Lately, I’ve been seeing articles mentioning a pending real estate bubble. Perhaps what’s caused this thinking is the sudden rise in home prices in certain parts of the country. It could be rising interest rates, inflation, supply chain issues, government spending, etc. Some think the sky is falling. Bad news sells papers and gets ratings.
But before I get into what I think will happen here, it’s worth repeating that real estate is unlike most other industries as its performance is mostly governed by local events and the local economy. Sure, national events can affect real estate, for instance the state of interest rates. The 2009 recession is another of those examples that was caused by questionable lending practices by the banks and questionable selling of bundled mortgage-backed securities by Wall Street firms. The Federal Reserve tightened many regulations to minimize the likelihood of an event like that ever happening again. The stricter lending requirements are, for the most part, still in effect today.
The pandemic really shook up many industries and parts of the country. Some were severely affected and others actually did well. Many companies that could had parts of their operations work remotely. Some large cities like New York, which had a high number of COVID-19 cases and deaths, saw a large-scale exodus to smaller towns as remote working was allowed. Real estate for offices, rental and home prices dropped significantly.
Conversely, vacation destinations like Lake Tahoe and those in Idaho, Wyoming and other suburban and rural places saw a surge in both prices and volume as families sought refuge. Interestingly, before COVID-19, many of these places had lackluster appreciation where prices weren’t all that different before the 2009 real estate downturn. A case in point is raw land in Lake Tahoe, which sold in 2016 for $185,000, sold this November for $275,000 and two months later was relisted at $475,000. It’s still available today at a slightly reduced price.
There are many similar situations in places that don’t have the strong underlying economic fundamentals to sustain this type of appreciation. In some cases, it’s like hyperinflation. These are the places that will be susceptible to a correction, hurting new buyers who overpaid.
But here in San Mateo and Santa Clara counties, the high tech and biotech industries have very bright futures and are an employment magnet with very high-paying jobs. These industries will continue to keep upward pressure on real estate as our land area is somewhat limited in size. Additionally, industries that were hurt, like hospitality, are starting to rebound spurring more economic growth.
So, getting back to my original question about a pending real estate bubble, I think you have to look at this at a local level and, most importantly, at the underlying economic fundamentals of each area. Some will thrive while others falter and some like NYC will rebound as people return to offices.
Steven Hyman is the broker and owner of Century 21 Sunset Properties. He can be reached at 726-6346 or at www.century21sunset.com