Are We Heading Towards a Real Estate Bubble?
Real estate prices have been rising significantly throughout most of the COVID-19 pandemic. To many people, this came as a great surprise. This is because catastrophes and market downturns often result in a drop in real estate prices. However, there were a number of important combined factors that together created a surge in real estate prices throughout the last year and a half.
These factors include extremely low interest rates, inflation, housing production shortfalls, fewer people selling, and increased pandemic-induced spending on properties by wealthy individuals and families.
Essentially, during the pandemic, interest rates were lowered to try to prevent a market collapse, fewer houses were being built because construction teams had to shut down during lockdowns, people stopped listing their properties for sale because they didn’t want to deal with potentially infected people touring the properties, and wealthy people started spending more on real estate because they were spending less on travel and vacations. Furthermore, trillions of dollars were created by the federal reserve and used for stimulus spending, helping to stoke the fires of inflation.
Now that the pandemic is slowing down, some of the factors that led to real estate price increases are disappearing. For example, new construction activity for homes is on the rise. Also, there is significantly less fear regarding allowing people into properties for tours since infection rates are down and roughly half the American population has been vaccinated.
Now that some of the factors leading to the increased real estate prices are disappearing, many people are wondering if we are headed towards a bubble that will pop just like it did in 2007 and 2008. If this were to be the case, there could be a significant decrease in real estate prices.
However, there are many indicators that are showing strong signs that we are not in a bubble and that the bottom is not about to fall out from the real estate market. In this blog, we will break down those indicators.
1. Most Tenants are Still Paying Their Rents
If the vast majority of tenants are still paying their rent every month, then this is a strong indicator that the real estate market is not in a bubble. According to the National Multifamily Housing Council, 94.6% of apartment households made a rent payment in May 2021. Regarding the state of the multifamily real estate sector, president of the NMHC, Doug Bibby said, “Having weathered the worst of the pandemic, we can say with increasing confidence that the outlook for the multifamily sector is as positive as positive as it has been in years.”
When almost 95% of people living in multifamily apartments are paying their rents each month in America, that shows that the market is not experiencing an unsustainable rise in rent prices that is causing people to default at high levels.
2. Rent Prices Are Still Going Up
If the multifamily real estate market was truly in a bubble that was about to pop, then rent prices would start to be flattening out or even going down. However, rent prices are going up. Many people have returned to the big cities and in many urban areas, life is starting to return to normal following the madness of the pandemic.
Rent price increases are a good sign that we are not in a bubble. On the contrary, it shows that the multifamily housing market is returning to normal following the rental price drops that happened in big cities during the height of the pandemic.
So, as long as rent prices continue to climb, then real estate investors should feel confident that they are not putting money into a bubble that is about to burst at any given moment. Instead, they should feel like they are investing money into assets that will grow consistently for some time to come.
3. Over-Leverage is not an Option Today
One of the biggest causes of most bubbles, whether it’s in real estate or another asset class is the overuse of leverage. Today, over-leverage is not an option in the multifamily real estate market because the vast majority of multifamily loans are granted between 65% and 78% LTV.
Because of this fact, there is a great deal of security and stability in the multifamily real estate market. This means that most likely, we are not in a bubble and the chances of the market taking a sudden dramatic downturn are extremely unlikely.
The 2008 real estate market crash was in part caused by overleverage and by people who were not qualified being approved for mortgages. It is virtually impossible for this to happen in the multifamily real estate market. This means that prices in the multifamily market are not dangerously inflated. Instead, they reflect stability. This market is carefully regulated unlike the residential real estate sector and derivatives market in 2008.
What Does This Mean for Investors?
Some multifamily investors got spooked because of the pandemic and held back on their investing activity. Now, however, it appears that the circumstances are getting better and better for multifamily real estate investing. Security is returning to the market.
So, if you are considering investing in multifamily real estate properties, then you shouldn’t let concerns of a “bubble” stop you. Most of the important indicators and trendsare pointing to the market not being in a bubble.
As long as the vast majority of tenants are paying their rent, there should be a high level of security in this market. Everyone needs a place to live, and more and more people are returning to the cities in order to resume their normal pre-pandemic city lives in apartments.
It is true that the pandemic drove vast numbers of people out of the cities, but as long as the pandemic keeps fading away, then the urban multifamily housing sector should not see another major pandemic-induced market downturn.
Are We Sure That The Pandemic Is Truly Ending?
Of course, no one can be one-hundred percent certain that the pandemic is on its last legs. Another variant could technically emerge and cause the pandemic to get worse. We will leave the scientists to speculate on that.
However, what is clear is that since January of 2021, the number of new daily COVID cases in America has been in rapid decline. This is primarily due to the fact that tens of millions of Americans have received the COVID-19 vaccine and that millions of others have had the virus, survived, and obtained natural immunity.
As of July 14th, 2021, there are only about 26,000 new cases of COVID per day in the US. At the height of the pandemic, there were roughly 300,000 new cases per day. So, it would seem that the pandemic is in steady decline.
The vaccination efforts are also still in full force. Roughly 48 % of the US population has been vaccinated and this number continues to rise. Because of this fact, it is likely that the number of new COVID cases that occur each day in the US will continue to decline as more and more people receive the vaccine. The decline of the pandemic is excellent for the health of the multifamily housing sector.
Conclusion
Most investors try to avoid investing in bubbles at all costs. This is because investing in an asset class that is in the middle of a bubble is a great way to lose a lot of money. There have been many famous bubbles throughout history from the tulip bulb bubble in Holland in the 1630s to the dot-com bubble of the late 1990s to the real estate bubble in 2008.
The pandemic caused a lot of fears that the multifamily real estate market might be in a bubble. However, we believe that this is simply not the case. We believe this for a number of key reasons including the fact that most tenants are still paying their rents. When 90%+ of tenants are still paying their rents, it means that it is very unlikely that there is a bubble. In order for a bubble to occur, a higher percentage of tenants would have to be struggling to pay rent. This is not the case.
Another sign that we are not in a bubble is that real estate prices in the multifamily sector are actually increasing, not decreasing. This is proof that the market is experiencing steady growth. If the market were in a bubble that was about to pop, there would be a flattening out of prices, not steady growth.
One final indicator that we are not in a bubble is the fact that it is essentially impossible for overleverage to occur on a large scale in the multifamily property real estate market. When overleverage is restricted, it dramatically reduces the chances of a bubble forming.
So, the bottom line is that the multifamily sector is very healthy right now and is ripe for investments. If you’re interested in learning about some great multifamily housing investment opportunities, feel free to get in touch today to learn more.
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About the Author
Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don’t have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital at www.bluelake-capital.com and learn more about Ellie at www.ellieperlman.com.
