyers are not putting skin in the game with these loans. This reminds us buyers are struggling to afford the market at certain price segments. When looking back at price appreciation over the past four years, the market was certainly due for an upward correction since values did bottom out. It was cheaper to buy than rent, so an upward value correction was ripe. However, prices did increase more than they would have had it not been for cash investors gutting the market (which lowered inventory and created more competition) and historically low interest rates around 4% for four years in a row. In that sense values are propped up and inflated. Now we need to see a market that is more driven by wage growth and the economy instead of historically low interest rates and low inventory. It’s an interesting point in the market right now. Lenders could begin to loosen standards and/or get more creative with financing to help buyers afford higher prices (thus inflating the market). Lenders have lots of power right now (as the Fed does).

    For any onlookers, I did a screencast this morning to talk through some of the trends in the market in 2005 in Sacramento County. When the “bubble” popped ten years ago, one of the byproducts was a VERY clear increase in inventory (as well as price reductions and such). It’s a good idea to study the market so we can be informed and have more to talk about as this conversation emerges. https://youtu.be/JNOcyg7Wtek

  5. says

    All great points Ryan. It is so easy to try and put real estate in a box but that just does not work. It is a moving target. We can try to make sense of recent trends but that only goes so far. You have planted some good seeds of thought for all real estate professionals to consider.

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