An introduction to market dynamics

During the 2003 to 2010 time period, I watched a number of my friends make significant money investing in real estate only to lose it all because of an unwillingness to see the market dynamics at the time. Living in the Atlanta area at the time, I witnessed the hypergrowth of the real estate market there. One of the reasons for such growth was high-risk lending practices that created an overinflated demand. 

If you were a part of it you know how easy it was to get a mortgage with little or no equity in the property and these subprime mortgages artificially inflated the buyer demand. Investors were jumping at the chance to get in. First a $50,000 flip. Then a $100,000 flip. Eventually a small community of 4 or 5 $500,000 spec houses and leveraged to the hilt. It seemed, at the time, as though this gravy train could not end. But it did crash, in what felt like virtually overnight. Fortunes that took several years to amass vanished within months. Bankruptcies were rampant thus driving down the real estate market including our own homes. 

While today's dynamics are a bit different, markets still work in cycles. Up for several years then back down. Today many in the real estate business anticipate a coming market shift. Right now we see a seller's market in many areas. This will change, but the question is when? Since most of us have no crystal ball the real question is "How do I protect myself should a market shift occur?". Many people are shifting 401K's and IRA's into real estate investing because the stock market is hot and at some point, it too will shift. They are nervous about the risks in an investment for which they generally have no control and would like to feel like they have some control. What happens to you when things change?

I don't believe there is a "one size fits all" answer to that question. It all depends on your time horizon, your goals, and your current investment positions. What I would say is "balance" is necessary for your investment thinking. In addition, patience is also an important component. That doesn't mean let deals pass you by. It means look for the right deal and don't just jump because others are doing it. Sometimes that means wait for things to go down then buy at better prices. You know, the old buy low and sell high strategy. Many suggest keeping some dry powder in your bank account until that time.

Today the markets are nearing peaks but we don't know exactly where in the Bell Curve they are. Is there more room to grow or is the shift almost upon us? Many factors will determine that answer, most of which are out of your control. So control what you can control in your investing strategy. Timing, costs, location, and your mix of investment vehicles can help mitigate your risks. Choose wisely and get help along the way from those that have achieved what you hope to achieve. Bigger Pockets and your local investment groups are a great way to find those people. Good luck!