Real Estate for Millennials: The Catch-22 & The "Bubble" of 2016

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Many early millennials went through post-secondary education only to find themselves employed in unrelated fields or underemployed and job hopping more frequently than previous generations. Their expectations may have resulted from the very encouraging, involved and almost ever-present group of parents that became known as helicopter parents.

The impact of millennials, specifically the emergence of the sharing economy, is prevalent across America. In a sharing economy, it's not the idea of sharing that's new; people have been doing that for years. The difference now is the introduction of technology and the role data plays to access demand. This economic model is where technology enables people to get what they need from each other rather than centralized institutions-- think of Uber or Airbnb. Why is this so important? As the millennial generation enters employment in vast numbers, they are expected to grow this sharing demand in all facets of the economy. What does this mean for real estate? What will be some of trends?

I want to bring your attention to the following article: http://fortune.com/2016/01/11/real-estate-bubble/

As a millennial, I am obsessed with efficiency and value. Like most people on BiggerPockets, I utilize numbers when making decisions, especially with money. While each real estate deal is unique, the overlying concept here is that while money is cheap right now, current valuations across the country are absurd. As a first time home buyer, I am reminded how cheap money is every day and that I should purchase my first home instead of paying rent. While I get the underlying variables that go into the decision between buying and renting, the current valuations make the decision more complex than it seems. I, see myself, like many other millennials, in a catch-22. I am faced with a difficult circumstance from which there is no escape because of a mutually conflicting or dependent conditions — interest rates and valuations. If I wait, I'll pay more interest (assuming rates finally do rise), but if I buy now, I pay more for the home and my mortgage notional increases.

For me, the most interesting aspect of this article is claiming the"bubble" is arguably coming not from mortgage demand, but foreign cash and homeowners buying second and third homes to rent. From my view, the type of demand that is allegedly causing this valuation "bubble" is unconventional.

What are your thoughts about this article and the "bubble"? What are your thoughts about the catch-22?

Appreciate your thoughts. 

At any point in history there are people claiming there is a bubble in something. Most of the time they are wrong and occasionally they are right. A broken clock is right two times a day.

Even if we were in a bubble, it would be impossible to say when the bubble bursts. Maybe it isn't for 10 more years and prices will fall to a number we hit in 5 years, so even if you bought now you would still make a lot of money. Or maybe the bubble bursts tomorrow and you lose half your value 

However if you buy right, buy something that is cash flowing....it doesn't matter if the bubble bursts. At some point values will rise. I have no doubt that in 20 years prices will be higher than they are today. Time is the greatest ally of those that own real estate.

The assumption is that now or later, buying a personal residence will be a smart financial decision and, well, it's not.  It's a personal preference, kind of like me owning an awesome ATV.  Except a home is a huge liability and money pit.  In either circumstance you stated, you're paying the interest, principal and carrying costs.

I'm still a believer that local economies affect local RE the most.  If the residents here still have jobs, I'll still get rent for my low, fixed rate properties.  I could care less if the value of the homes declined temporarily.  I wish the value of my home would decline, get an appraisal and shake it at the district.

  

I think that the question you are asking in a roundabout way here is this: 

Is real estate as an asset class going to increase in price in the short-term and if it isn't and there is a bubble does that mean that I should stop thinking about investing?

If I'm correct, then I think that you are asking the wrong question. The correct question (I just wrote about this on the blog in this article the other day) is:

Am I financially and mentally prepared such that a real estate investment will improve my current and long-term financial position TODAY, regardless of short-medium term future market conditions?

Who cares if it's a bubble? And, who can even predict it if there is? Smarter people than you and I are unable to tell, and to be honest I couldn't care less. I have a cash flowing rental property, and it would take a hell of a series of problems for that property to lose it's cash flow - rents would have to decrease by about 50% and I'd have to have some major problems come about. 

Who cares if my second, recent purchase that I am currently working on promptly tanks because of a market crash? Assuming I am conservatively leveraging and keeping my financial house in order with a large cash cushion, I'd LOVE it if there was a bubble. Sure I lose out on this deal, but that just puts me in better position to buy more when/if the market turns.

Stop asking if there is a bubble. Start asking if real estate in your target market makes sense for you TODAY, and whether it is a good long-term bet that your area will be more desirable in 10, 20, or even 30 years.

The only people that should be scared of bubbles are those that are broke or so leveraged that they can't afford to see their property lose some paper value. Don't let that be you.