“Will real estate crash?”

“When will real estate crash?”

“How certain are you that there isn’t going to be a real estate crash?”

This question comes up a lot. Here’s how I answer:

First and foremost, there are no investments with 100% zero risk. There will always be an inherent risk when investing in anything, including holding onto cash!

When you have massive stimulus bills being passed, there will be a downside to cash. Especially since there is no gold standard backing the new availability of money right now.

Any new money that is printed that is not accompanied by a correlating equal increase of productivity via the GDP or new companies or new economic value is going to decrease the value of old money.

Inflation isn’t only caused by printing more money. Inflation is caused by printing money in a way that outpaces productivity in the economy.

If you look at 2020, we printed more money than the subsequent increase in productivity. Yes, people needed it. But, this is what you have to recognize when assessing the risk of hanging on to cash and currency.

Before I go deeper into answering “Will real estate crash?” I’m going to give you a couple of examples of what a protected asset looks like.

Example: Gold

Why is gold typically not losing value?

A currency or investment type will spike when the demand for it is higher than the available supply of inventory.

Say there is a mad rush on the demand of gold and everyone is going crazy for it, causing a 7% increase in demand in gold this year.

However, history has shown that our world’s ability to mine and supply new gold to the market typically maxes out around 2% per year.

Because of the limitation in the supply of available inventory, there is a protection of the value of the asset of gold. 

Another example: Copper 

(Or something much less valuable than gold)

Say you have a sudden increase in the demand of copper. 

Miners can go out and produce more of it quickly. Then when the supply of inventory catches up to the demand, you have some deflation, some “crash.”

The reason gold is typically safer than other assets is because historically we can only get about 2% more of it per year, regardless of the demand. This protects the value.

Build Your Investment Game Plan Now

Have more questions about real estate? Book a call with the team to discuss getting started with investing in real estate now. One of our trusted advisors will be happy to share more information with you and help determine what next steps are right for you!

Book a Call Now!

Want to See Our Current Available Properties?


Submit your information here and we will send you our current available inventory.

Show Me The Available Properties!

So, Will Real Estate Crash?

What protects the value of real estate?

To answer this, we have to understand what happened in 2008. It was not a true real estate bubble in terms of supply and demand. 

What happened in 2008 was an arbitrary over-valuing of the real estate assets. This was because banks were greedy.

Loans were being sold to investors while cutting corners in the middle.

Banks were allowing and perpetrating fraud: 

  • Fraudulent appraisals
  • Fraudulent underwriting

They were loaning money to people who weren’t financially qualified to buy these properties, which were way overvalued in the first place.

Once the bottom dropped out, people were left with properties that were worth way less than what they paid for originally.

People offloaded and sold their properties quickly. This caused the demand to tank.

The demand didn’t tank because people didn’t need houses anymore. It tanked because people were underwater and upside down on their properties, because they were lied to about the value. 

The chances of us hitting that are almost zero because the banks aren’t allowed to do that anymore.

There are tremendous regulations now. Banks are on their game at this point.

We can’t just ask: “Well, what if 2008 happens again?”

It’s important to understand the factors that caused the 2008 crash.

It wasn’t necessarily because of the supply and demand of real estate.

Another factor contributing to the safety of real estate investing is, people need a place to live.

People Will Always Need Housing

We are in an era where people have to have new housing. 

The reality is: there is a high demand for single family real estate right now. The prices of single family real estate is going up.

Normally that might make you wonder “Is this a bubble?”

What is a Bubble?

A bubble is the space of time between the current high demand and the current supply of inventory, BEFORE the inventory can catch up.

If you looked at the current demand for real estate without much experience in monetary systems and how the economy works, it would make sense to wonder if we’re in a bubble.

But you have to look at how the supply chain was affected by the pandemic.

COVID-19 was one of the first recessions to affect our supply chain.

Everyone tightened up with the pandemic. The demand went up and the inventory went down. 

I’m building a house right now and the price of lumber is insanely high.

The increased cost to build houses right now limits the ability for new inventory to be built and catch up to the increased demand.

We’re not building houses in enough volume that we are going to catch up to the demand.

This is because we have a correlating increase in the cost to build new homes right now.

That is a big deal.

Example: Real Estate

Let’s say there is a 9% increase in the demand for single family real estate. But, because of the increased cost to build new real estate, there is only a 4% increase in the overall inventory.

This means investing in real estate is going to be safe for quite a long time if the demand stays where it’s at.

People are going to be moving for a long time, and for good reason.

When you have people moving to new cities to start their new jobs, that is a SAFE increase in demand because it is likely going to continue happening over time.

As long as there is a correlating increase in the cost to build new inventory, the value and stability of real estate will be hedged. 

I Don’t Think We’re in a Single Family Bubble Right Now.

I think we’re in a natural growth period in the demand for a product that is built on the back of a legitimate reason for the long haul.

The counter-balancing of the supply of inventory and the demand for it is very important.

Another, (the most) important factor to pay attention to when assessing if real estate is a good investment is the location. 

The Location

When you invest into a market where there is solid population growth & job demand, then you run a small risk of that city being a bubble.

We can’t look at everything that is increasing in value as a bubble.

We have to analyze:

  • What is causing the growth of this demand?
  • And what is causing the growth of the value?

Causation and correlation are different things.

When we ask ourselves why these things are happening, we gain confidence in our investments.

Yes. We have seen an increased demand in new real estate.

But we have also seen an increase in the difficulty to build and supply new real estate because of the increased material costs and decreased velocity of the economy due to the pandemic.

This protects the value of real estate.

Another important factor to consider when evaluating the safety of real estate investing is: land.

Land is Limited

Until Elon moves to mars and gets us to new interplanetary levels, there is no more land to work with. It’s all that we have.

Even if there is a temporary dip in a market (Because, say Amazon came into town and brought in a huge demand that was uncorrelated with the available inventory) it’s still going to be fine.

This is because there is no more land. We haven’t figured out how to create more land.

All we can do is build great real estate on top of it.

Diversify Your Assets Over Time

Diversifying your assets reduces risk. There are lots of ways to diversify your real estate assets for added security over the long haul.

I’m not saying for you to put 100% of your investments into real estate, or one market or one type of real estate. The point of this is to help you enhance your ability to think.

(I put about 75% of my investment capital into real estate.)

Hope this has been helpful in answering your question: “Will real estate crash?”

Happy investing,

-T

Build Your Investment Game Plan Now

Have more questions about real estate? Book a call with the team to discuss getting started with investing in real estate now. One of our trusted advisors will be happy to share more information with you and help determine what next steps are right for you!

Book a Call Now!

Want to See Our Current Available Properties?


Submit your information here and we will send you our current available inventory.

Show Me The Available Properties!

Leave a Reply