Thanks in advance for dealing with a longish post. I thought the topic merited a more detailed treatment.
Headlines the last six years or so have been negative, especially when the economy has been the topic. Duh. The thing is, speaking purely from a Boomer point of view, you learn there are hard times, and then there are HARD times. I’m speaking in macro economic terms here, not drilling down to individual families. We all know challenging circumstances can strike any of us, even in the best of times. Let’s focus today on the here and now, not try and predict the future. Frankly, if you told me we were about to enter another recession shortly, it’d be just as credible if you’d said significant inflation instead. We simply don’t know. But . . .
Let’s compare economic downturns since the year I got into the family business, 1969.
My first real estate license was dated October 15, 1969. Two months later the ’69 recession was said to have officially begun. Oh happy day. The typical home purchase loan would cost you around 8.5% interest. 1970 saw rates drop to the mid 7s. Rates remained in that range, more or less, ’til around summer or so of ’73, which saw 8% once again. By late spring of ’74, in fact just about this time of year, 9% reared its ugly head. In fact, for a few days in October that year, we came ‘this’ close to 10%, hitting 9.98% for a 30 year fixed rate home mortgage. It was definitely nervous time. To make things worse, I’d just gotten married several months earlier. Good thing she worked for a bank.
Anywho, the recession of 1974-75 hit, but rates had kinda sorta remained in the mid 9ish range, mid to high. But as the ’74 holiday season arrived, so did slowly falling rates. From early fall of ’74 to ’75′s first quarter, they fell almost a full percent, 9.98% to just a tick over 9%. Yet from January of ’76, the beginning of the biggest real estate run-up since the end of WWII, and August of 1979, rates rose to just over 11%! Again, this was during a huge 40-something month long price appreciation party. I’ll use my home market of San Diego as a measuring stick. Median price for a home in the first quarter of 1976 was easily below $50K. By 1981 or so, San Diego’s median home price had made headlines: $100,000. After reading those stories you’d of thought the world was ending. Funny though, they said the same thing when our median values hit $200K — then $300K — then $400K — then $500K. Before the median hit $600,000 they were finally right. But I digress somewhat.
Does 9-11% mean hard times to you?
You’d think so, right? Wrong, double-digit breath. Though we’re taught that when the cost of money is relatively cheap, i.e. low interest rates, real estate values rise. Nevertheless, home values literally skyrocketed from the end of 1975 to about fall of 1979. It was crazy out there. I had a friend who witnessed a fist fight between two real estate agents slugging it out over who’d be the first to present an offer on a house listed the night before. Um, there were 14 offers on that home. Dad had never seen anything like it, and he’d been in the business almost 20 years at that point. Buyers couldn’t pay enough for homes. Builders thought they’d died and gone to Heaven. Folks literally camped out on the yet to be paved roads, hoping to get on a freakin’ waiting list! All this with interest rates climbing from an already scary 9% to 11%. Hard times? Not to those people, at least not then. But wait, there’s more.
The rates seemed like they’d never stop climbing — and from where I sat, that’s what I was thinkin’ too.
By early fall of 1981 fixed rate interest for homes hit just under 18.5%. Ponder that a moment. A buyer would be lookin’ at a monthly payment, principal and interest, of a tad over $1,500 for a loan of $100,000 — give or take median price back then. Put into perspective, at today’s rates for INVESTORS, which is typically about .5-.75% higher than owner-occupied rates, that payment would allow for a loan of roughly TRIPLE that size.
Moving on . . .
From late 1985 through roughly the middle-ish of 1990, we lived through the sequel to the mid-late 70s appreciation party. WooHoo! By then, interest rates had ‘crashed’ to below 12%. Not only was there a God, but rates that low proved beyond a shadow of a doubt He loved us. Prices zoomed again, nonstop, ’til we hit the monster iceberg known as the S&L Crisis. Interest rates for that party went from around 11.25% in late ’85, to about 10% in the last quarter of ’90. Again though, as if laughing at those high rates, values soared while buyers/investors couldn’t be satiated. Go figure.
The years of the S&L fiasco were Bru-Tal. It’s the only time in my career when I literally took a little over two years off. There was no reason to come to work, period. Investors ran to the sidelines in droves. Though I fought the good fight, almost everyone on the real estate investment front had put up the ‘Gone Fishin” sign. I agreed with them wholeheartedly.
Let’s pause here to reflect.
As either a real estate investor or someone interested in gettin’ started, what ‘hard times’ would you rather endure? The early 80′s recession? The S&L meltdown?
The current rent/price ratios are akin to what I was taught from textbooks written in the 1950s — no kiddin’. The interest rates are seemingly divinely inspired. As I’ve written on these pages a few times, here for example, this PerfectStorm is unique in my experience. Yet, unlike the aforementioned hard times of the 70s, 80s, and 90s, real estate investors are partying like nobody’s business. About the only thing the current down economy has in common with those three recessions, is relatively high unemployment. However, there are some changes in the recipe too.
Let’s look at what’s changed and changing.
Unlike what we’ve been conditioned to expect since that (glorious?) first run-up in the 70s — rampant appreciation — little if any appreciation is the current, nearly universal expectation. In fact for years I’ve refused to impute any appreciation whatsoever in any cash flow analysis I conduct, on any property, in any market — period — no exceptions. And yeah, I know the appreciation jungle drums have begun beating. Don’t go for the bait. Don’t plan on it. DO make your investment decisions based on the assumption of no appreciation for the next decade. Furthermore, while you’re at it, also assume no increase in Net Operating Income (NOI) for the same decade.
Do I believe those things will remain flat that long? Don’t have a clue, as my crystal ball never came back from the repair shop. But I will tell ya this — you won’t be upset if one or both enter the picture.
The 1-4 unit market is poised to become the darling of real estate investing — that is, if it hasn’t already. If you’ve read me for any length of time you know I don’t like the phrase ‘paradigm shift’. However, I gotta believe my lyin’ eyes, right? We’re in the middle of an historical shift. Henceforward, real estate investment decisions must be based solely on the merits of the property, not future increases in either value or income. If the proposed investment doesn’t pass muster using that paradigm?
Step away from the spreadsheet.
BawldGuy TakeAway: If values remain flat, you end up with a free and clear portfolio, paid off ever so quickly due to the wicked cool low interest rates. If values consistently rise, as a consequence of inflation, ironically so will rents. Real estate is a champion tracker of inflation, something you definitely wanna keep in mind. Either way, you end up with a debt free portfolio, which will then generate a very nice retirement income. This doesn’t take into account the use of Strategic Synergism, executed as part of a Purposeful Plan. This historically blissful investment atmosphere will eventually end, as all things do. You’ll either be set for life — or not. I’m fond of the colloquialism, no-brainer. Investing in real estate now, as a vehicle gettin’ you to retirement, is the working definition of no-brainer.
Speaking of no-brainers, calling me comes to mind. 619 889-7100 will get it done every time. Click Contact BawldGuy if you’d rather write me. Meanwhile, enjoy the hard times. Have a good one.