Tuesday, September 23, 2008

The Shift

On October 3rd of last year, there was a shift. The ground underneath our feet in the Mt. Soledad area of La Jolla, CA literally shifted. The landslide that occurred that day disrupted many lives and caused homes to collapse. This was an extremely unfortunate event that left people feeling fearful of the very ground that we stand on.

Thinking back on this event, it seems as though it was a precursor to what was about to occur in the real estate market.

Change is inevitable. You have all heard that the one constant in life is change. What goes up must come down. Over the past 40 years, we have seen the real estate market change 4 times. It is interesting how the changes even occurred consistently and predictably. So why you ask - were so many people shocked when the market shifted this last time? It is almost as though people forget. They get real estate amnesia and block out the bad times and only focus on the good. They don’t want to see an ending of their new found wealth so they deny the possibility of a down turn. Now that we have arrived at that dark place that no man would go before, we must face the reality and learn from what has occurred so we are better equipped to handle the next one…and yes, there will be a next one.

Let’s explore the history of the real estate market, dating back to the old days of the early 1970s, well before my parents even though about my conception. Interest rates shot up from 7.5% to 10% and the unemployment rate rose to 9%. Times were tough, even worse than today but we recovered.

In the early1980s, the price of oil rose significantly, inflation was high and unemployment was over 10%. It is hard to believe, but my parents were thrilled that they locked in their loan at an interest rate of only 17%. Good times. But a few years later everything was back to normal.

The 1987 to 1991 downturn was a tough one too, but sure enough we all know that we recovered. Back then I am sure that not many would predict the unprecedented increase in housing prices over the next 15 years. Home prices rose over 200% in San Diego from 2001 to 2005 when the bubble finally burst.

There were many causes of the latest downfall with the primary factors being:

1. Weak lending standards and a lot of sub prime lending.

2. Exorbitant supply with 2005 being the year of the most homes every built in a one year timeframe.

3. Affordability. Income growth could not keep up with the increase housing prices so affordability was drastically affected.

When a shift happens, unfortunately many people suffer and experience the loss of their investments and even primary residence. They are electing to short sell their home in which their lender will agree to accept less than the amount the homeowner owes. They may choose to renegotiate their loan to make their payments more affordable so they can keep their home. Or they simply let it go into foreclosure where they bank repossess the property. These are all unfortunate circumstances but the truth is…another’s loss is someone else’s gain. There are vast amounts of opportunity for people right now in the marketplace. First time homebuyers have never had it so good, move up buyers wanting to purchase a nicer home and investors have an incredible amount of inventory to choose from, negotiating power and low interest rates. Now is the time that smart, savvy investors are scooping up property because they are able to disregard the fear and emotional aspects of buying and are able to see the bigger picture. Warren Buffett says that “The time to get interested is when no one else is. You can't buy what is popular and do well.” These are the words of greatest investor of all time and I don’t know how you can argue with that.

At the bottom of the bear market in October 1974 a Forbes article interviewed Buffett. Buffett, for the first time in his life, made public prediction about the market.
"How do you feel? Forbes asked.

"Like an oversexed guy in a whorehouse. Now is the time to invest and get rich."

All jokes aside, it is apparent that we have experienced a shift, however what is not so obvious is when the actual bottom will occur. The hard truth is that the local market shifts are seldom slow and landings never soft. It is like a pendulum or a golf swing…beginning very slow but accelerating very quickly through the middle.

Once we hit rock bottom, we won’t know it until it is well behind us. Remember, it is not about timing the market, but the time you spend in the market. If you follow this strategy and invest wisely, you will be prepared to handle the next real estate landslide.

1 comment:

Walker said...

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