Last updated on January 3rd, 2022 at 12:15 am

In 2006, people were running around buying anything on site. Rushing to close the deal before someone else took it away. A bit like the photo above.

A bit of a history lesson for those of you who are too young or too forgetful about the collapse of the real estate, mortgage, and investment industry. I well remember the entire process and how we got there and where we are today. I want to focus on why the property industry is different today than in 2006 particularly as the differences affect residential investment property.

2006 A Profitable Year

Starting with 2006 which I believe is about the zenith as far as buying and selling the property where most people were making money. Almost no homes during this year were underwater. You may or may not recall that there was a mini-collapse in some states about 1990. The Japanese economy tanked and California in particular suffered greatly.

From about 1988 through 1990, it was hard to find a house and buy it before the price would increase even while it was in the closing process. People waited in parking lots to buy new homes, they camped for weeks to the one of the lucky few. This went on for about two years. I know, I moved from Washington State back to California on a company move.

We bought a condo for a wildly inflated price, higher than the custom 3,200 square foot home we had built in Vancouver, WA just a year before. What a letdown. We bought the condo for two reasons, pricing on houses was way up there, and second, even if you wanted to buy in the lower-priced range, there were hundreds of people waiting with deposit checks.

1994 Prices Were Falling

Fast forward a year to about 1994, prices fell faster than one could repost a new price on a home. My wife and I decided that we could buy a single-family house because prices had fallen. The problem is that we listed our condo and about every few days we had to lower the price. After about two months with no offers and tired of constantly chasing down the price, we pulled it off the market and offered it for rent. We rented it almost immediately for a profit.

Home prices did not stabilize until later in the 1990s where they began to rise again. This cycle put many people off and they stayed put. Very similar to what has happened in the past two years. Finally about 2000, builders were on the move again.

I was buying the occasional property for rental at the time and my equity was going up at a brisk pace. It soon became clear that buying a rental for current income was not the thing to do. You could lose money on rents and hold the property for a few years then sell it and make big bucks.

2006 Flipping Was Not the Rage

This is what many people did. Flipping was not the rage at that time but buying a home and turning around and selling it (a form of flipping) without doing any work started to become popular. I did not go in that direction. Instead, I bought multi-family units and rented them. I also started buying new construction. You would put a down payment on a house to be completed within four to six months. I liked the six-month time frame.

A house selling for $300,000 in January to be complete in July would be worth about $360,000 by the time you closed on the home. In some cases, it would be worth more. So, just by putting down a deposit and waiting you made money. When the house was finished, I rented it. I was breaking even because at that time rents were not keeping up with home prices, they followed at quite a distance.

By 2006, people and found that they could not afford to buy investment homes in their markets e.g. California, Florida, and some others. The next evolution was to reach out to other states. As a result, Nevada and the Phoenix area of Arizona took off like rockets. Money poured in from all over the country to buy sight unseen properties. All that was necessary was to see financials and if prices were going up and you could rent it, you bought it.

Markets Were Saturated, off to Texas

When those markets became saturated, people went to Texas, Louisiana, Georgia, and many other states. Constantly chasing down the numbers. Buy a house for a lower price than in their home market, hold it for appreciation for a couple of years and sell.

Those were the days. Fortunes were made. It’s amazing how fast it seems that this climate just appeared. I was a property investor well before 2000 and I planned to buy, hold and rent and then eventually may years later to sell and rebuy. At the time no one had the belief that property values would escalate so high. We simply rode along with the wave.

One example of a deal that I did. I had purchased two, four-unit buildings next to each other. I paid about $425k for each and bought both at the same time. I put 10% down and raised the rents as soon as the ink was dry on the deed. The properties were in fair share but I am not a slum lord so I put about $50k into both properties to modernize them. Replacing carpet with tile, new stone countertops in the kitchen, etc. They each looked very nice when I finished with the remodels.

The plan was to hold them for about 10 years and then do a 1031 exchange (way to take profits without taxes and use them to buy something worth more) and buy other properties. It was about 2006 that a Realtor called me and asked if I was interested in selling one of my buildings. I was not but asked what his client was offering. He told me that his clients would offer $950k.

We were in a hunt to buy something witin the 180 days allowed

Remember, I bought them just three years prior for $425k and put about $25k in each making my out-of-pocket about $455k with buying costs all in. I told him that I had another and that I would consider selling the one if he had an offer for the other at the same time. He called me two days later with another client who was willing to pay the same price, $950k. I sold them. I made $313,333 per year for the pair just in equity appreciation. Incidentally, the rental income was positive.

The sale put me along with many others on the hunt with only 180 days to move the funds. It was like that back in 2006, money was flowing and crazy days of no firm ground under you were common. Near the end, it was hard to find properties that were priced well enough to turn a profit without property appreciation.

Fast forward to 2022. People are reluctant to sell their homes so inventory is tight in many markets. Interest rates are higher and people remember the late 2000’s and not in a good way. One of the ironies of the situation is that interest rates have risen to about 5% (as of today, rates were between 4.8% and 5.2%). People are worried about these rates. In the heydays of the mid-2000s, rates were in the 7-8% range. No one even questioned the rate.

