Lessons Learned From 2007

January 5, 2019 — 5 Comments

In 2006 and 2007, I received some of the best advice I didn’t listen to. It came from three of the smartest investors I’d met up until that point in my career. They were mentors and business partners, but now they are friends. To me, a cocky 28 year old millionaire house flipper, they were just “old dogs”. You see, I was rewriting the way flipping was done, I thought. In 2006, I rehabbed and flipped 120 houses. In 2007, I did 143. I was top in the nation for HomeVestors, and nothing could stop me. Little did I know, I was destined to meet the truth. The truth came to me in the form of “The Great Recession”.

I guess I was like an ostrich with my head in the sand. I didn’t want to think about a time that I couldn’t keep getting bigger. I didn’t want to think about a time when I couldn’t rehab my way out of a mistake. I didn’t want to think about a time that I couldn’t just refinance my hard money and keep any house I wanted. Well, here is the truth I learned. Whether you want to think about it or not; that time will come again. It always does, and always will.

If you’d like to read all the warning signs that everyone wanted to look the other way on, check out this page: Subprime crisis impact timeline

Now, here we are in 2019. A year full of promise and opportunity. Will the real estate market “collapse”; I don’t think so, at least not this year. I would though like to show you some things that remind me of 2006 and 2007.

In March of 2010, US auto loan debt was 0.7047T. As of October 2018 it is 1.265T. That is nearly an 80% increase. This is largely because lenders are now offering up to 8 year loans! We are experiencing record amounts and growths of non-housing debt. Read this article from the NY Fed: Total Household Debt Rises for 16th Straight Quarter

If you are a data geek like me, you’ll love this comprehensive report:

QUARTERLY REPORT ON HOUSEHOLD DEBT AND CREDIT
2018: Q3 FEDERAL RESERVE BANK of NEW YORK 

Here are some Images to take a look at and consider:

Total US Debt Balance and Composition
Non-Housing US Debt Balances
Percent of Balances that are 90+ days delinquent

I have been saying that I don’t think that real estate will cause the next recession or crash, BUT IT WILL BE AFFECTED.

Although debt in America seems to be climbing at rapid paces, and setting records, income levels have now reached pre-recession peaks as well. That’s great, right? Well it is, if everything could just keep going up in perpetuity. Unfortunately, the cycle is such that people spend more and try to make more. This not only increases the cost of goods and services, but it kicks in inflation. Queue the Federal Reserve. Just as they did beginning in 2005, they are now raising rates on almost a quarterly basis. What happens when corporations and individuals can no longer borrow at historically low levels? Right now, savings rates (amount of income peple tuck away) are down. People aren’t saving much, because their net worth has climbed to an all time high as well. This has been boosted by record stock market gains and record real estate values. Here are some images to look at:

Real median Income

So, hey, I think everything is great. Everything points straight up. There is no end in sight. What goes up, doesn’t have to go down. There, I gave you rainbows and sunshine.

Not really though. Anyone that tells you not to worry is selling you something. We have less than 24 months left in this act of the play, and I believe household debt is going to be the time bomb. Once that sets off the explosion, the cascade effects just happen. Rates go up. Delinquencies increase. Bonds don’t sell. Lenders tighten credit. Defaults rise. Companies layoff. Defaults rise. Borrowing dries up. Defaults rise.

You can call me negative. You can call me an “Old Dog”. I’m actually neither. I’m realistic. I’m prepared. I’m going to be ready to capitalize on whatever opportunity comes my way. You should be too. Don’t be scared, but don’t be me 12 years ago. I lost millions because I didn’t listen to people that had crossed the bridge before me. You don’t have to.

If you want to have some real conversations about these topics, join me at our Annual Summit in a couple weeks. Click here for more information.

If you don’t listen to me, cool. I could be wrong. Just make sure you are not listening to someone that has not made it through a complete cycle before. A lot of people have become “experts” since 2008. The problem is, they just don’t know, what they don’t know.

TimHerriage

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I started at the bottom, worked hard and am now one of the top Real Estate Investors in the business. I learned from some of the best, excelling early as an acquisitions manager and then moved on to partner with other skilled investors to create my own portfolio of productive rental properties and later to mentor others to do the same. I am still actively involved in Real Estate, giving a current awareness to the training I share. My wife, Jennifer, and I live in Rockwall with our sons, Alex and Will.

5 responses to Lessons Learned From 2007

  1. Dang Skippy! It’s amazing what 25 years under the belt will do for ones perspective. We love our affordable sanely leveraged multi family properties that perform well regardless of the economy. That, and learning how to properly qualify and train our residents to avoid the pitfalls that await them help us sleep well!

  2. Thank you. Very helpful. However, I wonder if the Dallas market is somewhat insulated for many reasons, among them: job growth, people and companies relocating here, relatively low cost of housing, diverse economy, etc., etc. I’d be interested in any comments you might have.

    • I think we’ll fair well with regards to price decreases, but the macro lending environment will have a strong impact on investors. Also, there will be some neighborhoods that have appreciated far too rapidly that will need to correct. I’d tell recommend you stay below replacement cost in you basis and you can weather almost any storm.

  3. Hello Tim,
    Your Quote is absolute truth : Anyone that tells you not to worry is selling you something. We have less than 24 months left in this act of the play, and I believe household debt is going to be the time bomb…. Up and Down goes thru sicle every 10yrs.. So ,system ready to go down : 1997-2007, 2007-2017, 2017- till 2027 we shall be in @Solwdown…

    Best Regards,
    Sam

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