Economic uncertainty is nobody’s friend but lately, if you watch the talking heads and read the mass media pundits, you would think the world is coming to an end and the rapture is here.
I’m not so certain these folks are using the correct lens to look through for their prophesies….
This article by David Lynn, Ph.D., covers some of the flight and self-preservation concepts very nicely. He also reminds the reader that business is a cycle with repeatable stages of peaks, contractions, troughs, and expansions.
“So where are we now?” is the BILLION dollar question, isn’t it?
Here’s Dr. Lynn’s conclusion for those of you who don’t care to read the entire article:
We are in a very unusual situation in that the normal pattern of oversupply has not occurred in this real estate recovery. This bodes very well for the real estate market. Over-supply has always killed the real estate party in the past. In this cycle, however, because of the GFC, the devastating impact on banks, as well as Dodd-Frank regulations, lenders have been reluctant to lend on real estate, dramatically lowering supply through the cycle. Many banks got out of the business completely. The banks and financial institutions that stayed in the business became much more stringent in terms of their lending standards. Lending standards have remained fairly strict until the current time, meaning far fewer new projects have been financed and built. Moreover, many developers and some investors went out of business in the recession or became much more conservative in the recovery. As a result, there is no oversupply and not even a threat of oversupply.
We are at a fraction of low-term supply levels in every real estate sector, except for multifamily. It will take many years at the existing and projected supply rates to attain long-term supply levels for all sectors save multifamily. This means that existing buildings have maintained and extended their pricing power, and throughout the expansion until the current time, we have seen increasing occupancies, rents and capital values. When the real estate downturn occurs, it is likely to be due to lack of demand, not oversupply. Given the economy has been in slow recovery mode and the real estate market has not been sowing the seeds of its own destruction, we could very well see another three to five more years in this cycle.
As always, Happy Investing and here’s to your pursuit of Financial Freedom!