By E.B. Tucker, editor, Strategic Investor

E.B. Tucker

He answers to Mr. Worldwide or Mr. 305, but you may know him as Pitbull.

Pitbull is bullish on real estate right now… We’re not.

The Cuban-American rap star’s real name is Armando Pérez. He has a touching raft-to-riches success story. His parents barely made it out of Cuba. He came up on the tough side of Miami in the ’80s.

Pitbull was one of the inspirational speakers at a Real Estate Wealth Expo I attended a while back in Chicago. I was one of around 8,000 attendees.

The seminar went like this: Pitbull wowed attendees during a 20-minute interview with soft questions. Then, a guy with a shaved head and a $3,000 Italian suit came out. He asked the crowd, “Isn’t Pitbull great?” before jumping into a 90-minute sales pitch.

His pitch promised to divulge the secrets of flipping real estate. Not today, of course… next weekend, for just $995. That’s in addition to the entry price to this event. Tickets ranged in price from $149 to $2,495.

This well-choreographed lineup went on for 14 hours. The final headline act was famous entrepreneur and best-selling author Tony Robbins. His sales pitch for a future conference capped his nearly four hours on stage.


Tony Robbins is a force of nature

I did some research on the conference’s organizer, Bill Zanker. His company, The Learning Annex, puts these events on. They are a huge money-maker.

What Zanker knows is the conference theme can be anything that’s hot. Calling it “Real Estate Wealth Expo” is smart right now… because real estate is hot.

Or at least it was hot. I keep tabs on real estate prices in my local market. After the last bust, I bought a portfolio of single-family rental houses for as low as $10 a foot. The cheapest house I bought was $10,000. The guys who owned it before me lost it in a $160,000 foreclosure.

But what I see is a weak real estate market right now.

I notice price cuts. Promises of minimal down payments and easy terms lure in the weakest buyers. It’s hard to make sense of a real estate purchase right now. It’s not the time to go all-in. We’re a long way from $10,000 houses.

Let me explain…

We’re a Long Way From the Bottom

Today is not a once-in-a-lifetime opportunity to buy real estate. In fact, if you think you might need to unload property in the next few years, today might be a good time to do it.

The lowest borrowing rates in history, tight supply, and amnesia related to the last crash are a perfect storm for real estate. This type of situation feeds on itself.

In 2017, The Wall Street Journal featured a piece on the home shortage plaguing Minneapolis. Buyers described homes selling for above listing price in as little as three hours after they were listed.

That same year in Toronto, one of the world’s hottest property markets, many buyers skipped home inspections. Bloomberg reported a local inspection company saw a 30% decline compared to the previous year. That’s in the face of surging prices.

The reason? Demand is so high, buyers will miss their chance if they wait even a day or two for a home inspection.

We see peak conditions in urban rental markets, too. Take the website Rentberry, for example. It allows would-be tenants to bid on rental properties. Competition for rentals is fierce. Landlords list an apartment and then sort through the offers, accepting the highest.

Real estate markets move slowly. The 2017 euphoria was a sign to sit on the sidelines. Two years later, I see price cuts. For most people, real estate is a negative cash flow asset. You have to spend hard dollars on maintenance, taxes, and insurance.

Everyone wants to own real estate. They rarely analyze the expected outcome when it’s time to unload. Commissions, closing costs, and inspection repairs all add to the cost of unloading property.

Owners have to sell if they get a new job, fall in love, or expand their family. All of these things just happen in life from time to time. A slowing real estate market leaves many people stuck with homes they no longer need or want. Nobody seems to care about that at the house-flipping conference. Attendees assume they will always be able to sell real estate. They’re wrong…

According to Bloomberg and Bankrate, a 30-year fixed mortgage costs 3.86%. That’s close to the lowest rate in history. It’s hard to imagine it going much lower.

Take a look:

Most buyers use credit to help them buy a home. In fact, for many people, paying off a 30-year mortgage over time ends up being their only savings.

At 3.86%, a $300,000 loan costs the borrower less than $965 per month in interest. If borrowing rates returned to a mere 5%, interest on the same loan would be $1,250 per month.

Most buyers stretch as far as they can when home shopping. That means new buyers coming in to the market as rates rise would be able to borrow less. They’d only be able to pay $240,000 for the same home, because their income limits their borrowing capacity.

Higher rates would mean lower home prices.

Millennials Have This All Figured Out

Not everyone is after a traditional house this time around. After all, the average person is not making much more money than they were a decade ago. The rise of the tiny-house fad is proof.

This movement fascinates me. So much so, I went to a tiny-house workshop to learn more about them.

A tiny house is essentially a miniature house.

It has almost everything that a traditional house would offer, just a lot less of it.

Most of the tiny houses I saw had wheels. This way, you can move the tiny house if the neighborhood goes to hell.

I also sat through a presentation on the concept by a man named Jeremiah. Jeremiah and his girlfriend described how city leaders are too dense to see that this movement isn’t going away. He says it’s more than just a small house… It’s a way of life. He described it as an inclusive community, sharing resources as needed.

This movement is a sign of the times. It reminds me of the food truck craze. Nobody seems to notice the food truck is an economic consequence of excessive building codes, regulatory hurdles, and labor costs. What used to occupy a building now fits into a truck.

Tiny houses are not a novelty. People actually live in these things. They take offense to the notion of property taxes, zoning laws, and city ordinances. They want freedom. They don’t mind sticking traditional property owners with the bill.

I talked to lots of people at the event. Tiny-house fans have a lot to say about the movement.


Tiny-house enthusiasts

I don’t know if tiny houses will be the way of the future. Millennials seem to think they’re great. Generation Z is so poorly socialized, its members may live in isolated pods 20 years from now.

What I do know is this: Today is not generally a good time to buy real estate. If you’re expecting a child, not planning on moving for decades, or just finding a sweetheart deal, it may be a good time. However, that’s not the case for most people.

Real estate is hard to get rid of. It depreciates constantly. If you don’t believe it, ask someone who owns a lot of it.

It’s also not an investment. It’s a consumption item. You have to live somewhere… and you might as well enjoy being there.

We’re not finished looking into this topic. We didn’t even discuss low-cost prefab homes available on Amazon. These $40,000 homes in a box are available now. If someone installs one next to a fully mortgaged $400,000 house of similar size, one of them paid the wrong price.

This will be much different than the last crash – and it will still be bad. Stay tuned…

Regards,

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E.B. Tucker
Editor, Strategic Investor

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