Are you thinking of purchasing real estate but aren’t sure if you’re inside a real estate bubble? In this video, we’re going to talk about four ways to identify if you might be purchasing real estate inside of a real estate bubble. By examining the housing bubble of 2007, we’ll learn how you can best protect yourself and your investments.
The Housing Bubble Pops
When COVID first hit, all of us thought that the real estate market—as well as every other industry—was going to take a dive. What we didn’t realize was that wasn’t going to happen. For about two weeks or so, people waited on edge to see what was going to happen with real estate. And then, everybody was back in it.
To understand the housing situation today, let’s go back a little bit. I am not new to this rodeo; I remember 2007 like it was yesterday. I was working for a national builder, and we all know how great everything was back in the heyday pre the 2008 bubble. Everything was wonderful.
There was a very intentional career path that I was on. In 2001, I started working for a real estate land developer in Maryland. I worked there for a couple of years while I was going to grad school at night. Next, I moved on and went to work for the #1 national homebuilder, D.R. Horton. They were out of the Rockville, Maryland division and essentially did Maryland surrounds. From there, I went on to work for a startup in this area, the #13 national builder that was starting operations in the DC area. I loved my job, loved real estate, loved everything about it. It was an industry where I had spent six years working.
Taking A Lesson From 2007
Now we’re at 2007 and one day the phones just stopped ringing. That was it. It was like death came for all of us. We all pretty much know how the rest of that story played out. All things considered—and for as bad as everything got with subprime loans, Wall Street taking a dive, and entire subdivisions filled with foreclosures—things started looking up by 2011 and 2012.
Smaller investors, those that were not beholden to Wall Street or any board of directors, were buying up properties in the DC area. They were preparing to either sit on them or slowly flip them when the market came back. And so the rollercoaster, my friends, was back on the track at this point. “It’s different this time,” they said. “The mortgage market is totally locked down, unlike it was before with all the subprime loans,” they said. “We’re practically recession-proof in DC,” they said. Maybe, maybe not.
The 2007 housing bubble is a disaster only if we don’t learn from it. Nobody has a crystal ball. Nobody knows where the bottom of any real estate market is—despite what they love to tell you and what everybody loves to sit on TV and talk about. Nobody ever really knows where the bottom or the top of a market is until you’re six months past it. By then, it’s too late to go back in time and make a purchase or conduct a sale of your property.
That being said, there are some things that you can do to protect yourself. You want to keep your eyes open to make sure that you’re not making a huge mistake. So here’s my best advice, after 20 years in this industry and in various facets of it, that will help you make good decisions. I don’t want you to be left holding the proverbial bag.
#1: Don’t Go To Parties
So first off, don’t go to parties. What? What are you saying? Yep, I said don’t go to parties.
Here’s what the pandemic did. It put a halt to all holiday parties because nobody could have one. So while the pandemic brought the real estate boom, it also crushed the holiday party market—which is a good thing. Because thank goodness, holiday parties tend to always be the ground zero of real estate braggery. I don’t think that’s a word, but I am now making it up.
Real estate braggery occurs. The secret is that nobody ever cops to making a bad real estate investment. They always say that they made the greatest investment and they made a ton of money. The problem is that perception is reality. So people hear this and they believe it.
I’m telling you, though, not to believe these things. Don’t put yourself in the path of real estate braggery. These are all lies. These are things that people like to say to brag and make themselves feel better about the investment that they made. Usually, when you start digging into their claims, you realize that people were either very highly leveraged or there were other situations. They didn’t make anywhere near the amount of money nor were they as astute of an investor as they want everybody else to believe.
#2: Don’t Follow The Crowd
The second way to protect yourself from a housing bubble is not following the crowd. “But everybody else is doing it,” you might say. So, what? If everybody else jumped off the Brooklyn Bridge, would you do it too? No, you would not—well, I hope you wouldn’t.
You don’t want to follow the crowd in real estate. This is the problem: there’s always somebody that’s going to be last in that line when you’re following the crowd. You do not want to be that person, believe me. You want to go where nobody else is. You want to plunk down your money, hang out, and wait.
Think about those investors from 2011 and 2012 that I told you about, the ones that weren’t beholden to Wall Street and were buying up properties in DC and sitting on them until the market turned. Those are the guys that made a lot of money. Of course, they’re going to brag about how much money they made. But let’s take it into perspective: they had some holding costs and stuff too. Everything’s relative. Everything ends up working out in the end, and nobody ends up becoming a gazillionaire. This is just about hedging your bets to make sure that you protect yourself as much as possible.
