To whom do you listen for the most current housing news, so that you can retire rich and early?
Can you trust the media, economists or housing experts?
The cover of Time Magazine in June of 2005 depicts a businessman in love with a home. A more newsworthy cover would have shown a house with a big red WARNING sign signaling that housing affordability was out of whack due to irresponsible lending practices.
Just five years later, Time Magazine’s September, 2010 cover asks people to rethink home ownership, stating that owning a home may no longer make economic sense.
Again, a better, more accurate cover would have shown a family jumping for joy because they could finally afford to purchase a home – and for HALF of what it cost to rent the same house.
At that time real estate investors had the opportunity to get double digit returns on rental property – another important news story that didn’t make the cover.
Unfortunately, most people look at the past to determine the future. They think if home prices are going up, that will continue. And if home prices are going down, that will also continue. History shows us this line of thinking is simply not true.
Instead, what we have are predictable market cycles, where asset values go up or down depending on supply and demand. It can change overnight. Unfortunately, the news media rarely gets this right because inexperienced journalists are looking at historical data rather than forecasting the future.
If we can’t trust our journalists, how about real estate experts?
In February, 2006, the Chief Economist of the National Association of Realtors came out with this book:
The mortgage melt-down occurred shortly after and our love affair with real estate turned quickly into heart ache. Amazingly, Mr Lereah was not alone in his forecasting. Chief economists from most financial corporations were in agreement with his line of thinking.
If our trusted real estate experts could be so far off the mark, what about a Nobel Prize winning economist?
In March of 2013, I was asked to debate Robert Shiller on Fox News. His position was to warn people that it was a terribly dangerous time to buy real estate. The producers wanted me to refute his opinion, which was easy for me to do.
At the time of the interview, it was still much cheaper to own a home than to rent one in most states. In fact, in many markets the mortgage payment was HALF or even 1/3 what rents would have been.
I felt it was dangerous to suggest that working class families NOT take advantage of their opportunity of a lifetime to purchase property at historically low prices, with historically low interest rates, and LOCK IN a fixed rate payment for THIRTY YEARS!
How would that same family fare after 30 years as renters? Rents would have increased substantially (possibly even tripling) while their salaries may not have increased at the same rate. The family who bought the home instead would have had a fixed payment for 3 full decades while their salaries increased (so they could put the extra money away into retirement) AND have a home paid off in 30 years, likely worth 2 or 3 times what they paid.
The renter would own nothing and be stuck paying increasing rents during retirement years when most incomes are fixed. The home owner would own their home free & clear with no monthly payment – just taxes and insurance – and have assets to pass on to future generations.
I also reminded Professor Shiller that not only would rents increase over time, but home prices would as well – making it more and more difficult for the average family to afford a home in the future. In the end, he came around and agreed with me. ?
So who do you trust for solid investment advice?
Back in 2006, I was a mortgage broker and had only been in the real estate industry for a few years. I was really just a happy housewife and proud mom at heart. But I knew something was wrong with the mortgage industry.
I didn’t need a degree in economics or 30 years experience as a real estate investor. It just took a little common sense to understand that there would be a price to pay for liar loans. Banks, borrowers, real estate agents, brokers – nearly everyone was aware of the rampant and commonly accepted mortgage fraud.
I remember turning in a client’s loan application, and the bank’s underwriter said the borrower wasn’t making enough money to afford the property. He then said, “We’ll just increase their income since it’s a stated-income loan.”
With the negative amortization loans, a borrower could qualify with the low starter rate rather than the real rate. The banks and the borrowers knew once the rate adjusted, the borrower couldn’t afford the payment, but everyone turned a blind eye.
The most amazing loss of any kind of financial sense was found in the NINA loans – no income, no asset verification. I’d see these flyers on my desk every day in which nothing was needed but a social security number – and that person could borrow up to $5M dollars.
Again, I wasn’t an economist, but none of this made sense. I trusted my gut and interviewed lots of experienced investors on the Real Wealth Show to find out how they were preparing for the aftermath of so much financial stupidity.
They told me they were selling all their properties in markets where affordability was out of whack, and trading them for properties in areas where the opposite was true.
That’s when we discovered Texas. At the time, Texas was 26% undervalued. The government was giving generous tax incentives to businesses who would move their headquarters to Texas. It worked, and their job and population growth exploded – but the housing market hadn’t caught up yet.
We helped our members sell high priced California property before the bust and exchange for high cash flow properties in Texas. People who listened were able to quadruple their monthly cash flow and protect their equity.
For example, one woman who owned three $420,000 homes in a rough part of Stockton sold and exchanged for 9 brand new homes in good neighborhoods in Dallas. The CA homes rented for $1200, but so did each of the Texas homes. Her gross income went from $3600/month to $10,800/month. Just a year later the bubble burst and those Stockton homes were worth $120,000 but the Texas properties held their value.
When it comes to succeeding as a real estate investor, understanding affordability is the key. If the average worker can’t afford to buy the average home with a 6% interest rate, that market is probably in a bubble.
Today we know that the housing bubble has re-inflated in at least 1/3 of the country’s largest housing metros and certainly on Wall Street. This bubble was not formed by easy lending, but rather from 10-12 TRILLION dollars created out of thin air and poured into our economy – specifically meant to re-inflate the bubble after it burst! Again, brilliant economist at work…
Now is the time to GET OUT of bubble markets and bubble stocks and get into sensible cash flowing investments.
Just like in 2006, some U.S. markets have not bounced back yet, but are poised to do so over the next few years. Astute investors will sell high in the bubble markets and buy low in the emerging markets. This is how great wealth is amassed.
Your key indicators are job growth, population growth, rent vs own ratios, city redevelopment plans, government regulations, and building permits. While this sounds like a lot of work, that’s one of the benefits of being a member of the RealWealth. We share our research with you (and basic membership is free).
So who should you trust?
Trust yourself! Don’t get caught up in the hype, but instead, listen to your wise common sense.
Then, get the information you need from real world investors who are succeeding at exactly what you are trying to achieve. That’s why we continue to interview real world experts on the Real Wealth Show and on our weekly webinars where we profile the best US markets for investing today.