Understanding Today’s Real Estate Bubble

Full Disclosure: This article is mostly written from my opinion mixed with some facts. I would like to think I am using an “educated” opinion to elaborate on my thoughts. I do encourage debate and would love to hear your opinion. After all, none of us know what will happen in the future so let’s respect each other’s thoughts. (:

At this point, everyone in my generation (ages 20-30) can collectively agree that the housing market, as well as the economy, crashed in 2008. I think it is also safe to add that we had absolutely nothing to do with it. With that being said, life goes on, the markets got better and here we are today. The scary part: we still don’t know what the f***k is going on! Here we are growing up, expected to do “adult” things like GET A JOB and BUY A HOUSE with pretty much no education or guidance on how or when to do so. (Mind you, all of our adult mentors who should be advising us on how and when to buy a house, most likely had a part in the housing disaster of 2008.) So how do we do this whole “adulting” thing without following the path of our elders? What do we do differently that will stop another disaster from happening? Well, that’s not what this article is about, although I still will share my thoughts on how to do so at the end. All I can do is give you the facts that I know and what I think and how I got to that thought. SO here we go.

Side note: Despite what other generations might think, the way we “youngins” live our lives & think about growing up is not our faults. It’s a series of careless actions from powerful, political, figures (in the older generations) that has made all the difference. 

How the crash happened

So if you’ve seen the movie “The Big Short” you could have a good idea as to what happened 10 years ago. Or you could be just as confused about it than you were before. If you haven’t seen it and are interested in what happened, watch it. It’s on Netflix. I’m going to try to simplify things a little bit for you even more than they did in the movie. Before 1970’s-ish, when you got a mortgage from a bank for you home, that bank basically owned your home until you paid them back. Around the 80’s and 90’s big banks were buying mortgages from smaller banks and grouping them and rating them based on how “good” (unlikely they are to go to foreclosure) they are. 2000’s hit and now investment banks are buying these groups of mortgages and trading them as public stocks based on the ratings they were given. In 2005-2007 there was a craze in the mortgage world and it was in the form of subprime loans. A subprime loan is a loan given to an underqualified borrower. Basically, mortgage brokers were giving loans to people who could not afford them and making tons of money off doing so. It doesn’t end there. Now the small banks were selling these subprime loans to big banks. The big banks were grouping them together and giving them A+ ratings (labeling them as non-risky investments) and investment banks were trading them. Long story short, a lot of these subprime loans eventually defaulted because the borrower was unqualified to pay it back to begin with. This caused a domino effect of devastation leading to the crash of 2008.

Market trends: What they are & how they work

A market trend is a perceived tendency of financial markets to move in a particular direction over time.

Any and every market has trends. The housing market, the stock market, iPhone market, coffee shop market, etc. Usually, all markets have one shape in common and it looks like this. It goes up and down while simultaneously and continually going up in a volatile manner. Think of the picture below as a representation of the housing market from 1950 to now.  There are ups and downs while the line is steadily moving up. It is important to first know that we are currently on an upswing. Now, it’s hard to grasp because time moves slowly and we can’t picture ourselves on this chart through our everyday lives, but we are there. Ask any economist, in reference to markets and they will tell you – what goes up MUST come down. How and why these markets move the way they do unique to each market. So I will fill you in on the factors of the real estate market.

When the housing market is going up, there are multiple factors that are all relative.

  1. Money is cheap. The government controls the interest rates and when they are low, people are approved for higher amounts of money.
  2. Because money is cheap, there are more people able to borrow.
  3. Because there are more borrowers, there are more buyers (higher demand)
  4. Because there is a higher demand, prices go up
  5. When prices go up the market goes up, people think they will continue to go up so they want to buy real estate before it gets too expensive
  6. Because so many people are buying, more people are selling at higher and higher prices.
  7. This process continues until the government intervenes and heightens interest rates.

When the government heightens interest rates, the cycle starts to come down. 

