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Pedal Downhill

Published: August 8, 2019

Most folks like to coast downhill, but not me, I like to pedal downhill. It helps you build momentum for the next hill that is coming up. And let me tell you, there are plenty of hills coming up.

If you have read at least one or two of my blog posts, you will know that I am a bicycle rider. This makes me see things with the lens of a cyclist. So let me explain a little about what I mean.

First, it takes quite a bit to climb big hills. You get tired out and are really out of breath. You see the downhill and think, “Wow, now I can coast for a little while”. Me personally, it gets me excited to pedal downhill knowing that I am about to go 30 or 35 mph.

I start to push lightly to get some speed. The down part of the hill helps to build some speed too. Most people think I am already going fast, why do I need to go faster?? Pedal downhill anyway.

I think I have learned a little about life in my 50 years that tells me, pedal downhill to get ahead of the next issue or hill. So what does this mean in real estate? The market right now is pretty good. Well, its actually one of the best in over 12 or 13 years.

I pedal downhill to gain momentum to build up some cash and do a few more deals. Use the momentum to plan out your next few years because as we all know, things will change. Interest rates WILL go up.

These are some of the lowest interest rates we have seen, ever!!

My first house that I bought in about 1998 had an interest rate at about 9%. That was pretty normal for the time. Rates had been up to around 18% back in the 70s and 80s. 1981 had home mortgage rates as high as 18.31. WOW!! And you were concerned about 4.5%!

Through the 80s as interest rates came down. This made mortgage payments a bunch lower. People could afford more house OR what actually happened is that prices went up quite a bit. During the 80s we saw some of the highest prices in real estate.

What I am saying is that there was a drop in home mortgage rates from 18% down to about 9 or 10% in the 80s. This caused a run up in house prices. 1986 saw a bust that lasted quite a while and included the S & L crisis. This is kinda the same situation as rates have come down from 8% in 2005 down to 4% or so right now.

My credit union where I have most of my accounts, Security Service FCU just lowered their 15 year mortgage to 2.86%!!! The 30 year is at a very respectable 3.383%. Holy Cow.

Property prices have gone through the roof with the lowering of interest rates, just like the 80s, and just like 2009ish to 2019. So here we are now with relatively low interest rates and high property prices. So whats going to happen now??

There is kinda only 1 thing that can happen after a run-up in prices that has lasted for about 10 years. They are going to come down. I keep telling people that, but they just dont listen.

With the economy at full steam, things are probably only going to get a little worse. What happens when things get worse? Rates might fall a little. But it will probably be only short lived, though. They can only go so much lower. They will probably go back up making the recovery a little worse. If they stay down for an extended period of time(or rise just a little), I will be buying as many properties as I can.

The economy down AND interest rates down AND cash in hand(or friends who have self directed IRAs) is the trifecta for building up a rental portfolio that will support me in my retirement. It will also be a great inheritance for the kids and grandkids.

Back when I started in real estate in 2003 that was the bottom of the hill that I had to climb. As I started climbing I realized that the hill was not too big. 2005 to 2007 was the downhill and what did I do?? I coasted and in 2007 I put on the brakes. There was no momentum to get through 2008 and 2010.

I had no assets, no cash and I went running just like most people. I had a few jobs to get me through and pay my bills. 2012 was again the uphill that caused me to build my real estate muscles. Now as we move toward the latter part of 2019 we are at a similar place like 2007 and 2008.

Some people think things are going so good and will only get better. I have seen a few cycles so I know what is really happening. I have been peddaling downhill for a few years now. There may be 6 months, maybe one year left of the upcycle. We are right at the top of the market.

Believe it or not folks, the US economy is not going to be at 3.9% unemployment for much longer. Interest rates are not going to be at 4% forever. And also, gas prices are not going to be at record lows of $2.50 for much longer.

As all of these things change over the next year or two, home prices will adjust downward somewhat. As people see their equity shrink or disappear they will tend to walk away from their homes causing more foreclosures. I dont see catastrophic bubble bursting, but I anticipate prices stayng the same or coming down about 10% over the next few years.

When rates move up from 4% to 6 or 8% over the next 5 to 10 years it will cause people to be able to afford less of a house. At the same time people will earn more money so it will keep prices stable for some years. This is when people will NOT see great appreciation in their homes. This is the time that I want to start accumulating homes.

I am sort of a contrarian. I have heard that Warren Buffet said to be, “Fearful when others are greedy and greedy when others are fearful.” People have been greedy for quite a while. People dont realize it yet, but they are going to get fearful in the next year or two. That is when I am going to be the greedy one collecting lots and lots of houses.

The whole economy and all of its many pieces is kinda like eating an elephant. You have to take it in, one bite at a time. Digest it all. See all the things that are happening and how they affect one another.

So as we are nearing the end of the “Good Times” I hope that you have been peddaling downhill and continue for a little longer. That momentum will get you through the next uphill.

Good luck and be frugal my friends!!