Why I’m Likely to Invest More of My Own Capital This Year Than Ever Before

by | BiggerPockets.com

We’ve had a hellacious rollercoaster ride this century when it comes to our economy, real estate, and investing in general, haven’t we? Born under President Truman, I can attest to having lived through—or should I say, survived—many down cycles. Experience tells me this latest version was the third worst compared to the 1981 recession and the S&L Crisis in the 1990s. It’s not even a close call. But as I often tell clients, don’t let me get away with saying something like that without backing it up with empirical evidence.

For those born in the 1970s and after, here’s what happened in those two down cycles.

The 1981 Recession

We’d just experienced over four years of nearly runaway inflation. In fact, it topped out at around 14%! Think a second, and let that reality sink in. Real estate tends to “track” inflation, which it did with a vengeance. Homes worth $30,000 going into 1976 were worth $100,000 in 1981. But by then the economy had tired of high unemployment, higher taxes, much higher oil prices, and rising interest rates.

In the last quarter of 1979, the you-know-what hit the fan in spectacular fashion. When the White House changed tenants around this time in 1981, unemployment was around 10%, give or take. Inflation was roughly the aforementioned 14%. Prime rate was ready to touch 20%. The FHA home loan rate for their anchor 203B home loan program hit 16.5%! The rates for small (1-4 residential units) income property started at 18%. Here’s a personal family anecdote from those days.

Grandpa and I were talking one afternoon when he mentioned the 13.5% interest he was getting on a bank CD. I could tell how proud he was, but then he asked for my opinion. I told him that after tax he was losing around 5-8% due to inflation. The air went out of his balloon. He knew it was true as soon as the words left me.

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The S&L Crisis of the 1990s

Crooks took advantage of new legislation, poorly thought out, that in effect gave the key to the henhouse to the foxes. The predictable mass theft and corruption spun out of control. That crisis is why young folks don’t know what savings and loans are. They’re gone. In 1994, home loan interest rates were back to 9% or so. No real estate was moving due to the S&L Crisis. Back then and for years before that, a huge chunk of home buyer lending was done by savings and loan firms. The economy was a joke. How bad was it, you ask?

Related: 3 Strategies I Use to Succeed in a Cooling Multifamily (or Any) Market

You just read the short version of how bad the ’81 recession was. This one, in my opinion, was worse. Every few days, back in August of 1994, I gathered small groups of my investment clients in my office. I told ’em I wasn’t renewing my office lease that December. I’d let them know when I thought it was time to get back into the pool. But ’til then? I was out. That’s how bad it was. I remained out ’til November of 1996, just over two years.

Compare those two downturns to our most recent experience.

  • Home loan rates remaining steadily in the 3-4% range. Investment loans for residential income property camping in the window of 4-5.5%. Inflation staying in the 2% range if not lower—though I will agree the current formula for “real life” inflation has become a bad joke.
  • Rent/price ratios have reverted to better days, though lately we’ve seen them begin to show weakness due to supply/demand. Income property in very high quality locations can still be acquired at a rent/price ratio of give or take, 1%. High quality locations? Yeah, locations you’d put your mom or grandma to live alone. That high quality.

Let’s Give This Some Historical Perspective

I was in the business as a licensed real estate agent, then the broker/owner of a brokerage for 32 consecutive years before I ever saw a home loan 30-year fixed rate interest starting with a number less than seven! Ponder that a minute before saying how much we all suffered with home loan rates under 4% the last decade or so. 🙂 Think about the ability to abandon your local market, as I did almost 15 years ago, in order to invest in properties that made, you know, common sense.

Technology has allowed me and my clients to buy and sell properties and notes in over half the states. It’s allowed me to begin developing properties out of California. This has been true since at least 2000, and I’m being kind. I know many who invested outside their own states in the 1990s. The only thing I’ve done in my own state since leaving is to buy a house, and that was on the boss’s orders.

How About Now—What’s New?

