Real Estate News & Commentary

Yes, I’m Afraid of a Real Estate Bubble—But I Continue to Invest Anyway. Here’s Why.

Expertise: Real Estate News & Commentary, Real Estate Investing Basics, Mortgages & Creative Financing, Personal Finance, Personal Development
72 Articles Written
Portrait of a young confident smiling indian man with his arms crossed looking into the distance

Over the past several years, I’ve heard the following claim consistently made by investors both in my home market of Denver and nationwide. It seems by far to have been (and continues to be) the most popular prediction made by investors both experienced and novice:

“The market is probably going to [reset/correct/crash/fall/decline/etc.] over the next 18 to 24 months.” 

It seems like pundits have predicted a price squeeze or bubble that was two years out on average every single year for the last six. Don’t believe me? Check out article after article from basically every major media outlet in the United States predicting a bubble at some point in the last six years. I’ve even compiled a sampling for your reading pleasure below:

2013:

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2014:

2015:

2016:

2017:

2018:

2019:

I could go on.

How Long Are You Willing to Wait for the Impending Market Crash?

If you believe that a market crash is coming, you are either right—or else you might be waiting a long time to get started in real estate investing. There were people waiting for the next crash in 2013, 2014, 2015… and every year since up until now. Oh, and of course, there were just as many equally well-written and well-researched opinions talking about the great health and future growth of the housing market, which also continues today.

But the point is that I’ve heard about an impending market crash throughout my (admittedly short) entire investing career.

Let me ask you this: When the next crash comes, will prices drop below 2013 levels? Below 2015 levels? Below 2017 levels? How much do those waiting for the crash stand to gain by waiting this thing out, and how much will those who own property today lose?

How low do prices have to go to eliminate the gains of the last six years here in Denver? How about your city?

These pundits—I don’t believe that they are any smarter or stupider than you or me. The thing is, I don’t think anybody knows when the market is going to crash. Nobody knows if that will happen this year, next year, the year after, in five years, or in 20.

real-estate-recession

To be clear, I’m not saying that I think the market will continue to go up forever. And the truth is, I’m scared. I’m afraid of two things:

  1. I'm afraid that the market will crash and that I will lose a ton of equity very quickly.
  2. I’m afraid that the market will climb much higher and that I will miss the ride if I don’t buy more.

I’m equally afraid of both of these things!

I'm sure that if you have an opinion on the market over the short- to medium-term (two to five years) future, you have great reasons. I bet you have a bunch of charts, just like those pundits. I'll bet that you can cite numbers that talk about supply, demand, interest rates, leverage ratios, employment, household income, the stock market, inflation, the trends of the Millennials, the trends of the Baby Boomers, or something else that's just as important as all of the above.

But I’ll also bet that the fellow who is just as smart as you—but has the exact opposite opinion—has strong data behind his beliefs, as well.

The fact of the matter is that if you believe that the market is going to crash, then you could be right! You could also be wrong! Or (and in my opinion the worst and saddest waste of being able to say “I told you so!”) you could be right and still lose.

The thing is that you don’t know which of those metrics and factors will be the lever that actually moves the housing market over the next few years.

As I hope I’ve demonstrated with the news articles above (and I can anecdotally tell you that I’ve been part of discussions on BiggerPockets about this very topic since 2014), we hear this song and dance about impending crashes all the time as real estate investors.

It scared me when I was thinking about starting to invest in 2013, and it scared me in 2014 when I bought my first property. It scared me in 2015 as I held that first property, and it scared me in 2016 when I bought again. It scared me in 2017 as I held those two and bought a third. And it’s never stopped scaring me as I’ve bought and planned to buy more the past few years.

One day, the doomsday prophecies WILL come true. These pundits (and you, if you agree that we are headed for a correction) will be proven right eventually. But will that be this year? Next year? Five years? What if the correction comes in seven years? What if every metric that you can conceive of screams, “BUBBLE!” and still prices climb? What if the bottom of the correction sees real estate prices and rents that are much higher than today’s?

Those sitting out will be right, and they will still lose.

Related: 3 Reasons I’m Still a Buyer in Today’s Real Estate Market

THAT is why I continue to invest—even though I, too, fear a bubble. I believe that over a long time horizon, say 20 or 30 years, prices in my market will appreciate at a rate equal to or greater than inflation. I believe that this will be the case regardless of whether I buy at the top or the bottom of the market today. And I believe that so long as I can ride the tides of market volatility and sustain possible cash flow, that I will not regret my decisions over time.

