“When it goes south, you can’t get out”

Is there an investment opportunity for you in this real estate revival that we have been witnessing over the last 12 months or so, or is there a dangerous landmine that you need to avoid? Like I said, the average price of a new home has just got back to $330,000, which we have not seen since 2007, before the crash, before the bubble burst and before we experienced our worst real estate and stock market fall ever, since the Great Depression. The first question we have to ask is, “If the greatest real estate crash ever was caused by an artificial bubble, filled with sub-prime mortgages and liar loans, then how can we recover back to prices that were artificial in the first place, hence the term bubble?” There are only a couple of possible answers to this question.

One answer is that we are in another artificially funded bubble and it will eventually burst. I don’t think this is the case because banks are no longer making sub-prime loans, and it is harder to get a loan today than ever before, even if you have real documented income and a good credit score. Another possible answer number is people’s finances have dramatically improved, and they now have more disposable income than before and are spending it on new houses. Well, this one’s not correct either because according to recent report, real disposable income is actually 2.3% lower than it was in 2007, so there goes that theory. How about population growth? After all, if there are more people in America, then more houses are needed, right? Well, according to the most recent data from the US Census Bureau, population growth in America is on track to be the slowest it’s been since 1930, so that’s not the answer either.

Our survey said… cash purchases by professional investors are making up a large majority of house purchases in America, either buying to rent out or to fix up and flip. So, how long can investors support the residential real estate market, buying houses they are not themselves living in? The answer is not for long. Any time investors are driving a market instead of homeowners, it is a short lived run that will end badly because it’s all about math. As soon as the process of the homes move up too much, as it looks like they have done, and the rents that those homes can produce no longer justify the process, investors will quickly stop and the market will slide. So if you’re an investor, there may be some more room to play this game, but my bat sense is telling me that we are closer to the end of this run than the beginning, and you need to be cautious. Please remember, unlike stocks, which are liquid at a moment’s notice, the biggest risk investors have when speculating on real estate is liquidity. The definition of true safety is being able to get you money out of trouble at a moment’s notice. The problem and major risk with real estate is “when it goes south, you can’t get out”, so please be cautious.

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Information presented in this blog post is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information and may not be suitable for all readers. A professional adviser should be consulted before implementing any of the strategies presented.

photo credit: Jeff Kubina via photopin cc

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