There’s so much talk about the market changing. It’s honestly hard to escape, right? But what if the market really did shift directions? Would you be ready for it? Today I want to share some things on my mind. This might seem off-topic, but hey, I’m a guy in business thinking through stuff like this.
The big mistake many companies make is the market changes, but they don’t evolve to be relevant for the future. This is why Sears filed for bankruptcy this week since they became a place consumers just didn’t want to shop beyond maybe appliances or tools. Likewise, Blockbuster video chose to focus their business around the idea that consumers would keep wanting to rent DVDs from a physical location instead of streaming online. In other words, Blockbuster held on to a business plan that worked well for the past instead of the future.
As I pay close attention to real estate trends, I find myself asking these questions. In fact, I’ve been asking them for years to stay on top of the market and hopefully keep my doors open.
QUESTIONS TO ASK:
Who are my clients going to be over the next few years?
What are my clients going to need from me?
What skills do I need to add to be ready for the future?
Who is coming to the market?
Who is leaving the market?
Who is going to be participating in the future market?
What steps do I need to take to position myself for the future?
Where can I meet future clients?
By the way, I’m not writing this post to say the market is collapsing, but only because with so much talk about change it would be unwise to not consider this.
ACTION STEP: Don’t wait for the future to come before asking the important questions. Remember, you can be successful in any market, but you have to try to think ahead of trends and be intentional about preparing for the future.
I hope this was helpful. Back to appraisal stuff next week.
Speaking Gigs: I’ll actually be talking about some of this stuff at AI’s 2018 Fall Conference in San Francisco & AppraiserFest in San Antonio.
Questions: What did you like most about Sears or Blockbuster? Any other questions to add to my list? I’d love to hear your take.
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Great thoughts Ryan. We all need to consider correction changes to be sure we’re headed in the right direction.
Thank you Joe. I appreciate it. In any market we need to ask these questions, but in a market where there is lots of talk about price dynamics changing, it seems even more relevant. Appraisers certainly know about change in an industry too, so it’s not real estate prices that drive us to ask these questions.
“Who Moved My Cheese?” 10% went to AVMs, 10% went to Appraisal Waivers, 10% went to hybrid products, 10% went to market slowing, and rest went to automated tools that made appraisers more efficient. Now we only need a few appraisers 8-D
Ha, yeah the cheese is being moved for sure. Thanks Gary. I respect the way you’re finding relevant ways to do business in your market.
Great words of wisdom Ryan! I’m looking forward to learning new tools to help achieve the goals you mentioned. Thank you for all of the help you have given me! I do truly appreciate it!
Thanks Jamie. I appreciate the kind words. Congrats on the success of your blog too. I’m glad people are noticing you.
Thank you so much! I’ve come to enjoy blogging. ?
Blockbuster video actually came out with something called “blockbuster online” to complete with Netflix. If I remember correctly, their service was better (had a better selection than Netflix and was cheaper) however Blockbuster Online never caught on strong enough to save the company from collapse.
Looking back in hindsight, I believe that there is nothing that Blockbuster could have done to save it’s business. The reason is because Netflix became too popular to compete with.
It’s the same thing that happened with Amazon. For whatever reason, Amazon became the global trend. It wasn’t necessarily the best quality in terms of service, price, or even structure but it was the most popular.
Another example was Facebook. Before Facebook first came out Myspace was one of the most popular websites on the internet. If you didn’t have a Myspace page, you weren’t considered cool.
To make a long story short, what happened in all of these cases is that the demographics shifted. People are like birds. They do things in flocks. It’s like a giant game of follow the leader. What ends up becoming industry standard is not necessarily what is the best choice in terms of quality. It’s just that it was lucky enough to get noticed by enough influential people that pretty soon the whole world follows suit.
I believe that it is the same thing with thing with the housing market. A trend that I’ve noticed take place since the housing crisis is how many investors own rental housing today. It appears to me that these investors began accumulating properties after the housing bubble burst. Meanwhile normal middle-class families (which were the primary consumers before the great recession) quickly got priced out of the market due to less income and stricter lending standards). If my theory is correct, investors own a large percentage of rental properties today as compared to the past. If this is true,I think that the housing market will become more like the stock market moving forward.
