Investing Is About Supply and Demand: One of the most important
things you can learn when it comes to real estate investing is market analysis—having
the ability to evaluate a market, whether your own or one in another part of
the United States, and determine if the values are going up, going down, or are
flat. This is where amateur investors fall short in their knowledge and this
lack of understanding creates problems for them when they buy, hold, and sell.
History is a Great Teacher—And Predictor of the Future:
A little bit of history from the past ten years will illustrate
our points as we begin to increase our understanding of market analysis. In
2000, the stock market was in a self-correction process and investors who
typically put their money in stock were worried about their earnings and profit
potential in the short term. In any investment there will be periodic
self-corrections in a market, whether it is real estate, stock, or even in
gold. Prices and values go up, they hit a peak, they stabilize, and if they are
not in line with what the market will bear, they will go back down until they reach
the point that buyers will once again make purchases.
To add to the situation with stock investments, in late 2001 we
experienced the trauma of September 11th and there was more emotional fear
generated by this event than our population has seen on a collective level in
our entire lifetimes. The natural reaction of people in the grips of uncertainty
is to do nothing—to “batten down the hatches” until the storm is over.
The problem with this reaction is the paper currency that we
operate on in the United States. The way our economy flourishes is for the
paper to keep moving. When the flow of money stops, the economy stalls. To
encourage the American people to buy/spend their money and keep the paper moving,
the Federal Reserve dropped interest rates—which allowed people to buy property
with far less interest expense than historic levels had demanded. Additionally,
loan programs were rolled out with much more lenient lending guidelines so many
more people were able to qualify for loans than historic guidelines in the past
had provided. So, with the stock market in a state of stagnation or
self-correction, average home interest rates lower than they had been in over
thirty years, and lending guidelines more lenient than we had seen in decades,
people began to take their accessible investment money and purchase homes and
land.
In essence, we had a “blue light special” or buying frenzy kick into full
gear and real estate became the investment strategy of choice for many people
who had never owned real estate, at all! Adding to that, investors who were
disillusioned with the performance of the stock market began pulling available
revenue from this type of investing and move it to real estate. O n top of the
stimulus of low interest rates and extremely relaxed lending qualifications, the
first waves of baby-boomers were within a few years of retiring. As they saw
the opportunity to invest (and also saw the non-performance of their stock
portfolios), they began visiting retirement states and purchasing their homes
or condominiums earlier than they had planned. This was typically a wise move
on their part—but it created an increased demand on real estate that was
unexpected.
When opportunities to make money abound, builders will rise to
the occasion. Since there were not enough houses available to purchase, pre-construction
plans became the norm. The mantra across the United States became, “Pay a 20%
non-refundable deposit, contract for us to build a home or condo at a
pre-agreed upon price, and when construction is complete, you can close.” That
accomplished two different things: people were working (construction picked up dramatically,
jobs were in abundance, and building materials were flying off the shelves),
and paper was moving! For the potential investor, a feeling of “locking in a
price” was of utmost importance.
If the investor was “buying” in a 20% appreciation rate market,
and if the condo was going to take two years to complete, life seemed golden!
The condo would theoretically be worth 40% more upon completion (and closing)
that the contract price! Talk about getting rich quick—it sure felt as if the
goose was laying a golden basket of eggs!
However, depending upon where an investor was in the market cycle
of self-correction, was there going to be a buyer for the property to do a
quick turn? In 2002, the answer was a resounding, “You Betcha’!” However, by
2005 and 2006, the buyers had exhausted their buying ability (run out of money)
and the markets began to stall. Since real estate revolves around supply and
demand, if there are not buyers that match sellers, the market will stall—which
is what happened. What a concept—ultimately, there must be someone to live in a
house or condo once it is built.
Sorce: Rich Dad™ Education
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