As real estate cycles go, the recent one has been a wrenching experience for the average U.S. consumer. The amount of pain being felt is directly correlated to the amount of euphoria that was experienced in the boom years of 2001 through 2007. The bull market for real estate during that period was one of the strongest on record and so, too, was the fall.
What can explain the strength of the rise that led to such a precipitous drop? There are a number of factors, and in hindsight, these factors were none too subtle. In the simplest terms, you can point to demographics and the behavior of the baby-boom generation. As this massive group of consumers moved into their higher-earning years, the money they wielded greatly influenced a number of economic events.
Do you remember the Internet boom of the mid- to late 1990s? I do very well. Technology innovations and advances were the rage, and caught the attention of the investing public — predominantly the baby boomers. Massive inflows of money from the boomers went into technology stocks, helped along by eager Wall Street investment banks and entrepreneurs looking to take advantage of lucrative exit strategies. This went on for most of a decade until the Nasdaq peaked at more than 5,000 on May 11, 2000. The market then fell by 80 percent during the following two years as it became evident that the valuations were unrealistic.
I think it’s safe to say that most consumers felt a lot pain from the Nasdaq crash in 2000. Most investors wanted to avoid tech stocks for a long time, and many never returned to stocks. So, the money removed from the stock market had to go somewhere, and that opened the door for opportunities in other asset classes — including real estate. It is no coincidence that starting in late 2000 and early 2001, the boom in real estate began.
The real estate bull market lasted five to seven years (depending on whether you call the peak 2005 or later). As in the stock market before, the real estate boom was helped along by massive inflows of money, and an industry that was willing and able to promote homeownership.
Personally, I believe the peak for real estate was in the late summer of 2005. A couple of years later, the 2005 peak was truly exposed when the concurrent and related credit bubble burst in 2007. That was the beginning of the Great Recession.
So the Great Recession was with us for a while, and “officially” ended in 2009. But has consumer behavior been changed by the recent economic events? I think so.
Going forward, consumers will favor smaller housing and taking on less leverage or debt. Certainly the boomers are rethinking the way they save, the way they invest and the way they live. Housing demand from this group will be less robust than it has been in the past as they move closer to retirement.
Fortunately for the real estate industry, the Generation X and Generation Y populations will have growing housing needs that will create additional demand for real estate. In every community, people need a place to live as they pursue their careers, raise their families or both. From an economic standpoint, the question each person or family should ask is whether renting or owning makes the most sense.
If you’re in the group of people who determine that it makes sense to purchase a home, the opportunities today are excellent. Lower housing valuations and historically low interest rates make an excellent combination.
For the renters (and those who already own homes), this has been a good time to own stocks again. Just be careful out there — investing is a moving target.
— Bill Masho is the broker/owner of Masho Associates. He can be reached at 805.895.4362.