There are movies. There are remakes of original movies. There are movie sequels. History shows us that our national economy, if viewed as a series of movies, has added a hybrid — it’s part remake, part sequel. But mostly it has plot twists. Many of you have had an entirely different experience as it relates to the national economy.
Those born in or after 1975 didn’t graduate high school till at least 1993, through 2003 or thereabout. If they went to work immediately, eschewing college, jobs were somewhat tough to come by in some of those years. They hadn’t experienced the bad times in the early 80s. They were kids. They may’ve noticed sighs of relief from their parents as the economy recovered from the double-barreled downturn, inflation in the teens, prime rate over 20%, FHA over 16%, and unemployment approaching double digits. If they went to college 4-6 years, they graduated between the years of 1997 and 2010 give or take birth dates. (My kids graduated college in ’04 & ’09 respectively.)
So in elementary, middle, and/or high school they saw their parents thrive financially during the last half of the 80s. Then maybe they didn’t go on family vacations for awhile in the early to mid 90s. Most of ’em had entered or were finishing high school just in time for the economic recovery, post S & L downturn, on through the beginning and height of the roaring 2000s.
Like I was for the first 30+ years of my career, they’ve been effectively conditioned by the first 5-10 years of adulthood as it relates to our economy. I never saw an interest rate starting with a number below 7 till I’d been licensed 30 years. I was literally beyond skeptical that a 4% home purchase interest rate was even possible.
Our kids are now convinced that jobs are not only hard to come by, but that loyalty coming from employers is something Dad and Grandpa talk about at holiday meals. They not only expect to hold many jobs, they often make it happen as the urge hits ’em, and there’s another job available. Job loyalty has apparently died alone, without fanfare.
The first one was the 1970s. Recession — then boom — than CRASH — then resume price march ever upward and beyond the previous high.
The sequel came in the 1980s. Longer recession — then boom — than CRASH — then resume price march ever upward . . . and beyond.
Then the hybrid snuck up on us, in my opinion.
Note that after each cycle real estate values not only returned to previous highs, they surpassed them, often as if they’d been standing still. Also, the specifics of the plot were not the same in each movie. For example, the horribly high inflation and interest rates of the early 80s wasn’t repeated in the downturn of the early 90s. Still, the bare bones outline of the script remained constant, right?
Prices began their predictable climb again sometime in the late 90s, though it was slight. Then 2000 came, and again we found ourselves off to the races. From that year till the end of 2005 or so, the same San Diego exact same duplex went from about $205,000 to roughly $580,000. (WAY to stupid to make up, I know.)
That’s when the new plot twist exploded on the screen.
In many huge markets, priced dropped 35% to as much as 50%. Being as the people are, even this didn’t immediately convince many that the normal cycle had been junked. In fact, there are those suffering now in my local market cuz they insisted the bottom had been reached in — wait for it — 2007. They must’ve felt like Carrie did at the end of that 1976 movie. Just when she knew the terror was over, BAM! a hand grabs her from the grave. (Remember how much that scene scared you?)
So where’s the so-called happy ending?
Unlike the recessions of 1969, 1974-, 1981-, 1991-, and surely the faux recession of 2001ish, this version of the movie is weirdly different in a buncha ways. But possible the biggest difference lies in historically low interest rates.
1969 — 7-8.5% 1974 — 8.5% & rising 1981 15%+ 1991 — 9%+
Today’s interest rates have folks grumbling cuz they’re now UP to roughly 4.9% for owner-occupied conforming 80% purchase loans. It’s 5.5-5.625% for the same loan to an investor — both 30 year fixed rates.
So now you’ve seen the original movie, its sequels, and the new hybrid with the gotcha plot twist.
You’ve also seen that part of the plot twist includes the potential for you to alter your personal movie ending. Your personal ending can be very happy indeed. Barring another plot twist, God forbid, it’s my thinking we’re not at rock bottom, but it’s likely in sight.
Those who buy now, regardless of further price erosion, have the opportunity to create a happy ending by acquiring as much property as prudently possible at the current interest rates. Even if you lose a bit in value, over the long run your ultimate retirement income, not to mention net worth, will be worlds larger than it woulda been. This is especially true, given the plots of all the movies before this one.
In none of them, without a single exception, were interest rates under 7%, most higher, some WAY higher. The happy ending in those movies was for the very few who had the cash to buy without having to borrow. (That’s me throwin’ a bone to the Cash is always king crowd. 🙂 )
It gets better
You don’t hafta chase price now. You can include location quality in your equation, which will ultimately make your ending even happier. If inflation hits our radar, your rents and property values will rise with it. If things go south, you will, with the right planning, still end up with a higher retirement income and net worth than if you’d stayed on the sidelines.
It won’t be close. Either plan to create your happy ending today, or tell your grandkids how you shoulda coulda woulda at some Thanksgiving dinner. Research how well those with cash did during the early 80s and early 90s downturns.
With the low rates we’re enjoying today, you can now be them.
In over four decades of enduring downturns and flourishing in good times, I’ve never, as in never ever, seen a window of opportunity this golden. The crucial question though, is one that so often remains unasked. So I’ll ask it.
To those with the ability to act — why haven’t you?