  1. Interest rates start to get higher, money is expensive and people borrow less.
  2. There are fewer borrowers, which means there are fewer buyers.
  3. When there are fewer buyers, there is less of a demand and more of a supply.
  4. To get rid of the excess supply, builders and investors sell their properties for less.
  5. When higher end properties sell for less, it makes all other properties sell for less because the market is based on comparable sales.
  6. When properties sell for less, people that bought their house in a high mortgage are now upside down. Meaning they owe the bank more than their home is currently worth on the market.
  7. When people are upside down on their mortgage, the default on their loan. Otherwise known as foreclosure.
  8. When a home goes into foreclosure, the bank now owns it and sells it for way less than it’s worth. Again, making other homes sell for less because of comparable sales.
  9. This cycle continues until the government intervenes and lowers interest rates again.


The term “real estate bubble” comes from the action of the market going up. It’s inflating. When the bubble “pops” the market will fall down. So on the graph to the left, picture a bubble in the open space below the red and blue lines.

 

My prediction with our current real estate bubble

With factors such as low-interest rates and a high demand of buyers with large loan amounts, it is safe to say that we are in a high real estate market. As we discussed in the paragraphs above, I think it is also safe to assume that we are in a real estate bubble which will surely pop at some point in the future. When and how is the biggest question. Here are my thoughts on when and how I think it will happen. I am 23, and the majority of my peers have just recently graduated college. They have set out to find their careers and hopefully, have some sort of job security. Sadly, it is hard to find nowadays. People are easily replaced in Corporate America by the next generation of cheap, entry level employees. Job security is slowly becoming extinct. So what are all us young adults supposed to do if we cannot keep a job and we also most likely have a heavy burden of student debt on our backs? And now we are also expected to be the next generation to buy real estate? How will we possibly be able to get a mortgage if we can’t pay off our student debt which is affecting our “debt-income ratio” (our income compared to the amount of credit we are currently using)? Also, most of our loans are unforgivable meaning we can’t even look to bankruptcy to eventually be wiped clean of student debt and start fresh.  Our credit score is sunk and we are renting, living paycheck to paycheck to barely survive. As the younger generations graduate college and enter the workforce, I see the debt amounts and cost of living increasing and the job security and entry level salaries staying stagnant. This is where the demand of home buyers will slowly diminish and the supply of homes will outway. As explained above this will cause house prices to drop.

How do we stop this from happening? Stop pushing young adults to take on MASSIVE debts in order to get a degree that will have a slim chance of giving them a reliable career. NOW – I am not saying all degrees are trash and that college and higher education is bad. It is not. Just know what you’re going to do with that degree. Use that degree as a tool, not an answer. Have a plan and set forth looking at all possible paths before choosing one. I said this in the beginning but I will say it again. This is my opinion. Will this happen? Maybe, maybe not. But I have spent the last 3 years studying real estate from all angles and having fresh eyes on the situation, this is my prediction. I would love to hear an opposing idea or opinion simply because I love to learn new things so if there is something I am missing or if you simply disagree, please share. My goal is to simply help educate those who are lost or confused about the subject of real estate at a young age.

Thanks for reading.

 

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It’s Not About the Money $$$

Post inspired by “It’s Not About the Money” Audio-book by Bob Proctor. 

 

 

WHAT DO YOU WORK FOR??

Ask yourself these questions and answer them in a comment! I want to know what your heart beats for. 

Why do you work?

Do you like your work?

Are you working towards a career, what and why?

Do you have a passion? What is it?

What does an ideal day look like to you?

What does your future look like?

Why do you want success or wealth?

What does success mean to you?

What does wealth mean to you?

If you acquired a large amount of money, what would you do with it? Why?

What are your hobbies?

Would you rather have things or experiences?

Would you rather have time or cash in the bank?

 

I want to know the answers to these questions simply because I am curious about why people live. I want to know what peoples passions are and I want to help people connect with their passions. In today’s world we don’t give a lot of focus to these very important factors. We sift through life because we have to, not because we want to. When we do this, we build up a lot of negative energy inside of us that is waiting to explode. We get bitter towards the world and the people around us because our life didn’t turn out the way we expected. We develop this victim mentality because we feel like we have no control. We need to know why we live. If all I can do to help you find that answer is write a silly blog post and ask you to answer some simple questions, not for me but for yourself, I feel like that’s a pretty decent ripple to start.