As I write this, home loan interest rates remain under 4%, though they’re knocking on that door loudly. Our taxes have been reduced somewhat, more or less for some than others. The repatriation of maybe a trillion dollars or more from across the Atlantic will be like a shot of adrenaline IF it becomes reality in any real sense. Over 100 large American firms have already shelled out bonuses. Many, including Walmart, have given raises while simultaneously increasing employee benefits. I mention that only as evidence of how big business must be viewing the next few/several years. It shows confidence in an economy they think is about to experience long term growth in percentages much improved over the last decade or so.

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I Agree With this Assessment

Again, I’ve seen this movie before. I’ve seen its sequel and its remakes. Though unanticipated plot twists are always on our menu, it’ll be the first of my nearly 50 year career. Again, that’s not to say something untoward can’t happen, it can. But it hasn’t happened in my lifetime. That said, the iconic bubble bursting in late 2006 and 2007 was a new one to me, though not an unanticipated plot twist. I’d seen it coming by late 2002. So why’d it take me ’til May of 2003 to leave SoCal’s real estate investment market? It took me that long to man up is the simple answer.

Related: How the Dire Future of the Retail Market Could Solve the Housing Affordability Crisis

Walking My Talk

That’s a lotta talk about good times headed our way, isn’t it? Let me assure you I’ll be walking that talk, barring any plot twists, for at least the next couple years if not longer. Here’s what I’ve done already and what I plan for those years.

In the last few months, I’ve already spent over $1.5 million of my own and group investment money I control on flips around the country and land in a nearby state. Six figures of that is my capital. My team and I have already, or will in the next 30 days, break ground on three projects. This calendar year, 2018, plans are to spend another $5-10 million on more of the same. I’m all in with my own capital. Every time one of my other investments in notes or flips pays off, it goes into another out of state development run by my team and me. I view the upcoming few years as a window for real capital gain and profit.

A caveat: Interest rates in this scenario have always risen. I expect no less this time. For buy and hold investors, get sooner rather than later. The rates more likely than not will eventually hit the point where buy and hold will become much more difficult to pencil out.

I’m likely to invest more of my own capital this year than ever in my career.

I’d love to know what your thoughts are for this year and the next few.

About Author

Jeff Brown

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

61 Comments

  1. Rob Cook

    Jeff, this was a great post! One of the best I have seen actually, cutting to the chase. I am about your age, maybe a little younger. Got my Real Estate Sales License in 1978 in Hawaii, and remember well, the high-interest rates and inflation rates of the Carter years.

    I have also lived thru many of the cycles in our economy, as a residential real estate investor. I “missed out” on $ Millions of potential profits by being over-cautious (If that is really possible LOL!) and going to the sideline when I predicted an impending bubble burst, always a few years too soon! Oh well, as we say in trading, “missed money is better than Lost money.”

    So, when you mention the window of opportunity we may be looking at, for the coming 3 years or so, I hesitantly, and cautiously, agree. Is that qualified enough a statement? We currently have 52 long term hold residential rental units (doors), personally, no equity partners, other than my bride of 37 years. At age 58, I sometimes think I am out of my mind for aggressively growing my rental portfolio at this “stage” in my life, having “retired” almost 20 years ago. But I am “backing up the truck,” having purchased over 40 units in the last 7 years, 21 of which were in the last 2 years, and 9 in the last week! We manage most ourselves and do ALL of the repairs, maintenance and remodeling work on them with only help in the last 2 months, from a new 22-year-old employee/trainee. Some relaxed “retirement” huh!

    I suppose the main point is that we, too, are acting in accordance with our belief/feeling/intuition that this is a good move right now. I think it is the too-long, too-low, interest rates which support my enthusiasm. I am in the “borrow as much as I can” mode now, while the going is still good. Not that I am over-leveraged or risky, learned those lessons many times in my youth. But I really believe we will see 7% residential first mortgage rates by 2021. That is probably NOT a prediction of good things to come, and I am not basing that on anything scientific…just a feeling. And it is entirely possible that we will see 10% in the coming 10 years, if not a lot worse.

