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In the Mood for Equity? – Part 1 of 2

It’s funny how when the economy stinks and all the news is doom and gloom, people suddenly become interested in economics and politics.

“It’s the economy, stupid.”

When everything’s good, people go about their business and don’t worry too much about what’s happening on Wall Street or in Washington.  The Real Estate Guys audience has actually grown over the last two years, even through real estate investing fell off the hot list of things to do.  We think it’s because people are concerned and many are downright scared.  They’re looking for insights to help them understand what’s happening – and what’s coming.

One of the things the talking heads say is very important is consumer confidence.  The theory is that when people are confident, they spend money.  When people spend money, businesses make profits, hire more people; they buy more equipment, supplies, etc – and even give out raises!  Then people become even more confident and spend more money and the cycle builds…until something comes along to burst the bubble.  Ahhhh, those pesky bubbles!

When the bubble bursts the consumer confidence cycle does a u-turn and the whole cycle works in reverse.  People stop spending; businesses lose sales and profits, and cut back on people, supplies and plans to expand.  No raises are given.  People become less confident, spend less money and the downward spiral continues…until something comes along to turn that cycle around.

Don’t you wish you knew what those “somethings” that break the cycles are?  Us too.  But we don’t.  We’re not sure anyone does.  Even though “experts” like to talk all about the reasons behind the phenomenon (and all have different opinions, so don’t be shocked if you can’t find a consensus), the smartest investors we’ve met have simply accepted that these “mood swings” which drive business cycles are one of life’s great mysteries.  They happen.  Just accept it and act accordingly.  Our observation is that faith in the certainty of the cycle is one of the keys to investor confidence.

Important distinction: “investor” confidence is different than “consumer” confidence.  Investors are confident in the certainly of the cycles.  Consumers are confident in results once they’re reported.  Investors get in ahead of the next wave up.  Consumers wait until the results are in and then get in.  Investors get out ahead of the next wave down.  Consumers wait until the results are in and then get out.  You don’t have to be a rocket scientist to figure out how it works out for each.  One buys low and sells high.  The other buys high and sells low.  It takes substantial emotional fortitude to “buy the dips” – especially in a market as fickle as publicly traded stocks.  It also takes courage to stop buying or to diligently shop for the right deal, especially when everyone around is racing to buy anything because all they see is sunshine!  Seasons change and so do markets.

Right now, the world is fixated on the economic cycle.  Underneath that, stock investors watch stock market cycles.  Some on a daily basis!  Others watch currencies and commodities like gold and oil.  Those are all exciting.  They move pretty fast, there’s lots of data and opinions readily available, and they’re easy to trade.   That’s why those markets move fast.

Real estate is more boring.  The most meaningful data is highly localized, so there isn’t as much information easily accessible.  And we all know how challenging a real estate transaction can be, so “easy to trade” will never apply to real estate except when talking about publicly traded REITs.  Over the last 8 years, we’ve witnessed one of the most dramatic and extreme cycles in the modern history of real estate.  From 2001 to 2006 we saw a substantial and rapid (by real estate standards) run-up in values as prices went far over the trend line.  Over the last 3 years we’ve watched arguably the most precipitous fall off in values since the Great Depression.  But that process took 8 years!  That’s a very slow cycle when you compare it to almost every other type of asset class.  In fact, the cycle is so long that many people don’t even think about it as a cycle.  It’s like watching a glacier and trying to think of it as landslide. It is, but it doesn’t seem like it.

Nonetheless, when you think it through, it’s most logical to conclude that real estate isn’t dead.  Real estate isn’t going out of style.  More people, not less, are coming in the future.  People’s need for real estate to live in, work in, farm on and recreate to isn’t going anywhere.  There will always be demand for real estate.  And if there’s money in the economy, sooner or later it will find it’s way into real estate -when the mood is right.  So logic dictates that this current price suppression is part of a cycle even though it doesn’t feel like it.  The glacier doesn’t appear to be moving.

So the question is:  Are you an investor or a consumer?  Do you have faith in the cycle or are you waiting for results?  Is your mantra “think and do” or “wait and see”? The answers to those questions will affect the actions you take and where you are in 10 or 20 years relative to the cycle.  If the cycle is real, then real estate could easily be worth much more in 20 years than it is right now.  Will you?

Tomorrow in Part 2, we’ll take a look at why income property is one of the safest ways to buy “dips” and maximize your upside, while substantially reducing your downside.


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