The stock market has always been much more volatile than housing. Before the great recession people would normally assume that housing prices would just rise forever. People generally expected their home to be worth more the following year than the year that they bought it. Stocks on the other hand was always considered a much more risky investment.
I believe that the extent to which rich investors own real estate now is going to backfire on them.
When the market starts to turn, I believe you will see a mass flood of investors all trying to sell at the same time. After all, that’s what investors tend to do. They tend to buy low and sell when things start to take a downturn. I believe that the decades-long “stable” housing market of the past is gone. I believe that what we will see moving into the future is a much more volatile market. This is because nowadays the only people that can afford to buy are rich investors.
Thanks Brandon. I appreciate your long and thoughtful commentary.
I do wonder if Blockbuster had seen the potential for the digital market and acted swiftly if it could have theoretically been a game-changer. Maybe then Blockbuster would’ve beat Netflix. Let’s remember in the early days Netflix was simply mailing videos instead of doing hardcore streaming, so Blockbuster certainly had opportunity there beyond their physical stores. For a while Blockbuster had a few “Redbox” type machines too. Again, had Blockbuster seen this niche market sooner, it could’ve been Redbox also. Though I do agree with you there is a certain amount of luck with some websites and companies that get huge. I remember when Amazon was new. I thought it was just music and books. I had no idea you could basically buy anything on there until a friend clued me into that.
Your hunch is correct about the rate of investor owners because the home ownership rate has declined in the United States since the real estate “bubble” burst. Here is a link to show that trend. Though to be fair it seems home ownership has typically remained somewhat stable since the 1960s beyond when it shot way up from the 90s through the “bubble” bursting. https://fred.stlouisfed.org/series/RHORUSQ156N
It is a concern that there are more institutional investors out there. We did see Wall Street invade Main Street in recent years, and that’s a newer phenomenon to see funds own real estate in mass. The verdict is still out on what this will do. It’s striking to me that Blackstone bought about 3,000 properties in Northern California in a fairly short period of time. Of course they own a whopping 82,000 homes in the United States too (along with Starwood).
We would definitely see some investors off-load their inventory, and many already have since they bought in 2009-2012. Though the market would have to really correct in a big way for some investors to move their inventory. The thing is they are sitting on huge equity right now and rents have soared too since acquisition nearly ten years ago. Thus there is less incentive to sell. I know some investors I’ve spoken to feel stuck. They could sell, but where are they going to move their money to? Bitcoin? (kidding).
As always, let’s watch and see. The market is always changing….
Hey Ryan, my friend, you bring up some amazing points that I didn’t even consider. I forgot all about Redbox. Yes, that’s so true. Maybe that was where Blockbuster could have landed the winning blow. There was that gap of time between mail order and digital streaming that Blockbuster possibly could have taken advantage of. You’re very right.
As far as the housing market I do agree that we would have to see a large dip in prices for some investors to offload their inventory but for some reason, I believe that given the current state of the world economy and markets it is far more probable that it will happen than not happen.
For instance right now the government is already proposing the possibility of rent controls. When I recently got my ballot and decided which box I would check on prop 10 I thought long and hard about it. After awhile of thinking, I decided not to vote at all because I believe that whether the bill passes or doesn’t pass the outcome would be the same. For instance, if they impose rent controls then investors would have no reason to hold on to their real estate (since there may be better vehicles out there for income and growth at that point). Also, I believe that rent controls would put a cap on housing prices since rental income would now be fixed. When investors notice this ceiling being hit, they would begin selling off and the market would only decline from there (in fact due to the high level of investor ownership I believe we would see a cascading effect similar to past stock market selloffs). Gone are the days of a calm and fundamentally-driven housing market. It would be 2008 all over again (but this time with investor sales rather than bank foreclosures).
On the other hand, let’s say that Prop 10 does not pass, well I believe the outcome will still be the same. Renters are currently almost tapped out. If home prices keep increasing and therefore rent, less people will be able to afford housing and therefore rents will have to be lowered anyway causing the same effect.
