How did the 2008 crash change REI?

Question

I'm pretty new to REI, and I've been reading a few books lately, but a lot were written before 2008. Not too say they have bad info because I think a lot of the principles hold true today and are excellent advice, but there is certainly a naivety in some of them that is only apparent in retrospect, especially the ones who talk down the RE bubble doomsayers of the time (I'm looking at you, Larry B. Loftis!). Is there anything we learned from the housing collapse that we didn't already know? Is the way we estimate appreciation or the value of a deal any different than it used to be? Any context, wisdom, or anecdotes are welcome.

Jay Hinrichs · Answer

@Brendan Morin

Well let me count the ways.. Well maybe not... to pain ful to recount.

Brian Burke · Answer

The biggest losers were the real estate crusaders--the average everyday folks with a dream.  It was a frenzy.  People would say, "my plumber just made $100 grand this year on a rental house, I'm going to get one too".  Two years later both the plumber and the client, and thousands like them with similar stories, were upside down on one or more properties that were all negative cash flow and soon found themselves in foreclosure.  Each of these people may have lost moderate sums of money but collectively as a group the losses were massive.  The biggest losers were their lenders.

Joe Kim · Answer

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful. - Warren Buffet.

I think this adage can be applied to real estate.  During the recession from 2009 to 2013, it was a tremendous opportunity.   Certainly money was there to be made during boon times form 2001 to 2007 but losses always hurt more than gains.

I want to be ready (with capital) for the next recession/downturn.

Brian Burke · Answer

@Brendan Morin the crash changed a lot!  First and foremost, it taught investors who thought they were invincible a very important and expensive lesson that you don't fool with Mother Nature. It taught the banks the same thing. No more ability to do the 100% financed deals and cash-out Refis with no income or asset verification!  I think you'll soon see that memories are short, however.

It took a lot of players out of the business--some permanently and some only temporarily. It caused our fearless leaders to enact laws designed to prevent all of that from happening again, most of which won't and a lot of which hurts more than it helps (like the FHA 90 day anti-flip rule--seriously?!).  And Dodd-Frank changed the game on seller financing, just search the BP forums to see how.

I don't see changes to how a deal is valued...the same appraisal methods still apply.  It might change the way some view appreciation...back in the day it was expected and people took it for granted. Nowadays the allure of homeownership has been lost on some consumers.

Elizabeth Colegrove · Answer

It has changed alot but has it really? There was a crash in the 80's, 90's even 2000's lol. So there are lots of crashes maybe not as bad since the 80's but still that being said. I think alot of people have been affected physiologically. You see alot more investors talk about how they carry less debt. There are many people who got burned buying their first house in this time period mid 30's who are NOT interested in ever owning again. You have alot of other people who did awesome because they bought during this down turn and than you have more of us mid 20's who have heard nothing but negative stuff.

While not nearly as bad as the "Great depression". I think you are going to see many of the same things. Where some people developed habits and "scaring" that changed them forever and others while learned from it, develop no lasting thoughts. So it will be all over!

For us personally it gave us the boast to get started. It also taught us that there will be a time to "buy" and a time to pay off and save cash for the next time to "buy". That is why we are trying to acquire 5 more houses in the next 18 months while houses prices and interest rates are still relatively low.

Brendan M. · Answer

Thanks again, I really appreciate the context. Very unfortunate for those that got hit hard, and pretty scary to think this could happen again.

Brendan M. · Answer

Thanks for the thought out reply! Any idea who were the major losers in the crash - as in was there one particular investment strategy that got hit the hardest?

How did the 2008 crash change REI?

Most Popular Reply