Is market correction a good thing?

12 Replies

I live in Nashville, TN and want to start investing in real estate. However, the market has been growing so fast and rapidly that I feel like there will be a market correction soon. Would investing still be viable since prices will go down but market growth will hit a plateau point?

@Long Nguyen

Waiting to get into REI until after the next crash could be the smartest thing you could ever do...

OR it could be the dumbest... If you can find good deals under market value even in this tough crazy market, you will be happy when it crashes cuz (if you bought right) you will have acsess to even more capital than you would if you would not have found good deals. 

For more on this topic check out Grant Cardones latest BP interview.  Podcast show 250... Its cool stuff 

Everyone has different opinions.

Somebody feel like a correction is coming.

Other like me, feel that the market is very strong, and will be up for at least another 5 to 7 years.

What if the market does not crash until 10 years later?

Are you willing to wait 10 years before you get into real estate?

I have to agree with Account Closed Especially being in Nashville myself. If the numbers work pull the trigger. Supposedly we are on borrowed time right now as for as market cycles go (up and down every 7 years), but Nashville is the fastest growing city in the US right now. 100 people a day move here and have been doing so the last 5+ years. I dont see that slowing down anytime soon... so you could be waiting for the market to "go down" for a while... find a good deal, they arent everywhere but they are out there, and make some money! 

Let me share my truth story.

I saw last bottom in year 1994.
But I didn’t think much about real estate except my own primary residence.

In year 2000, I started thinking about real estate, but the price had gone up a lot already compared to the price in year 1994.
(Looking back at it today, the price in year 2000 in fact was still very cheap compared to the price in year 2006!)

Back then, year 2000, I asked my co-worker, my friends for advice. They all said, “it is too expensive, not worth buying it, just wait for it crash.”

I was waiting and waiting, and waiting very patiently. Finally, I saw the bottom in year 2010, I spent all my savings from the previous years, all-in buying as many properties as I can using leverage in year 2010.

To be honest with you, I’m very regret that I missed the buying opportunity in year 2000, although year 2000 was not the bottom (6 years after the bottom.)
Waiting for it to be crash, it cost me 10 years to get into the real estate game.

Last bottom was around year 2010, today 2017, about 7 years after last bottom, using the 18 years real estate cycle from Harvard, next peak may be year 2024, still have 7 more years for the price to go up, then take another 3 years to bottom out. Next crash “may be” 10 years later in year 2027...

I purchased 10 properties using conventional loan last bottom.

Then refinanced it again after equity is built, used the cash-out refinance to continue buying more properties.

Repeat the same process.

I currently have 43 doors, 4 doors pending in escrow, 1 door close of escrow next week, the other 3 doors close of escrow next month.

Will have 47 doors (mixed of commercial loan and conventional loan) next month, won’t stop.
I’m still buying more to grow my portfolio.

@Long Nguyen I don't know squat about Nashville.  Just putting that out there.  But trying to pick a bottom or a top is, well, almost foolhardy.  Maybe the market will go up for 2 more years.  Maybe it will plateau after that for another 3.  Maybe the next correction will bottom out at 2015 prices.  Maybe the next correction will bottom out at 2018 prices.  Maybe Nashville will flatten instead of dropping because people are still moving there.  It's just, well, impossible to know.  If you're "worried" my advice would be to have hefty reserves.  Even if there is a correction/crash you'll likely be fine if you can make it through the rough times.  And if there is a correction or flattening you can still make some money in the meantime.  

Or, shoot, maybe tomorrow the world will implode.  My point is, you just don't know...

So many people *think* they will buy during the next crash.  But it's easy to say they'll buy after a 10% correction.  More likely they'll see a 10% correction and decide to wait for a 20% correction.  It's hard to get people excited about "catching a falling knife" and you don't know you hit bottom until you rebound.  And if you didn't buy at the "bottom" then you might think that the rebound is temporary...and wait again.  And if there is an actual crash you'll probably be worried about the economy, employment, etc. so you're less likely to actually pay out the money during the crashing market.  

Every plan always looks good on a spreadsheet until the pesky real-world happens...

@Long Nguyen

Most people "waiting for a downturn" won't buy then either, they'll simply transition to a new excuse.

Get your funds lined up, then find the best opportunity you can and execute.

@Long Nguyen

How can there be a market correction when there is a severe shortage in the housing market?

It's just not possible. In order to have a housing bubble, you have to have over-building in new construction. 

New construction currently lags demand so severely that existing home prices are being forced up significantly.

We actually have a new construction shortage crisis. Here's some of the reasons why:

  • 30% increase in price of input materials that new home buyers are not willing to pay (therefore new home builders not willing to build)
  • Major shortage of construction workers due to last recession when construction was wiped out. (It will take years to replace this workforce)
  • Building permits: Local governments only hand out so many new building permits at a time and they take time to process
  • Land prep for new construction takes a significant amount of time

Here's a link to help you do a bit of your own research:

https://research.realtor.com/

There is no bubble right now. There is no bubble for the foreseeable future. Hell, housing prices have just now caught up to pre-crisis levels from a NOMINAL perspective. From an inflation adjusted perspective, they are still well below what they were.

