Housing Starts – Loan Limits – Prices – Common Sense


Most of us here have been reading various reports the last several years showing housing starts, financing trends, underwriting restrictions, and home prices in general. The cold stats are one thing, but it’s the end game analysis that separates us, right? You conclude one thing, your neighbor goes a different way, with both of ya using the same info. Some of the stuff we read makes us wonder what the author might’ve been smokin’. I know I wonder sometimes.

Monday, Doug Lazovick wrote an informative piece listing stats for inventory, housing starts, sales and the like. I thought it interesting how many around the country choose to view these numbers, and interpret their potential impact, but with such divergent conclusions.

Inventory is high, and will be significantly increased this year by way of more foreclosures, short sales, and the well publicized resetting/recasting of a ton of adjustable rate loans. 8.1 months of inventory keeps us mired in buyer’s market territory. So why in Heaven’s name is it surprising that both builder outlooks and housing starts are relatively flat to grim?

Would the economy gain jobs, income from taxes, and overall growth if, instead of 587,000 there were the benchmark 1 million home starts? Um, yeah. And Grandma’s peach cobbler tasted a lot better than castor oil too. But if you’re ailing, castor oil is probably on your menu, not the cobbler.

Explain to me how the reason builders aren’t throwin’ up a buncha houses in this atmosphere isn’t self-evident. The market is inundated with inventory and I’m gonna risk my hard earned capital to what? Add to it? Really? Builders not rushing to pull permits for another 100 unit housing development shows me they have common sense.

The Million Dollar Question — Why aren’t lenders fighting over buyers with 720+ FICO scores, money up the ying yang, cash reserves galore, and the motivation to soak up all that languishing inventory?

The short answer? The powers that be have their heads firmly ensconced where the sun never shines. I’m talkin’ about the infamous 4 & 10 property loan rules. If ever there was an illustration of room temperature IQs at work, this one’s it.

“I know, let’s bar the best 15% of the borrowing public from ridding us of all this stagnant inventory. Instead, let’s drag this on into infinity, selling only to amateurs and wannabes. Yeah, that’s the ticket!”

I’ll speak of this only in terms of my firsthand experience. I know of at least a dozen, likely two dozen, investors who could immediately buy from four to 10 or more 1-4 unit properties currently on the market. They can’t get loans though. Why? The only reason I can figure is that they’re too experienced, and don’t offer nearly as high a risk as new or far less experienced investors. I know three of them who could immediately take out roughly 30 1-4 unit properties. They remain on the sidelines though, cuz Heaven forbid folks who’re financially qualified and battle tested be allowed to borrow on more than 4-10 properties. The world as we know it would collapse.

What about prices?

With inventory up, and more on the way, and builders for the most part opting for the sidelines, how in the world of Aunt Fannie are prices gonna go up? What often goes unsaid, is how construction lenders are now treating even longtime builder customers. Pretty much everything is viewed as speculation now. Wanna hear a real irony? I personally know lenders who’re financially stronger than the banks givin’ them a hard time.

From now on, and in my opinion, the foreseeable future, prices, at least at they relate to any anticipated appreciation, are no longer factors in the equation. They only matter when part of the real estate investor’s foundational analysis — that is, price/rent ratio and price’s affect on ultimate return. Factoring in even a whiff of a hint of future appreciation should be prima facie evidence of rookie status. Appreciation based investments are no longer to be taken seriously. Again — common sense. Furthermore, it’s my view that those hawking properties and/or markets where price/rent ratios aren’t up to snuff, use future appreciation cuz they have nothing else in their arsenal.

Let’s talk about common sense.

It makes no sense at all to throw your investment capital into real estate located in areas already proven to be black holes. Price isn’t the end all be all of real estate. Don’t believe that? Ask those who keep investing in markets where populations are not only shrinking, but where demographics are screaming for you to “Run! Turn around, and haul buns. It’s a trap!”

It’s simply nonsensical to buy cheap properties in markets where city/county/state government view business as evil, and think the only bad tax is the one they haven’t thought of yet. Markets in which employers have and still are running to other states, not just to better their bottom lines, but to protect their bottoms from extinction. Markets where not only employers aren’t welcome, but the movers ‘n shakers are penalized. Before long, the majority left are the ones who can’t afford to move.

What’s left in these places?

Fewer and fewer people you’d want as tenants. A rapidly dwindling market for your newly purchased rentals. Oh, and did I mention what’s next on your menu in these markets? Rent control. Once that happens your equity is pretty much floatin’ face down in the water. Regulation creep will eat you alive. So beware of those who want you to buy in these so-called price friendly markets. Another caveat: Some of these markets have been the darlings of real estate investors for decades. The key phrase there is ‘used to be’.  Apply the common sense Grandma instilled in you. 🙂

As yourself these questions.

1) Are the state’s income taxes among the nation’s highest? How ’bout business taxes too? Are they pro business?

2) What’s the recent history of medium/major employers in the state? Are they leaving? If so, why?

3.) If someone wants you to buy there, and the price/rent ratios etc. are inferior to other regions you’ve investigated, what’s the upside? It’s gotta be appreciation. RUN

4) Why are businesses and people leaving the state is such large numbers? Hint: It ain’t cuz their sports teams aren’t winning.

5) Are you willing to bet your retirement on this region? Ha! That one stopped you in your tracks, didn’t it? Good.

Common sense, or rather the lack thereof, dictated the results we’re all seeing and experiencing today. Yet for so many talking heads, it appears to be a mystery. Common sense, applied as you invest today, will ensure a reliable retirement tomorrow.

The rest is HappyTalk.

About Author

Jeff Brown

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.


  1. Hi Jeff, as usual, you are dead on. I been buying property for over 40 years, never miss a payment, always cashflow positive, FICO score over 800 and an excellent track record on investing in property. Thanks to the powers that be, I’m treated like a wanna be, if I can’t pay all cash, can’t buy:( Politicians are crying for more money, let us help. Example: just 50 investors spending $1,000 a month (not very much) at one lumber store would be an additional $50,000 in sales = more jobs, more taxes. I was spending over $8,000 a month, now $O. Season investors, rehabers should be treated like VIP’s. Give US loans, we will get this country growing in a NY minute. I could go on and on but, you’re doing a better job at it.
    Thank you.

  2. Jeff Brown

    Hey Jim — Isn’t it both amazing and moronic that successful investors like you are treated as if you’re part of the peanut gallery? A guy in your position could easily take a big bite outa the current ‘super-sized’ inventory. It’d be funny if it wasn’t such a sad comment on what passes for leadership in D.C.

  3. Another Investor on

    Jeff, you are preaching to the choir again….

    As I have said for the past two years, eliminate the 4/10 property limits on loans and real investors will clear the market in short order. They will buy the properties, spend money to renovate and upgrade and put all those vacant 1 to 4 unit properties back in service as rentals.

    Instead of leveraging my way into several more units, I have to be content to pick off one short sale or REO for cash. That’s no way to grow a rental portfolio nor does it solve the oversupply problem. Put the assets in strong hands and those assets will be productive.

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