What if there is no housing "recovery"?

[Timothy W.]

One of the things I always try to be conscientious to is herd mentality. Recognition of herd mentality and the pure luck of a well timed divorce kept me from investing in real estate in 2007 and waiting until 2008 when I could get property at 20% of 2007 prices. Recognition of herd mentality also pushed me to start flipping a rental here and there in the past couple years when post sub prime fallout out, everyone thought the answer was in buying steady, secure, cash flowing rental properties rather than flipping.

There's a new herd mentality and you can see it by reading what the majority of posts assume here and any other place on real estate investing is discussed. It's the assumption of recovery. Just like everyone assumed in 2006 that every flip could be profitable (look in the old posts on here - it's in there) everyone is assuming that these new lows in real estate pricing are just waiting for a market correction to bring them back up. That may be true but it's to the point now that your barber can tell you REOs are a good investment. When your barber can give you just as good investment advice as a financial professional that's not a good thing.

What if things don't change? What if these prices are the new norm for real estate? Are you mentally ready for that? Is your business ready for that? What are you doing to be ready for the chance that the herd mentality is wrong? What's your attitude, plan and strategy going to be?

[J Scott]

Historically, Real Estate has provided gains pretty much equivalent to pure inflation, though not along the same curve. Given the scarcity and the integrity of the underlying asset involved (land), this will most likely continue forever (in many economist's opinions).

For a long time (the past 50 years or so, inflation adjusted home prices diverged significantly from nominal prices, but in the past 25 years, the curves have started to converge, and are now pretty much aligned:

http://mysite.verizon.net/vzeqrguz/housingbubble/

In my opinion, if you believe inflation is a given over the long-term, then you should assume that real estate will appreciate over the long-term. If you believe deflation will reign over the long-term, then you should assume that real estate will depreciate from here.

As for what I'm doing, I'm just doing whatever is profitable in today's market. Currently, that's a focus on rehabbing and flipping lower-end SFHs to first-time FHA buyers. I also have some cash invested in a couple big apartment complexes, in the case the rental market rebounds. And I'm always looking for good commercial deals. In other words, diversification on a small scale (actually, within a small market space), with a cash and effort focus on the strategies that are working today.

If tomorrow there is a more lucrative investment strategy, I'll move my focus in that direction, while still maintaining some diversification.

Or, if MIkeOH's predictions come true, we'll retire, move the family to another country and sit on a beach until we die or get bored again...