Lessons Learned from Real Estate Market Frenzy

[Tom Goans]

Lessons Learned from Real Estate Market Frenzy

This is an observation of real estate market frenzies and lessons learned from the viewpoint of a third generation real estate investor, developer, property manager, and financier with almost 50 years of personal experience. It is not scientific, nor are the observations and expressed viewpoints 100 percent correct.

Today, the real estate business has once again become a frenzy. Prices have become unrealistically high and the number of sales is fueled by market manipulation with a big heaping of denial. Once again, the reliance on too much credit is a dominate factor in the market. Too many people are over extended and justifying this attitude.

What is being ignored? The true entire economic picture. The continued reduction in individual buying power and the reduction of the workforce to 1990s levels are extremely alarming. Future support of the current real estate market frenzy is unreliable. The majority of the future population cannot financially afford the required payment demands of today’s investment strategies.

I am reminded of a Colorado real estate development company in the 1970s. The real estate market was extremely hot. Colorado had become very popular with the entire U.S. and people around the world. How could you miss? The development company bought tens of thousands of acres of very prime real estate in four separate locations in hot markets around Colorado, including one large chunk near 4 major Colorado ski resorts. The company was very debt heavy. The profit potential was off the charts. Suddenly there was the oil embargo, lines at gas stations, a depressed economy, and no buyers. The Colorado development company quickly went bankrupt. The debt ate them up. These old experienced pros went bust.

I recall what my father stated: “They were land rich and cash poor.”

Yea, but it this cannot happen to me ... right? How much more thorough was their research, studies, and numbers than yours?

During the first half of the 2000s, the real estate market was extremely hot. Then the recession hit. In about 3 months, many markets went from scorching hot to completely dead. The recession took down EXPERIENCED developers, builders, “real estate investors”, and a record number of banks. All had files filled with comps, appraisals, and good numbers.

One of the points being made is investing in hot markets or hot local areas can be a major mistake. By the time a market or area is considered hot by many, it is too late for the wise investment money.

This is just an observation and viewpoint. It is not scientific, but may be worth considering.

[Eric Tait]

I look towards the durability of the payment stream as the metric for long term rentals.

I am lucky to be in a resource and healthcare based economy (Houston) and my focus is workforce housing.

Median income is around 42K in the city, but I target the historical 35K, two earner household and then keep my rents around 1/3 of their monthly take home pay. ($900 - $1350)

This I think gives some downside wiggle room, and since we purchase for cash flow, I do not really care about the nominal price of the assets, just my basis in that asset based upon the long term cash flow prospects.

I think that as long as we as investors keep an eye on median incomes of our respective markets, and make sure we are buying at a deep enough discount, we will alright and see the signs of the next bubble.