SIOUX FALLS - Real Estate development in the Sioux Falls area underwent a significant increase last year and stands to do even better in 2013. A recovery in the construction sector is seen as a welcome indicator of a strengthening economy overall.

Indeed, most episodes of prolonged economic growth are characterized by robust building activity. However, if the last decade has taught us anything, it is that we should monitor the real estate market cautiously.

The real estate bubble whose bursting precipitated the Great Recession was caused by the Federal Reserve under Alan Greenspan keeping interest rates too low for too long (sorry right-wingers, but Fannie and Freddie were only a very small portion of the problem). Those low interest rates made it easier to borrow money for all kinds of construction, renovation, and purchasing of real estate. Borrowing money on the cheap made real estate values soar, and eventually there were simply not enough qualified buyers entering the market to keep those prices up.

Warnings that the over inflated bubble was going to burst were easy to find by 2005 for anyone who was interested enough to look for them, as Greenspan should have been. Instead those signs were ignored and all aspects of the real estate process from construction to investment banking were artificially stimulated in order to paper over the fundamental economic weakness of the last decade. We are only now seeing the light at the end of that tunnel.

As a result it makes sense to ask whether Sioux Falls’ current uptick in real estate development is simply a product of the continuation of historically low interest rates. The last thing that we need is a return to the rampant speculation that blew up in our collective face.
While there is good reason to be somewhat skeptical of the national picture given how overbuilt many areas were when the bubble burst, Sioux Falls seems to be in better shape.

Economic growth in our area may turn out to be tempered by last year’s drought ravaged agricultural product, but on the whole, the city is expanding naturally in response to local economic conditions. Unemployment is very low compared to the national average, and if any place is going to undergo healthy expansion of the real estate market, it should be a place where people are moving to because jobs are available there.

Policy makers take note; this process needs to happen naturally. Growth in the real estate market needs to be seen not as a means to overall economic growth and hence something that should be artificially amped up, but rather as a consequence of a healthy economic climate as in the case of Sioux Falls.