Prepare to be shocked. The next real estate crash is almost at hand. It may start this October; but the crash will hardly be a surprise. We seem to have financial market crashes and real estate market crashes about every ten to fourteen years. It's been 16 years since the crash of 2008.
But that's not the shocker. The shocker is that -
Real estate continues to appreciate,
even during a huge crash.
My hard money commercial mortgage, Blackburne & Sons Realty Capital Corporation, is a whopping 44-years-old. I founded the company in 1980, and it survived the S&L Crisis, the Dot-Com Meltdown, and the Great Recession. I was there. I lived through it.
During each of these real estate crashes, commercial real estate values collapsed by almost exactly the same amount - 45%.
You need to remember that number - 45%. It will give you great comfort. When your real estate world is crumbling around you, and it seems like there is no bottom in sight, you can take solace in the knowledge that the crash will not continue forever. It will stop once the decline has reached 45%.
The full 45% decline will take about three to four years. Then the decline in real estate values will suddenly stop and violently reverse.
Within 20 monthly of reaching its
nadir (low-point in a cycle), real estate
values will soar to all-time highs.
If you are trying to buy a nice property, you will never catch the very bottom. The turn-around will be almost instantaneous. Boom! The cycle will hit bottom, and the bounce upwards will be violent.
So what is going on? Why does real estate recover so explosively?
The answer is that real estate continues to appreciate, even as it it is crashing. Huh? Whatchu talkin' about, Willis?
Real estate used to appreciate because the population was increasing. Unfortunately, too many American young women are choosing careers over getting married and having large families. If you remove new immigrants, we are not even replacing ourselves. As a country, we're screwed.
So real estate is not appreciating because of an increasing population. Real estate appreciates modernly because the government creates too much money.
On balance, the Fed creates this new money every year. The Fed may tighten the money supply one year, but it always seems to catch up the lost opportunity to print money like a drunken sailor in a subsequent year. An example will make this clear.
Let's suppose the Fed is creating new money every year at the rate of 3%. A great recession hits, the banks take big losses, the banks get scared, they stop making new loans, but the banks continue to demand their monthly loan payments.
As the multiplier effect works in reverse, massive amounts of money is destroyed. Money can be destroyed? Yup. And when money is destroyed during a crash, it is usually in enormous amounts. This why inflation goes negative in a great recession, and no one seems to have any money. It's been destroyed (digitally erased). We have outright deflation.
Absent a rescue by the Fed, we would have a depression; but that never happens anymore. The Fed rides to the rescue, and it prints an enormous amount of new money to replace the money destroyed (and to restore confidence).
During the great recession that we are using as our example, I want you to think of the Fed increasing the money supply by its usual 3% every year during the three to four years after the crash and the ensuing great recession. (The Fed will actually need to increase the money supply at a much higher rate - perhaps 8% annually - to replace the dollars that were destroyed.)
Even though commercial real estate is falling 45%, a sort of secret savings account of money supply growth continues to grow at 3% per year (compounding). Remember, the money supply, on average, increases at the rate of 3% per year. Like a sailor storing up his pay on a long cruise, the Fed gets to print up the extra 3% per year that it missed during the three-year-long great recession.
Does the Fed actually like printing money? I dunno, but they seldom miss an opportunity. They seldom sleep through a shore leave. Haha!
Three to four years into the great recession, a nice piece of commercial real estate can be purchased for just 55% of its former high water mark. On top of that great bargain basement price, three to four years of average annual 3% appreciation has built up.
It's no wonder why commercial real estate values, once the bottom-feeding sharks arrive of the scene, seem to suddenly skyrocket. It's a feeding frenzy.
Since I am an old veteran, and I am highly confident that another great recession is on its way, I have moved most of my personal savings into Blackburne & Sons' first trust deeds. Please note that I have made the move to first trust deeds because I am convinced that a crash is coming.
While past performance is no guarantee of future results, our "junky little commercial mortgages" did surprisingly well during past great recessions. I personally take lots of tiny pieces of small, low-yielding loans (I actually choose the deals with lowest interest rates) spread out across the country. As long as our borrowers keep making their payments, it doesn't really matter if the rest of the world is melting down.
