THE CREDIT CRISIS: INVESTMENTS ON A TIGHTROPE WITH LESS SAFETY NETS RICK TOBIN
I used to hear stories shortly after
the
creation
(Resolution
of
Trust
the
RTC
Corporation)
which involved apartment building
deals in Texas which sold for
something like $800 or $900 per
apartment unit back in the early
1990s. If the apartment building
was a small 10 unit apartment
deal, then the sales price may
have been close to just $8,000 or
$9,000. If the apartments were
possibly
100
units,
then
the
apartment might have sold for
$80,000 or $90,000.
I wonder what these same apartment buildings may sell for today. I also wonder if the monthly net cash flow
today exceeds their original purchase prices. There are few better real estate investments anywhere in the
USA than apartment buildings because we all need a place to live.
The word “Crisis” allegedly is derived from two characters in the Chinese language, which may represent both
“Danger” and “Opportunity.” Yes, the financial implosion we have endured since 2007 has been quite scary.
Tragically, the real estate implosion when considering median home price percentage losses was even worse
in recent years than what people experienced during the depths of The Great Depression.
In almost every well known financial implosion time period, recession, or depression these past one hundred
(100) years, boom time periods preceded bust time periods when “easy money” time periods such as “The
Roaring 20’s” and the early 2000s were followed by “tight money” time periods (or “slam the brakes” on capital
access), due to higher interest rates, tougher margin or capital reserve requirements, and / or more challenging
underwriting guidelines like today.
When “tight money” time periods later ease up again, then property values typically increase significantly such
as what he have seen between 2012 to 2013 primarily due to near record low interest rates. The most
important factor for real estate is related to the availability of capital in order to get in, and to get out of the
investment. Let’s hope that underwriting guidelines ease up a bit more so that more people may qualify
for loans again!