Editor, Rich Dad Poor Dad Daily
In the early summer of 2005, I sent a warning to the Rich Dad community that the real estate market was cooling down. After all, we know that all booms go bust eventually, and every party comes to an end.
While many readers thanked me for the words of caution, many others sent me “hate” mail. An angry real estate broker called me and said, “Are you trying to ruin my business?”
The angry readers should draw insight from something Warren Buffett said: “For some reason, people take their cues from price action rather than from values.
What doesn’t work is when you start doing things that you don’t understand or because they worked last week for someone else.” The sage of Omaha sums up pithily: “The dumbest reason in the world to buy a stock is because it’s going up.”
Personally, I would say, “The dumbest reason to buy anything is that the price is going up.” Yet that’s what people do when they invest. They generally don’t buy high-priced things when they shop.
This is what has been happening for the last few years in real estate. The market has been climbing and climbing largely due to a strong economy, low unemployment, and record-low interest rates.
But this all changed when the coronavirus pandemic hit this past March.
We all know a real estate crash is coming. The problem is we don’t know when. I’ve been saying that real estate has been in a bubble—much like everything else—and that it will take only one little event to burst the bubble.
During periods of high prices and volatility, it’s even more important to pay attention to value, more than price. Yet, it’s one of the toughest things to do especially when prices are volatile in either direction. It’s difficult to resist the urge to sell when prices are dropping and buy when they’re rising.
We are in a time that most of us have never experienced making real estate an unpredictable asset class at this time.
Below are a few considerations that will affect real estate for the remainder of 2020.
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We’ve had almost six years of increasing home rates and higher interest rates for the past two years. It has been challenging for all types of homebuyers these days.
With that said, affordability is forcing many to move back in with family, or to a state that has more affordable housing.
For example, in Phoenix, AZ where I live, affordability was already a problem prior to coronavirus. It was reported in early April that 65% of Phoenix residents couldn’t afford housing And according to the “Los Angeles Times,” it is estimated that “as many as 30% of Americans with home loans—about 15 million households—could stop paying if the U.S. economy remains closed through the summer or beyond.”
Student loan debt and skyrocketing housing prices were to blame for millennials planning to rent forever. 12% of millennials plan to “always rent” and the majority cited affordability being the issue.
So with millions out of work, businesses still shut down, and no end in sight, it is unknown what the actual aftermath will be.
Prior to the coronavirus outbreak, real estate was already seeing the effects of migration from one state to another. It’s a natural thing. When the cost of living goes up, people move elsewhere.
Big cities were already losing population. For example, New York has lost a net 1.4million residents since 2010. Nearly 181,000 in 2018-19 alone. Because of the coronavirus, many people are leaving high-density areas for fear of catching the virus. Additionally, many people are returning to their home states because they are being forced to move back in with their parents.
A combination of residents who had already planned to move out of high-density states like New York and those who are forced to move has accelerated the typical migration numbers that affect real estate.
Pay attention to migration patterns of both retirees and millennials, these trends will create supply and demand imbalances in certain areas which can often be very helpful for your investment choices.
Retirement marks a new phase in a baby boomer’s life, and it seems only natural to relocate or move to a new home when they transition away from their primary career, or from the day-to-day rearing of school-aged children. Historically people have also moved to areas with moderate climates, like California, Arizona, and Florida. Oftentimes people are tied to certain areas due to family and jobs until they retire, then they decide where they want to live.
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“Work from Home”
Once packed business campuses are all but ghost towns. Now more than ever, commercial real estate is feeling the ripple effects of the pandemic.
Commercial real estate used to be the playground for the rich. Now, empty buildings are causing great concerns for investors.
The major cause of fear is that there is still so much uncertainty in the market. Some experts predict that “work from home” for many businesses is here to stay as they’ve been able to continue business-as-usual while their employees set up home offices.
Very early on, Jack Dorsey, CEO of Twitter, announced that they would be able to continue to work from home as long as they see fit.
At Rich Dad, our team is still working from home and only coming to the office to pick up mail or record a radio show.
Obviously things are subject to change for many of these companies. But for now, the outlook for commercial real estate is unknown.
I’ve said many times that I love market crashes because that’s the best time to buy— finding true value is a lot easier during such periods. And during a crash many people start selling so they’re more willing to negotiate and make you a better deal. Although a crash is the best time to buy, the market’s high pessimism also makes it a tough time to do so.
I remember buying gold at $275 an ounce in the late 1990s. Although I knew it was a great value at that price, the so-called experts were calling gold a “dog” and advised that everyone should be in high-tech and dot-com stocks. Today, with gold above $1800 an ounce, those same experts are now recommending gold as a percentage of a well-diversified portfolio. Talk about expensive advice.
My point is that this current period is a tough time to buy or sell. Real estate is high, interest rates are still relatively low, the stock market is very shaky, the U.S. dollar is low, gold is high, oil and gas are high, and there’s a lot of money looking for a home.
So the lesson is: As I said in the beginning, now, more than ever, it’s important to focus on value, not price. When prices are low, finding value is easy. When prices are high, value is a lot harder to find—which means you need to be smarter, more cautious, and resist your knee-jerk reactions.
A reminder from Warren Buffett: “It’s only when the tide goes out that you learn who’s been swimming naked.” In my opinion, there are many naked swimmers, especially in the real estate market.
Editor, Rich Dad Poor Dad Daily
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