    There are many competing, interrelated and offsetting metrics to bake into this prediction, including the relationship between interest rates and price – usually an inverse correlation in real estate. Higher interest rates mean less affordability, which usually results in lower sales prices. Cannot escape that relationship, UNLESS “they” (the next set of crooks) come up with a totally new mortgage financing paradigm, such as 50-year terms, or another easy-qualifying scheme that creates the next financial crisis and “depression.” I have learned to never underestimate either the greed and stupidity of the public (Greater fool theory) or the degree of the dishonesty of manipulators of markets (the Crooks).

    All that said, I am putting my money and energies into growing my rental portfolio now. With a stringent analysis process and bargain purchases, combined with our hands-on management and improvement in working-class properties, we are pretty well hedged no matter what the future brings. People will always have to have a place to live, and they will rent when they cannot buy. Onward.

  2. Rob Cook

    Oh yeah, Jeff, you mentioned appreciation expectations and I forgot to comment on that. First, it is really fun, to “own” (have your name on) a lot of properties when high inflation occurs! Makes you feel like a genius. I never count on inflation in my investment analysis, but it has in fact fueled my ability to play the game over the years. That is part of why I am accumulating properties now. Second, not only are interest rates “bound” to rise but so is inflation. Although higher mortgage rates have a downward influence on sales prices, generally, the inevitable accompanying higher inflation usually overwhelms the downward pressure and results in higher sales prices. Not able to explain this technically, but have observed it for 40 years. Having your name on $10 Million of real property, when you have 10% inflation, increases your net worth $1 Million a year (more or less, at least on paper). And with Realty, the inherent potential leverage can make this an incredibly high ROI windfall. I.e., unless you own all $10 Mill of that property, free and clear, then your actual return from the same inflation, is far more than the 10% rate.

  3. Greg Parker

    Great article. Thanks for explaining it. I also saw the 2007 crash coming but ignored it. 10 years later, I have my ducks in a row and I believe the next 5 years will allow me to build wealth that will last generations. But, I still tend to lean a little on the cautious side, I don’t want to get caught with my pants down again. I am getting too old to keep starting over:)

    • Jeff Brown

      Always be cautious, Greg, we agree totally. The biggest risk in a boom is that too many investors think it’ll never end, and therefore never apply the brakes. I witnessed this firsthand at the end of the 70s, and end of the 80s. I’ve come to believe it’s human nature to think whatever direction the ‘chart’ is going, it’ll continue that way forever.

      The caveat in this window is that it may not be for 5 years.

  4. John Barnette

    Born in 1970 here. Graduated from college into the 91/92 recession. Got a bank mgmt training program job right out of school. Guess I didn’t realize how fortunate I was. Didn’t seem that bad though. At least to a 22 yr old. Econ. Major though. Working in SF as a real estate agent and small scale investor through the Internet 1.0 explosion, dot bust, liar loans and exuberance, 2008 crash, return to “normal” , Internet 2.0, and on. Never a dull moment. But it is coastal California and absolutely will change direction again. Jobs and economy are fantastic now. Thanks for the post.

  5. Katie Rogers

    The principal is more important than the interest rate. When the interest rate goes up, the house price goes down. The sweet spot seems to be around 7% where house prices stay in their historical relationship to wages. That might mean more people may have the opportunity to own the house they live in instead of rent. Right now there are actually too many people renting houses.

    • Jeff Brown

      Hey Katie — That’s an interesting observation. As I mentioned in the post, 7%+ interest rates didn’t stop home prices from rising, and significantly so. Then there’s the comparative home loan payment between today’s interest, about 4%, and the 7% you brought up.

      Today’s median home price in San Diego is roughly $535,000 or so. An 80% conforming loan at 4% would generate a loan payment of $2,043.34 monthly. To even remain at that payment amount the price would need to drop to just under $308,000. That’s a drop of just over 42% in home values, and the buyers are still not gettin’ any relief on the house payment itself.

      You’re right about rising interest rates at some point negatively affecting real estate values. But for homebuyers, with the exception of a reduced down payment amount, their monthly payment will remain the same even with a 42% downward adjustment.

