5 Lessons From the Last Real Estate Boom & Bust

Housing

The last decade has taught me many lessons about real estate.  Like many, I experienced what appeared to be an unstoppable freight train of real estate values that peaked in 2007, collapsed in 2008, and rebounded with a vengeance over the past few years.  Now that this is all behind us, we can assess lessons learned much more objectively.  Five of the key lessons I learned are outlined in below.

imsev115-0191. The market overshoots in both directions.  Home prices go up…but they don’t stop when they reach so-called “fair value;” instead, they pass right through it, peak, and then start to fall.  As they fall, they dropp past that value once again.  We appear to be in a constant oscillation around the fair value line, sometimes above it and sometimes below it, but rarely right on it.

2. It “Vs” up & down.  And that will always shock us.  Not only does the market appear to fall off of a cliff after it peaks, it climbs a nearly-as-steep cliff as it returns.  Knowing where the point of the ‘V’ is, top or bottom, is only evident after it has passed.

for sale3. Sales volume and inventory are better indicators than price.  We’re all trained to watch the easy metric: sales prices.  The problem is that prices going up does not mean a good market; what makes for an uptrending market is increasing demand and shrinking inventory.  While that certainly drives prices up, it’s quite a lagging indicator and prices continued to go up despite shrinking demand and growing inventories.

4 The high-end leads the slow-down and lags the recovery.  Whether it’s because the wealthy see the slow-down coming first or because the high-end of the market is more discretionary than the low-end, expensive real estate slows down first followed by affordable real estate.  When the recovery returns, it’s the low-end of the market that leads the recovery.

5. The “experts” aren’t as good as you think they are.  It’s unbelievable to me how difficult it is for even the most accredited of experts to predict the future.  The few experts who called the bubble didn’t call the recovery.  I see watching business television as entertainment and not a source of actionable intelligence.

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