So What is Going to Happen This Time?

More articles keep coming out from economists about how "the worst is yet to come".  The vets of the industry are usually more inclined to agree with the economists and the younger real estate professionals who have not weathered a long and severe real estate bust, are generally more inclined to try to stay positive.  There is pessimistic, and then there is just plain realistic. 

The last time we saw a big condo bust like this was in the late 70's.  People keep talking about when the market will correct and how long it will be at the bottom.  The economists say the worst has yet to come and that things will stay bad through 2009.  Well, maybe that is the case...the questions is...what do we do until that time.  You don't have to have 40 years in the business and gone through bankruptcy a few times to see when it is time to diversify and take precautions.  Of course, all that experience helps but if we learn from historic trends and apply them to our business models now, much pain and financial loss can be avoided.

After the big bust in the 70's new condos really just were not build for a long time.  Of course there were a few condos and new developments across the country but no major wave of construction hit again until our latest condo boom from 2001 to 2005.  I believe however that our city's demographics have changed, home buyer's needs have changed, and more vertical and high density living will remains a necessity.  That is one difference and positive point to make about the activity we will see as the market recovers.  I do think that we will not see many condo conversion developments for a long time.  Communities that are rentals will stay rentals.  Even investors purchasing condos and condo conversion communities want to see rent rolls and make sure those properties are generating an income.  We are well beyond a simply buy and hold or "flip" scenario. 

During real estate cycles we also see the development of cyclical business models.  During the boom of pre-construction condos investing, we saw new companies trying to capitalize in the "flip" model and many made good money doing it.  In turn, they also contributed too many of the problems we are now facing.  Now, with the down turn, we are seeing vulture funds and investment clubs come out of the wood work to make fast money of the aftermath of the bust.  More cyclical business models that will make money but not last.  Does this mean they should not be done, or that these models are in some way evil?  Not necessarily.  The bottom line is that people are going to do it anyway.  It will be interesting to see how these vulture funds and investment clubs perform as they soak up units and distressed condos all over the country.  There is a right way and wrong way to do this of course and the problems come when the industry becomes flooded with money hungry people who have no clue what they are doing or how it will affect the long term market.  Most don't care.  We'll see what happens.