Is the Real Estate Market Poised to Collapse Again?
I love football. College or pro – it doesn’t matter. If there is a game on I’ll watch. But these days it’s pretty difficult to dedicate four hours or more to sitting on the couch in front of the TV. I have to be creative. My wife will allow it if I agree to fold laundry at the same time. Last Sunday, I set up a card table in our bedroom and prepared our taxes while keeping an eye on the Eagles vs. Cowboys game. Doing taxes is never fun but watching the Cowboys lose made it less painful.
If you were watching any NFL football on Sunday then you probably saw the amazing video of the Metrodome roof collapse in Minneapolis. What is scary is that a game was scheduled to be played there the next day. Equally frightening is that it took just 17 inches of snow for the whole dome to come crashing down. It turns out that the roof has collapsed four times in the last 29 years. I came to two conclusions after I saw this video:
- I’m sure glad I live in Arizona. We never have to worry about sunshine causing our roofs to collapse.
- The designers, engineers and roofing experts should have saw this coming.
You would think in a region of the country that averages 50 inches of snowfall a year someone would have thought to build a structure that would hold up better when the temperatures drop. But consider this for a moment – maybe, just maybe, the architects and engineers that built the Metrodome did their homework. They had a solid plan in place. But external forces beyond their control (i.e. Mother Nature) took over and the whole thing collapsed.
We all know it’s not easy to predict the weather. In college, one of my science professors told the class that even with all the sophisticated equipment and computers meteorologists still only get the forecast right about 58% of the time. He colorfully pointed out that’s only 8% better than flipping a coin.
Sometimes I feel like real estate investing is a lot like forecasting the weather. Before I buy a house maybe I need get out the Magic 8 Ball. Should I buy this house or not? The ball says “outlook not so good.” Case in point – over the past 18 months my investment firm has flipped 40 houses. Several of them were located in Buckeye, Arizona, which is about 30 miles west of downtown Phoenix. We bought and sold one particular model of home in a popular subdivision out there six times – the retail sales price ranging from 105-110K.
After the tax credit expired on April 30th we bought two more of these homes at the auction. I calculated that they would be worth about $8,000 less because the government wasn’t paying people to buy houses anymore. That seems logical right? Boy was I wrong. We just closed on one – the retail sales price? $77,000! The other property is now pending for $83,900. That’s a drop of more than 25% in just six months.
How could this happen? After all, we had a good track record and a solid business plan in place.
It’s because there were external forces at work – the expiration of the tax credit, tighter lending restrictions, unemployment and lousy public perception. A combination of these factors has many housing experts predicting that we are poised for yet another real estate market collapse. Based on my recent experience it would be difficult to argue otherwise.
But I’m a glass half full, not half empty kind of guy. Yes, we lost money on these two deals. That’s the bad news. The good news is once we lowered the prices we got multiple offers on both of them. That tells me there are signs of life out there – if the price is right. We just need to find better deals from now on.
You’ve probably heard the old Yiddish proverb, “Man plans, God laughs.” These days it seems like there are always external forces at work. For a real estate investor there’s the federal government, banks and a fickle buyer’s market. For the folks who built the Metrodome in Minneapolis there’s Mother Nature.
Sometimes even the most careful planning won’t help you avert disaster. The roof may collapse on you a few times. Fortunately, in real estate you don’t have to be right 100% of the time to be successful.
Photo: Kevin Jack