this true? I keep reading that the
inflation on real estate is so high
and the market is going to crash.
Should I be worrying?
A basic understanding of real estate
and finance would prevent many of
these so-called "financial writers"
from their fantasy headlines.
Remember, these are writers--not
real estate geniuses. They are
people who make a low five-figure
income putting words on paper. They
love exciting doom and gloom
They interview self-proclaimed
experts from the stock market arena
who know NOTHING about real estate.
"Sell all your real estate and buy
stocks from me." Real estate cannot
be compared against other financial
markets like you would compare a
Yamaha against a Honda.
Much of the value of the stock
market and other financial markets
is “good will.” The only solid asset
of some companies is the real estate
they own. One good scandal, lawsuit,
or moronic manager and that
“non-real estate” value can go up in
a puff of smoke.
Real estate: The
foundation of wealth, currency,
Real estate will
NEVER crash. It never has, it never
will. It cannot happen. It is NOT
possible. Yes, there are
corrections. California gets high
priced, has earthquakes, and money
moves to Utah, Arizona, Colorado,
New Mexico, Oregon, and Washington
and prices go up. Boeing shuts down,
and Seattle is hurt--temporarily.
A total crash in the general market
will not happen. You will never see
a $500,000 house become a $5,000
house. Not unless everything else is
devalued, and then it makes no
difference. If real estate were to
sell for “pennies on the dollar”
then the days of penny candy will be
back, and you’ll get change from a
buck back from MacDonalds again.
You will never have a 5000 square
foot house sell for $5,000 while a
Mazda sells for $25,000. All other
value in this world is basically
tied to real estate. If real
estate plunged, so would everything
else. But it is not going to happen.
If values began to plunge, money
would rush in so quick your head
would spin. Japan, Germany, or
dozens of other capital markets
would flow this way.
Even in local
markets this is the still true. When
Boeing shut down, the market was
hurt bad. Someone literally put up a
billboard saying "Will the last
person leaving Seattle please turn
out the lights?" Well, where is that
market now? And what happened when
local people moved out?
Canadian investors came in and
bought up properties and made
millions upon millions upon
millions. In thirty years, I've seen
some corrections around different
states, but nothing resembling a
crash. I have books on my shelf
about the coming real estate crash
of the 70s, crash of the 80s, etc.
It never happens. It never will.
Authors that write those books have
no greater insight to the future of
the world than the heaven's gate
people or Jonestown groupies. But
like those organizations, there are
always nuts willing to listen to
financial fanatics. The definition
of fanatic is “zeal without
Real estate doesn't crash. Not
nationwide. Not without a general
crash of everything. And believe me,
the stock market, commodities etc.
would have gone down the toilet long
before. The same stock market
writers predicting a real estate
crash would be leaping from a ledge.
Now, local markets can correct.
California does tend to get a little
high priced. It corrects and money
moves to other states like Utah.
After the quakes some years back,
there were 100,000 people a month
leaving California. At the same
time, 40,000 of them were coming to
Utah. Then the values correct and
people head back to the beach.
Now, I am talking the residential
market and ONLY the residential
market. Commercial real estate and
other areas can have wider swings.
Hotels can be overbuilt like Utah
had twenty years ago or shopping
centers can be overbuilt like in
Denver a couple decades ago.
But, it corrects. Within five to ten
years of hotels going up for auction
in Utah there was a 100% occupancy
rate (because people were leaving
California). The plan and path for
an investor should not be one of
panic. There are things to do and
not to do.
Here is what you
should do . . .
1. Avoid or be
extremely careful of areas that are
highly dependent on one employer,
industry or other factor. A large
company like Boeing shutting down or
having big layoffs can drastically
affect a local market.
On the other hand, in the same area
you can also have both stability and
volatility. We had a steel plant
shut down a few miles away from me
and that local area was hurting. At
the same time, I live near an
extremely stable University that has
to turn away students and the market
is quite stable. So, in the same
city or adjoining cities you can
have both safe and risky areas.
2. Stick to bread and butter
properties. The average property
that Ward and June Cleaver would
live in. Even condos or apartment
complexes can have more volatility.
If you are following a buy and hold
philosophy (which I do not
advocate), than you need something
very stable to hold on
to--residential single family homes
in the starter home range and just
above. High priced homes can be
3. Be careful about “buy and hold.”
The plan of buy all the real estate
you can and hold on for dear life
has flaws. I heard one guru say “buy
all the real estate you can and hold
on by your fingernails if you need
to.” I know of many people who
acquired the nicknames “nubby” or
“stubby” throughout the years.
It is very high risk to be highly
leveraged with no plan for a
downside. The same guru also used to
say “Negative cash flow is like bad
breath; it’s better than no breath
Well, I’ve seen it squeeze the
breath right out of many people
leaving tragedies of everything from
bankruptcy to divorce and even death
and suicide. Even a small market
correction in prices or rents and
someone has to begin eating their
portfolio and that rarely works.
4. Have some reserves. If the only
way you have food for your family is
if all the tenants pay, there’s a
problem. If a property flooding or
needing a new roof means you can’t
make mortgage payments, you have a
problem. If you clothe your kids
from what tenants leave behind,
you’ve got a cash flow problem and
probably not the happiest kids.
This isn’t just a joke. I’ve known
people that were that tightly
stretched and that even ate the food
tenants left behind. Anyone
following a strategy where there is
little or no cash flow and no
ability to handle problems or a
market correction is gambling with
their finances, future and even
family. Again, a buy and hold
strategy must be very carefully
5. Make your profit going in. No
other strategy makes sense. You
don’t need to "buy and hold on for
dear life.” The greatest thing about
real estate is that you can profit
from an “inefficient” market. The
fact that there can be profit from
the moment you own the property is
wonderful and quite unique to real
When a stock broker shows you how to
buy IBM stock at less than the price
your neighbor is paying right
now, this very moment, then pay
attention to what he has to say.
Until then, learn all you can about
real estate. There are many, many
strategies and techniques to make
money when you buy the property.
When you are good at it, you can buy
and resell quickly and make a large
profit. When that happens, you have
little concern for what happens to
the market ten years, one year, or
even one month from now.
It’s about education. When a stock
market analyst tells you that real
estate is going to crash, he is only
demonstrating his ignorance. When a
real estate investor is worried
about a crash or even a correction,
that is also about lack of
6. Learn to forecast a market. That
doesn’t have to be all that hard or
ultra-technical. You can watch your
local market for factors such as
“housing starts” and new and
existing home sales. Read the
here or some of the posts
or information from a frequent
poster here, Robert Campbell, will
help your understanding of how to
read the trends.
Basically there are even some
simpler predictors available from
the Board of Realtors. I like the
“average days on market” factor that
is available in the sold
information. That is the time
between the listing of a property
and the sale date. When that time
begins to go up, a market is
turning. If you want to apply a
little calculus, you can even catch
it sooner, but I won’t get into that
There is also a statistic available
that shows the difference between
sale price and listed price. When
that begins to grow or shrink, a
market is changing short or long
Typically a property lists for one
price and sells for a lower one.
Example. List price $100,000 and
sale price $95,000. When the gap
starts closing the market is heating
up. If it starts growing, the market
This isn’t meant to be a course of
market forecasting or market
feasability studies. Take the CCIM
(Certified Commercial Investment
Member) courses for that. This is
more of a small illustration that it
is possible to forecast a market
somewhat--as long as it is not too
dependent on large factors like a
large company closing or an
But, back to the original message.
Real Estate Will NEVER Crash--no
matter how many headlines or talking
heads say so.
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