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Market Updates

How to See a Housing Crash Coming (Crystal Ball Not Included)

Editor’s Note: Hal Cranmer has had a wild past. Born in India, he’s lived all over the world and started his working life as an Air Force Special Operations and Commercial airline pilot. After 9/11 brought him down from the clouds, he entered the corporate world and rose to the level of running a $36M machining plant. Yet from 2006 on, he caught the passion for real estate investing. He flipped a bunch of houses in Minneapolis and still owns several multifamily rentals there. Lately, he is into assisted living, and owns 5 assisted living homes in the Phoenix area. He loves to follow real estate trends, both locally and nationally.

As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Cranmer provides us with his own unique, lively and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out our other super-helpful Market News Updates. For now, enjoy...

From Hal Cranmer, Cash Flow Mercenary...

The time to buy is when there's blood in the streets."  ~Baron Rothschild

That guy, Baron, should know... the British nobleman bought up tons of shares of the English Stock Exchange and other distressed English assets when their economy crashed during the time of Napoleon’s leadership.

After Napoleon was defeated at the Battle of Waterloo by the British, the stock market soared, with Baron Rothschild in complete control. As of 2015, the British government was still paying back monies owed to the Rothschild family from this maneuver.

Fast forward to 2008...

America suffered a financial crisis that year that was second only to the Great Depression in the 20th Century. Housing took a serious punch to the gut. Yet if you were a real estate investor at that time, you were amazed at all the bargains around.

It was definitely a fantastic time to buy.

Investors and homeowners who bought real estate in 2005 and 2006 were not so thrilled at the bargains available in 2008. Those bargains were other investors’ and homeowners’ losses.

The Devil’s in the Details

Let’s face it, if we could see booms and crashes with absolute certainty, we wouldn’t be running this website. We’d be entertaining royalty and rock stars on our own private island somewhere.

Life is uncertain. Uncertain does not mean high risk... unless you make it that way. As investors and entrepreneurs, we want to mitigate any risk as much as possible. That means we need to study the markets we’re in and look for clues that will:

  1. Lead us to profits
  2. Minimize our losses

That’s why I thought it would be good to write about what helped me see 2008 for what it was – a great opportunity – and how to be cautious when you think the next 2008 might be coming.

detailsReal estate is affected by both national and local trends. In this lesson, I want to talk about what to look for nationally. We’ll cover the local stuff in another lesson soon.

Being a good investor means staying on top of both local and national data.

The national data can give you a sense of which region makes sense to invest in. It can also give you a sense of when things are turning around for the better. The local data can let you know if the deals you are finding make sense. Either way, you need to look at the data.

Big Picture Time

Here are 3 good indicators to use to see how the housing market is doing on a national, or even a regional basis.

1. Supply of Homes – Housing, like every other good, is simply a matter of supply and demand. The greater supply of something, the less it will cost. Consequently, if there is a glut of homes on the market, chances are prices will drop. Obviously, the reverse is also true. You can go to the Federal Reserve website (a great place for economic geeks like me) and see graphs showing the supply in housing. 

Take a look at this chart:

Notice how the supply of homes was very low through 2005. In 2006 and the beginning of 2007, the housing bubble was still gaining strength. And yet the supply of homes was creeping up.

By 2008 it was zooming up. The grey vertical lines indicate recessions. Or as we real estate investors like to call them, “Buy Signals.”

If you see what is going on again like 2006-2007, it may be time to start hoarding cash and selling your properties. The buying time may be right around the corner.

2. Follow the Big Guys – Who do you think would be most affected, dollar wise, by a housing crash? Probably the guys who have the most money in housing. That’s why it’s good to check out how home builders are doing.

The big public homebuilders feel continuous pressure from Wall Street to constantly increase profits. Any downturn in housing will most likely slow down their bottom-line growth. Wall Street will see that slowdown in their financials and punish them for it.

Look at an index like the S&P Homebuilders Index

If the trend is not the home builder’s friend, there may be storm clouds on the horizon.

3. Housing Prices Compared to Income or CPI – Housing prices traditionally track parallel to the Consumer Price Index (CPI). They also need to stay somewhat affordable compared to people’s incomes. When prices rise substantially compared to incomes and the CPI, it will be more and more difficult for people to afford to buy, or stay in, their homes.

Many homeowners determine how much house they can afford with a simple question:

“What’s the monthly payment?”

If house prices are high, people’s monthly payments will be higher. Add in a dose of higher interest rates and it means monthly payments will feel like a double whammy. And… fewer people will buy, or stay in, their homes.

Listen Up

Here at Real Estate Mogul, we are not trying to provide specific investment advice. Besides, we’re not allowed to provide it by law.

Looking back though, these 3 indicators did a nice job of throwing up some flags about 2008. They may be good to keep on your radar as you look to invest in real estate.

They may also be good indicators of the beginning of a boom.

There are good deals to be found in any market. The trick is to know:

  • What constitutes a good deal
  • Where the market is headed
  • What you want to do with the deal (rent, flip, etc.)

Armed with that knowledge, you can feel confident about whether to pull the trigger or holster your weapon and wait for another day.

Know Any Other Good Indicators of Potential Market Turns?

Share them with us in the comment section below.

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