It's Time To Be A Conservative Real Estate Investor

It’s been a wonderful, spectacular ride for both real estate agents and investors these past years. Depending on where you’re located, you’ve probably experienced a solid improvement in your real estate market for the past five to ten years, as compared with what it was like for the five or so years before this great run began. But at the same time you may find yourself asking, How long will this continue for? Some things happening in the marketplace give pause.

Having been in our industry for over 25 years now, I’ve been around the business for two cycles of great appreciation in property values, and two cycles of 25 to 40 percent losses in property values in Southern California also. I also experienced the tail end of the upsurge in property values in the late 1970s, too, when I first began working in the industry at that time.

In these big market upswings, people get crazy. They sometimes think that they’ve become real estate geniuses because of how much their properties have been appreciating, and they often think, that this upswing and appreciation of properties will never end. These are usually the same people who get burned the most when the market changes, too. Being a real estate investment genius can mean no more than identifying a property, buying it, and enjoying great appreciation within six to twelve months afterwards and that’s why, I get really concerned about the times that may be ahead for us.

Great real estate booms in our country can be followed by great declines in property values, so a downward market shift like what we’ve experienced before, could happen again. The question is when.

There are a lot of people out there who are in a state of panic feeling, that they’d better get into the market now, or else they’ll be shut out from getting into it forever. These people are not seasoned, knowledgeable real estate investors, but they’ve seen their friends ride the gravy train of ongoing appreciation for a while now, and they’re determined that they’re going to claim their own piece of it.

Despite the fact that home prices in the United States have achieved record levels, the percentage of people’s equity in their homes has never been lower. While people have been experiencing record levels of appreciation in their homes, they’ve also been taking the equity out through lines of credit, and second trust deeds for both living and other expenses, too.

While people have been stretching to afford the home they want at these record high prices, many of them have also been financing their loans with variable interest rates. If, and when, interest rates go up, these people will be caught making much higher mortgage payments than they are right now. And some of these homeowners got into their loans at artificially low teaser rates, too, meaning that their interest rate will be increasing in the months and years ahead, even if market interest rates remain the same. But if interest rates go up, these people will get hit with both the increase they knew was coming, plus another increase in their variable rate because of the changing market conditions.

And in looking at the above two examples, it’s easy to see the possibility that a great number of families could find themselves financially strapped in a major way if the economy slows down.

Appraisers have been going public about the fact that they’re under tremendous pressure to justify continued higher prices in their appraisals, and the government is now demanding answers. With this in mind, I can only imagine what a little pressure on appraisers to be more conservative, could do to curb a good real estate market. Most of us remember what happened with the savings and loan scandal years ago, and I’m sure there are a lot of people who would like to take the necessary action right now, to ensure that something like that doesn’t happen again.

In addition, the government has now begun investigating brokerage companies, title companies, and lenders for the payment of illegal kickbacks in our industry, too.

And on a topic that could have ramifications for our overall economy, top investment experts on Wall Street are predicting that gasoline prices here in the USA will reach $4 to $5 a gallon within the next several years. And one of the oil industry’s most respected investment bankers says that he sees the price of gas ballooning to $7 a gallon in the years ahead. There’s simply so much more demand for petroleum from expanding economies in Asia these days, and we now have a worldwide level of competition for petroleum that we’ve never experienced before. In addition, the oil companies are not having an easy time finding new sources of oil to meet this demand either.

In looking back at the two dramatic down cycles I’ve experienced, they both began the same way. With a gradual slowing of demand by buyers, to no longer purchase properties at the same crazy, frenetic pace. So as an agent immersed in the marketplace, you may have the advantage of being among the first to recognize any change in your market before the rest of the public even sees it. But most importantly, you may want to avoid buying any properties that rely on ongoing appreciation in order for the deal to still make sense to you. And make sure that any properties you buy are based on sound fundamentals that will weather potential readjustments in the economy, too.

We all hope that this real estate market will continue for years to come, and that we’ll never, ever experience another downward trend. But as intelligent real estate professionals, we should still be prepared.

As real estate agents, we have to continually think positive in hot markets, normal markets, and in markets where we have great difficulty finding anything to feel positive about. But it’s positive thinking combined with sound decision making that will both have us produce the results we want to achieve, and have us lead the lives we’ve always imagined for ourselves.