Markets & Strategies

5 Real Estate Lessons From the Great Recession

A decade has passed since the housing bubble burst. What we learned then still applies to the market today.

by Suzanne Bopp - May 07, 2018

A decade ago, the housing bubble burst, triggering the onset of the Great Recession. As of 2016, however, housing prices in most locations had recovered — data from realtor.com shows that the median home price in the U.S. was $236,000 in 2016 (2% higher than in 2006, before the bubble burst), and that prices have continued to increase since then.

While we believe there’s currently little sign of a real estate bubble, there are still a number of lessons to learn — from opportunities to warning signs — from a decade ago that apply to real estate investments today.

1. Diversify your real estate investments.

We believe it’s best to diversify real estate holdings in both type and geography; real estate investment trusts — or REITs — are companies that own and operate income-producing properties and allow you to diversify, says John LaForge, a Managing Director and Senior Global Investment Strategist at Wells Fargo Investment Institute.

2. Beware of double-digit growth.

Appreciation of about 3% to 5% each year is ideal. “You don’t really want values to go up a lot year-over-year,” LaForge says. “If you think back to 2005 and 2006, a lot of year-over-year real estate gains were excessive — double digit. That usually means you’re at the later stages of a market.”

At those later stages, the fall is imminent. As supply catches up to demand, investors don’t want to be too far in debt or invest in too many properties as it may be hard to quickly get money out of real estate.

3. Recognize it’s unpredictable … but be willing to research.

It’s impossible to fully predict what markets will do best, so LaForge says the best tactic may be to maintain a diversified portfolio — risk-adjusted returns may be better in the end.

Research may be able to provide insights on what relationships may potentially affect property values in a portfolio, but sometimes those relationships are hard to uncover.

“Part of the difficulty of predicting individual markets is that real estate influences are extremely complex,” says LaForge. “Someone may live in a a town and think it’s just a great place to live and that’s why properties are going up, but the reality is it’s because the town is tied to a specific company, and that company is tied to China.”

4. Treat your home like an investment.

“In 2008, if an investor had looked at how much prices had risen, they may have said, ‘This can’t continue,’ ” says LaForge. “If investors treated their home more as an investment and weren’t emotional about it, there is a chance they could have gotten out before it all crashed.”

Assessing choices objectively means analyzing the market across both time and geography — locally and nationally. He explains if the price per square foot in a location you’re considering was $200 on average for the last 40 years and suddenly it’s $1,000 per square foot, investors may want to think twice about buying into that market.

5. Know what impacts the market.

All asset classes behave differently, and they all have different risks, considerations, and influencing factors. For example, real estate is affected by local politics, and the tax situation in a particular county, state, or city may also influence your decision to invest in those locations.

“Investors often try to apply what they know about stocks to commodities,” says LaForge. “My response is: Don’t do that. They’re very different markets. How you make your money, what your risks are, and the length of the cycle are all different.” Your financial professional can help you determine the specific risks and opportunities of the real estate investment you’re exploring.

Suzanne Bopp has written for USA Today and National Geographic Traveler.

Image by iStock

Additional Resources

Learn more from Wells Fargo Advisors about the real estate sector.

Risks:

All investing involves risk including the possible loss of principal.  There is no assurance any investment strategy will be successful or that a fund will meet its investment objectives.

There are special risks associated with an investment in real estate, including the possible illiquidity of the underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Diversification cannot eliminate the risk of fluctuating prices and uncertain returns.

Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.

Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

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WFII is not a tax adviser.

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