Real Estate "Bubble" -or- Acres of Diamonds

"Is Now the Time to Bail on Real Estate...?" "Are We In The Bubble...?"

I get these types of questions a lot, lately.

So, I decided to share the following, which is in response to a post I recently answered in the forums section of the Realinvestors.com website.

[Original post located at: http://www.realinvestors.com/forums/read.php?f=1&i=10006&t=10003].

Right now, a lot of folks are running scared thinking real estate is collapsing and they need to get out before they get stuck holding the bag. The media has hyped "the bubble" at the precise moment in time where we are in both:

a) The "natural" season of slow sales for real estate naturally (Holloween, till Spring) and
b) An overall market slow down for all markets (including DC) are slowing down to either a "normal state", or in many cases, less than normal due to the rise in interest rates. But this slow down for most markets is like The Enterprise or Millennium Falcon dropping out of Warp, or hyper-space. The ship, however, is still moving forward at a very fast pace, just not at "blinding" speeds.

But in addition to these two things, there have been a number of really stupid strategies pushed on unsuspecting newbie investors by the "Overnight" Guru's, who happen to have discovered real estate along the path of their other adventures such as: Selling snake oil as new the new cancer wonder drug, and their "OVERNIGHT INTERNET MILLIONAIRE" kits. Strategies such as buying pre-release condos in markets where there is already an over-supply of condo properties. Or, land development in Central Florida, as in under 5 feet of swamp land, or simply overpriced deals in markets that had been slowing before the last round of interest rate hikes.

Bottom line: STUPID IS AS STUPID DOES. If you fail to take the time to learn this business, then you will not be happy with your results, or worse.

So, what has this got to do with your post?

Many folks out there right now are thinking that now is the time to "DUMP" real estate and move on to something else. And for many people, and in many markets, they are probably correct. Deals that were never any good in the first place, but looked good in a hyper-inflating market, should be dumped. Markets where there is serious implosions in the major industries and will see thousands of people leaving to find new industries (like Detroit today) should be carefully examined. This is not to say, however, that they should be abandoned all together. From the mid 1970's to just recently, the City of Baltimore lost hundreds of thousands of jobs and almost as many residents as the steel making and ship building industries imploded and replacement jobs (for these industries) were created in the South (initially) and then overseas (mainly in Asia). HOWEVER, investors still made money in Baltimore. That is the smart investors did.

Those who simply employed "traditional buy/hold" got smokkkked! But those who used creative strategies made out like fat rats. Today, with the job growth predicted for Baltimore over the next 12-15 years, if you do not make really stupid mistakes, the marketplace will make you rich. The same is true for the entire Washington, DC region. Why...? Simple, after 9/11, the Bush Administration changed everything with regards to Federal Government spending. AND IT DOES NOT MATTER WHO ENTERS THE WHITE HOUSE or Congress in 3 years. The budgets are set and can not be changed overnight. In fact, with the major spending plans currently underway, there will be massive growth in the region.

You have heard it said that real estate comes down to LOCATION, LOCATION, LOCATION - that is only 1/4th correct!

Real Estate can be broken down into 4 basic "Food Groups":
1) Residential
2) Retail
3) Office
4) Industrial
** Land is simply a commodity, like steel and concrete that goes into the production of the four "food groups" above.

"Location - Location - Location" is a simple way to describe the MOST Important thing for the 2nd "Food Group" - retail. However, when it comes to Residential real estate the key phrase is "Jobs - Jobs - Jobs". Most people when looking for a place to live think about schools, quality of life, what they can afford, etc. BUT THEY MAKE THEIR FINAL DECISION ON ONE THING: "acceptable commuting time to work" and for most people in the United States today, this number is 60-90 minutes. 60-90 minutes by Car, Train, or Rickshaw. Therefore, it comes down to knowing what is happening in your local (as in a 60-90 mile radius around the center point of the major employer) for your region. Any real estate investor who does not recognize this as a fundamental principal for decision making will never make real money in the residential real estate business.

If we were in Detroit, we would ALL be paying attention to what was going on with the big 3 automakers and paying close attention to the 60-90 mile radius around GM's headquarters. If in L.A., we would be doing the same for the major tv/movie studios, and if in San Francisco, we would be looking to what is happening 45 miles to the South in Silicon Valley.

Yes it is that simple!

If job growth is strong, you will have a good (residential) real estate market. If job growth is strong, and the available supply of "affordable" housing is constrained, you will have a fantastic (residential) real estate market. THIS PRECISELY WHAT IS SHAPING UP IN THE BALTIMORE-WASHINGTON MARKET.

Yes, you can make mistakes, yes you can take the natural advantage the market gives you and mess it up. But, the biggest mistake anyone can make, right now, is getting out of this real estate market simply because of something they read in a book, or heard on the news.

Nothing wrong with diversification, except diversifying beyond your area of both expertise and control. If you do not know what you are doing, and you have little to no control over what happens with your investment, then you guaranteed yourself that you will lose. Might as well go to Home Depot get a 2" paint brush and some bright red paint and start painting a big red target on the back of all your cloths - cause baby, if you don't do your home work, and the investment you picked gives you little to no control, then you are GOING DOWN!

Bottom line, nothing wrong with Gold, Platinum, Oil futures or any other investment out there - if you know how to make them work for you. But anyone thinking of walking away from the best real estate market in the country to go pursue someone else's "Pot-O-Gold", really needs to read a copy of Acres of Diamonds first.