The Economic Bubble is Hiding in Plain Sight
Investors, beware and be aware—constriction is coming.
We are so far into the longest economic expansion in the history of the U.S. that just about everyone—no matter how bullish on their particular market—is stuck in a waiting pattern. Currently, our economy, our country and, arguably, our housing market are all subject to an array of uncertainties, including:
- COVID-19 (the novel coronavirus that first appeared in Wuhan, China) and its impact on global health and the Chinese economy.
- The 2020 U.S. presidential election.
- Cybersecurity threats, including the recent Equifax breach that compromised the data of an estimated 145 million Americans.
- A volatile stock market.
- A looming housing affordability crisis.
- Inflation.
- Student loan debt.
- Overall consumer debt.
The list goes on and on.
Despite the uncertainty, the economy and investors are not behaving as most would expect. They are behaving as though we are in the middle of an economic expansion rather than riding high on what can only be called a bubble, to put it bluntly.
Investors who fail to acknowledge and react strategically to the presence of this bubble will fall hard in the next 12-24 months. Do not be among those who simply shut their eyes and refuse to acknowledge that sooner or later, the end of this upswing is coming.
I tend to be a pretty unpopular guy when I say we are in a bubble or that the economic expansion is barreling toward the end of its life. I understand. No one likes to hear that the “good times” are almost over. Our industry does, however, gradually seem to be accepting that an eventual economic downturn—or at least a leveling off—is realistically inevitable.
3 Things to Know About the Bubble
When it comes to the next several years and our economy, there are three things every investor and small business owner must realize:
1) Real estate market cycles have historically been twice what “conventional wisdom” says they are. Looking back over 200 years instead of just 20, you will see that the biggest market cycles for real estate are not seven or 10 years, as most people think they are. Rather, they are about 18 years. Counting from the crash (2007 or 2008), you can see we are sitting right on the 18-year threshold as we enter 2020.
Keep in mind that not every recession is exactly like the one we just went through—most recessions are not 18 months long! In fact, the average length is 11 months, and the two prior to the Great Recession lasted nine months (the savings and loan crisis of 1990-1991) and eight months (the dot-com bust).
Although some economists are warning that the present extended boom will be followed by an equally extended bust, the odds are against this happening. Why? Because the Great Recession was a result of a combination of negative behaviors in two of the pillars of our country’s economic stability: the housing market and the financial markets. While some may argue that not everyone “learned their lesson” after the housing crash and financial meltdown, most of the problematic, institutional behaviors that led to that crash have since been remediated.
Takeaway // Not only is it unlikely the next downturn will last as long as the last one, but it is also unlikely it will stem from the same weaknesses in the system.
2) The next downturn is unlikely to hinge on housing. Supply and demand remain (and likely always will) the most influential factors in the life span and nature of real estate cycles. For this reason, the next downturn and economic cycle will be different from any other correction when it comes to real estate.
More than ever before, regional real estate performances will diverge from one another. Some areas will rise significantly in value while others fall. This happened to a limited degree during the 2008 housing crash, particularly in areas of the country like Dallas, Texas, which had not experienced the astronomical appreciation rates the rest of the country had leading up to the crash. When the market fell, the Dallas market softened slightly and then proceeded to go on the tear it is still experiencing today. By comparison, Boston went through a major upswing prior to 2008. But by 2009, houses were selling for half their former value.
Likely, the next downturn will certainly affect the housing market and real estate sector, but it is unlikely to be caused by the housing market. This means that different facets and tiers of real estate will react differently. It is far more likely that a recession will disproportionately affect higher tiers of the housing market, driving owners in those brackets downward to lower-cost residences, than send the entire housing supply plummeting in value.
Looking into my “crystal ball,” my best prediction is that if you invest in areas with price ranges between $300,000 and $600,000, these will be the properties most likely to go “on sale” during the next downturn. By comparison, highly populated areas with homes under $200,000 will continue to rise in value because it is nearly impossible to build properties at that price point in today’s market. Upper-tier properties have been overbuilt, and lower-tier properties are undersupplied and in high demand.
Takeaway // If you can buy homes under $200,000 in areas where there is any type of job stabilization, you will be in prime position to build your portfolio during the downturn and benefit over the long term from your foresight.
3) Inflation will be part of the equation. Although the Federal Reserve seems determined to keep interest rates low for as long as possible—probably until after the presidential election—it will eventually be impossible to continue to postpone inflation and an economic correction. When interest rates do normalize and we see 6% or 7% interest rates once again (which are still quite low by historic standards), the affordability of the midrange properties I mention in #2 will diminish greatly.
Takeaway // Lower-tier, affordable housing will be the hottest “ticket” in housing and real estate during the next cycle. Snap it up now while you have the chance.
Focus on Opportunities, Not Evasion
At the end of this economic cycle, one thing is certain: There will be another economic cycle. It will be both reliably similar to our country’s other economic cycles and, as always, wholly unique because the world in which it emerges will also be wholly unique. Instead of trying to avoid this fact, look at it as an opportunity. The most successful investors in this decade will be those who identify their strengths and then mold their strategies to fit the economic forces outside of their control.
