2022 Predictions – Crash or Boom

As appraisers, we have a Spidey sense that the real estate market is overheating right now. Appraisers worry when they see unsustainable values. Appraisal departments worry about their bank’s collateral. 

Rising inflation, future interest rate jumps, uber low cap rates, iffy office lease renewals, skyrocketing multifamily rents, industrial fever, construction on a tear, yada yada. Lots of anecdotal evidence, but where’s the tipping point? 

Identify good fundamentals 

Each market correction seems to feel different than the last. If you’re an experienced appraiser, you can sense it’s coming but you can’t pinpoint timing or how it’ll play out. In my Tampa Bay market, residential and commercial real estate market is white hot. 

COVID has put Florida on the map for wealthy Americans wanting good weather, outdoor activities and low taxes. The pandemic also served to break the centuries old 8-5, Monday through Friday work at the office standard. This model is now officially changed. Employees, including appraisers, look for flexibility. Highly skilled employees are taking the opportunity to relocate outside of large metro areas, creating COVID Boomtowns.  

The power of the Schwartz 

You don’t have to watch Spaceballs to know investing takes focus. Stephen A. Schwarzman, CEO of The Blackstone Group, explains, “Here are my simple rules for identifying market tops and bottoms:  

1. Market tops are relatively easy to recognize. Buyers generally become overconfident and almost always believe “this time is different.” It’s usually not.  

2. There’s always a surplus of relatively cheap debt capital to finance acquisitions and investments in a hot market. In some cases, lenders won’t even charge cash interest, and they often relax or suspend typical loan restrictions as well. Leverage levels escalate compared to historical averages, with borrowing sometimes reaching as high as ten times or more compared to equity. Buyers will start accepting overoptimistic accounting adjustments and financial forecasts to justify taking on high levels of debt. Unfortunately, most of these forecasts tend not to materialize once the economy starts decelerating or declining.  

3. Another indicator that a market is peaking is, the number of people you know who start getting rich. The number of investors claiming outperformance grows with the market. Loose credit conditions and a rising tide can make it easy for individuals without any particular strategy or process to make money “accidentally.” But making money in strong markets can be short-lived. Smart investors perform well through a combination of self-discipline and sound risk assessment, even when market conditions reverse.” 

Follow the Money  

The money transfer equals change, cash movement, resulting in a monsoon of economic activity. It’s expected between 2018 and 2042 that $72 trillion will be handed down to the next generation. Some of this activity includes starting new businesses, buying homes and donating to charity. 

“The greatest wealth transfer in modern history has begun. At the end of this year’s first quarter, Americans age 70 and above had a net worth of nearly $35 trillion” The Wall Street Journal 

Data increases investor speed 

Part of the equation includes the amount of data available to investors of all levels. The immediacy of market knowledge facilitates decisions. It also serves to inform buyers that opportunity is just around the corner from overheated markets. Having the confidence to buy when everyone else is selling is a Warren Buffett lesson being picked up my more investors. “Be fearful when others are greedy. Be greedy when others are fearful.” 

Jerry Seinfeld has a joke about when you see two homeless men talking, you know one is giving advice to the other. Right now, there’s a lot of faux real estate “professionals” giving advice incongruent with many appraisers. 

As valuation experts, we need to be the “go to” professionals. We have the best seat to see what’s coming. Share your market knowledge, experience and Spidey sense. Is 2022 the year of crash or boom? Ask your appraisers