inflationReal Estate

Inflation Will Drive Real Estate Market Back

There is a lot of talk on the news about how bad the real estate market is right now. It is actually only bad if you want to sell. The market is fantastic right now if you are looking to buy or invest. There are many reasons for this, but two that stand out as obvious.

Firstly, the market over reacts. This happens many times that their is a big drop in anything. Think about when a stock crashes. It is flying high at $100 a share or so – then drops like a rock – all the way to $20. Within a few weeks, it is back to $30 – $35. Why? Because the market overreacted. People panicked and sold at $25 and $30 when they should have just held. Once the market stabilized it went back to where it should have stopped falling to begin with.

A similar thing has occurred in our current real estate market. Housing prices started to drop and people panicked. Many cut their prices further than they should have. Many investors panicked and stopped investing for fear of losing. Thus, less buyers. With less potential buyers, even lower prices were sometimes required to sell properties. The media has not helped things with its love affair with bad news. They always place the most negative spin possible on each and every story.

The second big reason the real estate market will come back is inflation. New construction is more expensive to produce now than it has ever been. This has hurt the housing market temporarily because smaller builders have not been able to afford to ride the wave. In the long term, prices will have to move in line with the cost to produce a new house or building.

We recently decided to move our offices into a new building up the road from our current location. The per square foot predevelopment cost to build that building from the ground up were approximately 250% of the cost of our existing office when we purchased it just before the real estate bust 1 1/2 years ago.

The bottom line is that builders will not build if they are losing money. The extra cost of fuel and construction materials must be factored into the cost of housing. Right now, it is not. As current inventory is slowly absorbed, prices will rise again.

Who will win? The people that will win in this real estate market are not the people selling at all cost or the people that are sitting on the sidelines whining. The people that will win are the people who are out there strategically investing into the market. The current rental rates are as high as ever (at least in my market). The individuals that get in the game will be the winner. No one has ever won by sitting on the sidelines complaining.