No one, of course, can predict with certainty what will happen.
Serious players know that markets take hits every so often. That is a given.
Where I live in CA, we have earthquakes. Cannot predict when they occur but that they WILL occur. So, you plan according to your tolerance for risk.
After 35+ years of real estate I've survived 4 or 5 crashes. If the deal is right and the cash flow is there, you'll gain and lose equity as markets appreciate and retrace. So, you just build that into your plan.
People who are looking for reasons not to take a certain action ask questions based on fear and doubt to reinforce reasons for not taking a certain action. Nuff said.
I guess that's my point. I would be the card counter, using your casino analogy.
Have you counted cards? I did, for many years (yes, there's a very fine line between investor and degenerate gambler -- and I've walked it :-)...
I agree with you that the analogy is a good one. Though I think you underestimate the advantage a card-counter (and a macro-investor) has...
With card counting (and I would argue analogous to making macro-economic investments), your edge comes by placing very large bets in the rare situations where you have a non-trivial statistical advantage. But, the fact is, the vast, vast majority of card counters will never make money...for several reasons:
1. The biggest reason is that they over-estimate their skill. They think they have an advantage, but actually don't. This is why casinos will typically not kick people out even when they are aware the people are trying to count cards -- most just aren't good enough to swing the edge to their favor...they just don't realize it. Likewise with investors -- most overestimate their knowledge, skills and advantage over the market.
2. To my point in my previous post, you have to have a large bankroll to succeed in card counting (due to the small edge). General rule of thumb is that you never want to be betting more than 1% of your bankroll on any given bet. A 2-5% advantage over the house can be very lucrative over many thousands (or tens/hundreds of thousands of hands), but if you're betting too much of your bankroll on any given bet/investment, your "risk of ruin" (look it up) is non-trivial. If you follow the same rule in macro-economic investing, and try not to invest more than 1% of your bankroll per investment, you can start to imagine how big your bankroll needs to be in order to make any significant amount of money with a relatively low chance of losing everything.
3. Just like in a casino, for a typical investor/gambler, the rules are stacked against you. In a casino, card counters are foiled by the house shuffling relatively often (not dealing to the bottom of the deck), implementing max bets (so you can't fully take advantage of good situations) and using multi-deck shoes (which makes statistically good situations much more rare). In the investment world, the things stacked against you are things like transaction fees (it's not free to buy or sell a house or pretty much any other asset), collusion (the Wall Street guys and the large investors are going to get access to better deals than you and me due to their relationships), access to deals (are you an accredited investor?), inside information (there are things that you'll never know that your competition does), timely access to information (value of information is priced into assets by the time you find out the information), etc. Unless you're a big player with lots of capital, it's unlikely you have access to the quantity/quality of deals necessary to take advantage of your information advantage.
Let me reiterate that I'm not saying nobody can take advantage of the information out there to make (large?) profits...I'm just saying that I'm not smart enough to do it, and I certainly don't have the bankroll to do it. Perhaps others are smarter, have more capital, or are smart enough that they can do it without more capital.
I know you are a smart guy and I am also a big fan of your flipping book. I just wanted to get your opinion on something. I know that majority of the investors in Bigger Pockets believe that appreciation cannot be predicted, and that you are only speculating on your investment if you believe in this... but can't an investor somewhat predict what will happen in your housing market in the next 2-3 years simply by just understanding inventory levels, population and job growth, household income moving into the area, and unemployment levels by county?
Absolutely you may be able to predict and you may be able to get an edge. I'm not disputing that. What I'm disputing (for me, at least) is that that edge can be tactically translated into any significant profit.
Here's the biggest reason why I don't believe a typical small-time investor can take advantage of macro-economic trends -- TRANSACTION FEES.
In a typical real estate deal, the investor is paying about 8-10% in fees on the transaction -- closing costs, transfer taxes, commissions, etc. That means that you have to see an 8-10% gain on your investment JUST TO BREAK EVEN. In gambling, this is often called the "rake" -- the amount the house takes in an otherwise zero-sum game (think poker).
It's possible to make money when buying individual distressed assets because gains can be in the triple digits; but when making macro-economic bets, I'm skeptical that anyone can "beat the rake."
It's no different than day-trading -- if you have a 1-2% advantage over flipping a coin (which is pretty damn good in the stock market), and if you do enough transactions, theoretically you can make a lot of money. The problem is, you're probably paying more than 1-2% of each transaction in fees (the rake), so even though you have an advantage, you're losing money over the long run.
Now, if you have the skill to beat that 8-10% rake, you can make money. When it comes to making macro-economic bets, I don't have that kind of skill...
Anyone see skyrocketing prices in there markets or indicators that things might turn downward soon? It seems like every market is in a different spot this time around. In Atlanta, massive condos and tons of townhomes are going up everywhere, but we're not seeing many new SFR's built, which is really driving up the prices of SFR's through bidding wars since there's so many families and little inventory.
Or are we going to see slow and steady 2-4% appreciation for the next 30 years like a "perfect economy"
Housing prices typically readjust (or should theoretically), when prices get incredibly misaligned but it does vary with the specific market in question.
