Is There A "Bubble" Coming?

Question

I have spoken with a few people who told me they are waiting for the "bubble" here in DFW to pop before they start investing, but I'm not seeing that when it comes to real estate. Too many people are moving here and there's literally no supply so anything that hits the market, gets picked up quickly and it's not like '08 when there was excess supply and if you had a pulse you could get a loan.There's inflation happening but real estate is one of the best hedges for that, so I'm not seeing any reason not to invest nor am I seeing a bubble. Is anyone seeing a bubble when it come's to real estate?

Joe Villeneuve · Answer

Sounds like you're getting a lot of usable advice from people in your area.  I say usable not because it's good advice, but because they are telling you they will not be participating in REI until the bubble has,...has,...what?  What bubble are they talking about?  The last one, the next one, the one after that, ...?  Bubbles happen all the time, otherwise the word "average" wouldn't be part of the vocabulary.

So why did I say they were giving you "usable advice"?  They just told you there would be a lack of competition, if you choose to invest now, because they won't be participating.  So, next Christmas, my suggestion would be, to go to Amazon and buy up as many "chicken Little" books as they have, and gift them to all the people that told you about this "bubble",...and told you to wait to invest until,...until,...I'm still not clear as to when they think their sky would stop falling.

Account Closed · Answer

I just yesterday turned down buying a profolio of 37 units in Dallas of mixed small aparments, duplexs and SFRs we'd been working on for the last month. The reason why is the numbers don't cash flow. The seller wants 27% more than market.

Obviously he's either delusional, doesn't really want to sell or has no idea what the market is. I vote he's all three and his broker is probably the one that set the false expectation.

Point is, when the market is going gang busters like Dallas, there is a lot of inventory that is overpriced because people want above top dollar, even if their offering is an "added value play". (Places that need to be rehabbed, like this particular portfolio.)  Those properties will sit for a while until someone new to the market overspends the money on them because they don't care or don't understand and have FOMO (fear of missing out). Yes, there is a bubble but in Dallas it sn't going to bust anytime soon. That doesn't mean it's a good time to buy just any property though.

Edward Holland · Answer

I love @Joe Villeneuve's response. I think it perfectly captures what I try to tell everyone.

Do your due diligence, do it again, and BUY!

A good deal is a good deal. regardless of what the market does. Real Estate price fluctuation =/= rent price fluctuation.

Best of luck to you!

Bruce Lynn · Answer

@Jacob Maes They've been saying this since 2010.  The only person I would 1/2 way believe is Kyle Bass if you are in his circle.  All kinds of things can cause slow down or crash in the market....most out of our control.  War in Ukraine, War in Taiwan, War in North Korea, Covid-25, serious change in election results, China economy collapse, maybe a change or advancement in AI that wipes out IT middle/senior managers or some other industry like health care.  At some point probably doctors no longer diagnose or prescribe for example....when will that be?  When will we have full self driving cars?   That can change a lot of things...will we need garages?  Can we live further away from work (if we still go to the office.)   Predicting those things are probably more guesses than insight.

We're probably biased some being too close to the industry than some others.

Also Bubble probably shouldn't matter to Long Term Investors.  If they are talking about a bubble in DFW they're speculators and you should probably just pass on them or convince them to look at a longer horizon.

Taylor L. · Answer

The way I see it this question has two parts: is there a local market bubble in DFW and/or is there a real estate market bubble generally.

Local market bubble: I am not an expert on DFW, so I can't bring any particular knowledge. So the following will focus around local market bubbles and how I'd look to determine if there was one. To determine whether I thought a market condition was a bubble or not, I would be primarily focusing on job growth, wage growth, business migration, economic diversity, and household levels of debt. If all of those indicators are positive, I would find it hard to see anything other than a healthy market. People are coming in, supply is short, and the people who are there have the ability to pay and have good prospects to keep their jobs. That's a pretty good combination.

For real estate markets generally I see the biggest risk being the cost of money, i.e. interest rates. It's hard to imagine the current prices of any kind of real estate would remain if interest rates went up by 6% over a short timeframe. After all, if a house sells for $500k today on a 3% loan, how in the world would the same type of buyer be able to afford the debt service on the same $500k house with a 9% loan? The math just doesn't work. Buyers' ability to pay would go down considerably and therefore housing prices would take a sharp dive.

The main risk factor I see that could drive interest rates up quickly is the Federal Reserve. However, I doubt so very highly that they'll do anything like that. A steep increase in interest rates would not just hit the real estate market. It would kill the bond market, it would make the Federal Government's debt service completely unaffordable and unsustainable, and would drive households to save even more than they are now.

Can markets crash and do bubbles happen? Absolutely, no doubt about it. Bear in mind that a large percentage of US Dollars in existence were created since the beginning of the Covid pandemic. More dollars are competing for effectively the same number of properties as before Covid. People see the stock market constantly hitting all time highs and decide they'd rather own real property.

Jacob Maes · Answer

Ya, no matter what, the time to buy real estate is now and I think based on the strength of the market like what Taylor was saying, DFW is going to be strong for a while. I think overall it's a persons excuse to avoid investing from their fear. Thank you everyone who took time to reply, I really appreciate it.

Is There A "Bubble" Coming?

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