Also the state of the global economy including the US economy is not even as close to as healthy as people make it out to be. The price of assets have shot through the roof but yet wage growth has barely risen. Meanwhile governments have become heavily debt-ridden. Put all of this together and you have the recipe for a mean correction at some point soon.
Thank you Brandon. Rent control is a factor we’re going to have to watch. It could cause some people to sell for sure, or at the least dampen demand in the market. My big concern is we need more housing units, and I don’t want anything to impede that. But let’s be real. The huge problem with new units coming to town is often the cost to develop, so if local and state government really want to put a dent in the problem it would be wise to address the fees.
I also share your concern about renters being tapped out. Lately we’ve seen rents flatten a bit, and that’s actually a good thing. We can’t have exponential rent growth. Something has to give.
Oh and I just wanted to add lol about the bitcoin thing. But on a real note it may not be such a bad idea.
Bitcoin just went through a huge market correction (that still may not be over yet). But in my opinion, this massive correction only means that there is plenty of room for upside potential. Looking at historical charts Bitcoin has already undergone about 3 corrections of between 60% to 90% and each time it eventually went on to surpass previous highs. I don’t see why this time will be any different.
On the other hand, the housing market in some metro areas has already gone well beyond the 2006 peak (which at the time, was obtained through highly unsustainable leveraging). The housing market is highly overvalued in relation to incomes and I don’t see much upside potential. Sure rich investors can keep buying but they’re only creating a bigger bubble and the bigger this thing gets the harder it will pop.
As an investor I see a lot more upside currently in Bitcoin than I do the housing market.
Thanks. I’ll be watching Bitcoin. I think there’s lots of potential for digital currency, though it seems so risky, especially since it’s not regulated by the government. I hear of people who refinanced their homes to buy more Bitcoin. I hope that isn’t true for the masses.
lol. I know. I agree. People should only invest what they can afford to lose. Technically that goes for any asset but bitcoin even more so than others.
I think the sketchiest thing about bitcoin and other cryptocurrency right now is the exchanges. I must admit that I don’t feel safe holding assets in a lot of these exchanges due to the historical fraud, theft, and other things that have happened in the past.
At some point soon I think we will see an official bitcoin ETF. Also, I think we will see a lot of notable brokerage firms (such as ETrade, Fidelity, Morgan Stanley, etc) create official wallets at their holding firms in which cryptocurrency like bitcoin can be stored. At that point I think that clients’ cryptocurrency being held would be protected under something like the SIPC (say cryptocurrency holdings along with stock and other equity holdings insured by the federal government up to $500,000).
When that happens, I will feel a lot safer holding cryptocurrency. Until then, yes, it’s a little sketchy.
But on a side note, because all of the above hasn’t happened yet, even a small amount of cryptocurrency right now will be worth many times over in the future after all that takes place. Once institutional investors feel confident enough to start trading cryptocurrency in much larger quantities I think we will see the price of crypto skyrocket through the roof.
If your investment (I/E Blackstone) is turning out 10% return, based upon the initial investment, and you have 50% equity, why would you ever sell? The equity is a safety hedge. The rental return is ongoing revenue that rises with inflation. If for some reason, the revenue slows (only way that could happen is a housing surplus of starter homes) they might be compelled to sell it. The market in Sacramento needs them to sell to encourage another cycle of 1st time buyers. But I’m not holding my breath.
Thanks Geoff. Yeah, I tend to agree with you. They timed the market perfectly and frankly helped values increase because of the competition they created in 2012 and 2013. They are sitting on a pile of gold. They’ve really invested significant money in a system to manage these properties too. KCRA did a piece last year and states Blackstone is the second largest landlord in Sacramento County (behind local government). Among rented properties they stated Blackstone owns 1.5% of those properties. That’s amazing when considering how many properties are rented. This of course assumes their stats are correct. https://www.kcra.com/article/this-is-the-largest-owner-of-rental-homes-in-the-sacramento-area/13520555