I also believe that I am incapable of accurately predicting when the market will boom and bust.

I could be wrong on these beliefs, and I constantly reassess the foundation upon which I construct my investing philosophy. But this is my philosophy and approach for now—and the one I have acted on and plan to continue acting on until I find something better.

Given my overall take on investing, I believe that I can maintain a system of investing such that I give myself reasonable odds of winning financially in all three market scenarios:

  • I win if the market goes up. If you don’t own real estate, you lose if the market continues to appreciate.
  • I win if the market goes sideways. My portfolio cash flows and I self-manage to ensure as much profitability as possible if rents do not go up at all.
  • I win if the market goes down. I believe you have a reasonable chance at winning if the market goes down if the following are true:

A) You have the personal financial position and stability in your portfolio to make it through even serious market drops, particularly in rent.

This means a substantial cash cushion and substantial cash flow from existing properties. And I have no doubt that a sudden drop in equity will be hard. I try as best I can to mentally prepare for that ride and to learn from folks who have been through the 2007 recession.

B) You have the reputation to convince lenders and potentially other investors to invest alongside you when/if bargains do begin popping up.

Guess what? If you own no real estate, you cannot develop this reputation. I am not investing alongside someone in a recession or depression who has no experience, who owns no rental properties, yet who tries to convince me that they’ve known all along that the crash was coming.

I am instead going to look for someone with years of experience and the confidence to say, “Sure, I’ve lost some equity, but I couldn’t care less! Every month, I achieve a 10%+ cash-on-cash return, and I’m foaming at the mouth to buy as much as I can now that I see 20%+ cash-on-cash returns everywhere!”

No one can predict when the market crash will happen, how severe it will be, or what its effects will be. For all we know, all the metrics might point to oversupply and overpricing of U.S. housing, yet prices still rise over the next few years due to unprecedented inflation after over a decade of the Federal Reserve pumping trillions of dollars into the economy and/or a relaxed fractional reserve ratio (increasing the money supply and perhaps spurring inflation).

If that’s the cause of the next great economic challenge of the United States, then investors will see prices and rents rise!

To be clear, I am not predicting this or any event. I’m just pointing out that this is one of many possibilities that could negate the effects of other market conditions and throw off the predictions of even the best pundits.

Panorama of Denver skyline long exposure at twilight.

Why I’m Not Investing Aggressively

Now, all this said, I CERTAINLY do not believe that now is the time to overextend. I buy well within my means, with a rock solid personal financial foundation, and spend extremely little on my lifestyle. I maintain a high savings rate and have stashed away a large cash reserve. I also own a stock portfolio.

I do this because, just in case the pundits ARE right this time (and we are certainly six or so years closer to the next correction than we were in 2013!), I do not want to be caught with my pants down.

Related: 3 Strategies I Use to Succeed in a Cooling Multifamily (or Any) Market

But I am not staying out of the market entirely, regardless of what may or may not be on the horizon. I’m doing this because I believe the best policy is to adopt a conservative, winning formula and to apply it consistently. And that is what I’ve done and plan to continue doing.

I do not believe that continuing to buy is any riskier for me than staying out of the market is.

Conclusion

Should you wait for the next market crash? I don’t know. Someday, the pundits will be right. I’ve shared what I’m doing and why, and I hope that perspective gives you something to think about.

I’ll caution you, though. I think, personally, that it is unwise to invest a large, lump sum of money all at once in a real estate investment. And when I say large, I mean an amount that is more than one to three years of savings, given your current financial position.

If you do this, it means that you might be investing in a manner that is unsustainable for you. And if you are investing unsustainably, you risk losing a huge chunk of savings, perhaps all of your investment and then some, all in one go.

I believe my system has a good chance of working for me because I believe that I have an excellent probability of being able to buy similarly sized or larger properties year in and year out in my market and sustain a system of dollar cost averaging.

If I wasn’t able to do that, I’d be finding another market to invest in, developing another investment philosophy, or working on my personal financial position outside of real estate to the point where I thought I could sustain my approach in an up, down, or sideways market.

Are you investing in today’s market? Why or why not?

Let’s discuss. Comment below.