      • Katie Rogers

        You are correct that the monthly payment will remain the same despite a 25% reduction in home prices. That is because wages still have to fund those payments. If the homebuyer cannot afford the PITI, the lender won’t approve a loan and they cannot buy a house. Property tax would also be reduced by 25%. In a healthy market, house prices retain their historical relationship to median wages.

        Let’s look at your San Diego example of a median house costing $308,000. At the 7% rate I mentioned, the PITI comes to about $2022. Someone making the median wage will probably qualify for that house, so the house price is not too disconnected from the wages that pay the house payment. In Santa Barbara, the disconnect is tremendous.

        Agents say that lower interest rates means you can buy more house. What actually happened is lower interest rates meant you will pay more to buy the same house.

        • Jeff Brown

          Excellent points, Katie. My only point was that if the payment is the same the number of renters will only decrease to the extent they can afford the down payment on the lower priced home vs the higher price for the same home, given the same monthly payment.
          Again, great points.

        • Rob Cook

          Katie, that is a typical market reaction, we can observe in another significant, historical context/example. When women began entering the workforce en masse, making two-income households the “norm,” what happened to house prices? Prices increased almost immediately to absorb ALL of the additional (the women’s contribution) household income.

          In other words, now BOTH spouses worked full time, and yet there was still no money leftover after paying the mortgage, AGAIN! And living in the SAME house! What a kick in the groin!

          Housing prices increased as a result of the new and higher ability to pay due to a second family income emerging. People gave up an arguably better lifestyle (single spouse working) and got no net improvement financially for all their sacrifice. Again, not to say there were not social benefits, such as women availing themselves of career experiences and freedom from being a “housewife/slave” as many felt. But with the price of childcare, probably an additional vehicle, wardrobe expenses and higher home prices (and therefore monthly payments), there was effectively little if any positive financial benefit when the dust settled.

          Note, since two income families were chasing the same houses as single income families, the prices were BID UP and an overall step function jump in house prices occurred as a result. And it has never unwinded.

          Supply and demand? Yeah, kind of. Manipulation and an externality (reduced quality of life?) occurring is a more accurate explanation of the result.

          In the long run, nobody was better off financially, and we are all still caught up in this hamster wheel. It is a rigged game. And it has had substantial and probably permanent effects on our social structure. Heady stuff, huh?

        • Katie Rogers

          Did house prices go up to absorb the spouse’s wage? Or is that when families started buying McMansions because they could? Nevertheless, many of your points are valid. Elizabeth Warren wrote a book about the two-income trap that makes many of the same points.

  6. Chris T.

    Great article Jeff and Rob Cook. What are some of the signs, based on your experiences, that you would look for that may indicate a top is coming?

    I have cautiously starting getting more aggressive since last year as well. I just finished reading Big Shifts Ahead by John Burns and Chris Porter. They estimated 12.5 million new households that will be formed between 2015 to 2025.

    And can this stock market really keep going up?

    • Rob Cook

      Chris T. that is the $ Million Dollar question! There are many tale tale signs, but usually, they can only be identified as accurate, AFTER the runup has long ended. Is it just a correction? A momentary downturn in an uptrend? You ONLY know, after it has proven out, which of course, is of no benefit to speculators. “Timing” markets, stock or real estate, is essentially, impossible to do when it counts.

      So, does that mean you ignore indicators? Well, if you are a long-term investor, I would say YES. You cannot be whipped in and out of positions as the transaction costs are simply too high in real estate investments. Better to use a more durable approach to selecting your acquisitions. One which takes into account metrics which are more likely to be true, in the long run. I have lost a lot of money, as both Jeff and I stated here, by being too cautious. And I continue to make this “error” and always will because it pays off in Real Estate.

      We do not need every deal we can find. Cherry pick them, regardless of market conditions or outlook, always, and you will not only survive but thrive over the long run. I have bought many properties from wannabe investors who jumped in, half-cocked, making many fundamental errors including timing.

