For years, the price of real estate kept rising, leading people to believe that the boom-bust cycle no longer applied. Prospective buyers would drop a pretty premium on their dream home, only to see valuations rise the following year. Inspired by the near-instantaneous profitability, more buyers jumped on the bandwagon.
If this scenario sounds familiar, of course, you’re not alone. Typical boom-bust cycles may take decades to complete a full rotation; in this case, we were about seven or eight years removed from the 2008 financial crisis when we first saw the signs of a real estate recovery. In other words, the pain is still fresh in our memories.
Yet many in the mainstream argue that this time, it really is different. The primary justification for this seemingly foolhardy belief is the robust labor market. Prior to the global economic infrastructure melting down in late 2008, recessionary signs were evident. Currently, we see nothing but decisive bullishness.
Although an anecdotal tale, I’m sure my experiences aren’t at all unique. Every day, my inbox is bombarded with staffing agencies hawking their latest, greatest opportunity. And these aren’t throwaway gigs in some backroom of a major big-box retailer. No, these are legitimate, tech-centric employment offers that require substantive educational and professional credentials.
But as Bloomberg recently reported, real estate prices are climbing roughly twice as fast as incomes. On the surface, that’s clearly not a sustainable dynamic. However, it has stayed sustainable in the interim due to an increased population base, which in turn squeezes supply.
This situation is exacerbated in major metropolitan areas, where most people move to in search of top-notch opportunities, as well as for the “prestige effect.” That this trend catalyzed sharp rises in real estate prices in places like San Jose, Los Angeles, or New York City is understandable. But smaller cities that host two to four million residents have equally witnessed dramatic bullishness.
For now, the mainstream media is largely focusing on the recent slowdown in ultra-hot real estate markets, such as Seattle. But I fear that a broader boom-bust cycle unraveling could cause a ripple effect. We’re not all Seattle, but we share similar problems at varying scopes.
For instance, real estate in Alabama is experiencing a lift. One could argue that a crash in the market there wouldn’t cause much of an impact, and nominally speaking, they’d be right. However, Alabama’s labor market isn’t nearly as robust as, say, Southern California.
If the boom-bust cycle sours nationwide, the states without bustling employment opportunities face serious vulnerabilities. We’re not quite there yet, but the potential has just heightened.