Real Estate Investing and the “Invisible Hand of the Market”
As an Economics major from the greatest school in the Silicon Valley, Santa Clara University (Go Broncos), I was always struck by the simplicity of the “Invisible Hand of The Market” concept, which was first penned by Adam Smith in The Theory of Moral Sentiments.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
I found the concept to be very logical and it allowed me to understand how multiple forces could drive to a singular and ideal outcome where resources are allocated most effectively. Which is odd, as I have known lots of folks over the years who have admitted that Economics was actually their hardest class in College.
Given my passion for Real Estate Investing (REI) and helping others, I wanted to review the current landscape for Real Estate Investing in context of “Invisible Hand of Market”.
We will review the following 3 elements: Self Interest, Competition and Supply-Demand as they are tightly linked with the theory.
This one is simple. People are out for themselves and will make choices that benefit themselves over others. Self Interest plays many facets in today’s Real Estate market.
The most obvious place is in the REO and Short Sale Market. Individuals that have the capacity to pay, but realize they are seriously under water, make a choice to not pay because it benefits them.
Also banks decide to slowly dribble out foreclosures because mark-to-market is not in effect, and they can slowly bleed off bad debt.
Lastly buyers are on revolt as they have decided not to buy because prices are falling and negativity is ramped.
Supply and Demand:
This one is also simple. Can anyone argue that up and down the real estate spectrum that demand is below supply? Really? Is this even a question?
The bigger question is what can be done to either spark demand or constrain run away supply.
Restricting supply is easy but not practical. You could simply forgive debt, refinance debt or some other strategy. Note I am not in favor of this strategy, but it is an option to restrict supply.
Demand is equally easy to fix and just as unlikely in the near term. FHA could simply lift the investor loan limit from 10 to 100 or even 1,000 properties. Note: I believe this will happen, but probably after we have a lot more pain and the next presidential election.
This one is tricky in the current market.
You have unbelievable affordability metrics. You have crazy low interest rates. However, you also have ridiculously tight lending standards. You have high unemployment combined with low consumer confidence. So we have a stand off between Fear and Greed and thus the Invisible Hand of Real Estate is firmly tucked away in the pocket of the market.
Thus we need a positive event to trigger large scale demand, competition, and the competitive juices of self interest. It is really that simple. The Invisible Hand of the Market works, and it will work again. We just need an event to turn confidence around and people will jump back in.
We have to remember the real money is made by the folks that buy ahead of the crowd. That is why you won’t see any grass grown under my feet and I am buying deals and adding to my portfolio now a head of the crowd.
Image: Bernt Rostad