      The really cool thing is, if you buy well, and can afford to carry a property even if it has some negative surprises along the way, you should at least not lose much money. And then, only when you sell it! Long term rental holds are very forgiving. Rents rarely have bubbles and therefore few significant corrections/busts. Prices are always subject to speculative risks, not rents. At least, so far…

    • Jeff Brown

      Hey Chris — Though Rob saved me a lotta words, I’ll had just one thought.

      Experience has added a helper — my gut. Dad called his ‘lizard brain’, and he was almost uncanny. As I add more birthdays I have come to believe in the gut as a real thing.

      The market gives us what it gives us. It also takes. Go with the flow of the market.

  7. Nathan G.

    Good article, Jeff. I’m late to the game but intend to continue acquiring property through smart purchases. If the market grows, I win. If the market crashes, I survive (which means I win).

    I’ve seen many investors that stumbled into property 20 – 40 years ago. They knew nothing about rentals, they didn’t make the best purchases, and they sucked as Landlords. However, they held on through the storms and eventually turned their investment into wealth. Those of us that are educated and making smart buys will see far more success in the long run.

    • Jeff Brown

      Thanks a million, Nathan. I know tons of those investors who bought and traded, and kept doing while in the San Diego market. They look like geniuses, as you say. 🙂 In so many instances they were the blind leading the blind.

      • Jeff Brown

        Absolutely, Gary. I know dozens of investors over the decades who’ve done just that, and made out sometimes spectacularly. The key in my experience is to always remember that that cash is your equity, and that it’s in the bank, not in the property. Knowing that has always helped me stay on the super safe side.

    • Rob Cook

      Gary, another way to look at this is, with inflation and currency devaluation, it is “smart” to pay back nominal debt “dollars” in the future, with devalued “dollars.”

      For example, if you buy a property for $100K, with 20% down, and borrow the $80K for 30 years at the fixed rate of 5%, hold it 10 years. Assuming 5% inflation (both in housing prices and in currency devaluation). To make a SIMPLE MATH example of this (not an accurate financial time value calculation, etc. !!) assume that the future value of the house in 10 years would be $163K. And the “dollar” would now be worth only 63 Cents, 10 years from now. SOOO, you would not only have “made” $39K on the appreciation ($63K equity discounted at .63 cent the then-current dollar value), PLUS you will be “Making” 37 cents on each dollar you repay now on the remaining $65K mortgage balance, with the devalued currency, or another $24K, totalling an economic gain of $63K on your initial $20K cash investment in 10 years.

      Now, econ and math nerds, don’t “hate on me” for this simplified (and probably not mathematically or accounting-wise accurate) example! It is just to make the point that using leverage in an inflationary environment can pay off big.

  8. Don Brown

    Jeff, I grew up during the Truman years and it has been a roller coaster ride needless to say. I left Missouri and moved to California and have been a California Resident for 1966 and I moved to Northern Nevada in 2013 and wish I had done so sooner.

    This was a great Post and I must say I have experienced everything you mentioned. Great job.

    We are in the process of setting up a Modular Manufacturing Facility of which we will be building Workforce Housing for a client we have a contract for 274 Homes over the next 5 years. These are not your typical manufactured home these are built using Structural Insulated Panels of which will built in the factory hauled out and placed on stem wall as if it was built site built. We don’t build trailer houses or single and double wide. Only real houses.

    If you or if you know of anyone that may be interested in Joint Venturing I would be interested in discussing the opportunity. Northern Nevada is bursting at the seams due to expansion of companies moving into the area you may want to consider looking at Northern Nevada and if you are interested give me a call at 775-537-3218 or my office at 775-301-1461.

    • Rusty Russo

      Don, I m intetested in your SIP project as well. Im in two markets, Denver and Austin, and by hapinstance bought rentals situated on lots that will accomadate an additional 5-10 additional units each. The markets are great but finding builders is difficult and are expensive. Im exploring SIPS as a way to decrease labor costs. I own the properties free and clear. Ill check in with you on your project and probably invest in it to also learn about the process of SIPs for building.

  9. Dave Van Horn

    Great article Jeff! I’ll definitely be investing of my capital more than ever this year too!

