Housing Market: Are We Doomed To Repeat History?

by | BiggerPockets.com

I started investing when I was 30 years old and I have probably bored more than enough readers with my recitation of my history plenty of times in the past.  But I think it bears repeating that I was attracted by the “shiny object syndrome” that so often gets attached to real estate investing.  In the end, I was one of the lucky ones who knew how to work hard, how to kick a little dust off when I got beat up and how to eventually learn enough through experience to no longer be a danger to myself.  Unfortunately, there are still many out there who gravitate to real estate for the wrong reasons and find there way to the table only to get carved up by a reality that is not nice to those that do not understand the rules.  How is that for a first paragraph!

I have been noticing recently a lot of posts on real estate forums, including those on BiggerPockets, where posters are asking questions about creative financing and how to buy properties with no money down or refinacing with cash out.  This surprised me and I was wondering why the sudden uptick in interest.  Then the responses surprised me as well as many readers were commenting on either how they were accomplishing these creative strategies or were just as interested in what the answers may be.  I wondered to myself about history repeating itself.

As if that were not enough, I received a piece of mail that bothered me even more.  It was from a bank in another state and they were encouraging me to refinance my home to a cheaper rate.  And the best part was…no appraisal needed!  Just tell them what the value is, they will do a desk top appraisal and we are off and running with a super low rate of 3.99% (for the first year of course) and then a nice adjustment each year there after of no more than 1% for 5 years.

I am a student of history.  I love reading anything and everything that I can get my hands on and, if the book grabs my attention, I will keep reading.  Last night I had no idea what this weeks’ article was going to be about.  Lately I have been in kind of a creative funk because I want to put articles out that are going to make a difference and I just have not been sure lately what subjects to tackle.  I performed a Google search on  some different phrases including a question I tackled last week on my own blog about public works projects and there effects on real estate investing.  And that is when my journey of research began.

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What History Can Teach Us About Real Estate

“Nearly every one of us has been made directly aware, in one way or another, of that much talked about bugaboo, The Housing Problem.”

Some of us have found the house we were building cost far in excess of estimates.  Some of us have had our savings sacrificed through a foreclosed mortgage because we were unable to pay a large amount on the due date.  Some of us have seen the neighborhood go to pieces around us in spite of our efforts to keep up our own property.  Some of us have had to relinquish a cherished holding because of mounting taxes.  Many of us, for all our searching, have been unable to obtain a decent house within our ability to pay.

It is a rare family indeed which has not discovered that hte housing problem is a thing which not only concerns social workers campaigning against slums, or bankers seeking safe outlets for their funds, but a matter which affects almost every phase of day-to-day living.”

I am not sure what you think when first reading that, but my first thoughts were that this came from a report from some government agency or real estate researcher, possibly a think-tank, and they were lamenting the state of the current housing crisis.  Maybe it was from a research paper trying to tackle housing issues and searching for a solution.  Knowing the topic, some readers may have guessed this was written in the early 90’s during the last housing crisis.  Maybe it was from the early 80’s when 15% interest rates priced many home buyers out of the market.

I will tell you that, if like me, you thought this was from a recent report on U.S. housing problems within the last 30 years you would be wrong too!  It was written by Miles Lanier Colean in 1942.  The title of the text was “Can America Build Houses” and it was intended to challenge the American psyche and inspire change from the thinking that existed at the time.  Read this next passage and tell me if it sounds anything like challenges facing our cities today.

“If we take the evidence presented by the survey of housing conditions made in sixty-four cities in 1934 by the Department of Commerce, we find further misgivings.  The Survey shows that, after a period during which we built more houses than ever before, only 37 percent of the dwelling units in these cities could be considered in good condition, that over 15 per cent needed major repairs, and between 2 and 3 percent were, by any standard, unfit for use.  It shows that the surprising figure of 23 percent of the dwellings did not have what we long considered the normal sanitary conditions.”

If this was the state of housing in 1942, why then are we still dealing with some of the same problems today?

Not to get off on too much of a side note here, but if this is the description of housing at this time, why are so many investors attracted to housing built during this time period and directly after?  I am amazed at the number of investors I talk to and they tell me how excited they are to be buying a “cute little bungalow” in some far away city built in the 1930’s and how excited they are to start earning cash flow.  My question now is going to be…if it was a piece of junk then is it a piece of junk now?  That conversation can be for another day, but it does lend itself to a problem of today.