This blog post is inspired by an audio-book I recently purchased. I bought it because I have felt really caught up in life the past few weeks and I felt like I wasn’t giving myself enough time to focus on my me, my mind, my heart, and my soul. After all, the best investment you can make, is an investment in yourself.

This audio-book is called “It’s Not About the Money” by Bob Proctor. I chose this specific book because as a real estate agent/investor, I do not get paid on a regular bases. I am a bartender on Moody St in Waltham part-time to make ends meet financially. I also make traveling a priority at this time in my life (because money will never be an excuse for me to miss out on an opportunity). So as you can imagine, money get’s tight sometimes. People may say, why do you work at your office full time if you aren’t getting paid? Why don’t you get a full time job and do real estate part time? My answer: it’s not about the money. Although money was one of the motivations to get involved in real estate, I have come to realize that the fulfillment I get when I see a home go from old and outdated to new, when I find someone their dream home, or give an investor an opportunity to make money, that is enough for me. I know that by rendering my services to society and becoming the best I can at my service, I will succeed. So, why do you do what you do? Does your work fulfill you are you solely working for money? Do you just want cash or do you want all the things that cash can bring you?

Bob Proctor talks about adapting a “wealthy mindset.” This means taking your mind out of the normal mindset of making money (getting a job, trading time for dollars, working long hours to be productive, etc) and changing it to a mindset of the wealthy.

Here are 5 steps to take to adapt a wealthy mindset: 

  1. Dispose of all limiting beliefs about money.  

    Think about the general attitude towards money. People say things like “money is the root if all evil,” “money isn’t everything,” “the rich are greedy,” etc. In some situations this is true. Money tends to bring out your personality more. If you are a greedy stingy person, more money will make you more greedy. BUT if you are a generous, compassionate person, money will only escalate that personality. Write down you limiting beliefs about money and then write down all the good things you would do if money wasn’t a factor. 

  2. Decide you want to be wealthy and justify why.

    One of the corollary of the Law of Abundance states “People are poor because they have not yet decided to be rich”.

    Your why is your biggest motivation. It is the reason why you want to be wealthy. I can almost guarantee you don’t just want to stare at a 7 digit bank account or bath in a tub of gold. You want all the things that money can buy. You want the freedom of not having the responsibility of a job. You want to not worry about money ever again. Whatever it is, know your why and focus on it. Write down all the reasons why you want to be wealthy. Think deep. 

  3. Determine how much you want 

    So obviously we can’t pin point the exact amount of money we need to live a financially free life, right? Well we can start with rough numbers. How much do you live off now? How much more do you need to be comfortable in your life now? Maybe an extra $2-3,000/ month, maybe an extra $200-300,000/ month. Who knows, all you have to do is figure it out and write it down. 

  4. Brainstorm on how to get there

    There are so many angles you can take to being wealthy. The best thing you can do is start multiple sources of income. So what if you wanted to get from point A to point B? There probably multiple routes to get there. When you’re planning your route, your mind starts considering all the options and may cause you to act on one. During that time, your wealthy mindset may attract different opportunities, encouraging you to change course and go through a unique and exciting situation. Write down all your ideas on how you can start to earn money, ideas for a new business, services you can provide, etc.

  5. Imagine as if you already have it

    Imagination is one of the most powerful tools we have as humans. We are also the only species on Earth that has an imagination. People may think that this only something we use when we are young. Wealthy people use their imagination ALL the time. They first saw their life the way wanted it in their imagination before it was reality. Bob Proctor always says “believing is seeing.” When you can believe something, only then can it become a reality. Visualization puts your emotional wavelengths on a level that will attract you thoughts into reality. Believe or don’t, you life will reflect accordingly. Make a vision board and, putting a collection together of pictures reflecting the life you want to live and look at it every day until you can close your eyes and imagine yourself already living there. 

Whatever you do, just remember; IT’S NOT ABOUT THE MONEY.