Real Estate craziness

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These people just watched a house flipping show

I started investing in Real Estate back in the good ole days of 1997 when I bought a loft in the south loop of Chicago. Little did I know we would be entering a 20 plus year (and still going) bubble and bust roller coaster. In retrospect it makes sense given the financialization of the economy that went into overdrive in 1999 when retail and investment banks no longer had to be separated. That of course is only part of the story.

The short story is the Fed proceeded to lower interest rates to record lows following the Nasdaq bubble burst and 9/11, raise them, lower them again even lower during and after the “Great Recession”, and then injected steroids into the economy with quantitative easing which has blown the biggest bond bubble in history.

By the end of 2018, approximately 11.3% of housing purchases in the US were for investment purposes (source: Core Logic). This is the highest since Core Logic starting tracking data in 1999. During this time, a flood of cable shows have popped up which showed people flipping houses and making tons of money along the way. It’s that easy, right? Wrong.

What is not glamorized is the people who bought at market highs in the 2005-2007 period, only to be left holding the bag as value of their real estate plummeted 30% or more. That event aside, the more troubling aspect is the mentality of “flipping” for a capital gain rather than holding for a cash flow. Of course this sentiment has spread to other parts of the “economy”, notably the stock market. With real estate, however, it is even more dangerous due to 1) leverage and 2) illiquidity. Leverage of course refers to making a small down payment (5-20%) and then borrowing the rest. Illiquidity means you can not buy and sell instantly. Even in the best case you have to wait a couple weeks to close.

So, here we are in 2019 and behavior has not changed. Not only with flipping either. Folks I know are buying houses and dumping in 50-100K or more before they even move in. That is great if you intend to live there for at least 5, 10 years or more. Usually though it is a striking example of poor money management and putting too many eggs in one basket. Alternatively, I have long been an advocate of generating cash flow by buying houses or 2-4 unit buildings and renting them. Why is this not sensationalized? Because it is more work and you do not get the “sugar high” of the quick capital gain by flipping.