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Are Real Estate prices peaking?

Supply and demand have been driving the real estate market for the past several years. Supply has been tighter than years past, and demand has been increasing. Will that scenario continue, and will housing prices continue to rise? As usual, the answer is “it depends.” Will there be a recession? Will there be a stock market crash? Will there be an inflationary event, like a trade war, or an oil embargo, or an actual war?

The economy can have a significant effect on the real estate market. When the economy is booming, and the Fed starts taking away the punch bowl, interest rates start rising and that tends to slow down real estate gains. However, in times of recession, two things occur: 1) people lose jobs and have a harder time making payments, or decide to move, and 2) the interest rate falls, allowing people to get a better interest rate, interest rates, inflation, and if we are in a Fed tightening cycle (rising interest rates and tight monetary policy).

Another factor would be the stock market. When the stock market is rising, people feel good, and may even have extra money to invest in real estate, or to “move up” into a larger or more expensive home. Sometimes investors even pull money from their real estate asset (via home refinancing or home equity loans) and invest those funds in the stock market. When the stock market is falling, or when there is a bear market, investors tend to remove funds from their under-performing stocks, and invest it into real estate (the dot com crash and the real estate boom of the early 2000s is evidence of this).

Inflation is one of the primary drivers of real estate prices. During the “Great Inflation” of the 1970s, real estate prices across the US rose at an average of 9% per year (the 10-year period from 1973-1982). Since real estate is a “real” asset, it is inflation protection. So, even though the average inflation per year for that same time period was also 9%, you don’t lose money to inflation like you would with a paper asset (like dollars).

Remember first and foremost, that real estate is a local phenomenon, so know your local conditions before making real property investment decisions.

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