Markets Are Tough: Should We Brace for a Bubble or Continue to Invest?

by | BiggerPockets.com

The national S&P CoreLogic Case-Shiller Index, which tracks home prices, reached a post-recession high of 184.8 in September, an index level last seen in July 2006. Since 2012, the average home price across the nation has increased 37.9%. Commercial real estate cap rates have continued to fall year over year.

All of these statistics are important, but how do most investors feel this invisible sway of the market cycles? They see the deal flow drying up. Many real estate investors couldn’t tell you prices have climbed 37.9%, but almost all of them can tell you it’s harder to find a deal today than it was 1, 2, or 3 years ago. If deals are harder and harder to find and prices are at pre-recession levels, does this mean we are in a bubble again? Does that mean a crash is coming? Should everyone stop buying and start hoarding cash?

Are We in a Bubble?

First let’s address the “are we in a bubble” question.

If you type into Google “are we in a real-estate bubble,” your results will be filled with a third of articles that say “smooth sailing ahead,” “fundamentals are good,” and “we are on pace to see amazing years of growth for the foreseeable future.” The second third will say we’ve had several great years since the recession, but we are coming off our recovery and will see things stabilize going forward. And finally, the last third will tell you the world is going to collapse and the financial system as a whole will implode.

The world is complex. Sure, there are statistics and fundamentals to be tracked and monitored, but when shifted, framed, and paired the right way, those statistics can be made to say anything. Go back to 2007 and read articles on the same exact subject and guess what? You will see a third saying sunny skies, a third calling for a level out, and a third predicting a a crash. So why the major variation in perditions from the same data? Emotion, emotion is the x-factor that determines what becomes of the fundamentals.

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You may be thinking, “Actually, history always repeats itself, and a large grouping of people’s emotions are, in fact, more predictable because they average out and end up doing typically the same thing as they did in the past.”

Recently, I listened to an economist who shared that belief. In his interview, he was discussing the future of the real estate market. He was rattling off current statistics and fundamentals that mirror events like the great depression of the 1920s and the hyperinflation of German Marks back in the ’20s. While listening, I couldn’t help but to think, “Yes, fundamentals and data are important and should be monitored, but it is how the whole system interprets them and reacts according to that interpretation.”

Related: 4 Ways to Survive Future Real Estate Market Crashes

I am a firm believer that tracking fundamentals is important so you can position yourself for several outcomes, but much comes down to human emotion. Still, to say that human reactions will occur the same way as they did in the 1920s seems to me a stretch. How astronomically different is the landscape for emotions to form and spread today than it was 100 years ago or even 10 years ago? I am not saying that economist is wrong; I am simply saying I don’t know, and I don’t think anyone really knows. I can’t tell exactly what will happen in the market. I also think anyone who says they are sure one way or the other is a fool.

So What Do We Do About It?

Deals are harder and harder to find, and prices continue to climb. What should we as investors do? The good news it there is several options. You can quit, wait it out, get more creative, change your strategy, change your market, or be patient and stay disciplined. So let’s dig into those options.

Quit or wait it out.

Well, I guess these are the easiest to execute and pretty self-explanatory.

Get more creative.

My favorite option! In today’s market, I hear so many investors say, “There are no good deals to buy,” and I liken it to when someone stands in front of the open refrigerator and says, “There is nothing to eat,” even though 99 percent of the time there is plenty to eat in the fridge — you just have to get in there and cook. You’re not going to open your fridge to a fully prepared home-cooked meal, and you’re not going to open Zillow and buy a home-run deal. When the easy trail like Zillow has been beaten down, you have to change course.

Related: How to Make Money in Real Estate — Whether You’re in an Up OR Down Market

Change your strategy.

If you are a smaller company that can pivot on a dime, you have an advantage to adjust to market conditions like the large companies cannot. For example, as supply for good deals continues to decrease, demand goes up. Flippers begin to squeeze margins tighter and tighter just to keep the deals going. If you are getting deals, oftentimes in these conditions it makes more sense to simply wholesale than flip when all things are considered. You may consider many other variations of adjustments depending on your skills, market, and size.

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Change your market.

Some markets are crazy expensive. Maybe for years, you were buying cash flowing rental in your local market and now you can’t hit your same targets. There is likely a market nearby you could adjust to continue making sense of your same investing strategy.

Stay disciplined and patient.

What I do in my own business is combine this and the previous action of getting creative. I believe staying disciplined is vital to long-term success. Know your underwriting metrics and stick to them throughout the cycles. Think of it as a graph going up and down through the cycles, but your underwriting metrics are the constant linear horizontal line running through that wavy graph.

The reason I write this article is to help investors realize there is success and good deals to be had in any market; they just become harder to find. The question then only becomes is it worth your time to find them?

What are you doing to find deals, despite tough markets?

Let me know with a comment!

About Author

Jered Sturm

Jered Sturm is co-founder and director of sales and marketing at SNS Capital Group. Jered began in the real estate industry in 2006, working for a successful real estate investment company as a handyman. From 2009-2012, Jered co-founded the construction company Sturm Properties. Using his background in contracting and construction, he began investing in “Value Add” real estate. Now, after co-founding SNS Capital Group, Jered has conducted over 10 million dollars in real estate transactions. He currently co-owns and operates a portfolio worth over 3.7 million dollars in investment real estate.

