A question that I get asked all the time is how long I think it will be before the housing market returns to “normal”. “Normal” in most cases is the housing boom that we just came off of. The people who ask this are usually those who’ve only been buying, fixing, and selling houses for a few years. They don’t yet comprehend that the housing boom wasn’t “normal”; as a national phenomenon, it was the biggest boom in housing in history.
If one were to look at housing over a 30 year period from 1970 – 2000, during the first five years in many markets there was no appreciation whatsoever. The way people got rich in houses was to buy them with a 5% down payment (FHA and VA loans required less down payment, but high closing costs), and laboriously pay them off. If this “normal” housing market resumes, and that 5% down payment resumes along with it, without any fancy institutional financing such as the 80/20 and 80/10/10 loans, reverse amortization, interest-only, etc.; nor faked down payments that amount to loan fraud, many of those who are waiting for it to return won’t be able to make a living.
For the next few years, the game is going to be won by skill rather than luck or “friendly” appraisers, loan brokers and lenders. This skill is going to take two completely different tracks. The principal track will be based upon the entrepreneur being able to negotiate seller financing on terms that make holding a house over the long term as a positive cash-flow rental; then being able to manage it so it will attract the right tenants, who will pay the right rents without any government assistance, and who will renew their lease year after year. Obviously this is likely to require skills that many don’t possess, so they’ll have to serve out an apprenticeship to those who already have these skills to be able to master them.
The other track will be the “mortgage” business. The opportunity in this track won’t be to originate loans for a mortgage banker. The real money will go to the person who can make a market for the seller financing negotiated by the foregoing entrepreneur by finding long term investors who want secure, high-yield mortgage investments. To accomplish this, the “paper-person” is going to have to master the calculator to be able to calculate the price to offer to get a desired yield. Then he is going to have to find a cadre of investors who are looking for this kind of paper at the yield he is able to negotiate.
None of this sounds nearly as much fun as the good old days when all you had to do was to buy, fix, and sell. That’s bad good news. The good news is that most entrepreneurs will drop out and sit on the sidelines waiting for the market to return. In the best case, if it does return, they will have lost all the profit they could have been making in those idle months. In the worst case, the market may never return as it was before, and they’ll still be sitting there waiting when they’re old and gray. Bottom Line: The world won’t change to suit you, but you can change to fit it; and you should.
