Are We Heading Towards a Real Estate Bubble?

Real estate prices have been rising significantly throughout most of the COVID-19 pandemic. To many people, this came as a great surprise. This is because catastrophes and market downturns often result in a drop in real estate prices. However, there were a number of important combined factors that together created a surge in real estate prices throughout the last year and a half.
 

These factors include extremely low-interest rates, inflation, housing production shortfalls, fewer people selling, and increased pandemic-induced spending on properties by wealthy individuals and families.

Essentially, during the pandemic, interest rates were lowered to try to prevent a market collapse, fewer houses were being built because construction teams had to shut down during lockdowns, people stopped listing their properties for sale because they didn’t want to deal with potentially infected people touring the properties, and wealthy people started spending more on real estate because they were spending less on travel and vacations. Furthermore, trillions of dollars were created by the federal reserve and used for stimulus spending, helping to stoke the fires of inflation.

Now that the pandemic is slowing down, some of the factors that led to real estate price increases are disappearing. For example, new construction activity for homes is on the rise. Also, there is significantly less fear regarding allowing people into properties for tours since infection rates are down and roughly half the American population has been vaccinated. 

Now that some of the factors leading to the increased real estate prices are disappearing, many people are wondering if we are headed towards a bubble that will pop just like it did in 2007 and 2008. If this were to be the case, there could be a significant decrease in real estate prices.

However, there are many indicators that are showing strong signs that we are not in a bubble and that the bottom is not about to fall out from the real estate market. In this blog, we will break down those indicators.

1. Most Tenants are Still Paying Their Rents
 

If the vast majority of tenants are still paying their rent every month, then this is a strong indicator that the real estate market is not in a bubble. According to the National Multifamily Housing Council, 94.6% of apartment households made a rent payment in May 2021. Regarding the state of the multifamily real estate sector, president of the NMHC, Doug Bibby said, “Having weathered the worst of the pandemic, we can say with increasing confidence that the outlook for the multifamily sector is as positive as positive as it has been in years.”

When almost 95% of people living in multifamily apartments are paying their rents each month in America, that shows that the market is not experiencing an unsustainable rise in rent prices that is causing people to default at high levels. 

2. Rent Prices Are Still Going Up
 

If the multifamily real estate market was truly in a bubble that was about to pop, then rent prices would start to be flattening out or even going down. However, rent prices are going up. Many people have returned to the big cities and in many urban areas, life is starting to return to normal following the madness of the pandemic.

Rent price increases are a good sign that we are not in a bubble. On the contrary, it shows that the multifamily housing market is returning to normal following the rental price drops that happened in big cities during the height of the pandemic.

So, as long as rent prices continue to climb, then real estate investors should feel confident that they are not putting money into a bubble that is about to burst at any given moment. Instead, they should feel like they are investing money into assets that will grow consistently for some time to come.

3. Over-Leverage is not an Option Today
 

One of the biggest causes of most bubbles, whether it’s in real estate or another asset class is the overuse of leverage. Today, over-leverage is not an option in the multifamily real estate market because the vast majority of multifamily loans are granted between 65% and 78% LTV.

Because of this fact, there is a great deal of security and stability in the multifamily real estate market. This means that most likely, we are not in a bubble and the chances of the market taking a sudden dramatic downturn are extremely unlikely.

The 2008 real estate market crash was in part caused by overleverage and by people who were not qualified being approved for mortgages. It is virtually impossible for this to happen in the multifamily real estate market. This means that prices in the multifamily market are not dangerously inflated. Instead, they reflect stability. This market is carefully regulated unlike the residential real estate sector and derivatives market in 2008.

What Does This Mean for Investors?
 

Some multifamily investors got spooked because of the pandemic and held back on their investing activity. Now, however, it appears that the circumstances are getting better and better for multifamily real estate investing. Security is returning to the market.

So, if you are considering investing in multifamily real estate properties, then you shouldn’t let concerns of a “bubble” stop you. Most of the important indicators and trendsare pointing to the market not being in a bubble.

