September 2002

All over the world, with interest rates at record lows and strong real estate markets, people are wondering whether the "bubble will burst". This month, I'd like to offer some comments on this issue that could affect us all. Enjoy this September newsletter!

For some time now--and with increasing regularity--real-estate investors, commentators, pundits and detractors have been badgering me to concede that the bubble is about to burst. The way the question is posed is interesting in itself. A statement is made along the lines of, “Come on, Dolf, you have to admit that the bubble is about to burst.” But the confidence in the questioners’ beliefs is shattered (in my view anyway) when they add with much less confidence, “Isn’t it?”

It’s extremely safe to claim that the bubble will burst, just as it’s safe to proclaim--even in the middle of a severe and prolonged drought—that the rains will come. The real question is when it will happen. And when this supposedly calamitous event does come to pass, how severe will it be?

I’ve heard many theories over the last half-dozen months as to why the real-estate bubble will burst. A common one suggests that, with the stock market down as much as it is, there will be a natural downturn in the real-estate market when cash-poor and asset-depleted stock-market investors become forced to sell real-estate holdings to meet their financial obligations. The theorists suggest that these investors are all holding off selling, hoping that the stock market will turn around. When it doesn’t, they’ll all be forced to sell their real estate at roughly the same time, thereby precipitating a bursting bubble.

Others claim that changes in real-estate values follow precise, predictable and, in their opinion, documented cycles that are as regular as atomic clocks. The most commonly quoted time period for such cycles is seven years, although a few claim it to be 10 years.

One of the most common views--and the one based on the least amount of reasoning--is that the bubble must burst simply because “prices can’t continue to rise like this.”

Whatever the theories, the armies of people convinced that the real-estate bubble will burst are now out of the market, waiting with trepidation for their predictions to become reality. I appreciate their departure from the market for three main reasons.

First, since so many investors are not in the market, there are plenty of great deals to be snapped up by those with the courage to realize there will still be great investments out there, even if the bubble bursts.

Second, we don’t know when the bubble will burst. If you’re going to wait until it does, how will you feel if you end up waiting six years? Will you lament the plethora of missed opportunities?

Third, and most important (please sit down for this), I am hoping that the bubble will burst in a most spectacular fashion! I relish the thought of the real-estate market crashing spectacularly.

Before you think I have a sadistic streak, reason with me. When the stock-market bubble bursts, stock values plummet, and often erstwhile high-flying companies go bankrupt. Witness what happened to all the technology companies recently: Many highly priced stocks have not just been reduced, but totally wiped out. Compare that with real estate. Even in a severe downturn, real estate doesn’t vaporize and disappear. Rather, at worst, the owners have to sell. And they have to sell at giveaway prices. That’s where you and I step in.

Burst bubbles and major downturns are golden opportunities to acquire real estate at prices that couldn’t be comprehended before a crash. The properties themselves won’t disappear. Nor will the tenants. Even if many people have to sell their homes, they still have to live somewhere. So they may sell a property and become tenants--possibly even your tenants. But they will still need a home.

Of course, in bad economic times, the demand for commercial space will go down somewhat, and some families will move in together where before they may have occupied separate homes. But in general, there will still be a market for the spaces you have for rent.

It’s so much easier to do exceedingly well when the real-estate bubble bursts that I actively seek out markets where the bubble has burst. When a market is high and increasing, I get worried (just when the masses are resting on their laurels and complimenting themselves on their fine investment skills). But when the market is falling--or preferably crashing--when the masses are worried sick, that’s when I reach for my party hat.

Bursting bubble? Bring it on! I’m ready.

Successful investing!

Dolf de Roos