Not to date anyone, but most people born before 1988 will have some sort of understanding of the 2008 housing market crash. People were losing homes and interest rates were crazy. There was a lot happening around those times and it caused panic for those that did not know it was coming or what to do. There is a whole new workforce that can barely remember the 2008 market crash. I am here to tell you what the signs were and how those same signs have been creeping back into the market. I am not saying it will be the housing market that crashes again, but I am saying that the market will be crashing again soon and we all need to be smarter than we were in 2008!
If you pay attention to the macroeconomy, or the “big picture” economic cycles, you will see that every 8-10 years there is a crash that results in some sort of recession. This doesn’t mean every 10 years we are having a crisis which results in mass panic, some of the recessions are quick and aren’t as devastating. The last recession in 2008 was one of the more serious recessions in the last 40-50 years. The global market felt the recession and the housing market took a big hit. The recession saw banks needing bailed out and people just leaving their homes in the night because they couldn’t live there anymore.
Anyone telling you that the market won’t be that bad again is foolish. The signs are there and we are due for another blip in the market. Technically, we are a little past due because we are at the end of 2018 and the market is still doing well, but that’s because people are still cautious after 2008, as they have every right to be.
What Will Be the Straw that Breaks the Camel’s Back?
I don’t think it will be the housing market this time. You can take a look for yourself, but the charts from 2009 and 2010 where the market was trying to correct itself (on a nationwide scale) look like the charts for housing right now. The housing market charts from 2005-2008 clearly show a bubble. A nationwide bubble. That bubble is not seen on the charts from 2018, it can be seen on smaller scales in expensive markets like LA and other markets where there are big swings of up and down on the charts. Those bubbles are not enough to cause a huge recession as we saw in 2008.
This all sounds like fantastic news, but it doesn’t mean we are recession-proof. There are other signs out there that indicate where we are on the path to recession.
One of those being a yield curve. Bonds are a security you can give to the government that will be returned to you with some sort of interest. When you head into a recession, you will see that suddenly way more people are investing in bonds. People will see some volatility in the stock market, freak out, and then pull a good chunk of their money from that market to put into the low-risk bonds. The yield curve has flipped again, for the first time since 2005. Not all flips are the cause of recessions, but every recession we have had have flips a couple of years before everyone feels the recession.
Liquidity is everywhere. The government pumps as much into the market as they can. This is where you get loans for $0 downpayment and the idea that if you have a pulse and a paycheck, you should get the loan. If you pay attention, you will see that the loans are starting to go that direction now. The FHA loans will probably drop in the next 6 months to try and undercut the conventional loans.
Subprime lending is up. Again. The Dodd-Frank bill was partially repealed allowing the same mistakes the be made that started the 2008 recession. People are being given access to loans and loan companies are making them as big as they can to make the most money they can. These loans are too easy to get and give too “generously”. Not all loans officers are out to get you, but there will be loan officers who have those thoughts cross their minds.
After the loans and liquidity have been given out, the government wants more people to buy the short term bonds instead of the long term bonds people were buying when they thought the stock market was getting too risky. Those short term bonds effect the interest rate of things like mortgages. Those interest rates then catch up to people and no one could afford their houses that they bought without thinking about what they could actually afford. The banks are no longer giving out loans and those people can’t even refinance. If you ever want an adjustable rate for your mortgage, you need to know what that really means for your finances.
What Does This Mean for Real Estate Investing?
If you know what a good purchase is and you are crunching numbers, it shouldn’t matter when you buy your property. When you buy, you should assume the house will never be worth more than what you paid for it now.
Here is my advice to all in real estate investing: make sure all your property is secured with long-term debt, get all private, short-term debt out of your deals. This way, when the market liquidity is pulled again, you don’t have to worry about restructuring your debt and you be forced to try to sell the property (even though selling it to recoup your money will be next to impossible).
Make sure your portfolio is stabilized. Don’t take on any short-term debt.
A recession does not mean a real estate investor is screwed. It means that you can find some great deals. The market will be a buyer’s market, but only for those that have the cash to buy these properties. A real estate investor can have the best position in the recession because of their ability to get private cash lenders and people don’t want to put their money in stocks. Use the opportunity to your advantage.
Until Next Time…
If you love the returns of real estate investing, but don’t want to deal with any people, you have the option to be the bank. You can be part of a trust or a fund. Right now, I have a fund set up for accredited investors with over $5 million in assets. The fund has preferred interest and 70% profit sharing. Visit me at investwithdrmatt.com to find out if you have the opportunity to invest with us.
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