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!


More From The Real Estate Guys™…

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Main Street needs Main Street investors …

When the 2008 financial crisis hit, the mortgage industry was at the epicenter … and the disruption of funding feeding real estate crushed housing values.

But it’s important to remember, the problem was NOT real estate.

After all, people still needed and wanted places to live.  So the demand for housing remained stable.

It was credit markets that failed.  And in a credit-based economy, everything stops when credit markets seize up … including home loans.

Without a steady influx of fresh debt to fund demand, prices collapsed … taking trillions in equity with it.  And it wasn’t just real estate.  Stocks tanked too.

Mortgage and real estate is just where it started.

The double-whammy of teaser rate resets … and the resulting big monthly payment hikes which sunk a lot of homeowners …

… and then the negative equity led to a rash of defaults by even prime borrowers …

… all of which caused a credit market contagion that scorched financial markets world-wide.

Of course, this all created huge problems for Wall Street, the banks … and for Main Street.

So Uncle Sam and the Federal Reserve got heavily involved to “help” … and to no surprise … Wall Street and the banks came out on top.

The banks needed relief from realizing their losses on their financial statements, while finding a fast path to re-inflating values.

After all, property values are the collateral for all those mortgages.  And when values drop, borrowers walk … along with the prospects of loss-recovery.

So Wall Street rallied and raised many billions of dollars to buy up Main Street houses …

… even as millions of homeowners were being demoted to the rank of tenant.

So now instead of collecting mortgage payments, they collected rent.

As a real estate investor, you probably think that’s better.  Who wants to be a lender, when you can be an owner … enjoying tax breaks and building equity.

But Wall Street doesn’t think like you … and that’s our point.

Today, those Wall Street buyers are landlords.  And by some accounts, they’re not doing a very good job for the Main Street tenants.

Shocker.

Don’t get us wrong.  We’re all for investors stepping in to clean up a mess.

Investors are like the white corpuscles of the economy … bringing capital to damaged areas and healing blight and distress.

It’s one of the reasons we’re excited about Opportunity Zones.

We just hope Main Street investors and syndicators don’t get pushed aside again by the wolves of Wall Street.

The issue is there’s a BIG difference between the way Wall Street money and Main Street money behaves.  And it’s not about savvy … it’s about heart.

Big money guys (and gals, we suppose) have a way of looking at things.

Remember this classic 2012 quote from mega-multi-billionaire and legendary investor Warren Buffett …

“I’d buy up ‘a couple hundred thousand’ single-family homes if I could.” 

Of course, we all know money’s not the gating issue for Buffet.  He can buy anything he wants.  So what could his hesitancy be?

Maybe he agrees with Sam Zell, who’s been quoted as saying this in 2013 …

“An individual investor can buy 25 houses and monitor them. I don’t know how anybody can monitor thousands of houses.”

Really?  We know Main Street investors like Terry Kerr at MidSouth Homebuyers who successfully manage thousands of houses.

So it’s not impossible to manage a big portfolio well. You just need to be committed to doing it … one tenant at a time.

The folks we know who excel at single-family property management really care about their tenants as human beings … and deal with them as individuals.

They’re focused on creating cash-flow as the PRIMARY investment result … as opposed to simply a necessary evil to offset holding costs until a capital gain can be realized at sale.

Buffett and Zell are smart guys.  Buffett saw the opportunity in single-family homes … but had the good sense to know he wasn’t the right guy for the job.  Ditto for Zell.

Big money moves in broad strokes, which is fine when you’re dealing with commoditized assets and you can buy and sell in bulk.

But real estate … especially single-family homes … is not an asset class and can’t be effectively commoditized.  And neither can property management.

We think Main Street tenants are much better served by Main Street landlords … like YOU … so long as you remember the main thing is happy tenants.

Happy tenants means longer tenancy, less turnover and vacancy, and better real-world cash flows.

Of course, you don’t need to be a small-time investor to build a portfolio of single-family homes.

When you learn to syndicate, you can combine bulk money with individual property investing … and build a portfolio of hundreds or even thousands of homes.

Being big isn’t bad.  Wall Street’s problem isn’t its size.  It’s its mindset.

As the legendary Tom Hopkins says …

“Don’t use people and serve money.  Use money and serve people.” 

Because when you do, you’ll end up with both.

Until next time … good investing!


More From The Real Estate Guys™…

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training, and resources to help real estate investors succeed.


Love the show?  Tell the world!  When you promote the show, you help us attract more great guests for your listening pleasure!