@Ben Leybovich, it's always difficult to call the top (or bottom) of a market. Even the best professionals get it wrong.
It's tough to see a bubble and know it will pop at some point, but have no idea exactly when, and thus have a hard time making the right move. If you get out when you see a bubble start to form, and sit in cash, you can miss out on the lion's share of gains even though you also eliminated the possibility of losses.
In stocks, one can hedge positions with options - basically insurance for your positions.
It's a bit tougher in real estate since it's so illiquid. But in my mind, spending time to buy properties which cash flow - completely disregarding any potential appreciation - is a similar kind of "safety insurance".
The danger I think is when people come into the market because they think "real estate is going up" and they expect appreciation, without looking at fundamentals (cash flow).
It's the real estate equivalent of someone looking for a hot stock tip - they want the rewards without being willing to do the work of educating themselves, doing real investment analysis, and choosing their investments carefully - the "stupid money" as you said.
Right now it seems that values are coming back, but real incomes haven't risen, it's really driven by a little more demand due to people feeling their jobs are more secure than a few years ago, combined with still-tight supply.
I think what we're going to see over the next few years is that builders will step up to the plate and do a lot of building. If the economy continues to be "OK" I think the new inventory will be absorbed and we will see mild but steady increases in values.
However if wages/real income actually starts to rise then I would expect price increases to be more dramatic. That might be tempered somewhat by higher rates but I don't think it will be as much as some people think. I think real wage increases will supersede any tempering effect from higher rates, and values will increase at a good pace.
Demographically (millenial renters, people who had moved back in with their parents 7 years ago, etc.) I think the trend will swing back from renting and group psychology about "rising real estate values" will kick in just as it did 10-15 years ago.
Yes I think we should keep buying to get more pieces on the board (boats in the water to rise), but completely disregard any potential appreciation both in terms of our return calculations and psychologically (in other words, don't get caught up in the coming "real estate boom" psychology and buy marginal properties or cash flow negative properties expecting appreciation).
That may mean doing fewer deals but it's a price I'm personally willing to pay.
There are also some broader economic issues which could throw in some systemic risk and gum up the works, such as Russia-Ukraine, the Chinese economy, the European economy (and some of its weaker members like Greece), etc.
So in my mind I think there are three possible scenarios: 1) 1/3 likely to have steady good growth in RE values (scenario of U.S. economy continuing to do reasonably well but little/tepid real wage growth), 2) 1/3 likely to have another boom (scenario of U.S. economy doing very well and finally having real wage growth for the first time in a long time), and 3) 1/3 likely to have the train get derailed by external factors such as the world economy, some kind of war, etc.
In all of those scenarios it seems to me that good, cash flowing properties will be good to have. The only thing I would say is even if it seems like we're going into scenario #2, DO NOT OVER LEVERAGE because I still think there are some geopolitical issues that make scenario #3 a non-negligible possibility.
In that scenario tangible assets like cash flowing real estate are good, but you don't want to lock yourself in to high loan payments in case broader economic malaise makes it hard to find tenants who can pay the rents.
So personally I am willing to have fewer pieces on the board, and sacrifice some gains in scenario #2 (another big RE boom), and order to have fewer pieces on the board that are safer due to good cash flow and lower loans-to-value, to protect myself in the less likely scenario of #3 just because #3 could blow a lot of people out of the water and I don't want to be one of them.
I agree that seeing so many new "wholesalers" come into the market is worrying and makes me really want to pay attention to group psychology and redouble my efforts to buy sound cash flowing properties where the #s actually make sense.
But I don't think we're at a market top at all. I think it's far more likely we're on the up slope from the market bottom of 2008-2009. The only question is how steep that slope is (scenario #1 or #2) and the risk of a sudden turn (#3).
You asked if the smart money should come out when the stupid money is all in. I think if the stupid money is all in, then the smart money should start to hedge its positions by (in stocks) buying options or (in real estate) selling some dogs and paying down loans-to-value, but keeping select pieces on the board because it's very difficult to time a market top and if a property cash flows on its own it stands on its own and is fine to keep on the board anyway.
However I think we are far from having all the stupid money come in. We are seeing a lot of interest in real estate just because of where we sit (Bigger Pockets and local RE investing clubs), but I think because we're so attuned we also have a little bit of skewed perspective. We might perceive more interest in RE than is really in the market as a whole.
I think it's most likely that we're just at the beginning of all the "stupid" money coming in and if the economy continues to do OK or even improve significantly, we will see a LOT more of such money come into the market.
To me, we could be 3-5 years from seeing all the "stupid money" be back in the market" depending on what else happens with the world economy, the stock market, world politics, etc.
In generally I'm a big fan of being a "contrarian" investor - being the smart money that zigs when the stupid money zags - but I think part of being "smart" is being keenly attuned to what the stupid money (the money of the masses) is doing.
And you also wouldn't stop all RE (or stock) activity just because it's no longer a market bottom - you'd continue to be active but you might change your strategies (e.g., reduce time horizons for stocks or pay down loans for real estate) depending on where you think we are in the market cycle or what the "stupid" money is doing.
This was kind of a brain dump but is a decent summary of where my mind is currently at on these issues. Hope it provides some food for thought.
