The Real Estate Bubble?
January 1, 2003
The naysayers and the haruspices of doom and gloom talk about the real estate “bubble.” It’s going to pop any second now, they warn. And when it does it going to get burnt-umber goo all over investors and them. Their answer to the problem: take all that money you yanked out of the stock market and put it back–right now! No matter the old adage “fool me once, shame on you; fool me twice, shame on me.”
Remember when Alan Greenspan warned of “irrational exuberance” in the stock market a few years ago? He had to calm that down by raising interest rates so we would all come back to our senses. Well, we’ve not only come back to our senses, but we’ve hit ground now. And lo and behold, what do we find on the ground but real estate, right where it’s always been.
So what’s this bubble they keep talking about? With interest rates so low, real estate prices have increased and sales have skyrocketed. Remember, people buy a payment, not a price. So when interest rates drop, the same payment buys more. Prices increase to accommodate the lower interest rate and the payment ceiling. When interest rates go up, prices tend to drop some, though not to the same degree they went up, due to seller reluctance.
That said, should we be afraid to put our investment dollars in real estate? Will a popped bubble get goo all over what savings we have left from the corporate ethics scandals and the stock market debacle? Not if you buy smart. The primary rule in real estate investment, the words to live by, the adage you want to hang prominently on your wall is “you make your profit when you buy the property, you realize your profit when you sell it.” So you do your homework and buy smart. Even in a rising market, there are still money-making bargains to be had.
That means when you buy investment real estate you buy it with intent. “I intend to keep this property five years and exchange it for something bigger.” “I intend to keep this property for its retirement income, so I’ll never sell.”
Too many small real estate investors don’t buy with intent, they buy with hope, imagination, advice from psychics, irrational exuberance, rose-colored glasses, haste, or as the result of somebody being a better salesperson than they are.
If you have bought smart, let the bubble burst. No matter to you. If you have done your homework and legwork and find the good buys, popped real estate bubbles will have little effect on your investments. After all, the tenants are paying the rent and that rent covers your costs and puts money in your pocket every month. The property is in such good condition that repairs and maintenance end up being just a minor irritation. And it’s in a neighborhood that is improving, which means that even in the worst real estate market, the values will increase at least a little.
A real estate bubble? Not a worry for the savvy investor.