As long as the vast majority of tenants are paying their rent, there should be a high level of security in this market. Everyone needs a place to live, and more and more people are returning to the cities in order to resume their normal pre-pandemic city lives in apartments.

It is true that the pandemic drove vast numbers of people out of the cities, but as long as the pandemic keeps fading away, then the urban multifamily housing sector should not see another major pandemic-induced market downturn.

Are We Sure That The Pandemic Is Truly Ending?
 

Of course, no one can be one-hundred percent certain that the pandemic is on its last legs. Another variant could technically emerge and cause the pandemic to get worse. We will leave the scientists to speculate on that.

However, what is clear is that since January of 2021, the number of new daily COVID cases in America has been in rapid decline. This is primarily due to the fact that tens of millions of Americans have received the COVID-19 vaccine and that millions of others have had the virus, survived, and obtained natural immunity.

As of July 14th, 2021, there are only about 26,000 new cases of COVID per day in the US. At the height of the pandemic, there were roughly 300,000 new cases per day. So, it would seem that the pandemic is in steady decline.

The vaccination efforts are also still in full force. Roughly 48% of the US population has been vaccinated and this number continues to rise. Because of this fact, it is likely that the number of new COVID cases that occur each day in the US will continue to decline as more and more people receive the vaccine. The decline of the pandemic is excellent for the health of the multifamily housing sector.

Conclusion
 

Most investors try to avoid investing in bubbles at all costs. This is because investing in an asset class that is in the middle of a bubble is a great way to lose a lot of money. There have been many famous bubbles throughout history from the tulip bulb bubble in Holland in the 1630s to the dot-com bubble of the late 1990s to the real estate bubble in 2008.

The pandemic caused a lot of fears that the multifamily real estate market might be in a bubble. However, we believe that this is simply not the case. We believe this for a number of key reasons including the fact that most tenants are still paying their rents. When 90%+ of tenants are still paying their rents, it means that it is very unlikely that there is a bubble. In order for a bubble to occur, a higher percentage of tenants would have to be struggling to pay rent. This is not the case.

Another sign that we are not in a bubble is that real estate prices in the multifamily sector are actually increasing, not decreasing. This is proof that the market is experiencing steady growth. If the market were in a bubble that was about to pop, there would be a flattening out of prices, not steady growth.

One final indicator that we are not in a bubble is the fact that it is essentially impossible for over leveraged to occur on a large scale in the multifamily property real estate market. When overleveraged is restricted, it dramatically reduces the chances of a bubble forming.

So, the bottom line is that the multifamily sector is very healthy right now and is ripe for investments. If you’re interested in learning about some great multifamily housing investment opportunities, feel free to get in touch today to learn more.

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About Ellie Perlman
 
Ellie Perlman is the founder and CEO of Blue Lake Capital, a woman owned multifamily real estate investment firm focused on partnering with family offices and accredited investors to build and preserve generational wealth. Since its founding in 2017, Blue Lake has successfully acquired and operated multifamily assets across high-growth U.S. markets, completing $1B+ in transactions.

At Blue Lake Capital, Ellie and her team work exclusively with family offices and accredited investors, offering carefully curated investment opportunities that emphasize long-term wealth creation, stability, and risk-adjusted returns. A defining aspect of Blue Lake’s investment strategy is its integration of advanced AI-driven analytics and data science into the entire lifecycle of acquisitions and asset management. By leveraging cutting-edge technology, the firm executes data-driven forecasting on market trends, asset performance, and tenant behavior, ensuring strategic decision-making and optimized returns.

In addition to leading Blue Lake Capital, Ellie is the original founder and host of "REady2Scale - Real Estate Investing" podcast, which provides insights into multifamily real estate, alternative investments, and finance.

Ellie began her career as a commercial real estate attorney, structuring and negotiating complex transactions for one of Israel’s leading development firms. She later transitioned into property management, overseeing over $100M in assets for Israel’s largest energy company.

Ellie holds a Master’s in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.

You can learn more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com
 
*The content provided on this website, including all downloadable resources, is for informational purposes only and should not be interpreted as financial advice. Furthermore, this material does not constitute an offer to sell or a solicitation of an offer to buy any securities.
 
 
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