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the ...
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    Gannayya Bommali Investor from Waterloo, Ontario
    Replied over 2 years ago
    good practical suggestion. Thanks for sharing. gannayya
    Marie S. from Burbank, California
    Replied over 2 years ago
    Don’t invest more than 3 years savings?! Well I live in Los Angeles and my LIFE savings isn’t enough here to get into the market yet, so by his estimation I should never enter the market? Because if I can only save MAYBE $15k a year I’ll only have $45k for a deal, and if my current life savings isn’t enough, $45 never will be UNLESS i wait for the crash. So I’m getting mixed messages from this article..
    David Etenburn Investor from Everett, Washington
    Replied almost 2 years ago
    I was wiped out in 2008. I was too highly leveraged and somewhat reckless; and while the downturn in the Seattle area was less severe than in Denver, the negative cash flow killed me…especially when I became not just unemployed, but unemployable. That said, in rebuilding my portfolio, I too, am not worried about the potential for lower prices down the road, as long as all my investments combined produce enough cash flow to pay my mortgages -including the house I life in. This way, when things head south again, next week or the next decade, I believe I will be able to stay afloat.
    Buckner Toney Rental Property Investor from Denver, Colorado
    Replied almost 2 years ago
    Go back and listen to some of the early BP podcasts, I crack a smile when Josh and Brandon are talking about overheated markets and a possible bubble in real estate 5 years ago! Just goes to show you never know what the future holds!
    Christopher Smith Investor from brentwood, california
    Replied almost 2 years ago
    An interesting insight on this is Buffett and Munger’s. Neither could care less where we are in a market cycle, it’s simply not of any interest to them or in any way directly relevant to their investment determinations. Which is all very fascinating since they have complied the greatest investment returns over a period of at least a half a century between the two. As long as the intrinisc value of what they might investment in is meaningfully less than it current FMV, it’s a potential acquisition to them. If an emotionally driven market decline occurs immediately after buying into a position, then simply buy more. Of course determining true intrinsic value is no game for amateurs and requires significant application of necessary due diligence and enterprise valuation skills, but in concept it’s not rocket science either. As Buffett says, investing is not really in the final analysis an intellectually complex activity, but one extremely challenging for most people to be successful at because they lack the emotional constitution to unfailing adhere to a well concieved yet simple plan. It’s also interesting that both have utter disdain for market timing claims, as they so readily note it cannot be consistently done and those who assert that they can are adject liars. Of course that doesn’t mean market valuation multiples as a whole are always irrelevant as opportunities will be likely be more prevelant when they are very low than very high, but trying to consistently capture or exploit any market’s emotional dysfunctionality du jour through active trading is an idiot’s forte.
    Vaughn K. from Seattle, WA
    Replied almost 2 years ago
    As other people have basically said: Make sure you’re cash flowing, and won’t HAVE to sell during a down market. This is the most important. You will survive, and come out fine long haul that way. That said: Fundamentals! There are a few basic metrics in real estate that are as solid as the rock of Gibraltar over the long haul. Average income to average sales price ratio is my favorite… Long term sustainable ratio is between 5-6 like clockwork. Some economists have verified this very same metric going back AT LEAST to the 1700s, and some think they’ve pinned it down going back to ancient Rome! It seems to be a magic number. The thing is a lot of “trendy” markets have BLOWN past this… What that means is as soon as the first hiccup comes along, there will be a correction. That could be a national recession, or it could just be a local thing in a certain trendy market. So while a hot market can stay above these numbers as long as things are going perfectly, it will fall back into that sustainable range as soon as something goes wrong… Because it is essentially the floor supported by the incomes in the area. Markets IN that range right now have basically nowhere to fall in a correction, or at least very little room to fall. This describes MANY midwest/southern cities, as well as lots of 2nd string cities and suburbs all around the country, even in the market right now. Seattle is at about 10x, SF is closer to 20x… Tell me there’s not major room for a correction there at the first sign of trouble? I dare you! So all it is is waiting for a hiccup. And there WILL be one. Heck, Amazon HQ2 could be the thing that topples Seattle full and proper, and it’s already been announced to be happening in the next couple years. We’re not in a national bubble per se right now, it’s just certain markets, and they’re all over inflated to totally different degrees. So you have to know YOUR area, and what local hiccups might happen there, and when. If you’re not too outside the normal zone on metrics, it can make sense to keep piling into the market, as there’s not a ton of downside… But remember the longer a bull market has been going, the shorter period of time it is until something will go wrong. Seattle prices just dropped for the first time in several years the last few months… Is the bubble popping full on? Maybe, maybe not. But it’s surely a sign that 10%+ increases are not likely to continue, and that it’s a lot softer than it was a few years ago. Pay attention to the fundamentals, use your head, and make sure you have the cash to survive a downturn… If you do, you’ll be fine long haul even if you do buy towards the top of a market.
