Hi my name is Jake, and I'm a realaholic.
I've been completely obsessed with real estate for a while now. After several years of education, preparation, and researching countless markets and strategies, my wife and I finally turned all the theory into reality and bought our first rental property in 2020. We also completed a fix-and-flip in 2021, and we're currently putting the finishing touches on a new vacation rental as well as trying to get under contract on another rehab here in Tallahassee.
I'll save the juicy details about those investments for another time, but let me tell you -- finally taking action has only fueled my passion and desire for more.
Having as much fun as we are, and watching our wealth grow more quickly than I even imagined, I can't help but share our success with others and hopefully open anyone's eyes (for those whose aren't already opened) to the incredible potential that real estate investing holds. I want to help anyone interested in real estate to figure out their own journey and how to get started.
I'd love to discuss my long-term plans for syndication, but there is a more pressing topic I need to start with. Because, you see, some of you are skeptical.
Some of you see home prices reaching new heights every day, and you're convinced that there's nowhere to go but down. I hear people saying the same thing about once a week, whether it’s my contractor, my in-laws, my cashier, my dog: "Well, when the bubble finally bursts...."
That’s not actually true – we don’t have a dog. But it's no wonder everyone else assumes we’re in a bubble, given that the carnage of 2008 is still pretty fresh in our minds.
But the truth is, aside from prices continually hitting new record highs, 2022 has almost nothing in common with the circumstances that brought about the Great Recession. I can think of five very good reasons to believe the housing market is not in a bubble.
1. The M2 Money Supply
The M what? Exactly. Somehow this almost never gets discussed in mainstream media, yet it's the single greatest argument for why we're not in a bubble. (I'll spend more time on this first point, but the rest should be shorter.)
The M2 is simply a measure of how much cash (and other short-term deposits) is in circulation in the U.S. This supply has consistently risen, slow and steady, for the last 40+ years... until COVID.
Check out the incredible graph below. When COVID hit in March 2020, both Congress and the Fed began taking drastic measures to keep the economy from tanking (for example, the $167 that gets deposited into my bank account from the IRS every month, I'm not even sure how or why). Those measures resulted in an immediate spike in the M2:
M2 money supply graph
But since then, the Fed has continued to increase its balance sheet (in ways that are beyond my ability to explain), and that is why you see the M2 is now increasing at a much faster rate than historically. And what this all amounts to is that about six years' worth of new money has been put in circulation in less than two years -- $6.3 trillion of new money.
And that money has to go somewhere.
And it is largely going into real estate. But that's not new or abnormal. In fact, the housing market has historically followed the M2 trend line very closely, which makes sense for a number of reasons. So of course we're seeing historically high home prices -- the Fed practically guaranteed it.
2. Record "dry powder"
This is the reason that ultimately forced me to stop "waiting for the bubble to burst" back in 2019. I realized that countless other investors were waiting for the same thing -- and still are. This article outlines the staggering amount of dry powder (i.e., capital committed by investors that has not been invested) that is just sitting there, waiting, looking to pounce on a decent deal. And when trillions of dollars are sitting there waiting for the housing market to crash, that basically ensures that it won't crash -- prices won't have to fall very far before investors start spending all that extra cash, which will stabilize the market. Again, this is very different from 2007, when there was about half as much dry powder as today.
3. Affordable housing inventory is still at historic lows
And nobody expects this to change anytime soon. In fact, I do think the affordable housing crisis will be solved within the next 20 years (for reasons I’ll get into in the future), but until then, that extra $6.3 trillion discussed in #1 will continue competing for a historically small supply.
How small of a supply? In 2008, just before the crash, monthly supply of inventory (the ratio of houses for sale to houses sold) was at an all-time high of 12 months (6 months is considered balanced); by the end of 2020 the supply was at an all-time low of 3.5 months. The relative supply has officially leveled out in recent months, but the actual supply hasn't: last month there were less than 500,000 active listings on the MLS -- down from 1.3 million just three years ago.
4. Banks' lending practices
This is maybe the biggest difference between 2007 and today. I won't go into too much depth since this is fairly common knowledge, but back then the banks were straight crazy. They gave loans to anyone and everyone. They were giving home equity loans up to 125% of your home's value. And they were giving everyone an adjustable rate. Together it all spelled disaster.
If you've never seen The Big Short, go watch it right now (highly entertaining and informative). There are many regulations in place now to make sure the banks stay more conservative.
5. History
Question: on average, excluding 2008, how much does the housing market drop in value during a recession?
Answer: it doesn't. It usually continues to go up. Check it out:
Recessions & housing prices
Because 2008 is forever seared into our collective conscience, it's easy to forget just how unique that time was and how incredibly stable the housing market has historically been otherwise.
Yes, but...
These are some of the reasons why I'm still buying with confidence. But of course I could be wrong. How might I be wrong? First, prices compared to income levels recently hit an all-time high. If incomes don't keep rising, prices will soon hit a ceiling.
Second, and related, the Fed is becoming increasingly hawkish -- they have no choice but to increase interest rates this year to fight rising inflation. Higher mortgage rates alone will likely be a wet blanket on home price growth. But it would not shock me if this also causes a recession. If that happens and hundreds of thousands of people lose their jobs, and congress doesn't enact another foreclosure moratorium (which they won't), then it's possible we see a flood of foreclosures (or pre-foreclosures) hit the market, which would certainly dampen prices.
But even so, it would not be anywhere near the number of foreclosures we saw in 2009 (because the housing inventory relative to the population was so much higher back then). So the worst case scenario I could see happening is housing prices dropping 1-5%. But that is a far cry from a bubble "popping."
And even if there is a 5% decrease (or worse), that still wouldn't phase me, because price appreciation isn't a big factor in my strategy -- cash flow is. And when you only buy houses that produce positive cash flow, you can survive any recession because rental rates are far more stable than home prices. And, as they say: people always need a place to live.
Conclusion
I don't know what the future holds, but I hope I've at least convinced you there is a strong case to be made that now is as good a time as any to be buying (the right) real estate.
If you agree and you want to get into real estate but don't know where to start, you're not alone. But it doesn't matter how much expertise, or time, or even how much money you have -- I believe there is a place for just about everyone at the table. So if you want to talk more about it, you know where to find me! I (obviously) could talk about this stuff all day every day.
