In 2005, everyone was buying houses. It was common knowledge you were stupid to wait. House prices flourished and loans flowed like drinks at an open bar. Lots of people made money-until they didn’t. In 2009 the music had stopped and people were frantically looking for someone to pass the hot potato to. By 2010, those “smart” people were the ones looking stupid. Foreclosures dominated the market place and the great real estate boom of ‘05 looked more like a ghost town as the real estate downturn hit full effect.

Fast forward to 2018 and it’s starting to look a little familiar. In Northern CA, we frequently see homes sell significantly over asking price, regardless of appraisals or the condition of the home. Demand is outpacing supply, and prices are rising again. In hot rental markets across the country, we continually see local investors totally puzzled by how much out of state folks are willing to pay for traditionally modest priced homes.

So what do you do? Is now the time to buy, or should we be waiting for the next crash? Are we in 2005 at the peak of the market, or are we in 2010, with plenty of room to run?

If you want to make the best decision, you have to consider all the facts. Before I make a black or white suggestion, let’s take a second to consider several market factors, strategies, and possibilities. There just may be a way to invest now, and still be primed to take advantage if the market crashes later.

Are we in a bubble?

When we refer to a “bubble”, we are typically referring to an unrealistic, unsustainable value in an asset class that can’t be reasonably expected to continue. In 2005, home values weren’t based on affordability, they were based on horrible loans that allowed people to borrow much more than they could afford over the long term. When those loans reset, nobody could pay them, and the market was flooded with foreclosures. Supply increased while demand dropped and the market went south.

In today’s market, we see a much different scenario. I work as a real estate agent in the SF bay area, and I’ve yet to see any funky, clearly foolish loans from any of the buyer’s I’ve worked with. Rates are generally fixed over 30 years, do not adjust, and are absolutely reasonable based on the buyer’s income. It’s obvious that home prices are up, what’s not often talked about is how wages are up too. Let’s not forget that there have been 13 years of wage increases since 2006. That’s a pretty healthy number. Prices may be higher, but they’ve increased in proportion to wages as well. The danger of a massive wave of loan defaults hitting the market all at once isn’t all that high.

So are we in a bubble? In some areas, possibly. But remember, as long as people can afford their payments, it would take some external event to cause a housing problem. Things like an overall recession, hit to the job market, etc. If that happens, many asset classes are going to take a hit, not just real estate values. The point is, don’t be lazy and assume just because home prices seem high that automatically means we are in a bubble or seeing a repeat of 2005. There are lots of other variables to consider.

What happens if I invest too early and the market crashes?

This seems to be every investors worst fear. It’s a bit of a catch-22. If you invest too early and the market crashes after, you missed the “opportunity of a lifetime”. If you wait for the market to crash, you could spend years not making any financial progress. Then, when it does crash, all you hear is how real estate will never recover and you end up too scared to pull the trigger. Either way, no matter the current market, it’s hard to take the plunge and jump in.

This question also assumes real estate markets are the same everywhere. A “crash” in one area doesn’t always mean there will be a crash in another. Some markets are driven by specific economic factors that aren’t affected by the rest of the country. Example? Texas. In 2009-2010, when many of the rest of the country (CA, AZ, NV, FL, to name a few) were all getting hammered, Texas…