Monday, April 5, 2021

Bubble Questions

Are we in a bubble or is this the new normal?

How long will the current real estate bubble last?
Buy now and risk overpaying?
Or, wait it out?  Wait for how long?
And if we do wait now, do we not risk that the market will be even worse later?

As John Templeton famously observed, "The four most dangerous words in investing are, This time it's different."  And if we recognize that, we must assume that the bubble will burst...eventually.  Right?  But these things can go on longer than we anticipate.  And longer than some people can afford to wait.

We all know some of the causes, like record low interest rates and easier lending standards.  A record stock market.  Lots of cash sloshing around and an influx of foreign capital.  These are the usual suspects contributing to bubble inducing behaviors.

Less recognized and considered is the influx of millions of illegal immigrants and a government that tolerates and even encourages this.  This is not meant to be a political point.  But no matter what you think about immigration, nationwide our resident immigrants do use a portion of our housing stock.

But there are a few other factors that make me revisit the dangerous question:  Is it different this time?

Note, these are factors for my market, the greater Research Triangle Park area of North Carolina.  I cannot speculate as to what is going on anywhere else.  But here they are:

  • Under-built housing stock.  This will take many years to correct.  And that is assuming that there is the political will to correct it, which I do not see.

  • People fleeing high tax and high expense states and metro areas, looking for affordability, more responsible government, and quality of life.

  • The extended lockdowns finally demonstrated that offices are no longer really necessary.  Meaning that people do not have to live within commuting distance of an office.

These are not mere bubble factors.  These are long term and perhaps permanent changes in the real estate sector.  They will certainly affect the real estate market for a generation.

Will the bubble burst?  Well, it always has in the past.

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