Truth Part 2 How to Succeed in any Market

Thanks to a part time job and my parents’ generosity, I was able to double major in Finance and Real Estate at The University of Texas in Austin. I was excited to attend my first real estate investments class, and the very first thing my teacher asks the class is “How do you make money in real estate”? Answers, strategies, stories, everything you can imagine were offered. I just watched. The professor shook his head, turned his back on the class and wrote “BUY LOW, SELL HIGH” on the board. While this is true in any business, or any investment, it proves the point that simple is rarely easy. Buy low, sell high is simplicity at it’s finest. The question is now, “What is low, and what is high?”.

Aha! We’ve stumbled on the problem. In 2008, the market imploded due to bad loans and bad lending regulations. Values plummeted up to 40% in some areas of DFW, days on market climbed into the 6 month range and the FED was forced to lower rates in order to breathe life back into the market. We can all agree that was low. What we didn’t know at the time was whether it was the bottom. I sold 2-3 year old homes to investors for $95k that sold new for $135k and today are selling for $160-170k. The real estate market is one of the slowest moving of all markets. That’s the good news. We all knew it was at bottom in 2008-2011 and it stayed there awhile for us. The fear then is “will it ever come back”? This answer was also provided by my good professor when he said, “markets are cyclical” – meaning they go up and down on a reasonably recurring schedule over time —  and real estate generally runs in 7-10 year cycles (as does the economy). The answer in 2008-2011 to my clients was absolutely, your investment will go up and indeed it did. In late 2012, something changed, who knows, maybe a butterfly landed on a bull’s butt in outer Mongolia – and the ripples rippled.  Rates dropped, most of the foreclosures were sold, the stock market was up, jobs were good and cash started pouring into our area. Since then, we’ve been on a 10-20% annual increase in home prices. Starter homes are $150-200k instead of $90-120k.

Now add the investors coming out of the woodwork, everyone is an investor. So many people I meet are flipping houses (or want to) and are looking to buy rentals. Investor’s cash money is trumping the FHA buyer as investors are paying list price or higher for homes. So wait a minute, I was told to buy low and sell high, why is “smart” money still buying at the top? Right now we KNOW the market is higher than it’s ever been. Ever. So are they buying low and selling high or buying high and hoping for no end in upside? Will the market come back down? Today we are 9 years from the last crash in 2008. The market is as high as it’s ever been. Hmm. A wise investment guru named Dave Landry once said when all the bandwagon people finally hop on, it’s usually the end of the trend. It’s like the drunks hanging around at the end of the party who don’t want to go home.

BUT – This issue of whether or not prices crash again is clouded by some external factors. Cost of living in DFW was lower than most. Housing prices are just now rising to meet other parts of the country. Interest rates are still reasonably low, so that most people who want to buy can afford a mortgage. People aren’t leaving the area, while others continue to move in. The job forecast remains strong and it’s very possible Texas misses the worst of any recession simply because it’s fairly cheap to be here and people don’t leave. We all have to live somewhere. What is most likely in the next crash is not tumbling prices, but lack of liquidity. Longer days on market with lots of pressure on property condition. If your house isn’t updated in a down market, it’s much harder to sell. This will put some downward pressure on pricing, but it’s avoidable by updating your home. Prices will depress and there will be opportunities for bargains. Rising interest rates will slow this market down faster than anything else could, then all bets are off. When people can’t borrow enough to buy a home, downward pricing pressure gets most severe.

Barring an external force like 9/11, a scary disease outbreak, war or other catastrophic event, I believe as long as rates stay low, our market will survive if not thrive. Having said all that, my magic 8 Ball broke when I was a little kid, but it seemed as accurate as most market gurus. The true answer is we really don’t know, but an educated guess and a plan will take you a long way.