The Real Estate Mess: We've Seen This Before
In light of the uncertainty in the real estate and investment markets, I thought I would share a little perspective. Financial bubbles, downturns, and corrections are part of normal and healthy markets. This is not to say that it isn’t disquieting when all we hear are the dire predictions of the “experts.” As with all down periods in history, the best approach is not to panic and remain steady: This too will pass. I realize that when it is the value of your home or portfolio that is dropping, it is easier to say “don’t panic” than to remain calm.
I am reminded of a story of a man who dug himself into a deep hole. The hole was so deep that the man could barely see the top. Despondent, depressed, and feeling he may never get out, the man looks up towards the distant hole and hopes for some help. He catches a glimpse of a shadow walking past and shouts, “Hey, can you help me?” The figure, a police officer, peers into the hole and asks, “What are you doing in there?” The man replies, “I’m stuck and can’t get out.” The officer thinks a moment then drops down a ticket for loitering and walks away shouting, “Don’t do it again”.
Time moves on, and the man sees another shadow cross over the hole and shouts, “Hey, can you help me?” A man of faith peers down into the hole and says, “How’d you get down there my son?” The man replies, “I’m not sure exactly how I got here, but I’m stuck and can’t get out”. The religious man ponders this predicament a moment, then tosses down a prayer and says, “May God be with you” and walks away.
More time passes, the man growing ever more desperate and despondent. He has a feeling that he will never get out of the predicament he has found himself in. He sees another shadow pass over the hole and cries, “Hey, can you help me get out of this hole”. To his surprise he sees his friend peering in, and feeling hopeful he says to his friend, “I’m glad to see you. I’m stuck here in this hole and can’t get out.” Without warning, his friend jumps into the hole. Stunned, the man stammers, “What are you doing, now we are both stuck in here!” His friend replies with confidence, “Don’t worry my friend, I’ve been in this hole before and I know the way out.”
Many people I speak to believe we will never get out of this mess. I try to remind them that we are living through period in time that is similar to many of the past real estate downturns. Many of the same refrains -- “Real estate will never come back” and “government needs to save the tax payers” -- were said in response during previous periods of falling home values.
We can simply look back to 1987, when a change in tax policy removed incentives to own real estate, causing a severe downturn of the commercial and residential real estate markets. The downturn lasted through 1993, causing many bank (savings and loan) failures and leading to the creation of the RTC that managed and sold $500 billion worth of real estate. We made it through that period and, in fact, we saw real estate prices climb to unprecedented levels.
This time may be different, but I doubt it. I believe real estate will make its way back; it will just take time and some smart policy. Now, I do not think the properties priced far above their true value and driven by speculation will go back to those prices. I am suggesting that many very good properties are priced below their value and will move back to a fair price.
I am not making a call for people to rush back into real estate or any other investment, without smart investigation and an understanding of the market they intend to invest in. I am suggesting, however, there are properties that are priced below their true or intrinsic value and present an opportunity to the right investor. In any case, real estate investing should be done with care, knowledge of the market and good professional advice. As with all investments, people need to make sure they understand the risks associated with each investment and can carry the investment longer than they expect, since you never know when a market will turn around.
In the mean time, I'm advising that people get their investment house in order and learn about the markets they're interested in. This way, when that great deal comes along, clients can be prepared to act.
