All Real Estate is Local – Truth or Myth
Between basketball games at the gym I got to talking to a local agent today.He asked me what I thought was going to happen with local real estate values and I asked his opinion also. He then went on to play the “All Real Estate is Local” card while trying to justify his point. While I do agree most trends that affect real estate values are on a local level, he blatantly disregards (like most people) the national trends that affect real estate values.
There are multiple national trends that affect real estate, but I’m only going to touch upon two for this post; inflation and the psychology of the masses.
Real estate cycles are partially shaped by these national trends and they can directly influence if your next real estate investment is successful or an opportunity cost. Don’t get me wrong, you can go against the grain and invest successfully when these trends are not favorable, but great care must be taken.
More often than not inflation occurs on a national level and if you are a real estate investor, most often inflation is your friend. If prices of building material (lumber, steel and other raw materials) go up, then the cost to build a home or building will rise also. This obviously helps your investment to hold its value or more likely appreciate.In addition to appreciation, during times of inflation we can usually raise rents.
You might be thinking “so far so good”, but one of the key measurements most inflation loving investors forget is wage inflation. If wages aren’t inflating accordingly you have a bad situation on your hands, and that my friends is part of the reason most real estate markets aren’t finished correcting at the time of this writing.Their values simply aren’t inline with local wages and historical price to rent ratios.
The second trend I want to talk about today is the psychology of the masses. There are many reasons our country recently experienced probably the greatest national real estate boom in our history, but one of them was the phychology of the masses. From the year 2000 to 2005, no matter where you went people were talking about real estate. Everybody thought they were Donald Trump and money was pouring into real estate as if it was impossible for values to go down. Fast forward to today and we obviously know how that story turned out. Try talking about real estate today and most people treat you as if you have the black plague. The psychology has shifted. The proverbial pendulum swung too far in favor of real estate during those heady times and I believe it will swing too far the other way (at least in some markets) as time goes on (some markets will “over-correct”).
In summary, don’t believe the hype, while there are many trends that affect real estate on a local level, remember there are national trends that affect values too.
P.S. If you are reading this John, I will see you on the court on Monday, be prepared to be schooled again (just kidding).