The Changing World of Real Estate Investing

The real estate fad is over If you’ve been dreaming of “Flipping” real estate because you’ve heard of people making a fortune flipping houses – YOU ARE TOO LATE! The real estate fad has come and gone.

Like all fads, the “Flipping Real Estate Fad” lasted only a short period of time. This is not the first get rich quick fad to occur and it certainly won’t be the last. Whether it’s flipping real estate, day trading stocks, breeding ostrich eggs, or trading tulips, our history is replete with examples of get rich quick fads that took the world by storm and ended badly for nearly everyone.

One of the first recorded examples of a get rich quick fad was the Tulip Craze that occurred in the Netherlands in the 1600’s. Tulips had just recently been imported from Turkey into the Netherlands. Many of the richest Dutch citizens started collecting the flowers and proudly displayed them in their homes. As time went by, the middle class took notice that this flower was so prized by the rich, and also started collecting the flowers. Before long, everyone wanted tulips and tulip bulbs and the prices started going up. As the prices rose, people started trading tulip bulbs as if they were a commodity or a stock. Someone would hear of a neighbor that had traded a tulip bulb and made a big profit. The neighbor also wanted to cash in on this new venture. Before long, it seemed like everyone was trading tulip bulbs. It got so ridiculous, that entire estates and life-savings were traded for a single tulip bulb!

At some point, prices became so ridiculously high that a few smart investors realized that the tulip fad couldn’t continue forever. These “smart money” investors sold their entire stock of tulip bulbs and locked in their massive profits. Others followed suit and soon it became apparent that the market for the bulbs had disappeared. Suddenly, everyone wanted to sell their tulip bulbs and there were no buyers. In no time, panic selling caused prices to drop so far and so many people lost money that the country’s economy was propelled into a depression. So ended one of the world’s first recorded Get Rich Quick Fads.

Get Rich Quick Fads have continued to occur from the time of the great tulip craze to the present. The technology bubble of the late 1990’s was a prime example of one of these fads. The price of internet and technology stocks soared. Many of these inflated stocks were of companies that had no way to make money. Many thought that the price of technology stocks would continue to go up forever, because “this time things are different”. RIDICULOUS! The value of a company who can’t make money is ZERO! People were blinded by greed and simply didn’t realize this reality until the crash occurred.

The economy of the United States took a double hit in the first two years of the new millennium. First, the tech bubble burst taking the entire stock market down with it. Then, a small group of terrorists brought our country’s economy to its knees with the attack on the twin towers of the world trade center. In response, the Fed lowered interest rates to a 40 year low. This lowering of interest rates along with the introduction of relaxed lending practices kept our country’s economy strong and opened up the possibility of home ownership (and real estate investment) to more Americans than ever before.

The increased demand for real estate also increased the demand for all real estate services. Homebuilders, realtors, rehabbers, appraisers, lenders, and everyone else in any real estate related business prospered. The demand for houses exceeded the supply and many smart investors began to speculate on houses. This was the birth of the house flipping craze! As the smart money began to make money “flipping”, the middle class took notice and also started flipping. Before long, it seemed like everyone was flipping property for a nice profit. Demand for houses increased and it seemed like there was no limit to house prices. New investors entering the flipping business drove up the demand for houses, which increased the prices. The more prices went up, the more new investors entered the market and bid up prices even higher. It became a vicious cycle. It got so ridiculous that new “investors” would camp out in hot markets just for the chance to bid on pre-construction projects.

This vicious cycle continued through late 2005, at which time the real estate bubble started to deflate. The smart money realized that prices had gotten ridiculously high and that the end was near. These “smart money’ investors started selling their real estate portfolios

The real estate fad is over. Demand has dried up and the number of houses on the market is increasing. In many areas, prices have already started down and this trend will surely increase as time goes by. The home buyers and “investors” who used interest-only loans, negative amortization loans, and adjustable rate loans over the past few years will soon have payments that are drastically higher, when their promotional rates expire. Millions of these people will not be able to afford the higher payments and will lose their homes to foreclosure. All of these millions of additional houses on the market will further depress prices and prices will likely stay low for many years to come. The flipping fad is ending as suddenly as it began. With the lack of retail buyers, there simply isn’t a demand for flipped houses. Millions of the new “investors” that started flipping during the recent fad will go out of business, losing a lot of money.