History Repeats Itself: What You Should Know About The Impending Real Estate Downfall
By Mark Weiss
I first joined the ranks of real estate and economic publishing in 2000 and had work published five times within three years. Since then, I’ve researched, verified and observed this industry. In sharing insights and experiences with colleagues, builders, brokers and economists, a clear pattern has emerged: I call it the Mark B. Weiss Economic Theory.
If you look back over the last 100 years, you’ll see a common trend of recessions following the end of prosperous decades. The Gilded Age of the 1890s led to the recession of the 1900s. The roaring ’20s led to the Great Depression of 1929. During the late 1970s, interest rates at 20% shut down the economy well into the ’80s.
Regan’s tax reform act of 1986 led us into the Savings and Loan Crisis from 1988-1992. The tech wreck in the early 2000s (they don’t always hit before the new year) kept receding the economy well after the 9/11 attacks. In January 2008, the door to the Great Recession blew open, and parts of the economy and real estate are still crawling out nine years later. Now, you might say “things are great,” but allow me to explain what happens in this cycle and why, before 2020, the economy will dip and fall — and how you can expect this to impact the real estate market as a result.
The way I see it, our credit economy is dependent on having the next guy borrow more than you owe: This way, the next buyer pays you a profit, so he can pay a profit, taking from Peter to pay Paul. A bank has cash it invest-lends — this is the money you deposit into the bank to hold your deposits — but the money lent out doesn’t always get repaid. Banks are regulated by the federal and state governments through the Office of the Comptroller of the Currency (OCC). OCC regulators visit banks throughout the year and notify the bank that when too much money is out in loans, the bank is “out of balance.” The bank then has a limited time to replenish the cash. The FDIC insures depositors, the deposits and loans are transferred to a stronger bank and life goes on for the depositors who haven’t lost their money. Who loses? The borrowers.
Here is the equation: Banks hold depositors’ money. Banks lend depositors’ money to business and real estate investors (real estate has traditionally been viewed as a safer investment for banks). Banks run out of money by being too greedy looking for a big return. Feds step in and say, “Slow down, stop lending and get cash back in the bank or we will close you.” Banks do what they can to save their skin, as they have no choice but to do so at the expense of the loyal customers. Remember, without being offered generous loans, borrowers could not take the money and the bank would still have the depositors’ money. After the banks replenish themselves with government subsidies, new equity investors or what have you, they might look at their losses or low profits and say, “We better start lending again.” Then once one lowers the cost of borrowing to be competitive, another bank then lowers the standard of lending, and within 36-48 months, the cycle starts all over again.
And so here we are the last quarter of 2017: Banks have been on the wild lending ride since 2012. The country is building apartment towers at a rapid rate in every metro area, with projected rents that both the appraisal industry and bank committees think are or were achievable. We are finding they are not achievable: The rents that have to be obtained are well over what the average Joe can pay.
If you want to see the future economy, drive at night in the dark and look at the number of dark apartments signaling vacancy in the new construction towers. Shopping centers are dying due to home delivery of goods. Medical offices are consolidating and leaving commercial properties. So here we go again.
So how can you use the notion of an impending real estate downfall to your advantage? Begin by looking at the court filings by banks and lenders in the local county records. Since our country was established to preserve property rights, foreclosure hearings must be public hearings to notify the property owner and prevent a surprise. Then, look at the filings in the counties you are interested in buying property in, so you can locate the opportunity. This identifies the bank foreclosing and the borrower. In either case, you want to find a borrower who needs some extra money to pay off the bank by selling his property at a good price, or a bank who owns something they need to liquidate and turn into cash. See what happens when you test out this approach.