No Such Thing as a Normal Market

By Vena Jones-Cox

I was today years old when it dawned on me that there’s no such thing as a “normal” real estate market.

I was brought up on the same generalizations that you were…

• Real estate appreciates at some average rate every year.
• Net rents rise slightly faster than inflation.
• Values always go up over time because everyone needs a roof over their head.

I bet that taken over 50 or 100 years, those statements are 100% true.

But saying that real estate appreciates 3% or 4% a year “on average” is like saying “it’s always about 55 degrees in Cincinnati” because that’s roughly our average annual temperature.

In other words, technically true, but experientially ridiculous.

Sitting here on this 84-degree September day, I can’t remember the last time it was exactly 55 out. We don’t experience weather in averages, any more than we experience the 100-year average real estate market.

We experience cycles, and we experience how 4 or 5 key things come together in those cycles to create the market, and if we pay attention, we experience how it looks to adapt to that market and put together the kinds of deals that make sense FOR that market.

Case in point: when I started investing in 1989, we were coming out of a period of very high inflation and interest rates that made today’s “high” rates look cheap.

Rents had struggled to keep up for over a decade, because tenant incomes couldn’t keep up with inflation. Conventional financing was expensive.

So how did people do deals?

Owner financing.

The problem wasn’t that people didn’t want houses. It was high interest rates and stagnant incomes. Smart real estate investors quickly figured out that they could only influence one of those 2 things, and only by negotiating better financing than was available conventionally. It wasn’t exotic. It was how a whole lot of deals got done.

And for that time, THAT was the market.

Then, starting just before I got involved, rates started to fall, and fell or stayed stable for years on end. Buying power increased. Financing became easier. Prices generally rose. Not at a crazy clip, but dependably.

That was the market.

Then 9/11 and the tech wreck happened back to back. The Fed crushed interest rates in an attempt to avoid a recession. And guess what? Cheap money started a housing boom. Institutional investors, chasing yield, ate up investments in subprime loans; no-doc financing, teaser rates and increasingly insane underwriting turned it into a bubble.

You could borrow more than a property was worth. Anything you bought, you could sell for more money a year later even if you did nothing to it. For a while, people made great money buying houses before they were built, then selling them when they were finished.

We know what happened next…values dropped by 34% nationwide and by half or more in some communities. Builders went bankrupt by the hundreds. Foreclosures flooded the market. Financing tightened to the choking point.

Properties were soooooo cheap, but you needed cash, or private money, skill and courage to buy them, because that whole “There will always be demand, because people need a place to live” thing? Yeah, it turns out that when they don’t have jobs, the place they choose to live is with their parents, or children, and demand craters.

And for 5-6 years, THAT was the market.

Then we had a decade-long recovery, where prices and rents rose consistently while interest rates kept falling and falling.

Since we were “recovering” from such a low point, it was pretty easy to buy, hold, raise the rent, refinance and watch the market improve your deal year after year.

That was the market, too…but the seeds of the next thing were already sown by the LAST thing.

15 years of underbuilding plus a pandemic that changed the way we work plus a trillion new dollars dumped into the market plus a shortage of labor and materials that guaranteed that we couldn’t build a lot of new houses really fast plus 3% loan rates?

Of COURSE desperately low inventory plus extra money in everyone’s pocket plus artificially low interest rates caused prices to go up 18% a year. Of COURSE properties sold in hours. People bought deals with lousy current numbers because they assumed appreciation would eventually fix everything.

Because that, too, was the market.

Now we have high prices, expensive financing, low inventory, owners trapped in 3% mortgages and rents that can’t rise enough to make every overpriced property cash flow.

And this is the market.

36 years of buying houses, and I have yet to say, “Oh, this market is JUST LIKE….”

Oh, sure, there are ECHOES from one cycle to the next (For how many years have you been hearing internet geniuses saying, “Uh oh, loans are getting easy and foreclosures are up a point, here comes 2006 all over again”? I’m pretty sure I’ve been hearing that since 2012)

We’re pattern-seeking creatures. We want to believe that if we correctly identify the old pattern, we’ll know what happens next.

But the same forces never seem to come together in exactly the same way twice.

Interest rates may look like one historical period, while inventory looks like another.

Financing might resemble 2006, but lending standards, homeowner equity and housing supply are completely different.

Prices might look ready to fall, but millions of owners have low-rate mortgages, substantial equity and no particular need to sell.

They say history rhymes, but it feels like it’s a different drunk dude writing the poem every time.

After 36 years, I’ve finally realized that predicting the market is a fool’s game.

ADAPTING to it is the real skill.

By adapting, I mean recognizing the market you’re actually in right now, and understanding the problems it’s creating FOR YOUR CUSTOMERS. Not for you, for the people who want to rent from you, or buy from you.

By adapting, I mean quickly learning which strategies are solving those problems, from real people who are actually doing those strategies, not from the gurus who claim in a single year that the answer is flipping subject to, no, it’s RV parks, no, it’s multi-families…

It’s kind of all about building relationships with people who know things you don’t.

That can be hard in a world of algorithms, where your social media is only going to connect you with other people who are retailers, or other gurus who are wholesalers, or the BRRRR crowd, or whatever. But it can be done (maybe at the National Real Estate Summit, hint hint), and if you’re REALLY serious, you’ll figure out how to do it.

The investors who thrive through multiple cycles aren’t the ones who believe that one strategy is the perfect strategy for all markets.

And they definitely aren’t the ones who can magically predict interest rates, prices or the next recession.

They’re the ones who never sit around waiting for the old “normal” to come back.

Because let’s face it: if it does, it’ll probably be different anyway.