    I’m with you that I believe interest rates will continue to go up, but I’m not positive that that will impact prices dramatically in the near future.

  10. Mary Love

    I agree with your assessment Jeff. Thank you for the article. I am also going “All In” in 2018 and plan for continual growth for the next 3-5 years. I live in Asheville NC and the real estate market is booming here. I also plan to keep cash on hand this time so I’ll be able to pick up those deals when the market does turn.

    • Jeff Brown

      Superb question, Daniel. Generally speaking the demand for any product puts upward pressure on the product’s value. As more folks gain full time employment, and employed people begin seeing more take-home pay in their checks, the demand for homes could indeed rise measurably. When that happens, more times than not the interest rates go up.

      Make sense?

  11. John Murray

    Bravo Jeff leaning by history is called wisdom. Every savvy individual will learn from history. Government policy of the Lawmakers and the Courts will dictate how individuals can prosper or fail. You are correct when the last of the New Deal Administrations, Lawmakers and the Courts established the new corporate regulations, America changed. Our President and his Dad made bank during the New Deal and continued through the rapid government regulation change during the the 80s, 90s and into the 2000s. Many prospered during government regulation changes. Investment banks rose to established policies that were unchecked by regulators, causing catastrophic greed and the eventual bailout by the taxpayers. People will forget about that time period and will repeat the process. The Lawmakers and the Courts will always find new ways to insure the process will happen when the time is correct. Smart guy!

    • Jeff Brown

      Good question, Noam. I’m interested in Texas, Idaho, Utah, Nevada, and a few others. I’ve recently purchased over a million bucks worth of Utah land. There are a buncha places to buy land to develop, and never enough Benjamins. 🙂

  12. John Boby

    Jeff,
    Please give us your prediction for next real estate crash in California. As you know the new tax plan
    residents of states with higher tax rates like California, might be facing bigger tax bills. For families in these particular states… the loss of deductions will impact them much more than families in states with lower state income taxes and real property taxes.
    The history shows we had crash every 8 to 12 years and I believe that history repeats itself.

    • Jeff Brown

      Very interesting question, John. Let me begin by admitting my crystal ball is as reliable as the next guy’s. 🙂 The tax deduction loss for high tax states will be hurtful to their citizens, though it won’t impact the vast majority of the other states. But the real ‘fuse’ already lit is the negative influence on Producers that the state’s business regs, confiscatory income tax rates, cost of developing land, and the rest. These factors are causing CA to lose so many of their Producer families. And lest we forget, they’re takin’ their progeny with ’em. This means the loss will be extended to the next generation, and likely even to their kids too. Let that sink in.

      In fact, it’s why I’m serious as a heart attack about arranging a move for The Boss and I to Puerto Rico. THAT’s how bad it is. But then you already know all this, right?

      I saw the futility of remaining in CA business wise, which is why I abandoned CA’s real estate investment market in May of 2003, when even the vast majority of my clients said I was being foolish. Being one of those lucky folks who love most of what they do, I’ll likely never retire. That fact, along with my son being our family’s third generation in the business, avoiding all the massive taxation in CA and the IRS is merely a natural next step for thousands of CA families. CA talks about their population still growing, net/net. True enough.

      But the mode of this growth is the fastest way to financial and overall economic calamity one could conjure. While the Producers are leaving, they’re not being replaced tit for tat. CA has the most citizens in the nation on some sorta gov’t financial help. As time marches forward, that ‘trade’ in demographics won’t bode well for the state. Furthermore, the state is now openly promoting the acquisition of even more ‘Takers’, which will only tend to add velocity to the crash of the state’s economy. At some point the Takers overwhelm the Producers. If you wanna survey the opposite of CA’s approach, try lookin’ at Texas, Idaho, Utah, and a handful of other states who aren’t trying to suck the Producers in their states dry. People are flocking to those states, usually exiting from states like CA.

      So John, I have no clue when the next economic crash will hit CA, I just know the state’s leaders are doin’ everything in their power to hasten it, regardless of their stated intent. It ain’t gonna be pretty.