Who Called The Housing Crisis…And When Is the Next One?

I had two opportunities to learn from others back in the early 2000’s but chose to beat my head against a wall and take the road less traveled.  That would be the dark, windy road full of potholes and broken bridges!  Twice I had people close to me tell me to study up and be careful.  I was taking risks that I should not be taking and that danger was directly ahead.  I had a good friend in Florida who was investing in single-family rentals and he suddenly backed off the market and contacted me to advise me to do the same.  He had been reading a blog kept by an economists in Florida who was publishing and writing about data from Peter Schiff.  The premise at the time was that defaults on sub-prime mortgages were ripe for exploding and that housing prices were growing faster than at any point in history.  Housing starts were outpacing population growth, banks were lending to anyone who could fog a mirror and creative financing would cause massive foreclosures.  I still remember my response…

After I got done chuckling at him I told him to relax…I had been investing in real estate for 3 years, if anyone knew the market it was me!  This was in 2005 and, after all, I had Ben Bernanke on my side:

(July, 2005) “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” -Ben Bernanke

(October 20, 2005) “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.” -Ben Bernanke

(November 15, 2005) “With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly.” -Ben Bernanke

No need to play politics here because, for this article anyway, I don’t really care which way the Fed Reserve leans.  As dumb as I am, there were a lot of people who are supposed to be really smart telling me and every other investor at the time that the economy and the housing market were safe.  If I had simply studied history and expanded my mind a little, I would be a much happier (maybe), have a better performing portfolio (maybe), have experienced more restful sleep nights (for sure), and possibly not had to go through the painful lessons of a real estate investor who over-extended and bought properties simply because he could instead of because he should.

Outside Forces that Affect Your Investing

The second piece of advice I received is what shaped my future buying decisions and really helped me build a stronger portfolio once I dealt with the aftermath of my original crazy purchases.  I had a home builder here in Memphis who had lived here all his life (over 50 years) sit me down and educate me on what I was doing.  It was in the fall of 2007 and I was knee deep in worry, bills, paperwork and desperately trying to keep my sanity.  Luckily, I was able to offset any losses I was experiencing in my real estate portfolio with the other companies I had started.  That being said, I believed like many did at the time that the U.S. economy as a whole was going to be o.k. and I was looking at continuing to expand my portfolio as a way to hedge against the losses I was taking.  I wanted to mix better properties with the losses in hopes of mitigating the damage and even Ben Bernanke was giving me hope:

(May 17, 2007) “All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.  The vast majority of mortgages, including even subprime mortgages, continue to perform well.  Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.” -Ben Bernanke.

Ahhh – ignorance is bliss!

So my builder friend sat me down and asked me to pull up several of my properties online so we could research them.  He pointed out to me that as an investor, I would only have success when I recognized that there were many outside forces at work in the market and most of them conspired against my success.  He really educated me that there is so much more to picking and choosing the right investments, especially in property, than simple numbers on a spreadsheet.  He pointed out that I really had to dig into social and economic factors and conditions not only in the cities I wanted to invest, but also in the neighborhoods and the streets themselves.

He showed me that most investors come in and get out quickly and they secure their profits and move on.  For investors like myself who were looking to build a generational portfolio that cold be passed to my heirs, there was a lot more danger.

In looking at my portfolio he showed me where houses that I was purchasing built in the 1940’s through the 1960’s were originally sold.  In researching the records we could see all of the activity on the homes.  He showed me where the house sold when it was built for a price of mid $20,000’s.  At some point in the next decade it may have been foreclosed or lost by the owner.  It was then sold to another person for somewhere in the mid $20,000’s.  Then again the next decade and again the next and so on.  And then I walk into the picture.  I was buying this house for the mid $20,000’s and receiving a bill for $20,000 to fix it up into a great rental property.  Anyone familiar with investing at that time can probably relate to being told that they property was actually worth closer to $70,000 because sub prime lenders were lending all over the neighborhood to anyone who would buy at those prices.  I was paying the same price that the property has sold for every decade since it was built.  My investment was going nowhere but down.

There are a lot more details to all of those stories but his point was that throughout the history of that property in that area and in that neighborhood, it has been sold multiple times through the foreclosure process and always at that same low price.  Regardless of what any independent appraiser or banker or city tax man tells you – history will always paint a full picture of the housing market.  I needed to be buying where people wanted to live and fixing the homes to a condition that people wanted to live in.  Plain and simple.  No more buying because some spreadsheet showed me I would be making money.  I had to dig deeper and learn from what history shows us.

