"I'm So Confused!" - Of Course You Are My Dear and For Good Reason...

Every day a new set of statistics comes out about the US housing market, and every day more and more people are standing around saying: "I Told You So!"

The problem is, of course that the people wagging their fingers in the air are on opposite sides of the argument (or so it seems) and are Both Right and, of course, Both Wrong!

HUH...?

It seems that over the last 5-7 years we seemed to have forgotten that real estate really is a "LOCAL BUSINESS". Well, sort of...

Over the past 5-7 years, the factors influencing residential real estate (from a Sellers Perspective) were so strong across the board and in every market, that we all got lulled into this stupid misconception that there is ONE BIG real estate market, and all you had to do was jump into the pool to get "filthy stinking rich".

Now here we are a few years later and "The Market" is not walking in lock-step. Well truthfully, it never did!

For a brief moment in time we saw what looked like one big market, but it wasn't.

It is true that the financing of real estate has become global, and therefore interest rates and any dramatic reduction in interest rates have an immediate impact across the entire country and across every price point in housing affordability. All be it, different areas of the country define their housing as "Affordable" at different price points. And over the past 10 years we have seen a significant increase in the production of houses across the country by Big National Home Builders who are financed by Wall Street money. This is different because historically home building was financed by local S&L's and built by local, or super regional home builders. But the story does not end here.

Despite all the media inspired mantra about "Location, Location, Location", the three core fundamentals of residential real estate are, and have always been: 1) Interest rates, 2) Supply versus demand, and 3) JOBS!

The "Supply" part of real estate has to do with who is building, and fixing up housing for any given market, and with the presence of large national homebuilders in every major market that supply can seem like a national issue. But in almost any market in the country the national home builders do not have more than a 25%-30% share of the market. Which, by the way can actually be good, because when they shut down production they tend to do it across the board and not just in markets that are "weak" vs "strong".

However, Job creation is most definitely a local thing, particularly in Major/Major cities like L.A. NYC, and of course Washington DC. In other words cities with either very diverse economies, or as in the case of DC, and economy that is not subject to downturns by local industry, like Detroit or Houston.

Right now, even in a marketplace as small as the Washington-Baltimore Corridor there is a huge discrepancy from one market segment to the next. While the Ladies sing the blues in Northern Virginia, Prince George's is still solid and every house we complete in Baltimore City (under $170,000) has sold well within 30 days of being completed and put on market.

So, what's up with this?

Simple, and getting back to the original point of this blog post: the residential real estate market has returned to "normal". While some markets are doing well, others are completely in the toilet. It is not strange that markets across the country (if not across town) are out of sync. What is strange is the number of supposed real estate investors who are "whining" about it! There are 10 fundamental strategies for acquiring and making money in this game and it is insane to believe that ALL 10 ARE SUPPOSE TO WORK ALL THE TIME!

Now maybe over the past 5 years they did, but that is the exception not the norm.

As any first year economist will tell you, the reason there is opportunity to make huge scads of money in real estate is because real estate operates in an "Imperfect Market". Definition: If you make the time to learn the biz and what really works you do better than the "average" investor who is always looking through a rearview mirror and as a result, usually winds up making "average" returns, or on the rocks.

If you are expecting to see the days when everything (regardless of location, or price point, or state of repair) goes up in lock-step - FO'GET ABOUT IT.

Now is the time when educated investors will profit, and everyone else go back to the 10% annual return on mutual funds, or simply make stupid mistakes based on "national data", or what some report had to say in a 30 second "snip-it" on the evening news.

However, those who choose to recognize that real estate is local, and to be smart about their investing, make the required adjustments and get educated will probably see the types of triple digit types of returns we are seeing right now in Baltimore City, and in Prince George's. But to get to triple digit returns, you have to do a little more homework and get a little more education (on your local market) then the folks who are content to play the mutual fund game, or only get a superficial knowledge of how real estate really works.

As for me and my team, putting in $5,000 and getting back $35,000 to $50,000 by working the right deals, at the right time in the right local markets is worth the little "extra" time it requires to figure this thing out, at a local level. And of course, all of this has absolutely little to nothing to do with commercial real estate - a topic for another blog, trust me.

But for those of you who simply want to buy a book at Borders(r) and put it under your pillow, or just respond to a "FREE" TICKET that shows up in your mailbox to attend the traveling real estate circus when it comes to town, and now believe after reading this that keeping up with this real estate thing is "too hard", Sorry. Please deposit your deeds on the way out...

Sherman Ragland - Thank you for reading...