    Nicholas Lohr Investor from San Francisco, CA
    Replied almost 2 years ago
    I’ve found that many strategies investing in stocks for the long term also apply to real estate investing. In this case it would be ‘Dollar Cost Averaging.’ In stocks, its continuing to put in capital consistently whether or not the market is up or down. It’s just as effective a strategy for real estate.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied 10 months ago
    Absolutely agree - this is exactly what I am doing.
    Wenda Kennedy JD from Nikiski, Alaska
    Replied 10 months ago
    I agree with your fear and the decision to forge ahead. I started in real estate in 1976, so I have lived through several cycles. You obviously wrote this article a couple of years ago. Your points are still very valid. The banks are at again right now. They are making risky loans, similar to what they did before 2008. And yes, the market moves in waves which have peaks and valleys. Their bad loans will catch up to them and hurt the market. These people never learn. We don't know how low they will tank the market. BUT, you have a steady & slow plan to invest. You have savings to back you up so you can hang on no matter what happens. You have other investments for your diversity. You're doing it right. Keep going.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied 10 months ago
    Wenda - thanks for the nice comment here. Glad you thought the points were valid!
    Mark Stedman Investor from Nashua, NH
    Replied 10 months ago
    Wow that was a long-winded article that could have stated the same thing in 1 paragraph. Basically it states the old saying “Damned if we do, and damned if we don’t.” Written by someone who has been investing in real estate for almost 5 whole years. The author hasn’t even experienced a severe downturn yet, but he is giving advice regarding how to handle one. Most articles I read on this site have some new bits of information that I can come away with, or at least consider as an interesting perspective. I didn’t feel that way after reading this one, but I’m sure it’s mostly due to lack of experience, and the wisdom that can only be gained by years of trial and error.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied 10 months ago
    Mark - sorry that you didn’t like the article and feel that I am unqualified to give advice on this subject. Because other people seem to have benefited from this and other content I’ve produced in the past, I’m going to keep writing. However, feel free to just skip past future work from me - the great thing about BiggerPockets is that we’ve got a huge stable of authors with different viewpoints and experience. You will certainly find someone you respect, admire, and can learn from!
    Chad Matthews Rental Property Investor from Philomath, OR
    Replied 10 months ago
    There will ALWAYS be naysayers ... and those who dismiss young folks. (They imply that doing something for a long time means that you know more or are good at it. NOT TRUE. Time alone doesn't make one "qualified" and lack of time doesn't "disqualify" a person) Keep up the great work young fella!
    Kevin McGuire Rental Property Investor from Seattle, WA
    Replied 10 months ago
    Great article, and as true today as two years ago. Completely agree with the approach. It makes three important points: (1) no sudden moves (in or out) during uncertainty (don’t let fear or over-enthusiasm drive your decision making) (2) a measured, long term strategy that adjusts to conditions (3) risk adjusted return. All sage advice.
    Scott Trench President of BiggerPockets from Denver, CO
    Replied 10 months ago
    Thanks Kevin! I am glad that you enjoyed the article!
    Chad Matthews Rental Property Investor from Philomath, OR
    Replied 10 months ago
    Well written and well supported. My in-laws rented for years because they bought in an up market and were then forced to sell and move in a down market. I watched as they rented for the last 20 years of their lives and made the payment for a wise property owner. As investors we can win in either scenario, provided we are smart and cautious as you have stated. I use to buy for appreciation but now I focus more fully on cash flow. Value really isn't so critical to me because I can weather the storms and continue to collect rents. I believe many people forget that, regardless of market conditions, our population will continue to grow and those people need places to live. Demographics may cause population shifts or dying industry may cause soft local markets but the overall concept of population growth and inflation are both hedges that favor the investor. Keep going for it Scott. I wish I had started sooner ...
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 10 months ago
    I had a friend stop in 2015 because he was convinced the market was on the verge of a recession. Even I was thinking we were very close back in 2017. Yet here we are. I definitely think we are nearing one, but that just means to be more cautious, not to sit on the sidelines.