Could the Real Estate Boom Bust?


Between 2008 and 2012 many of our clients bought homes well below the previous market highs. In fact homes were selling for what building lots were selling for previously. It wasn’t uncommon to buy 2005 homes for $45,000 that had sold for $160,000 previously. The cash on cash returns for many of our clients rested around 20% annually, and those who got in at the right time were able to really cash in after a few years of strong appreciation.

Starting in 2012 the hedge funds entered many markets, and properties were being bought in bulk by many BILLION DOLLAR players, some of whom paid ridiculous prices for properties because they had to deploy the money they were paying interest on. Prices naturally soared in this market, a market that wasn’t sustainable and was mostly unnatural. The nature of many neighborhoods has fundamentally changed during this downturn, because many of these neighborhoods are now over 50% rental properties.

This trend means that pride of ownership in some neighborhoods has dropped quite a bit, but there is one thing that is more alarming. What will happen as the hedge funds decide to exit the markets and pull in the returns they hoped for when they bought these assets? Will they be willing to drop their prices to sell quickly? As I don’t know anyone with a crystal ball, we can’t be sure the worst case scenarios will happen, but it’s likely interest rates will go up. What affect will that have on an already tepid housing market?

Current housing inventory is low, many homes are now out of water, but many are not by the time the owners pay commissions and closing costs. Days on market for listed properties are creeping up in many zip codes, and prices have started to stagnate. They are not dropping in very many places yet, but could that happen by this fall?

Wisdom dictates that it’s best to ride the market up 80-90% and then cash out and take the gains that you have made and reinvest them in a down market. Many of my investors are doing that now, and I recommend that if you bought during the downturn, that 1031 Exchanging to get your money into other assets in lower priced markets is a wise move. Doing so allows you to roll all of the profits into larger, higher income producing assets without paying taxes on the profits (if you do it right according to tax code), and you can always refinance the property if you need capital.

Some markets have already gained 75% to 100% of the market losses, if you are in one of those markets, it might make sense to look at markets that have only gone up 10-15%! If you have questions about whether it might be time to sell or exchange an asset, I’m glad to provide insight. Call me for a consultation: 404-718-9126.