Over the past five or six years, I’ve heard the following claim consistently made by investors both in my home market of Denver and nationwide. It seems by far to have been (and continues to be) the most popular prediction made by investors both experienced and novice:
“The market is probably going to [reset/correct/crash/fall/decline/etc.] over the next 18-24 months.”
It seems like pundits have predicted a price squeeze or bubble that was two years out on average every single year out of the last five. Don’t believe me? Check out article after article from basically every major media outlet in the United States predicting a bubble at some point in the last six years. I’ve even compiled a sampling for your reading pleasure below:
- Denver Post: “Buyers Caught in a Price Squeeze”
- CNBC: “Housing Market Already Shows Signs of a New Bubble”
- CNBC (Again): “Housing today: A ‘bubble larger than 2006’”
- National Review: “We’ve inflated another bubble; count on the crash.”
- CNN: “Housing bubble fears have returned”
- MarketWatch: “The Seeds of the Next Housing Crisis have already been planted”
- Forbes: “58% of Homeowners Think The Housing Market is Set for a Correction”
- USA Today: “Hot Housing Market Could Cool in 2018”
I could go on.
How Long Are You Willing to Wait for the Impending Market Crash?
If you believe that a market crash is coming, you are either right—or else you might be waiting a long time to get started in real estate investing. There were people waiting for the next crash in 2013, 2014, 2015, 2016, 2017, and still here in 2018. Oh, and of course, there were just as many equally well-written and well-researched opinions talking about the great health and future growth of the housing market, which also continues today.
But the point is that I’ve heard about an impending market crash throughout my (admittedly short) entire investing career.
Let me ask you this: When the next crash comes, will prices drop below 2013 levels? Below 2015 levels? Below 2017 levels? How much do those waiting for the crash stand to gain by waiting this thing out, and how much will those who own property today lose?
How low do prices have to go to eliminate the gains of the last six years here in Denver? How about your city?
These pundits—I don’t believe that they are any smarter or stupider than you or me. The thing is, I don’t think anybody knows when the market is going to crash. Nobody knows if that will happen this year, next year, the year after, in five years, or in 20.
To be clear, I’m not saying that I think the market will continue to go up forever. And the truth is, I’m scared. I’m afraid of two things:
- I’m afraid that the market will crash and that I will lose a ton of equity very quickly.
- I’m afraid that the market will climb much higher and that I will miss the ride if I don’t buy more.
I’m equally afraid of both of these things!
I’m sure that if you have an opinion on the market over the short to medium term (2-5 years) future, you have great reasons. I bet you have a bunch of charts, just like those pundits. I’ll bet that you can cite numbers that talk about supply, demand, interest rates, leverage ratios, employment, household income, the stock market, inflation, the trends of the Millennials, the trends of the Baby Boomers, or something else that’s just as important as all of the above.
But I’ll also bet that the fellow who is just as smart as you, but has the exact opposite opinion, has strong data behind his beliefs as well.
The fact of the matter is that if you believe that the market is going to crash, then you could be right! You could also be wrong! Or (and in my opinion the worst and saddest waste of being able to say “I told you so!”) you could be right and still lose.
The thing is that you don’t know which of those metrics and factors will be the lever that actually moves the housing market over the next few years.
As I hope I’ve demonstrated with the news articles above (and I can anecdotally tell you that I’ve been part of discussions on BiggerPockets about this very topic since 2014), we hear this song and dance about impending crashes all the time as real estate investors.
It scared me when I was thinking about starting to invest in 2013, and it scared me in 2014 when I bought my first property. It scared me in 2015 as I held that first property, and it scared me in 2016 when I bought again. It scared me in 2017 as I held those two and bought a third. It scares me now in 2018 as I plan to buy another property.
One day, the doomsday prophecies WILL come true. These pundits (and you, if you agree that we are headed for a correction) will be proven right eventually. But will that be this year? Next year? Five years? What if the correction comes in seven years? What if every metric that you can conceive of screams, “BUBBLE!” and still prices climb? What if the bottom of the correction sees real estate prices and rents that are much higher than today’s?
Those sitting out will be right, and they will still lose.
Related: 3 Reasons I’m Still a Buyer in Today’s Real Estate Market
THAT is why I continue to invest—even though I, too, fear a bubble. I believe that over a long time horizon, say 20 or 30 years, that prices in my market will appreciate at a rate equal to or greater than inflation. I believe that this will be the case regardless of whether I buy at the top or the bottom of the market today. And I believe that so long as I can ride the tides of market volatility and sustain possible cash flow, that I will not regret my decisions over time.
