Multifamily Bubble

First, a story torn from the history books:

“In 1593 tulips were brought from Turkey and introduced to the Dutch. The novelty of the new flower made it widely sought after and therefore fairly pricey. After a time, the tulips contracted a non-fatal virus known as mosaic, which didn’t kill the tulip population but altered them causing “flames” of color to appear upon the petals. The color patterns came in a wide variety, increasing the rarity of an already unique flower. Thus, tulips, which were already selling at a premium, began to rise in price according to how their virus alterations were valued, or desired. Everyone began to deal in bulbs, essentially speculating on the tulip market, which was believed to have no limits.” See Investopedia

Are seeing a bubble forming in the multifamily market? Are apartments prices behaving like tulip bubble? My assertion is we are not likely to see a bubble in the multifamily market in 2014. With the caveat that predictions beyond a year tend to be susceptible to error, the next several years appear to continue the gilded age of multifamily.

To answer our question of the day lets look at the definition of a speculative bubble provided by Robert Shiller in his must read book Irrational Exuberance:

“A situation in which temporarily high prices are sustained by investors’ enthusiasm rather than consistent estimation of real value.”

So we will now turn to the three prongs of the definition to reach our conclusions:

1. Are Prices Temporarily High?

The best way to compare apples to apples across the US multifamily market is to evaluate cap rates. The cap rate is simply the net operating income divided …read more