Real Estate history set to repeat itself

[Ray Johnson]

First off, I’m a true believer in the saying “If you have a dream in life, you should seek and follow the path to obtain it!”

In late 2006 we saw the real estate bubble come into play and wreak havoc on the housing industry. The main focus of the cause was targeted at the financial industry for its relaxed lending requirements, banking regulations, and “predatory” lending practices. Most people seem to avoid the conversation about all the Real Estate risk takers that played the biggest part in the housing crisis.

A few years before the bubble burst I was encountering real estate investors, house flippers, and buy-and-hold participants everywhere I went, my waitress at The Cheesecake Factory, the two McDonalds employees talking deals on their lunch break, the clerk at the grocery store, everyone everywhere appeared to be a real estate investor in one form or another getting a piece of the housing boom.

The underlining problem I noticed was during the rush to get into the RE industry most of the people capitalizing in the industry never learned the basics of RE investing and were simply doing what their friends, neighbors, coworkers, or online postings told them to do to get a piece of the pie. A majority of all those RE acquisitions were closed without basic RE fundamentals as part of the deal causing them to play a major part in the housing crisis as they were not structured properly and/or in fragile portfolios that quickly crumbled with the first sign of trouble.

Flash forward 10 years to 2016, minus the banking industry’s participation, we are seeing the same industry practices that played a major role in the last bubble. I’m encountering wholesalers, real estate investors, house flippers, and buy-and-hold participants everywhere using the same knowledge base that played a part in the last crisis.

Here’s why I say history will repeat itself. An example can be found in the BP community when there’s not one day that goes by that I don’t see a post along the lines of:

“Help, I have a property under contract, I need help with the next step”

“I have a house under contract, what’s the best way to get financing?

"I got a cash advance on 5 credit cards for the EMD, I need help with financing the deal"

We’ve all seen these post and there are some far scarier than these. While I would never discourage anyone from trying to close a deal, I’m simply pointing out the similarities of 2006 in which the industry was saturated with far more uniformed participants trying to get rich quick than those who know what they’re doing when structuring deals.

[Ben Zimmerman]

So according to you, the primary cause of the crash was relaxed lending requirements by banks, and now even though that primary cause no longer exists, you think there is going to be a crash because a lot of people are interested in real estate?  That doesn't even make sense.

People are naturally attracted to whatever makes money.  If the stock market were to see annual gains of 20%+ for a few years then a large number of people would stop being Saturday afternoon landlords and start being 'stock gurus'. 

The only thing that can cause an actual housing market crash, is for people to start defaulting en masse on their loans, which can happen only if the loan is unstable, or the job market is unstable.  In 2008 this happened because banks were giving anyone and everyone a loan regardless of the credit score, down payment, or income.  They gave loans to people who couldn't possibly repay those loans, especially when their adjustable rate mortgages increased.  Another scenario is if we experience another great depression, or prolonged recession.  People who were previously financially stable can become unstable if the economy sucks and they can no longer find a job. 

Having a large number of people interested in RE will certainly drive the price up, and this increase in price will create more people who want to invest, and this hype will further drive prices up.  This is what happened in 2008.  The difference is banks in 2008 kept giving ridiculous loans that they are no longer giving, which by default creates a realistic limit to how high prices can go.  We have seen prices go up by large amounts following the crash, and this increase will likely start to flatline a little bit at some point, or possibly even recede slightly, but this will not cause a crash.  So long as the underlying loan is solid, and the job market is solid, then real estate as a whole is solid.

We've seen one crash in the last XX years, and suddenly everyone becomes Nostradamus and feels the next one is right around the corner.  Will the market flatline or possibly have a market correction in the next 1-10 years?  -Possibly.  But I am worried about this about as much as I'm worried about what Kim Kardasian just posted on twitter.  A market correction doesn't scare me in the slightest because I invest correctly from day one, with built in equity and cashflow so that I can easily survive during the down years, and thrive during the up years.  I'm nowhere near close to cashing out and retiring, so I am actually hopeful for a market correction because all of my current assets will still produce, and my future purchases will be made at a discount.