Within a 30 year horizon anything could happen but each market/region may have its own average housing price growth rate within the horizon examined.
Whatever the "average" growth rate in any area may be, that doesn't mean it was a "steady" growth though -- just what it averaged out to.
Tax lien certificates are super simple but I will tell exactly what the problems are. Don't buy any guru courses on it because it is a waste of money.
Problem 1. You have to know a lot of out-of-areas very well.
Problem 2. You have to buy a lot to make the travel and due diligence worth it.
Problem 3. Tax liens are becoming popular as a safe investment with banks and insurance companies and the returns have been coming down.
Super simple conceptually but very difficult to do. I would recommend focus on what you are doing now (flips), don't get sidetracked with tax liens, and when you have made enough money to lose then look at cash flow properties and tax lien certificates. You have to spend at least mastering one thing before lookingn at anything else.
A lot of investors bounce from idea to idea and that won't make you successful.
In my 25 years experience as an investor, all I can say is the market will ALWAYS go up and down as it has for generations. The best thing to do is buy RIGHT... low... so even if the market goes down, you'll be ok, and buy right, don't over-leverage and use COMMON sense... always plan for "worst case scenario " on rentals like unexpected repairs, high vacancies, etc.. Too many people are trying to buy too much too quickly with too little reserves then they are able to handle. Sometime patience will grow your portfolio stronger and then you will be in a position with cash to buy at the bottom when all the "temporary investors" leave the market. Works for me !
Perhaps...but in your original post above, you mentioned using macro-economic data to predict 2-3 years out...that's not much time to recover your transaction costs...
And, the further out you're trying to predict, the harder it is to do...
The short summary: You can probably predict a short period out, but you won't be able to beat the rake short-term. And you probably can't predict a long period out.
My recommendation: Buy locally based on local trends that can be predicted more accurately than national, macro-economic trends. And I believe this is what you're doing...so I'm guessing we're in agreement... :-)
What do you think are the leading economic indicators maybe 2 years out that show a downturn might be coming, a certain level of surplus inventory, etc?
I can't see a bubble forming like in 2008 simply because the easy mortgage money is no longer their to fuel it.
In my little economy prices have been more or less flat since 2008.
Prices on SFH's have to go out of whack compared to incomes to have a correction, at least in my area they are about right. Throw in tight lending standards and you have just the opposite of a correction, solidly financed properties at sustainable prices.
Is it possible to predict what will happen in 3 to 5 years...of course not. But following data can help give insight into the trend.
I personally think that timing and trend analysis is a very important aspect for investors who focus on volatile markets.
Real Estate is a very slow moving market. Because real estate is so illiquid, it is reasonable to track the data needed with just a few minutes of attention per week.
I personally track:
Inventory
Sales
DOM
Prices
NODs
Trustee Sales
Interest rates
And many general economic indicators that are not specific to housing or real estate.
The crux is two fold...
1 - Finding reliable data sources. This is more difficult if you are not in a major city.
2 - Weighing the data properly. Putting the proper weight on each indicator is critical and comes down to skill and experience.
I personally think a data driven approach can help guide an investor towards making better investment decisions in terms of the trend than one could otherwise. Of course there is no certainty in trend analysis (or in life). Black swans can emerge with no warning.
I work hard at not having an opinion on what will happen. It is hard to leave emotion out of the decision. My goal is to follow the data and adjust, adjust, adjust.
My first mentor put it simply. The average is 7 years, things should start to swing downward. The longer it go's past that point the lower the decline.
It just blows my mind that people are trying to flock to places like Ohio and Indy to buy deals, and talking about how hot cleveland and detroit are.... it's just not reasonable
You can get an FHA loan with just 3.5% down though... That's pretty high leverage
True but the borrowers have to be pretty solid financially to get it.
I agree though, I also think the commercial guys going over 70% LTV with ARM's will get bit in a few years.
I'm starting to get deja vu reading some investment articles about leverage, I find myself looking at the dates to see if it was written in 2015 or 2006/7.
It just blows my mind that people are trying to flock to places like Ohio and Indy to buy deals, and talking about how hot cleveland and detroit are.... it's just not reasonable
Anyone else thinking prices are getting too high or there's too much building going on in their area and they see a downturn coming in the next few years in their markets?
Anyone else thinking prices are getting too high or there's too much building going on in their area and they see a downturn coming in the next few years in their markets?
I *always* think prices are too high when I'm buying...
And I *always* think there's too much building going on when I'm building...
Well yeah, but as you said earlier, different markets are in different places right now. Atlanta is definitely in full out expansion mode, some markets prices have been flat this year, lack of inventory in SF and then a surplus of condo's in miami. It'll be interesting to see which market is the first to see any kind of drop in price, which I don't think any market has dropped in the last 4 years.
It'll be interesting to see which market is the first to see any kind of drop in price, which I don't think any market has dropped in the last 4 years.
I've seen price drops this year in two markets where I do (or have done business) -- Baltimore (the city) and Milwaukee (the suburbs).