BY LOU GIMBUTIS ON DECEMBER 12, 2019
The front page of the Mecklenburg Times recently carried the headline “U.S. will become a buyers market in 2020, according to experts.” I knew it was coming, real estate is cyclical. The “experts” guess as to when is undoubtedly better than mine, I just know that it’s coming. We need only look to the past to see that Buyer’s Markets follow Seller’s Markets as inevitably as night follows day.
However, history is no simple mirror with which to gaze upon past events, but it is an instructor of great sagacity as regards what the future may hold. From a Buyer’s market we have come, and to a Buyer’s market we shall return. Is that the time to get out of real estate investing?
For a lot of people the answer is yes, but it needn’t be so. As Abraham Maslow said, “when the only tool you have is a hammer, every problem looks like a nail.” When the “bottom falls out”, I would not recommend strategies that I see in abundance today, such as overpaying, overimproving, and riding the wave of appreciation to profit. Remember the game “hot potato” some of us played as children, or even “musical chairs”? When the music stops, you do not want to be the last one standing.
But history has taught us a myriad of ways to profit from a market in which housing prices are flat or even moving downward, for those of us savvy enough to listen. One of the largest factors that will turn a strong real estate market, where houses “fly off the shelf”, to a weak one, where houses literally have birthdays on the market, is the cost and availability of mortgage funds. The vast majority of homeowners do not buy houses with cash, they shop for a payment they can afford. One of the government’s favorite tools to curb inflation (which we have seen quite a bit of in recent years) is to raise interest rates. Thus, Harry Homebuyer’s income will dictate that he buy a less expensive house, exerting a downward pressure on housing prices. When mortgage criteria (credit score, etc . . . ) become more stringent, less people can qualify. This is a massive opportunity for Investors. If interest rates are at 12%, why not take over a 5% loan “subject-to”, and sell it with owner financing for 10%? You’ve created a “spread” with the interest rates, and are normally able to command a larger down payment because you can offer better terms than a bank can, and to many people to whom a bank would offer nothing. Where there’s a will, there’s a way!
Lou Gimbutis, owner of Property Solutions, LLC, www.soldcarolina.com, has been buying and selling houses full-time since 2004, first in Michigan, then after moving to NC in 2007. He serves as Director of Education for the Metrolina Real Estate Investor’s Association.