I see periodically on these message boards topics that are related to ‘declining values’ or ‘real estate bubble’.
Please don’t by into the media hype that you read in Money Magazine or other publications.
Before I get into some thoughts, let me preface this by saying I’m relatively new to real estate investing privately but I have worked for a wholesale mortgage lender for several years. I am an underwriter and review property transactions all over the country (well, we don’t lend much in the Northeast so I can’t speak for that specifically) including Arizona, California, and Florida (three of the top 10 real estate markets for appreciation).
That being said there are some things to consider when wading through the real estate articles on the internet, watching news reports or reading other publications.
First: Death, Destruction, Mayhem and Fear are what sell. Without commenting on why this is the case (that’s a whole different discussion) just remember that the things you read, the shows you watch, etc are all trying to get ratings / viewers. Stories about how everything is just great, life is wonderful, hope springs eternal just don’t have the same ‘bite’ that stories of ‘Impending Danger, tune it at 11 to see how YOU could be affected!’ have.
Second: The real estate collapses that these experts predict are almost always validated by a story of how prices for real estate collapsed in ‘X’ year in certain areas. The part that is often overlooked is the ‘WHY’. In virtually every instance of overwhelming depreciation in homes, the economics of the area are what caused this. Take for instance the Oil price drop in the mid 80’s. That took a toll on housing prices in Houston, TX. The area dropped about 21% during that time. This is just one example, but you get the picture.
So, the point? The point is that the real estate bubble that people predict doesn’t make sense unless there is an accompanying economic disaster for the area. In the United States home prices have outpaced inflation by about 1-2% per year and in the last 40 years there has NEVER been a nationwide decline in prices(ironicaly enough, this data is from Money Magazine). I’m not naive enough to think it couldn’t possibly happen, however we know the media loves to prey on fear, and the fear of impending doom for home prices (which would affect almost 70% of Americans so the story hits home) is just good their ratings.
What is the most likely scenario is that very hot markets like Phoenix or Nevada slow down to more normalized levels. I’ll use Massachusetts as an example. According to the Office of Federal Housing Enterprise Oversight, since 1980 Massachusetts Home prices have outpaced all over states in appreciation. Home prices have appreciated over 600% during that time. However, as is the case in most areas, they couldn’t sustain the growth and during 2005 they are actually below the national average of 13.4 percent (Mass is at 11.8%). The bottom line is that prices in one area may level off but this fear of massive real estate collapse isn’t justified.