I'm calling a 2026 crash. Yes I'd be willing to bet on it haha

@Long Nguyen - like some of the folks above say, I would caution against making investment decisions based on which direction you think the market will go. Rather, I would advise that you not be afraid to evaluate deals, but always do so with a defensive mindset, and keep asking yourself what are the potential problems for a specific deal, and what would be my workaround if that problem arises. For example, if you are a long term buy and hold investor and you find a deal that cash flows - great, market prices dropping are probably less of a concern to you. But what if (as an example) you based the deal on current vacancy rates of 2%, and vacancy rates suddenly go up to their 2010 highs of 6%. Do you have enough cash flow coming in to cover you? Or have you already stretched your finances thin because you didn't plan for bad times?

Usually the folks who get burned are the ones who fail to ask themselves "what can go wrong in bad times, and what have I done to mitigate that risk" (e.g., you flip a house with HML because you think the market is hot and ARVs in 3 months will be at current or higher levels, but don't plan for a market slowdown). Obviously it's impossible to protect against every doomsday situations, but if you only pick deals that provide enough of a buffer to carry you in difficult periods (2010 is an example reference point), market cycles become less of a concern because you've already prepared for the bad times, and get to benefit from the good times. Good luck!

@Long Nguyen market correction is not always a good thing. It means your supply will outpace demand and prices will start falling. Major corrections can involve massive job loss or population loss. It can take years for a market to recover.

Market growth is all about supply and demand. Nashville is a very popular place for relocation, which is causing growth in home values as demand outpaces supply. The market response is increased supply, which means building new construction. New construction costs are higher and it pulls up all values of existing homes.

Rapid growth doesn't signify a market correction, beyond the basic supply/demand balance. If the market has good long term prospects, then investing now is smart. Waiting for a crash is a fools game. When a crash comes, most people will run scared and will never take advantage of the opportunity. If you don't buy in a good market, you won't buy in a bad market.

@Long Nguyen - trying to time the market is a fool's errand. Looking at the stock market(which isn't exactly like the real estate market, but the participants are the same- people and corporations,) Jeremy Siegel did some research showing that if you ONLY bought an exchange-traded fund reflecting the broad market at market peaks(yes- right BEFORE crashes) and simply held on through the crashes, your returns would be dramatically better than the average investor's returns. Not only would they be better, but they'd be empirically quite good. This suggests that active traders tend to sell at exactly the wrong times.

It's not hard to see how this applies to the real estate market. Remember the collapse of 2008? Buyers in 2009 and 2010 did very well, but think about what was required. People were afraid- after a collapse, would you really have the fortitude to make a purchase? And if you did- would a bank really have the fortitude to back you up? Especially if it was your first purchase. You can see this on these forums today if you look a bit- people stating that they wished they'd bought in '09 and '10. 

Having said all that, it's possible to get lucky. I tried- successfully- to time the market back then. I bought from 2003-late 2005, then stopped from '06, then went all in from '09-'14(I then slowed my acquisition rate between '15 and the present.) But I was young and I was a fool, and I acknowledge that I got lucky. When your portfolio is somewhat large in size, you'll have the luxury of being able to reduce exposure gradually, and increase it gradually as well. Since you're just starting, you don't have that luxury. 

It's probably better to get your sea legs under you and get some experience so that you can take advantage of a crash. The tastiest morsels in a crash are the severely distressed properties, but if you haven't any experience, you won't know which distressed assets are worth your while, and you won't have the team to repair the situation(managers, contractors, attorneys, etc.) So perhaps start with something modest if you're concerned about an impending crash. Remember- "impending" can mean tomorrow, or two years from now, or ten years from now.

Even though I'm older, I s'pose I'm still a bit of a fool. I acquired aggressively from '09-'14, and very slowly since then, which suggests that I'm timing the market in a sense. I'm not taking my own advice; it's just hubris so common to man, I think. Then again, not selling everything(or anything) is a statement that I'm not very afraid of the future as it relates to real estate prices. However, I do not believe that the current political risk has been factored in to asset prices- be they stocks, bonds, real estate, etc. The man leading our country is unqualified and dangerous- we've never been in a situation so extreme. This can end well, but I believe the odds are against it.

Good luck with your first purchase!

Michael

If you want to invest here, just keep at it and make sure that your numbers work.  Yes, the market is going nuts here, yes a correction is coming.  But are there still deals where the numbers work?  Yes, they are just few and far between.  Choose your investment based on cash-flow and don't bank on appreciation and just keep plugging away until you find something (or shift your focus to a different market if that's easier).  But don't wait to invest until the next downturn, because it could be tomorrow or it could not happen for 15 years.

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