What is a market inversion?
Are you familiar with the term market inversion? If not, that’s OK. I wasn’t until recently. But as real estate investors, you need to understand what it is, and more importantly, what it means for the current and upcoming real estate market.
First off, let me give a quick overview as to what market inversion is from my understanding, and then I’ll tell you why it matters.
The term describes a particular phenomenon that happens when we look at the yields on bank and government bonds when plotted on a growth curve.
Bonds tend to be safe and secure investments because they’re guaranteed — this means you know exactly how much interest you will be paid at the end of the investment. That being said, their yields vary over time. The shorter the term of the bond, the less interest is due when it matures. But the longer you’re willing to leave the money in the bond, the more interest you get paid and the higher your yield should be.
When you plot that scenario on a growth curve, where you compare yield over time, you get an easy upward curve.
During a market inversion, which we are in now, the growth curve goes downward. That’s because the longer term bonds begin to yield less than the shorter term bonds. In other words, you make more money on short term investments than the longer term ones, which is odd.
Let me stop right there and put a disclaimer in before we go any further. I’m not an economist. I’m just listening to and trying to relay to you what the people who are much smarter and more experienced in this area are saying. And the most important thing I can convey to you from them is that every time a market inversion has shown up since we’ve been keeping records, a recession has followed shortly thereafter.
So, what does that mean for us as real estate investors? First off, we’re going to see fewer and fewer transactional-based deals be available to us until the recession comes.
Transactional-based deals are the ones where you really aren’t meeting with people. They include deals like buying at foreclosure and online auctions. Other ways include buying houses via tax lien sales, buying from the HUD store and MLS options like REOs.
These deals tend to be cash-in/ cash-out scenarios.
Now, if you have been paying attention to the market, you know foreclosure levels are really low. We are door knocking 20 or fewer preforeclosure per county each month, whereas we used to go to somewhere between 50-150 per county. And as far as REOs, auction sites and HUD houses, there are only a handful available.
Once they recession comes, however, we should see the availability of these transactional based deals go up. But what are we to do until then?
It’s simple — you’re going to have to move to relationship-based deals.
Relationship-based deals are ones where your primary objective is to get face to face with the seller. There, you’ll need to get curious and ask lots of things like Pete Fortunato’s famous question: “Why are selling such a nice house as this?” But in doing so, you will need to increase your skills as a real estate problem solver.
And you need to do that NOW!
The reason for this is because another thing the market inversion will bring is sellers with more unique problems that take longer to solve.
This year, for example, we have purchased four different houses from tired landlords. Whereas us buying from tired landlord is not out of the norm, buying them with tenants installed in them is. We had to come along and solve these landlord/ tenant problems in order to get the house. In some cases, this took us 60 days, plus a drawn-out eviction, in order for us to gain control of the house. That’s not our normal.
We had another one we purchased from an estate where there were title flaws, a missing executor and all kinds of other stuff associated with it. And it took nearly four months to close that one. But because we were patient, and the problem solvers with the know-how to help our seller, we got a great house that we will keep as long-term rental.
So in short, during this market inversion you are going to need to get face-to-face with sellers, be patient and be more creative in order to keep buying good deals.
Joe and Ashley English buy houses and mobile homes in Northwest Georgia. For more information or to ask a question, go to www.cashflowwithjoe.com or call Joe at 678-986-6813.