BOOM, BUST, OR SOMEWHERE IN-BETWEEN?Posted on 2018-12-21
If there is hand-wringing over a possible real estate downturn, it may be justified. Or not. On the one hand, 2019 home prices are expected to rise almost four percent - that's on top of a 5.6 percent increase so far this year (2018).
On the other hand is the wild card, also known as mortgage interest rates, which are rising after years of restraint due to an unsteady overall economy. Mortgage interest rates have a direct effect on buying power.
Concern about the health and well-being of the real estate market is justified: In 2017, the professionally managed global real estate investment market was estimated at $8.5 trillion.
With that much money at stake, it's no wonder that the folks on Wall St. and in other investment domains are nervous about interest rate hikes, housing shortages, and affordability. The market watchers know that weak home sales are just first ripple in a pond that includes construction, design, home goods, and many other costs and investments that will slow down dramatically in the event of a real estate bust.
Whether the fear is real depends on the source. Veteran real estate professionals know that while the dollars and cents and rates may be difficult to predict, there is at least one inevitability: Sooner or later, the real estate market will weaken. It's as sure as the sunrise.
But is 2019 the year? For investors, the trick is to successfully digest the data and know whether it's time to step on the brakes or put the pedal to the metal.
Will History Repeat Itself?
Context is important. The same, calm investors who understand the cyclical nature of real estate recall the paradox of the late 80's: For much of the decade, housing sales were robust, yet 30-year mortgage interest rates did not fall below double digits until July, 1989.
The peak interest rate in the 80's was a whopping 17.48 percent, reached in January, 1982. In December, 1989 - the end of the decade - it was still high at 9.74 percent.
That was then, this is now. Today, real estate is more sensitive to interest rate fluctuations due to its connection with slower - some would say stagnant - wage increases. What was affordable back in the 80's even at high interest is positively out of reach today.
The bottom line is this: Yes, the real estate market will slow down. The ability to know when, however, is the stuff tycoons are made of.