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There is No Bubble in the Real Estate Market
from: Corey S. Kupfer That's right - there is no bubble in the real estate market. In
fact, there is no real estate market.
Many recent articles and stories on whether there is a bubble
in the real estate market show a lack of understanding of real
estate, real estate investing and real estate markets. There is
no one real estate market. Unlike the stock market, real estate
is by definition geographically based and the markets are local.
Also, there are various types of real estate that are
differently affected by changes in the economy including
interest rates. To make any blanket statement about the impact
on the real estate market of interest rates or any other single
economic factor is absurd. Finally, how any factor affects real
estate investment decisions versus primary residence purchase
decisions is very different.
The decision, for example, on whether to buy a primary
residence in New Burn, North Carolina versus a pre-construction
investment condominium in Miami or a multi-family residential
building in Oklahoma City or a commercial office building in
Manhattan or a strip mall in York, Pennsylvania is, always has
been and always will be, affected by different market factors
and right now by very different stages in the market cycle for
those particular types of properties in those particular
geographic locations. In my over 20 years of representing real
estate investors, my clients have made money in markets that the
media and so called experts have defined as overheated, in a
bubble, depressed, stagnant and every other variation of good,
bad or neutral.
Let us distinguish between purchasing a primary residence and
an investment property. There are so many factors unrelated to
value that should be more important to the decision to purchase
a primary residence - such as do you and your family love the
house, does it work for your lifestyle, is it conveniently
located and are the schools good. Of course, value should also
be a factor but high current values could be due to the market
being overheated or due to fundamental factors supporting the
increase in value. For example, in the mid '90s there were some
experts who were warning that the Las Vegas market was
overheated, yet values continued to increase for another 10
years due to continued growth of the city and its surrounding
areas. Also, if you are selling a house in the same market in
which you are buying, the market value is less relevant as you
either sell high and buy high or sell low and buy low. If you
will be in the house for a long period of time, current market
conditions are less important as well as it is hard to predict
what conditions will be like in 10+ years.
In terms of investment properties, on the other hand, the
economics are all that should matter. No matter what is
happening in the overall economy, there are always submarkets in
which there are opportunities and those that are less favorable.
Determining which is which takes extensive research and
fundamental analysis - not uninformed or emotional investing.
For example, it does concern me that over the last year I have
seen people who have no real estate investment experience
investing in, for example, preconstruction condominiums in
Miami. If there is any submarket that might be in a "bubble,"
it's that one. In fact, my clients who have made a lot of money
investing in that submarket over the last 5 years stopped
investing in it more than a year ago. That tells me something.
Those investors, however, have not stopped investing in real
estate - they have just shifted their investments to other types
of real estate or other submarkets.
The real estate investment fund that I manage is currently
focusing its investments on multi-family residential rental
properties. Why? We believe that interest rates will likely
continue to rise. This, combined with the increasing percentage
of people who have loans with high loan to value ratios and
adjustable rate, interest only and negative amortization loans,
will increase the cost of owning and over the next few years
shift the rent/buy decision in favor of renting. This will
increase the demand for rental units and, correspondingly, the
rents. Increased rents mean increased cash-flow and building
values. Will we be right? There is no guarantee. However, even
if we are wrong, like my clients who have been successful real
estate investors over years and through several economic cycles,
it is unlikely we will get hurt because the properties we are
purchasing are cash-flow positive (the income exceeds the
expenses each month) even at current rents. We do not invest
betting on appreciation. This allows us to wait out a market
cycle and not be forced to sell due to inability to carry a
cash-flow negative property.
Successfully investing in real estate over time is not easy. It
takes work and discipline. We often have to review over 100
properties to find just a couple that meet our criteria. I heard
someone say recently that they ran into financial trouble in the
stock market some years ago when they confused a bull market for
brilliance on their part. In the shell game of betting on
appreciation over the last 5+ years in many markets, some have
made a lot of money and many will get caught and realize that it
was just a bull market and not their brilliance that made them
paper profits that were quickly lost. Many experts and the press
will blame this on the real estate bubble bursting. In reality,
however, it is just the market catching up to inexperienced or
greedy real estate investors who did not apply the fundamentals
while the experienced real estate investors moved on to
investments in other segments of real estate or sat waiting to
pick up the pieces of those appreciation gamblers on the cheap.
About the author:
Corey S. Kupfer is a principal at the law firm of Kupfer &
Associates, PLLC in New York City and a co-founder and
co-manager of Blue Whale Real Estate Fund I, LLC, a Clifton, New
Jersey based real estate investment fund. You can contact him
with any questions at 212-244-5588 x101 or at
kupfer.articles@kupferlawfirm.com.
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