How To Prepare For The 2021 Housing Crash
In 1997 I made what was at the time a heretical statement in my book Rich Dad Poor Dad.
I said, “Your house is not an asset.”
I might as well have been a witch in seventeenth-century Salem, Massachusetts. Howls of protest went up, and people demanded I be ﬁguratively burned at the stake.
When I make that statement today, the howls of protest have mysteriously disappeared. That is because it is now easy for people to understand how a house is really a liability. It does not put money in your pocket; it only takes it out in the form of mortgage interest, maintenance, and property taxes.
After 2007, many houses could not even be sold for the original loan amount borrowed against them, proving that houses have indeed become a major liability.
For years, I knew a real estate crash was coming. The euphoria was growing. People with no income and no jobs were buying homes. My apartment houses were running high vacancies. Tenants who could not afford their rent were suddenly buying luxury homes. I knew the end was near when the cashier at the grocery store handed me her card and said, “Call me. I have some properties you may want to invest in.” In an effort to seal the deal, she added: “Prices are going up, so act quickly.” The year was 2007.
In 2008, I was interviewed by Wolf Blitzer on CNN and predicted the crash and bankruptcy of Lehman Brothers. Six months later, Lehman Brothers ﬁled for bankruptcy and the Great Recession began.
In 2008, almost $700 trillion in derivatives exploded, nearly bringing down the world economy.
During this crisis, millions of people lost their homes to foreclosures. Millions more are upside down, which means their homes are now worth less than their mortgages. Many people blamed the “subprime real estate” buyer for the real estate crash. The reality was, as Brill conﬁrms, the elites were manufacturing fake assets called derivatives. That was the real problem.
What we are seeing today, is different than that of 2008. We are in an “everything bubble.” Since the Fed has been printing trillions of dollars, everything is full of hot air—including real estate.
Rich Dad said,
“Bull markets seem to go on forever, which causes people to become sloppy, foolish, and complacent.”
Since my warning in 2008, it seems people still believe that their house is an asset because the coronavirus has exposed so many in financial trouble.
To save the economy, Congress passed the CARES Act earlier this year. One thing that was included in the CARES Act was mortgage forbearance.
Mortgage forbearance is when the mortgage lender allows the borrower to pause or reduce their payments for a limited period of time.
Forbearance does not erase what is owed. The borrower will have to repay any missed or reduced payments in the future. This usually doesn’t turn out well and ends in foreclosure anyway.
As I said, forbearance doesn’t mean the mortgage is forgiven or erased, it just means the borrower still owes it but at a later date. So if you take into account the millions of people out of work, drowning in personal debt, and no sight of relief coming anytime soon, we may see a housing crisis worse than we saw in 2008.
Tidal Wave Of Property
Prior to 2007, housing price data seemed to indicate that real estate prices could continue to rise indefinitely. In fact, the average sale price of homes sold in the U.S. climbed steadily each year from 1963 to 2007—when the housing bubble burst and the financial crisis of 2008 happened. When that happened, the market was flooded with properties in foreclosure.
Since about 2011, prices have once again been on a steady incline—largely in part due to the printing of trillions of dollars – and there is now low supply once again, causing prices to climb to all-time highs.
Once the bubble bursts, some are predicting in 2021, the supply will skyrocket, and as I like to say, real estate will be “on-sale.”
The Biggest Real Estate Opportunity
Although a crash is my favorite time to buy, the market’s immense pessimism also makes it a tough time to do so. Your family and friends, possibly even your financial advisor, will think you’re absolutely crazy and try to prevent you from “making a big mistake.”
But if you do your homework, there’s no reason you can’t take advantage of the biggest real estate opportunity headed our way.
#1 Cash Is King
Ken McElroy, my Rich Dad Advisor on real estate, says “Cash is King” during times of big real estate opportunities.
This might sound like terrible advice when the dollar is losing so much in value. But the key focus here is the ability to act fast when the bottom falls out on the real estate market.
Some general cash management tips are:
- Have an investment plan for your cash on hand to maximize its earning potential.
- Establish a line of credit with your bank before you need it.
- To make sure you can move quickly to borrow if needed, keep an eye on your current assets/liabilities ratio (at least 2:1 is good). Quick ratios (liquid assets divided by current liabilities) should be over 1:1.
#2 Learn Short Sales
After 2008, Banks learned a big lesson: they don’t want to hold inventory very long. Ken says that buying a property directly from banks is one way to be able to take advantage of a real estate crash.
A short sale—one of the most popular techniques involving foreclosures—takes place when the lender agrees to accept less than the amount owed on a piece of real estate.
A short sale could happen for a few different reasons, but the most common is the value of the property has declined below the value of the loan.
#3 Go Beyond Local Markets
A general rule that my team and I live by is that we invest where we live. I say generally, but not all the time. However, when a real estate market crashes, it affects geographical areas differently. Ken invested in Las Vegas after the 2007 crash because of the great opportunities there.
Keep an open mind as some areas will be hit harder than others, so do your research. A few things to look at are migration patterns, unemployment, and demographics. Each of these will tell a different story and how one particular area could be affected by a market crash.
#4 Master One Type Of Investment
You’ll notice a trend in real estate that each successful investor tends to stick with one type of investment. Some prefer single-family, some prefer multifamily, or commercial—my point here is that you have to invest in what makes sense for you and your plan. Once you find what that niche is, stick to it and become a master at it.
Editor, Rich Dad Poor Dad Daily