Insights About the Current Cycle & What the Future Holds

The optimism and pessimism of the 1970s boom and bust is VERY similar to what we have experienced today. In fact, there were a larger number of overbuilt units back then. Don't take our word for it, read the New York Times article about the time for yourself.

The market recovered in 1977 even as the so called experts in 1976 were forecasting years of pain (see below). Markets today have faster cycles, and we believe that the pain is working its way through the system as we speak.

Comparing Recessions Then & Now

This Cycle Has Parallels to 1973-1974

- Tremendous Over Supply of Units

- High Energy Prices

- Oil Price Spike

- Correction Following A Frenzied Buying Spree

- Strong Demographic Migration Trends

- Interest Rates at 7-8%

Charles Babcock Jr. remembers it well -- the great Florida real estate depression of 1974-75. Times were tough, money was tight, unemployment was severe and spirits were low.

UNSOLD HOUSING
"There was a tremendous overhang of unsold housing units," the chairman of the building and development firm that bears his name recalled. "The supply greatly exceeded the demand."

High rates were not present at the depths of the middle 1970s recession. The prime bank lending rate was 7 to 8 per cent. Mortgage went for about 9. But in many respects, things were considerably worse at that time than they appear today.

The official unemployment rate in the three-county area exceeded 14 per cent at the trough of the bad 1974-75 period. The number of housing units unsold or under construction, according to Barnett Bank figures, was almost 110,000 in the middle 1970s.

No One Foresaw The Exuberance of the Recovery in 1977

Some business observers anticipated a recovery of some sort when things were bleakest in the middle 1970s, but none foresaw the exuberance of the recovery.

An economist for a Florida investment firm, addressing a business audience in February of 1975, insisted that "as long as we have a very large inventory of unsold condominiums being offered above $40,000, we're not likely to see any rapid recovery."

He could hardly have been more wrong. Within six months of his sober forecast, the South Florida economy was off and running and the housing inventory was rapidly being eliminated.

As it turned out, $40,000 was not a prohibitive price for a place to live.

Key Factors for the Current Recovery

• Having done the research on past cycles, we are certain that recovery will not be apparent until it is already well under way.

  A wave of renters is ready to buy but waiting for prices to continue falling.  The majority of these renters will miss the bottom and a wave of purchasing will be the seed of the next upswing.

• Proposed vote on housing tax reform in January 2008 could be the catalyst that marks the bottom.

• Population Growth is the key to recovery, and that is why we are sanguine about the prospects for a recovery. Florida has consistently added 300,000 people each year going back around 30 years. Migration is a secular trend.

• Prices are attractive relative to the Northeast and California and about the same as other in-migration states such as North Carolina. 

• The economic outlook today is far better than 1973-1974, we are in the midst of a global period of prosperity never seen before with Eastern Europe, India, China and Latin America all accelerating growth

• The Fed could be lowering interest rates by the end of the year, another catalyst for a housing recovery

• The precursors for recovery are being put into place - non-existent new construction permits, continued population growth, 320,000 in 2006

• The weak U.S. dollar will ensure a busy U.S. tourist season as less and less U.S. citizens can afford to travel to Europe

• Previous so called experts have been horribly wrong - forecasting a continuation of current trends - they have no clue.  A recovery could be right around the corner and no one will see it coming.

Our advice is simple - this is a great time to build a portfolio of properties that cash flow, a great time to get started in real estate investing.  In no other time in the past 25 years have I come across the incentives such as 50% depreciation, $30,000 rental incentive grants, $60,000 cash, zero money down, zero closing costs, 3 years guaranteed rent..... and on and on...

The next 6 months are a great time to sow the seeds for significant wealth creation in real estate and set your self up financially.

Is there risk? Sure, but what endeavor in life that entails great rewards doesn't carry risk along with it. Invariably, every real estate investor I have ever spoken to felt they were taking a risk at the time of purchase, with the majority subsequently saying it was the best financial decision they had made.

The key is to ensure the rewards far far outweigh the risks.   37% of millionaires made millions, lost it all and came back to make it again.

In order to win, you have to be willing to play.  The worst decision of all is no decision or a decision not to act based around fear and uncertainty.

The final point we'll make is you could have bought a unit for $22,000 at the bottom in 1974-5, a townhouse for $45,000 in 1981 and today you'll pay roughly ten times or 1000% the price from 1974 and 800-900% of the price paid in 1981. We're at a trough or close to one today.