There has been lots of blame throughout the housing crisis tossed around by everyone as well as plenty of solutions.  My biggest worry is that any solution that we come up with has to take history into account.  If you take any time to read some of Mile Lanier Colean’s works, you’ll find that he laid some blame at the feet the federal government for creating unintended consequences with taxes, fees and monetary policy.  When you look at the most recent crisis, it is not too far of a stretch to say Colean called the current crisis 70 years ago.  As I read the forum posts and receive more solicitations to do business, I can not help but wonder if he has already called the next housing crisis as well.

Image: Tony Fischer

About Author

Chris Clothier

In 2005, Chris Clothier (G+) began working with passive real estate investors and has since helped more than 1,100 investors purchase over 3,400 investment properties in Memphis, Dallas and Houston through the Memphis Invest family of companies.


  1. Brandon Turner

    Hey Chris –

    It’s interesting that history seems to be repeating itself so quickly, especially referring to that “no doc” advertisement you got! I didn’t think I’d see those anytime soon! Anyways, great piece, very deep! Thanks for the article!

    • Chris Clothier

      Brandon –

      I was a little surprised to see the solicitations for easy to qualify loans and I have been inundated with them. Two things I find fascinating about it:
      1. They are coming because I bought my home in 2007 and so I am deemed as a buyer who is under-water.
      2. The only way a home is under water is if the owner is trying to sell at that particular time and is not able to do so.
      I think so much of this “idea” that a large percentage of homes are underwater comes from the news cycle reporting it. IMO, that is simply not true and it has led to this new push to create a solution which I think is really simply geared toward getting consumers to refinance and spend money again thru the system. Generate fees for everyone in that process.

      My little rant! Thanks for taking time to read and especially for leaving a comment.

      All the best – Chris

  2. Chris,

    Yes we are doomed and will always go through these boom bust cycles in RE. Why? Because lenders and the political figures they so handsomely pay to lie to us want it to be this way.

    How do you think Miles Lanier Colean came to his conclusions concerning the RE market?
    All he had to do was look back to the late1800’s when America had the same collapse of real estate prices. This collapse sucked up the fortunes of most of the upper middle class. Ever wonder who lived in those splendid victorian mansions in all of our major cities, which have now been turned in multiunit buildings?

    These collapses aid in transferring the wealth from those who don’t know history to those who continually set the stage for the next big collapse. In the past large banks as seen at the link below hoarded hard assets and raised interest rates, later lowering interest rates and easing credit to suck in the next bunch of suckers.

    No need for banks to hoard hard assets the taxpayers are here to protect their bottom line if things go wrong.
    At the link below there is a hyper link to the authors website where you can get a different slant on RE financing, boom and bust cycles one different then tv media.


    My advice the next boom cycle is being artificially created by Ben Bernanke QE1 QE2 and QE3, housing prices are rising again because of lots of money being pumped into the economy. A very bad idea as there was no paying down of debt by very indebted American citizens.

    In the next run up of RE values I am going to sell the junk and pay off the good stuff with the profits. Something like the bankers of old hoarding gold and silver.

    • Chris Clothier

      Dennis –

      Thanks for taking time to read and comment. We will see what happens in the next cycle and you are correct, we will be repeating it. How vicious the next downturn will be will depend a lot on what home buyers, home owners and real estate investors decide to do over these next few years.

      All the best – Chris

  3. Great article, Chris. Just tonight at dinner, my wife mentioned she was reading about hedge funds buying up distressed properties and intended to collateralize the asset pool, and I said “sounds like something we’ve heard before,” and asked if she’d seen your article in Bigger Pockets. I think the key is to help serious, conscientious investors to take proactive measures to protect themselves against the inevitable consequences of these policies. Step No. 1 is to identify the problem, so thank you.

    • Chris Clothier

      Jeffrey –

      Thanks for leaving your comments after reading the article. We have had several funds in our offices and they are all talking some of the same nonsense that got us into trouble in the first place, but one of the BIGGEST problems is their flawed beliefs in how you buy investment property.