Interest Rates Today Are Historically Low

Mortgage interest rates today are historically low. I recall rates as high as 17% in the Regan years. Regardless, it’s your frame of reference. Much younger Gen X and Millennials were exposed to 2.5% or so for rates. Buying real estate is venturing into the area of “faith”. A property is only worth what someone is willing to pay for it. If most owners did not hold the line on pricing, prices would collapse in that area. Again, it’s believed that properties in a specific area are worth X that makes things work.

The primary purpose of this discussion was to cover the area of residential rental real estate and why things are different between 2006 and 2022. Other than interest rates, another difference is that many investors in 2006 put just 10% down, and most did not pay PMI. With the debacle, lenders began asking for 20% or more as a down payment from investors. PMI would not be an issue with 20% just as it is not with homes.

Lenders recently have relied more on the buyers’ credit and sources of income other than the rental property. Back in 2006, the rental property was generally used to support the loan. Because of the tighter guidelines after about 2009 and up to as late as a couple of years ago, individual investors had largely left the market. They are back now.

Zillow stopped buying houses

You have seen the flipping shows and others of their ilk. Buying a rental investment property is nothing like the TV shows. The days of buying a home at an auction for nothing are about over in most markets. There was a time when large investment groups were buying up blocks of residential properties in places like Las Vegas. Those activities have about dried up as well. Zillow was one such investor who has recently backed out of the market.

Another difference between 2006 ad 2022 is that some markets weathered the meltdown better than others. California, Florida, Arizona, Nevada, and a few others that were the hot places to buy have seen horrendous drops in value, many repossessions, short sales, and bankruptcies. Other markets did better because they did not receive buckets of investor money.

The markets that sustained severe losses between 2006 and 2010 have largely recovered, some are better than before the crash. Regardless lots of people lost money in the interim.

Mississippi Gulf Coast Was Almost Unaffected by Investors

The Mississippi Gulf Coast is one that was little affected by the Real Estate collapse. Investors were set to defend the area just as the end was near and they disappeared. In talking with Realtors in the area, they were set to sell properties to these gangs of mercenaries then there was nothing. Good for the area because the unabated buying pushed up prices and when the markets fell, owner-occupied homes suffered.

More differences include the fact that lenders must practically teach economics to buyers. The documentation required to buy properties has grown exponentially. Essentially the documents are warning over and over again reminding buyers of their obligations. While there is more paper, frankly the average buyer today is not much smarter if at all than the buyers of the mid-2000s. It is a good try on the part of the government, perhaps it works for some.

In the last few years, investors have returned to the market, not like it was earlier, now the market is open for the individual investor who watches TV and wants to make a single flip or some who just want passive income. The idea of buying out of their area is something new to these new investors. Conventional wisdom says “buy something down the street”. Unfortunately for some would-be investors, down the street is simply not affordable.

Investors living in High Cost Markets Can Generally Not Afford to Buy There

Another irony is that people with the money to invest largely live in the most expensive states where wages are higher. Even with the higher wages, it’s difficult to find a property that will make money. Yes, you can consider equity growth but not at the rate it was in 2006. In many of these “richer” markets, prices are hitting ceilings where the majority of people can not afford to buy. This could cause a partial collapse in prices.

The secondary markets are now becoming interesting to potential investors e.g. Columbus, OH, and similar smaller cities. The idea that one has to buy in their area is slowly transforming to the concept that making money is the first and foremost qualifier. Frankly, why do you need to look at a property other than to be sure it is real and not falling? You can trust someone to do that for you.

The idea that an investor has to look through photos of properties to pick one to invest in is ridiculous. Why you are not going to live there. In 2022, there is also no need to keep thinking of “cities”. The media, TV, etc. all focus on cities. Charts, articles, etc. are all written about cities. “The Top 10 Cities to Retire In”, etc. Why cities. Why not areas. Some of the best rental properties are not located in Cities at all but County unincorporated communities because taxes are lower.

The Lending Market Has Changed in 2022

The point is that things have changed. Home loans are now available with less than 20% down to qualified people. Commercial loans that are based completely on the income from the property and not individual income are now possible again. Some of the flexibility that we had in 2006 is back. The difference with the “flexibility” is that the lenders will verify the source of income. The so-called “liar” or “stated income” loans while still around are few and far between.

You may know that the government buys nearly all loans and they have tighter guidelines than they had after Congress opened the flood gates in the mid-2000s and nearly destroyed our economy. Because the loans have to be sold, they have to be good loans from the start. Today that simply means that the buyer has more than a pulse. The buyer or the buyer’s property has a real possibility of repayment.

Underwriters are tough today. They want what they want. You may be asked to provide the same information more than once. They verify everything now. Not only is a good credit score essential for a residential loan, but your ratios of debt to income must also be in line as well. Telling a sob story will not get the loan.

If you are in the market to buy a home or a residential rental property on the Mississippi Gulf Coast, please contact Logan-Anderson, Gulf Coastal Realtors

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