21 Comments

  1. Nathan G.

    Jered, this a good article. I was just talking with my wife a couple days ago and telling her there are always good deals available; we just have to change where or how we find them. Even in a down market, someone is making money somewhere!

  2. Christopher Smith

    Interesting Article

    I did a rental property market switch this last year from California (Far East SF Bay) to Ohio (Springboro). It worked really well for the first half of the year, and I was able to pick up a couple of additional very nice near turnkey upper middle income rental properties by June. But over the last few months prices there have started to accelerate pretty dramatically, and now I am about to be priced out of that market. K sera sera

    Not sure where to head next. Thinking about partnering with my prop mgr / agent on some modest flipping activities. Not a flipper by intent or desire, but cash flowing rental properties at these elevated price levels is becoming a real challenge.

  3. Tim Puffer

    Great article! There is always going to be a good market to find deals somewhere – markets are very localized and can be different even one town to the next. Hustling and being creative will allow you to keep finding deals!

  4. Ujwal Velagapudi

    Great post Jered! I definitely agree in that you can find a good deal in any market, but it’s just going to take a bit of extra work to do find it. I will act a bit more cautious, and try to save more cash, but if a good deal is there I won’t think twice.

  5. James Alston

    Thanks for the post, Jered! I really agree that you hear all kinds of opinions, and they are all over the map. Just this morning, a colleague of mine was saying that he is really looking forward to 2017 and the opportunities that it will bring. He also mentioned the fact that Trump is a real estate investor and that may have a positive impact on our activities. You may have already written about that, but what do you think about Trumps influence on real estate as president?

  6. Michael Williams

    Very Good Post Jered

    All of the free information I have gotten from successful investors and gurus is to change strategy and also implement your working strategy in a different market as you said. This makes sense to me and now that I have a mentor I am sure his advice would be the same if I asked him.
    As you mentioned the ups and downs are determined by the EOTM (Emotions Of The Masses), so as an investor I plan to make numerous offers like I have been doing for the last 3 weeks. I will just adjust the offer to where it stays within my strategy plan, because my thinking is, if things are tight for our side I think it would be tight for many on the other side as well. So my plan is to make more offers in more markets. I plan to step up my offers and partner with the appropriate investor at the appropriate time. Like you said even in a depressed market, there is always somebody somewhere making a mint off that kind of market. The money just switch hands and my goal is to be one of the receiving hands. I plan to offer some type of service to help that person or company make that mint, even if I have to offer something for free for a short time. Better to be in that circle. With my mentor I think I am already in that circle.

  7. Mike Fuchs

    This post was really helpful to read as we have been slightly frustrated with the market lately! That said, even with prices too high, we have been able to find places to put offers on, we just miss out. The key for us as new investors is to keep reminding ourselves this is a long game. We have a 20 year plan, and if we don’t buy a place for a few months, that can be OK. We have also used the down time to learn more about flipping and non MLS spots to find deals, so there is always a silver lining. Thanks!

  8. Marc Jolicoeur

    Some doomsday economists are predicting we are setting up for a bout of hyperinflation. I don’t believe it but theoretically could happen if the US dollar stops being the world’s reserve currency, or if Trump does something really really stupid to put the US dollar out of favor. At the moment the US economy and prospects are better and more stable than any other major economy. The US is the best house in a bad neighborhood.

    If hyperinflation were to happen, it would really suck to have a regular job but our stocks and hard assets should rise at the pace of inflation, and the best part is that our cash flow should keep up with inflation too.

    Properties are an inflation hedge.

      • Mike Flavin

        I enjoyed this article. However, your article on the monetary policy is a bit oversimplified.

        Banks attempt to invest as much excess cash that has not been loaned out in an income earning security as possible while still ensuring they have cash available when it is needed for a loan. U.S Treasuries are the most liquid security in the world and can be sold within seconds, can be found in almost any duration and are accepted as collateral everywhere in the world. It is for these reasons that banks purchase treasuries and has nothing to do with making a profit when bonds are purchased from the Fed. This is evident by the fact that banks have purchased and traded treasuries in times of monetary stimulus, inaction and contraction.

        The Federal Reserves decision to purchase bonds is also in no way correlated with when or how much the Treasury borrows and demand for US debt from foreign investors, and mutual funds has remained strong since the crisis. The Fed owns less than 13% of US debt.

        The Federal Reserve purchases bonds when it wants to stimulate the economy (increasing money supply) and sells bonds when it wants to slow the economy (decreasing the money supply).

        A to rapid increase in the money supply can lead to inflation. However, this has not happened during the last few years because of the decrease in the money multiplier (which basically means banks are more reluctant to lend than they have been in the past. This is why we will not and have not seen hyperinflation since the crash.

        If you are right about the government trying to cause inflation to lower the value of their outstanding debt they are doing a really bad job….

  9. Ro Gela Washington

    Great suggestions! Not only are good deals getting harder to find but first-time buyers like myself may be limited by upcoming policies (I’ve seen that the rate of FHA loans will not be decreasing) so now we have to think harder about creative ways to invest

  10. Phillip Lanier

    Great article!

    Imagine a huge apple tree filled with delicious apples. For a while, all you have to do is reach up and grab an apple. After a while, you’ll have jump up to get your apples. We are now at the point where we need to get creative. Do I get a ladder; do I get a stick to knock them down or should I shake the tree? Either way, I have to be creative. At least until next season when the lower branches bloom again.

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