      They all have formulas. They have formulas that they believe work no matter which city you are investing, no matter where the houses are located, no matter the level of repair you perform on the properties and regardless of the professionalism of the property management. I love data, but I also realize it tells a story and should be used to make decisions. Unfortunately, those we have heard from believe that data is how you run a portfolio and that the product, personal and performance matter very little. We will see…

      All the best – Chris

  4. Hi Chris — Great article! As a young investor looking to get started in investing, this article brought up several insights I had not thought of before.

    I recently finished an economics class in college, and one thing I’ve found is that economists rarely agree, especially on macro-economics related topics.

    Do you have any recommendations on certain economists you like to follow?

    • Chris Clothier

      Hey David –

      Thanks for taking some time today to read and comment. First, I would do a Google search on real estate economists blogs and get a feel for what you like reading. Pretty soon data can start getting pretty convoluted as can opinions. I would just see what you like. I would definitely read Peter Schiff. He is a pretty smart dude and I like reading his stuff. I like Calculated Risk and I wold also check out Steve Cook who writes right here on BP. Steve is not an economists but has insight into the real estate market and access to info. and data that is excellent.

      All the best – Chris

  5. Chris,

    You talk about a $20,000 property that had not gained in appreciation since it was built back in the 1940’s. While this is true, it seems to me you are totally discounting the value of good cash flow? Even if tenants are less that sub par and repairs are higher than normal, a $20,000 (+ whatever you spent on repairs) will be paid off sooner than later and cash flow will be a big factor.

    I’m not talking about a being a slum lord (although I know a few who are “wealthy” in their own right) but cheap rentals do have their place in REI.

    An investor like myself who is looking to build their portfolio of buy/hold properties, It is easier and faster to initially acquire cheap cash flowing rentals. I agree a foundation consisting of better appreciating properties is generally less riskier and may allow me to sleep easier at night, but at the expense of time, more cash out of my pocket, less cash flow, less properties.

    Do you agree that we have to find a balance in our portfolios or are you strictly looking at the quality of properties as opposed to the quantity… Surely there is merit to both strategies.


    • Chris Clothier

      Hey Glenn –

      First – great response and thank so much for taking some time to read and leave your comments. There is absolutely merit to building a portfolio of the best performing properties possible – regardless of price. In my case, and that is the point of view I was writing from, I had a solid portfolio and I began to be enticed by “cheap” and “high returns” on paper and not on the solid fundamentals. I needed to be very judicious in what I was purchasing and I also needed to be very clear on WHY I was buying particular properties. Instead I was buying anything with legs! I made myself an easy target and lost my shirt on some of my portfolio. The builders point was that I was not using any fundamentals and the properties I was purchasing were not within line with my expectations.

      So, to your point, an investor that purchases lower priced properties and is doing so without blinders on can do very well. I simply prefer to purchase better properties now that may cost a bit more, but, in my experience, I expect them to continue to perform better over time.

      Great comments – Thanks


  6. Yes history will continue to repeat itself as long as you have new generations of young people who believe that they know everything and will not make these mistakes, yet they do not actually take the time to do any research before signing a piece of paper. We are a results driven world and it is a common belief that if by a certain age you are not married, own a home and starting a family then you must not be successful. We want it all and we want it now, now, now.

    • Chris Clothier

      Brea –

      Great comments. Thanks for taking the time to read the article and leave your thoughts.

      I think that one of the best things parents (especially if you are already an investor) is to teach children about real estate. From an investing standpoint it would be great. But also from a simple understanding of the fundamentals. I think it would lead to a greater appreciation of the opportunity we have to own something concrete.

      All the best – Chris

  7. What an incredible article. I am a history buff as well and this just reminds me that I must do a better job at picking my investments. I too got caught by the “shinny object” syndrome and practically lost my mind. Thankfully, I’m bouncing back, a lot smarter and wiser. Great article!

  8. Kristopher Knight on

    Great article, and thank you, you provided some confirmation of the path I am slowly moving down to build a buy and hold portfolio. One point that caught my attention in your (and other’s) article is the point of view relative to housing stock built in the 30’s to 40’s or any period of over a certain age.
    I actually prefer these types of properties over the ‘spec housing’ of the last few decades from both a cost and aesthetics vantage. I understand the numbers involved to a point about mechanical systems ect, is there more to it that I’m missing? Is it a rule of thumb thing or regional? On the other hand there are areas I’ve looked where the housing stock is older, super cheap right now, but the history does tell me to stay away for my objectives.
    Thanks again,

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