      • Katie Rogers

        Your division of the population as Producers and immigrant Takers is spurious. It very mush sounds like you mean illegal immigrants. California has seen a net decrease in illegal immigrants over the last ten years, and the ones who are here are mostly tax-paying workers, thus they are the Producers.

        Regulation is also not the problem. Regulations tend to be reasonable and are there for a good reason. In my town, the biggest problem is lack of regulation enforcement and a vacancy rate below 1%. My town is infested with crummy rentals charging outrageous rents because there is no natural competition for tenants to ensure that landlords properly maintain their units.

        Another big problem is the influx of hedge funds who overbid properties. Then real estate agents use the comparable sales thereby created to keep the vicious cycle going. There are NO properties on the market in my town that cash flow. My town thinks a 4% cap rate and and a GRM of 20 is normal. Actually, my market is very sick.

        Something needs to happen to reestablish a reasonable relationship between median house price and median wage in many parts of California. Agents could be at the forefront of preventing a painful correction by giving better price advice to both buyers and sellers, but instead they would rather maximize their own commissions in the short-term rather than give the fiduciary advice their clients deserve.

        • Jeff Brown

          Hey Katie — I don’t speak in ‘mush’. CA is huge in welfare, period. You’re the one who brought up illegal aliens, not me. If I meant that I’d of said it straight out.

          You said: “Something needs to happen to reestablish a reasonable relationship between median house price and median wage in many parts of California. Agents could be at the forefront of preventing a painful correction by giving better price advice to both buyers and sellers, but instead they would rather maximize their own commissions in the short-term rather than give the fiduciary advice their clients deserve.”

          That would require either a magic wand, Divine intervention, or a completely gov’t planned economy, which CA is heading towards at breakneck speed.

          Real estate agents giving ‘better price advice’? I can’t top that. 🙂

        • Katie Rogers

          Then who exactly are Takers in “the state is now openly promoting the acquisition of even more ‘Takers’,”? That is usually a reference to the so-called “open borders.”

          California manages to pay for their welfare recipients as well as make up the tax shortfall for welfare recipients in other states.

          Your response to me was mush. (It was also petty of you to ping on a typo). Real estate agents need to advice their selling clients to set fair market prices, not bubble prices based on the last overpriced comp. They need to advice their buying clients to not overbid for a house. In this way, the possibility for a gradual, relatively pain-free correction exists.

          Buyers and sellers must certify by signature that they understand that their agent has a fiduciary responsibility to them. It should not require “a magic wand, Divine intervention, or a completely gov’t planned economy” to get agents to fulfill their fiduciary duty to clients. If agents won’t do it voluntarily, it might require another one of those pesky regulations. Regulation generally come into being because people are always looking for loopholes that will allow them to do less of what they should do if they were actually acting in good faith. So I guess you are agreeing that agents generally fail to fulfill their fiduciary duty towards their clients.

          There is no evidence that which CA is heading towards a “completely gov’t planned economy” at any speed, much less “breakneck” speed. That is just destructive and inaccurate partisanship framing.

        • John Murray

          Hi Katie,
          If you cannot make money where you live, it’s time to move. I did several times and I’m a multimillionaire. It’s not easy to pick up and move but that’s what separates the the true entrepreneur from the insecure employee. Don’t complain, change.

      • Chester Lee

        Hi Jeff,

        Your insight on CA is dead on. I’m a CA resident. San Francisco in fact. The kind weather and liberal thinking doesn’t make up for the state’s business regulations, confiscatory income tax rates, and extremely high cost of living. I’ve stopped investing in CA real estate. My last few investments have been in Michigan, Buffalo NY, and Wisconsin. The wife and I still have W2 day jobs so are obligated to be CA residents for the time being. When retirement comes around, the plan is to exit CA and move to Nevada, Florida, or maybe even over seas. US dollars goes a long way in many parts of the world. Regarding your comment on higher interest rates moving forward, I totally agree. Now is a great time to take some cash out of equity in properties by refinancing and redeploying that cash into new investments.

