Every week, people asked me this question, “are we in a bubble now?” In fact, people have been asking me this same question since 2014. I care about this question as well because I did buy properties after 2014. It is a good question, however, not for reasons that people often think. There are many misconceptions about real estate bubbles that can lead to uninformed decisions.
The truth is, no one knows. Many economists have struggled to figure out the answers. There are salespeople out there who will say things just to get you to buy. Price gain has definitely slowed down 2015-2017 compared to 2011-2014. However, there was still price gain from 2015-2017, and there are ways to thrive as an investor in this market.
I believe in studying the data and the historical sales trends in order to make the most educated decision. Also, I believe each investment scenario is different, and each person’s financial profile is different. There is no investment property that is good for “everyone.” In fact, what makes sense for one investor may be a complete disaster for another.
First, there are a few myths to debunk:
Myth #1: High prices = Bubble
Just because prices are at an all time high, it doesn’t mean we are in a bubble.
Real estate bubble means that the underlying value of the properties doesn’t support the prices. A bubble is when there is a severe disconnect between affordability and the inventory. In a bubble, investors are not buying properties based on cash flow or fundamentals that indicate that the market will likely go up, but on speculations, fueled by cheap financing. A bubble can happen in a rapidly appreciating market, but a rapidly appreciating market does not necessarily mean it’s a bubble.
Price gains occur because there is a severe imbalance between supply and demand. If the demand is much greater than the supply and there are no tangible ways to increase the supply to match the demand, and the affordability is still there, price gain will continue. If 20 people are willing to bid a high price for a single property, have the ability to, and there is no other property to buy, the price will reflect that demand. In a bidding war of 20, only one buyer will win, and the 19 bidders who lost will continue looking in the same area, and might bid higher next time.
Myth #2: buy low and sell high is the only way to succeed as an investor.
If you bought a property at below market price, you already walked into the closing with equity. If you bought a 2-family at $1.3 million while similar properties in the area sold for $1.5 million, you already gained $200k equity on the closing date. Conversely, if you bought an overpriced property $50k below asking price, and similar properties in the area sold for $100k lower in the same time frame, even if you bought $50k below list price, it doesn’t mean you got a good deal.
Focus on relative data and actual comparatives. Don’t get distracted by high or low prices.
Conclusion: I think you should make home-buying decisions that you feel comfortable with. Stay within your budget, buy in an area where historical price trends over the past 20 years has been steady (and many neighborhoods in Boston fit this criteria), study the numbers, and then you should be fine.
Tania Wu, Top Producer at Boston Luxury 2017