I also believe that I am incapable of accurately predicting when the market will boom and bust.
I could be wrong on these beliefs, and I constantly reassess the foundation upon which I construct my investing philosophy. But this is my philosophy and approach for now—and the one I have acted on and plan to continue acting on until I find something better.
Given my overall take on investing, I believe that I can maintain a system of investing such that I give myself reasonable odds of winning financially in all three market scenarios:
- I win if the market goes up. If you don’t own real estate, you lose if the market continues to appreciate.
- I win if the market goes sideways. My portfolio cash flows and I self-manage to ensure as much profitability as possible if rents do not go up at all.
- I win if the market goes down. I believe you have a reasonable chance at winning if the market goes down if the following are true:
A: You have the personal financial position and stability in your portfolio to make it through even serious market drops, particularly in rent.
This means a substantial cash cushion and substantial cash flow from existing properties. And I have no doubt that a sudden drop in equity will be hard. I try as best I can to mentally prepare for that ride and to learn from folks who have been through the 2007 recession.
B: You have the reputation to convince lenders and potentially other investors to invest alongside you when/if bargains do begin popping up.
Guess what? If you own no real estate, you cannot develop this reputation. I am not investing alongside someone in a recession or depression who has no experience, who owns no rental properties, yet who tries to convince me that they’ve known all along that the crash was coming. I am instead going to look for someone with years of experience and the confidence to say, “Sure, I’ve lost some equity, but I couldn’t care less! Every month, I achieve a 10%+ cash on cash return, and I’m foaming at the mouth to buy as much as I can now that I see 20%+ cash on cash returns everywhere!”
No one can predict when the market crash will happen, how severe it will be, or what its effects will be. For all we know, all the metrics might point to oversupply and overpricing of U.S. housing, yet prices still rise over the next few years due to unprecedented inflation after over a decade of the Federal Reserve pumping trillions of dollars into the economy and/or a relaxed fractional reserve ratio (increasing the money supply and perhaps spurring inflation). If that’s the cause of the next great economic challenge of the United States, then investors will see prices and rents rise!
To be clear, I am not predicting this or any event. I’m just pointing out that this is one of many possibilities that could negate the effects of other market conditions and throw off the predictions of even the best pundits.
Why I’m Not Investing Aggressively
Now, all this said, I CERTAINLY do not believe that now is the time to overextend. I buy well within my means, with a rock solid personal financial foundation, and spend extremely little on my lifestyle. I maintain a high savings rate and have stashed away a large cash reserve. I also own a stock portfolio.
I do this because, just in case the pundits ARE right this time (and we are certainly five to six years closer to the next correction than we were in 2013!), I do not want to be caught with my pants down.
Related: 3 Strategies I Use to Succeed in a Cooling Multifamily (or Any) Market
But I am not staying out of the market entirely and plan to buy another solid cash flowing rental property here in Denver again in 2018 to maintain my system of dollar cost averaging, regardless of the market conditions.
I’m doing this because I believe the best policy is to adopt a conservative, winning formula and to apply it consistently. And that is what I’ve done and plan to continue doing.
I do not believe that continuing to buy is any riskier for me than staying out of the market is.
Should you wait for the next market crash? I don’t know. Someday, the pundits will be right. I’ve shared what I’m doing and why, and I hope that perspective gives you something to think about.
I’ll caution you, though. I think, personally, that it is unwise to invest a large, lump sum of money all at once in a real estate investment. And when I say large, I mean an amount that is more than one to three years of savings, given your current financial position. If you do this, it means that you might be investing in a manner that is unsustainable for you. And if you are investing unsustainably, you risk losing a huge chunk of savings, perhaps all of your investment and then some, all in one go. I believe my system has a good chance of working for me because I believe that I have an excellent probability of being able to buy similarly sized or larger properties year in and year out in my market and sustain a system of dollar cost averaging.
If I wasn’t able to do that, I’d be finding another market to invest in, developing another investment philosophy, or working on my personal financial position outside of real estate to the point where I thought I could sustain my approach in an up, down, or sideways market.
Are you investing in today’s market? Why or why not?
Let’s discuss. Comment below.