The Return of the Doomsayers
January 1, 2005
They’re back! Every December they call down from their ivory towers to warn of the dire consequences awaiting anyone who buys real estate now. The real estate bubble is going to pop. And when it does, oh boy, watch out!
Bottom feeders are lurking, ready to scoop up properties that go into foreclosure for pennies on the dollar. How nice for them.
Is there a ready-to-pop real estate bubble? I don’t know. I’m not an economist, and I don’t have a crystal ball. I do know that experts have been predicting the end of the real estate bubble for several Decembers now. One of these years they will shoot a bulls-eye. Then both they and we will forget about all those years they shot their arrows into the stock brokers’ offices behind the targets. “Brilliant!” we will say. “They really know their stuff.”
Just look, the signs are there. Cap rates are lower than they’ve been in a long time. But so are interest rates. They move together. If interest rates go up, smart investors won’t tolerate a low cap rate and that will mean that property owners will have to lower their prices to raise effective cap rates.
Will that burst the bubble? Maybe. Will that adversely affect smart investors? No way.
Here’s why. Smart investors buy smart. They follow the rule: You make your profit when you buy; you realize it when you sell. Smart investors buy with the attitude that there will be no surprises. They have done their due diligence. They have run the numbers down to the third decimal point. They know which properties are good investments and which will fulfill the prophecies of the doomsayers. They buy on terms that ensure their investment will provide a profitable return in good times and bad.
That is the advantage of investing in real estate over the stock market: you have control over what you buy and how you buy it. Unlike the stock market, you have direct control over your assets, as opposed to some corporate bigwig. Unlike the stock market, the company owner has the best interests of the investor in mind, because they are the same person. Unlike the stock market, the investor can make the executive decisions necessary to see to it that his or her investment remains profitable.
So what if they are back, those doomsayers? To smart real estate investors it means only that we will have to pay close attention to our investment strategies. But we did that anyway, didn’t we?