A divergence in the farce …

In our last edition we took a look at this chart for clues to where we’re at in “the cycle” …

Housing Price Index to Production Wage Index
Interesting Image

SOURCE: FEDERAL RESERVE ECONOMIC DATA HTTPS://FRED.STLOUISFED.ORG

(The data came from the Fed, but the chart was put together by The Heritage Foundation here)

You can see a tight correlation between wage growth and property prices from 1991 to 1999.  Then something happened to create a divergence.

That divergence blew into a BIG gap between wages and housing prices … with home prices inflating much faster than wages.  At least until the middle of 2007.

Then something else happened which crashed housing prices … and not just back down to the wage trend line …

… but housing prices dipped well below the trend line (“over-corrected”), hitting bottom in 2011 and starting a new “bull run” in early 2012.

That’s when Warren Buffet famously proclaimed on CNBC 

I’d Buy Up ‘A Couple Hundred Thousand’ Single-Family Homes If I Could

Warren Buffett 2/27/12

Smart guy.  Obviously, when you look at the chart, the timing was perfect.  And most folks who were buyers in 2012 are sitting on piles of equity today.

But now it’s clear the correlation between housing prices and incomes remains broken.  Housing prices are once again stretching the limits of incomes.

No wonder there’s pressure to lower taxes, interest rates, and oil prices!

The only way to keep this party going is to make those relatively anemic household incomes control bigger loans.  And to no surprise …

Average U.S. mortgage size hits record-high $354,500

Reuters, 3/13/19

Does this mean housing prices are about to crash again?  Maybe.

It’s said history doesn’t always repeat itself, but it often rhymes.  That’s a catchy way of saying people often find new ways to make the same mistakes.

Then again, smart people learn from their mistakes so they can avoid making them again.

In this case, go back and look at the chart.  But instead of focusing on housing prices, focus on incomes.

What do you see?

Incomes are slowly, consistently, persistently, steadily … rising.

Of course, if you look at the CPI (inflation) chart below, you can see the cost of living is also rising …

Interesting Image
So just because people are making more money, it doesn’t mean they’re getting ahead.

In fact, folks who don’t own inflating assets which can be sold or borrowed against to supplement their incomes … are falling further and further behind.

So what does it mean, what can we learn, and what can we do to survive and thrive?

These are all topics of a much bigger discussion.  We covered some if it in a recent radio show.

For now, here are a few suggestions to consider:

Focus on investing and underwriting for cash-flow …

Yes, you’ll make more money on equity.  But equity is a by-product of cash-flow.  The more cash-flow, the more equity.

More importantly, conservative cash-flow gives you staying power when asset prices temporarily collapse.

Think of equity as a fun, but fickle lover … and cash-flow as the loyal, predictable partner you can build a life with.

Sequester some bubble equity for a rainy day …

Rates are low.  Lending guidelines are softening.

This indicates there’s a lot of motivation (desperation?) to get more debt in the system … a sometimes-telltale sign we’re nearing the end of a boom cycle.

Of course, when you harvest equity from properties, it’s important to be smart about using the proceeds.

We think it’s best to create cash-flow (have we mentioned this is important?) … along with liquidity, and safety from volatile markets and financial systems.

We could do an entire series on this one topic … and in fact, we’re working on it.

Something like … “knowing what we know now, this is what we wish we would have done heading into the 2008 financial crisis.”

Yes, we know the title needs a little work.

Watch for signs which signal shifts …

Shift happens.  It’s painful when you’re on the wrong end of it, and that usually happens because you missed the sign … not because it wasn’t there.

In 1999, Uncle Sam pressured then semi-private Fannie and Freddie to lower their lending standards to help marginal borrowers buy homes.

It worked.  Home ownership … and prices … went way up.

In 2001, the Alan Greenspan Fed threw gasoline on the fire by pumping in billions (which was a lot of money back then) into the system to reflate the stock market after the Dot Com crash.

But a lot of the money ended up in bonds … mortgage-backed securities in particular … and ultimately into housing … inflating an equity bubble.

Oops.

In fact, Greenspan tried to jawbone the markets into prudence.  But he’d already spiked the punch bowl … and everyone was in full-blown party mode.

More recently, the Fed tried to take away the current punch bowl by raising rates … and took a lot of criticism.

When you see interest rates and lending standards falling, it’s a sign.

Study history … and talk with smart, experienced people …

 Everything is 20/20 in hindsight. It’s easy to predict the past.

But as it’s been said …

 “Those who don’t know history are doomed to repeat it.” – Edmund Burke

That’s why we encourage attendance at live events like the New Orleans Investment Conference and the Investor Summit at Sea™.

These are great places to connect with like-minded folks, have our perspectives broadened, and get into great conversations.

But even if you’re a dedicated homebody, invest in finding a local tribe of similarly interested people to study and talk with.

You’ll learn more faster in conversations with others compared to simply gorging yourself on terabytes of content.

It’s important to use conversation to process what you consume.

Enjoy the sunshine, but pack an umbrella …

We’re not saying a crash is coming.  But no one can say it isn’t.

It seems to us the best plan is to prepare for sunshine or rain.  In practical terms, this means ….

… organize some liquidity and keep it insulated from both market risk and counter-party risk …

… build a solid brand and network with well-capitalized potential investors …

… fortify the cash-flows and financing structures on your keepers …

… jettison assets you think already have their best days behind them …

… study history, watch for clues in the news, and mastermind with smart investors.

Because you’re only better off for doing all these things whether the party continues or comes to an ugly end.

And this is probably not a good time to get too over-extended.

Besides, even if you’re interested in aggressive personal wealth building right now …

… it’s arguably faster and safer to build rapid wealth through syndication rather than getting personally over-extended.

Until next time … good investing!


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