For example, right now there are incredible values in condos. You want to look at and buy condos. It’s true that condos really are the horrible investment that everybody thinks, with condo fees that can go up and special assessments that can potentially come into play. But here’s the thing that I’m seeing even in really closed-in areas in DC, Arlington, Alexandria—places that people have coveted where there were multiple offers: nobody wants to touch the condo right now.
They don’t want to be in communal living spaces. They don’t want to be in a smaller space. They want a yard. They want their own outdoor space. This is where the value is. You have to go where the people aren’t and then make your own way. Some condos are 20% off what they would have sold for before COVID. This is a real advantage because the vaccine’s coming. We all know it’s coming. Some people I already know have started to get it. Things are going to change and they’re going to start to change swiftly.
#3: Don’t Live In Today
That leads me to my third piece of advice, which is you cannot live in today. Today there’s a pandemic. Today everybody wants to abandon their condo and small living space—the place they downsized to—and move to some giant cabin out in the middle of nowhere. I don’t get it either.
No one really thinks about tomorrow, and tomorrow is going to come. We learned that from Scarlett O’Hara. People are going to want to live in cities again. I still believe in cities and I think they are the greatest thing. My kids are growing up in a city. I’ve seen incredible differences in them in general as little people living in a city than, like for me, living in the suburbs where I grew up.
People will eventually be commuting back to offices again. Think about 5, 7, and 10 years from now. Are we still all going to be working from home?
People will want to downsize. I am one of those people. I would like to throw everything away in my house and live in a studio apartment where I can plug the vacuum cleaner in at one outlet and vacuum the whole place without ever having to move. But I have a husband, two kids, and three dogs. I can’t do it.
#4: When The Market Defies All Logic, Stand Down
My fourth piece of advice is when the market defies all logic, stand down. What the hell does this mean? Things only change with rapid speed when there’s some sort of panic, which we’re experiencing right now with the pandemic.
For example, in real estate, there has yet to be a Christmas that I’ve ever experienced where things don’t just slow down to this grinding halt. There’s usually time padded—maybe a week before and a week after Christmas—where things are completely silently dead. So if you want to invest in real estate and you want to be smart, what should you do? Well, save money and wait this stuff out. This is what I am doing right now. I am not thinking about buying any more investment properties. I’ve bought some. I’ve watched the market. But now, I’m standing down and I’m waiting all of this out.
If I did anything, I would do something on a condo. But I still don’t even want to do that right now, just because I feel better sticking the money in the bank and watching and waiting to see what happens. If I’m going to buy, I’m not going to buy when there are rock-bottom interest rates. I’m going to save the money.
The Ups And Downs Of Interest Rates
Remember, for the people living in today, the second interest rates tick up a quarter-point, bam—you lost half the market. They’re gone. They don’t want to buy anymore because everybody looks at what was in their pocket that they could have gotten but they didn’t. Interest rates are 2.75% today. I know that sounds crazy. There may be a time that we all watch this video and go, “Oh, my God, that’s unbelievable.” If they tick up to 3%, people are gone. They’re like, “Good luck paying that. I’m out of here.”
Okay, fine. They’re gone. But, you know what happens? Eventually, the rates go up high enough that the prices start to push a little bit—and then things change. Does that mean you’re going to lose a ton of value in the market? The market’s always going to stabilize where it needs to. Does it mean that you need to wait until everything goes back to 6%? No, you only need a quarter or half a point to watch everybody scramble the hell out of the market.
If you’ve saved a ton of money, then you’re going to be in better shape than you would have been with a lower down payment, going in very highly leveraged with a high loan to value. It bears repeating that you have to go where people aren’t. I tell clients that the best way to protect yourself is to go for a house that’s been overlooked by others. The house needs work, it’s been sitting on the market, or the agent that they hired took horrible pictures that render sideways on the internet and you have to turn your head just to see them. This is more common than I wish it was.
Staying Out Of The Real Estate Bubble
Overall, you have to go where the people aren’t. You have to find the house. You have to find the condo. You have to find the thing that’s been overlooked and needs some paint, some work, and maybe some renovation. You can figure out how to renovate it and how to walk away with equity. You’ll also learn how to have a house where you won’t feel like you’ve been completely taken advantage of and bought at the top of the market. I’ll tell you, some people bought at the top of the 2007 market and it took them until 2015 or 2016 to break even, get their money back, and sell. You do not want to be that person.
I hope this helped you understand how to keep yourself out of the housing bubble. If you have any questions, feel free to contact me and I’d be happy to help.