Are We At or Past the Real Estate Market Peak?
Two weeks ago, I attended the Best Ever Real Estate Conference in Denver. The conference ended with a debate about where we are in the real estate market cycle: are we at or past the market peak or is there still room to grow? In the “for” camp was Jorge Newbery and Steve Baldus who think we’re at or past the peak. Kathy Fettke and Dave Van Horn supported the “against” camp and believe this cycle has not yet reached its peak. After the debate, Ben Lapidus, the moderator, asked the conference attendees to vote for the wining argument. But before I tell you who won, I'll provide a summary of the arguments.
The “for” camp made strong arguments that the market is at or beyond peak - and they believe we're already heading down. They cited the following points in support of their argument:
Interest rates are well on their way back to what are historically normal rates; this will push down home and asset prices; as the economy continues to improve, rates will continue to rise and push prices down further
The inventory of homes for sale is increasing, indicating slowing demand
Multi-family vacancy rates are starting to increase, meaning supply of new apartments is starting to outstrip demand and holding down occupancy
Similarly, new apartment supply is holding down rent growth which has slowed over the last year; it’s not yet negative but the trend indicates its past peak
Rents have also grown much faster than wages and the trajectory is likely unsustainable
Wage growth is not keeping up with the increase in mortgage expense caused by higher interest rates; this has caused unaffordability in housing that is not abating; less and less people can afford the housing that is being built or currently available
The debaters also noted the perception that “everyone is rushing into real estate investments” and that this is typically an indicator of a late cycle
The “against” camp countered the belief that we have reached the market peak and think there is still room to grow. They pointed to the following market observations to support their case:
Basic economics are playing out in the housing market; supply is not keeping up with demand and prices are rising accordingly:
There is high demand for homes and the millennial generation is only starting to buy homes, this will push demand even higher
Rates are still historically low, making homes more affordable
The supply of new and existing homes for sale is still historically very low
Sales of homes are increasing but still well below prior peaks
Mortgage defaults are very low indicating that there is very little distress in the market
The economic vital signs (jobs, wage growth, GDP growth, etc.) are not indicating a peak
Inflation is still low, labor supply is still strong and will keep wages from spiking
Household formation is still increasing
Jobs are still being created and unemployment is very low
We are experiencing the slowest economic expansion ever; GDP has increased only 19% since the bottom of the recession; this is well below growth seen in past recoveries
Mortgage rates will probably not rise too far too fast because of the fear of creating a shock and hurting the economy
Stimulus from tax reductions, infrastructure spending, etc. will most likely provide a boost to the economy over at least the short-term
No one knows how long this cycle may last or how deep the next downturn will be. Both sides agreed that we’re nearing the end of this real estate cycle but they couldn’t agree on whether we are past the peak. The market may keep expanding for some time before the next recession. Or not. We could see the the market turn flat, with no growth for several years, like Japan. With the government pulling so many economic levers at once, it’s hard to determine how the economy will react. But what both sides did agree on is that the low hanging fruit from the last downturn is gone and that today, purchasers need to be cautious when analyzing acquisitions.
In the end, the attendees supported the “against” motion, that we are not yet at or past the market peak. However, the clear bottom line to investors was to play it safe. Don’t stretch, use conservative underwriting, buy for cashflow, and use long-term financing. If you plan for the worst you can survive, and thrive, in a market correction.
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