Bubble

[Karen Alexander]

What is people's opinions on the market? Are prices going to continue rising? Or is this going to blow up in people's faces again? Especially on the west coast

[Leland Barrow]

A bubble is something that is artificially forced. In 2006 lending was ridiculously easy to get. That caused a bubble where the availability of risky financing put pressure on prices.

Student loans can be a bubble for the same reason. Getting 120k in debt to graduate with an anthropology degree is an example of a bubble.

What are the artificial pressures in 2016? You may argue that it is overseas investors or maybe it is hedge funds and REITS. In my opinion there is not enough artificial pressure to justify a bubble.

In my opinion housing is simply expensive. There is a lot of demand for a combination of reasons and no single reason is strong enough to argue for a bubble. Interest rates, quantitative easing, struggling foreign markets, millenials starting families, boomers relocating, job markets transitioning, populations migrating, are all examples of just a market with a combination of real estate friendly causes.

The risk is that people will except a lower ROI on investments. That lower ROI increases their risk unlike what we see in traditional investments. Less NOI on a buy and hold is more risky, a lower cap rate on multi-family is less risky, a lower gross profit margin on flips is more risky.

Returns should be compared to the risk free rate, stock market risk, and other investment options to make sure that real estate is still a good option. Unfortunately the "quit your job" and invest in real estate attitude took over in 2010 and a lot of people did just that. That is the bubble, that is the greatest risk. You now depend solely on real estate as an income. To continue making an income you have to accept lower ROIs and increase your risk.

No bubble just a lot of people that will struggle with adjusting to a changing market.

Rule of thumb: When everyone is running to an investment run away. When everyone is running from an investment run to it.

In other words buy low, sell high.

This is not advice, I am not a professional. It is opinion only and should be treated as such.