Let’s play devil’s advocate: What would happen to your portfolio if there was a real estate crash?
The perception is that as the economy goes, so does the rest of the Boston real estate market. Google Trends shows that a potential housing crash is in the near future, what would be the possible effect on your portfolio? For insight, let’s look back to the last housing crash that sparked the global financial crisis.
Reviewing The Great Recession
Let’s start with the causes of the housing crash of 2007. Experts agree that there was not just one factor that contributed to the housing bubble. The crash resulted from a combination of factors like the gathering forces of a hurricane that fed off each other until they could no longer be contained.
These asset-backed securities, which were packaged by banks, were sold to the investing public as fixed-income securities, which appealed to investors because, at the time, they offered higher interest rates than treasuries and carried strong risk ratings from rating agencies.
Fueled by the demand for asset-backed securities, lenders were motivated to originate more and more mortgages leading many to relax their borrowing criteria, giving rise to subprime loans. Fueled by greed, nobody stopped questioning the wisdom of offering loans at high interest rates to borrowers with poor credit.
Subprime loans opened up home-buying to a larger pool of candidates, fueling rabid residential housing demand and driving up prices. Hoping to profit from the real estate boom, investors of all types — individuals, institutional, private equity, syndication — jumped into the fray.
As real estate history has demonstrated,
As history has demonstrated, the residential housing market is closely tied with the broader economy. If one goes, so does the other
Boston real estate and the Bottom Line
The lesson we can learn from successful investors who survived the Great Recession is that diversification is critical. Putting all your proverbial eggs in one asset and the geographic basket is a recipe for disaster. ( I know as a Boston real estate broker, should I really be saying this?) Diversification across various geographic locations, investment strategies (value-add, opportunistic, etc.), and segments — particularly those that are recession-resistant like affordable housing, will not only give you the best chances for surviving but also potentially thriving during a recession.
Besides diversification, another critical factor in surviving a recession is investing with the right sponsors. The right assets in the right locations managed by the right people can make the difference between your portfolio being wiped out and thriving during a downturn.
Nobody knows when the next housing crash will occur. Wall Street wants to sell you on volatility because the public markets are marked with volatility, but as we learned from the Great Recession, investing in commercial real estate the right way can shield your portfolio from the next downturn.