These questions pop up frequently on the internet and social media, but who exactly is asking these questions besides economists and news outlets? Some groups would understandably be concerned about a real estate crash. House flippers would be one of them. A real estate crash would put a crimp on short-term profits. Real estate developers, real estate agents, and brokers would be other groups who would be concerned about the bubble bursting. Potential retirees banking on the equity in their homes for retirement would also have cause for concern.
First of all, I don’t think we’re in a housing bubble. A correction of demand typically causes bubbles, but there’s no reason to believe demand for housing will wane anytime soon. The last real estate bubble was a fluke caused by subprime mortgage-fueled demand and prices. We are not in the same environment. Banks have cleaned up their act, and prices reflect real and not artificial demand.
Regardless of whether we’re in a bubble environment, there’s a segment of investors unconcerned about a real estate crash, and that segment is the long-term investors. Long-term investors are unconcerned about short-term corrections because, in the right asset classes like affordable housing and mobile home parks (MHPs), where demand far outstrips supply, a market correction will only increase demand as people downsize. Additionally, long-term investors know that even if there is a short-term dip in the value of their assets, prices will eventually bounce back. There may be a short-term dip in the value of a long-term investment in the worst-case scenario, but in some cases, a shift in home prices doesn’t necessarily carry over into other real estate sectors. Because of their long-term investment window and the reliable cash flow from their assets, long-term investors can afford to hold onto their properties for as long as they need for the market to rebound. The Great Recession of 2008 and the recent pandemic-induced recession are prime examples. While many commercial sectors saw declines along with declines in single-family, MHPs thrived - unaffected by the wider market vulnerabilities. It’s well-established that certain sectors of CRE are more correlated to the broader economy than others. Retail and office are among the most highly correlated where lagging retail sales drag down demand for retail and office space. On the other end of the spectrum are segments that thrive in a downturn as households downsize. Affordable multifamily and MHPs are the two segments that come to mind - unaffected by economic downturns or drops in home prices.
An impending housing bubble - whether real or not - doesn’t scare away sophisticated investors with long-term investment windows. History has proven that market corrections are typically short-term. Regardless, some real estate sectors are unfazed by broader market downturns, real estate bubbles, or even inflation. Consistent demand ensures reliable cash flow insulated from downturns, which correlates with rising prices because people will always need affordable housing.
Will real estate crash? Does it matter? Not if you're investing in the right assets.
Andrew Lanoie, Co-Founder - Four Peaks Capital Partners, LLC