Optimism is at an all-time high these days, as the current bull market is making an unprecedented run. However, it’s at these times where investors need to prepare for a downturn. No bull market runs forever. Investors who haven’t prepared for downturns, convinced that a bull market would be eternal, have been burned throughout history. Don’t be one of them.
How can you protect your investments in a bear market? Real estate is one of the key vehicles. Obviously, real estate investments aren’t bulletproof, as the market was crushed in the last recession, but real estate historically loses less value in a bear market than the stock market. By choosing the right location for your real estate investments, your money will be even better protected.
For example, real estate in Manhattan was largely insulated from the negative trends which impacted the wider market. While the value of Manhattan real estate obviously dropped during the recession, the drop wasn’t as sharp compared to the national average and Manhattan real estate has since rebounded to much higher levels than it saw in those years.
The efficacy of real estate investments isn’t limited to locality. For example, data and infrastructure real estate tends to do well even in a bear market. In contrast, real estate investment trusts and the stocks of home building companies tend to correspond more closely to the market average during a downturn, which is bad news if you want to invest in real estate to defend yourself against a bear market.
Not all recessions are alike. Despite the infamy of the collapse of real estate during the 2008 recession, that collapse was actually unusual, according to Yale’s Robert Shiller, the winner of the 2014 Nobel Prize in economics. According to Shiller, the collapse in home prices during the 2008 recession came as a result of unusual circumstances, such as the development and widespread use of subprime mortgages. Those abnormal financial instruments have since been scaled back in use due to new regulations and norms of behavior from the banks. Absent factors such as these; real estate is an investment that should act as an insulator against a market downturn.
With the cyclical nature of the market, a recession is on the way sooner or later. In fact, according to experts, including Robert Shiller, we’re overdue.
Investing in real estate is a good way to prepare for what might be coming. However, you shouldn’t do so before consulting a team of financial professionals with long term experience in the field.
If you want to get a good grip on the optimal real estate investment strategy for your situation, contact us.