        • San Francisco is not representative of the whole state. Neither is my town. The analysis of California is wrong because of unexamined assumptions based on partisanship rather than facts.

          When people demand less regulation, bad actors will swoop in and take advantage of the opportunity. Which specific business regulations do you object to? Have you examined the rationale for the specific regulation you object to. Most regulations have a good reason behind them or they would not have been promulgated in the first place. Our income tax rates are not confiscatory. Even my income, which puts me in the top 10% of Americans, has an effective state tax rate of only 4.8%.

          I grant you the high cost of living. Renovation costs are ridiculous. The construction workers in my town make around $10/hour, the cost of materials is the same here as elsewhere, but the bids you get from general contractors here are outrageous. BP members often itemize full remodels that total about $30,000. In my town, that same remodel costs about $200,000.

  13. Brian Costanzo

    Love this article, we need to constantly learn and remember the historic cycles. We are coming up to another BIG one but I agree with the majority to full steam it while things are good but not to over extend. There is so much more to this thought that other articles have given to gain the knowledge and prepare. Thank you BP! For now I’m looking into MF in the Charlotte area if anyone has info.

    • Jeff Brown

      Thanks Danny — Here’s the short list of some of the states I really like this year. Texas, Utah, Idaho, Nevada, and a few midwest and southern states too. I’m puttin’ my money where my mouth is. 🙂 Here’s just one major indicator to watch, Danny.

      Does the state in which you’re lookin’ to invest like you? Do they well new business and all kinds of investors? Do they make the improvement of real estate easy or difficult? What’s their income tax rate?

  14. Elizabeth rigali

    Good historical perspective. I’m 76 & been in CA since 1976, so I have seen these swings. I was almost destroyed in the last one; lost a few million! I trusted the wrong guys. So, in my late 60’s I started flipping little houses again. Just as I did when I first started years ago. Now I am so cautious, I have been buying houses for cash in DFW, TX. With this run up in prices, I am sitting on cash I need to invest, but have been afraid of the crash.

    Glad to hear you outlook. Hope you are right. I’m going to get investing this Spring. Not in CA!! Where would you suggest?

  15. Sheldon Webster

    Great street science, JB. Questions I have are: 1) Aren’t we at the top of the market again, a la 2007? 2) Isn’t today’s supply & demand metric different from 30 years ago in that today’s demand is skewed by large institutional & large investor (like yourself) buying vs majority primary resident buying of yore? Can you trust this inflated metric?

  16. What about a good old fashioned recession? We’re approaching 9 years without one, they happen every 5-7 years, and this expansion marks the 2nd longest expansion in history. Being “all-in” seems pretty risky. The Fed and the EU are unwinding QE so liquidity is getting pulled from the system, the dollar is signaling a weak economy, rates are increasing and gold has been rallying. We seem to be at it near maximum optimism. All signs I’ve seen many times before. If I can’t get 15% without leverage it’s a no go. Better prices will come at some point but even a patient monk would find this market tiring and endlessly frustrating.

    • Jeff Brown

      Hey Ruth — I’ve been making many of your points for quite awhile. Thing is, in my lifetime there hasn’t been a recession immediately following across the board income tax cuts for personal and business taxes. Could it happen? Of course it could, but it’d be a first in my experience. Like you, I find much of this market frustrating. This is why I spend my time on specified narrow markets exclusively.

      You points about QE and the central banks are compelling. I still land on the side of the next 2-4 years being good. But as I’m fond of saying, Ruth, “My crystal ball is as good as the next guy’s.” 🙂

  17. Amal Benkiran

    Thank you Jeff Brown
    for this article I love to learn from a seasoned Investor that have all his heart and soul in business my passion for real estate got me curious since 1992 and I haven’t stop learning since .your article put me at ease for my next move it always nice to have a professionel advice .

  18. Ashley Wilson

    I keep finding your posts, and you have me intrigued with every word. You have a very interesting insight on the market, and an almost Thomas Friedman approach. Keep posting, and I will of course keep reading! Thank you again for another great post!

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