David from the Money GPS YouTube channel gives us a first look into the collapse and bankruptcy of China's Evergrande, said to be the world's largest property development company. China's real eatate market is a $62 trillion industry, it's the single largest asset class on Earth, bigger than the bond markets, stock markets, and every other asset class. And it's in big trouble right now.
I've been watching David's Money GPS channel since late 2019, shortly after the Repo Market crisis happened. He's had his eye on the Chinese real estate market for quite a while, and in the video above, he gives his early take on what's happening with the bankruptcy of Evergrande, and where things are likely to go from here. He takes his information from original sources, not 2nd or 3rd hand opinions. This helps us get a clearer picture of what's happening around the world in economics, business trade, and related issues.
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This video popped up on my feed, and since the FOMO real estate market is so recent, and actually still going in a few areas, I wanted to check it out. I know nothing about Javier, I've never watched any of his videos, but he does seem sincere in his analysis. But he missed the #1 mistake all three of these people made.
First of all, Millennials and Gen Z people, here's a basic fact of life, real estate agents are salespeople. They only get paid if the deal closes. They don't get paid for spending their weekends at open houses, or walking you through 17 homes. They get paid when the deal closes. So they will say what they need to say to sell you the house and close the deal. Period. Some agents may be really shady in this respect, some may be pretty honest.
Never, EVER take a salesperson's advice at face value, on ANYTHING. There's an old saying familiar to us geezers from Generation X and older, "Never ask an insurance salesperson if you need insurance." Their answer will ALWAYS be "Yes! Sit down, let's talk." Unless your agent is someone you have a long relationship with, having closed multiple deals, where they know that being honest will lead to future deals with you, just consider the agent's ideas and advice as an opinion. Find whatever professionals you need (example- Get a seasoned construction worker friend to walk through the house, and tell you their opinion, in addition to an inspection), people outside the actual deal, who can help you make a solid decision, one way or the other.
Now, the real reason I'm writing this post, is the huge mistake that all of these homebuyers in the video above made:
You bought at the top of the market.
Never buy at the top of the market, when it comes to major purchases.
A simple Google search of "U.S. home prices chart" brought up this chart first. Click over, check out the chart. That chart shows median home prices, heading up and to the right. You live in the early stages of the Information Age, there's lots of great data out there. It took me about 5 seconds to search and find that chart. Do some research. This is called doing your due diligence. And don't buy at the top of the market. Anytime from mid 2020, to the end of 2022, was the top of that market at that point, on the U.S. median price chart. That's just a national average, but it's a good first step. Then do local research on real estate in your area. Talk to other brokers and agents, and even better local real estate investors. You know a couple, or know someone who does, ask around. Nick Gerli's Reventure App is an amazing resource for national and local real estate data, across the U.S.. and is still free as I write this post (for a month or so).* There are other databases as well.
A home, or any other piece of real estate is a huge purchase, put some time into the due diligence process. If the particular piece of property is a foreclosure, in probate, the product of a divorce, or some other kind of forced sale/motivated seller, (like the three people mentioned above will be soon), and you can get the property at a 30%-40% discount, it might actually actually be a good deal, even in a really high market. But those deals are very few and far between, and the insiders snap them up before you hear about them, in most cases.
The real mistake all of these people made, intelligent as they may be in other aspects of their life, is making a big, financially stretched, real estate purchase at, or near, the top of the market. This mistake will cost each of those three people tens of thousands of dollars, maybe more. Hopefully they learn that lesson.
This is a mistake very often made by "high income/high spending" people. In my younger days, these were usually people in professions like doctors and lawyers. Really intelligent people in their area of expertise, but prone to wanting to "keep up with the Joneses (or the Kardashians, these days). Because of this, high income/high spenders were prone to making bad financial decisions. In today's world, the high income/high spender category includes tech people who've made money in stock from start-ups they were a part of, professional athletes, rappers and other musicians, top actors and media personalities, and all the entrepreneurial people and YouTube ballers who've earned a really high income at a young age. Sometimes even at a not so young age. This is also why big lottery winners usually go bankrupt in a few years.
I nearly made this mistake myself in 1989, though I wasn't making very much money. I first had almost enough money to buy a house way out in the Southern California desert... 6 or 8 months before the real estate market began to crash in 1990. I could have squeaked into a small single family house way out in Lake Elsinore, if I stretched myself. Luckily, pure fear of debt, and the 1 1/2 hour commute to work, kept me from buying a house. The video company I worked for was dissolved a few months later, though I was kept on by moving to the parent company, which really struggled in the 1990's recession. So I didn't make a mistake I definitely would have regretted a year later. Ultimately, not buying a small house worked out in my case.
One more thought on the 2021-2023 FOMO real estate market. I'm creating a new acronym, feel free to share it. FOMO = LOPMBD. OK, I know it doesn't roll off the tongue like FOMO does. What does that stand for? Fear Of Missing Out equals Lots Of People Making Bad Decisions. If there's a sense of FOMO in any situation, where there's a big purchase involved, then FOMO is nearly always a sign it would be smart to back off, and walk away.
This is actually a very basic sales tactic, to create a sense of urgency with a customer, to force them to make a decision without properly thinking it through. "We only have one purple Escalade with 24 inch rims left on the lot, this thing's going to get snapped up quick!" In that situation it's always smart to back off and think about it. In many cases, it's smart to wait for a better time, and take time to learn that market, and the longer term cycles in that market. Buying a gallon of milk when the price is a dollar more than usual, won't seriously affect your life. Buying a house for $600,000 or a million dollars when the market's about to drop will seriously affect your life. It's worth it to do some more research on the long term price cycle. If the whole market is in FOMO mode, also called a mania sometimes, then there's probably a big drop in prices coming before too long. Smart money buys during the "sale" after the FOMO subsides, when motivated sellers appear, and the market drops off.
One last thought, the amazingly knowledgeable macro economic analyst, Danielle DeMartino Booth, recently cited data saying that 65% of people who bought a home in 2022 and 2023 already can't afford their mortgage payments (13:47 in the video linked). This is when prices are just beginning to drop in former boomtowns, and still fairly steady in most areas. We haven't seen the big home market crash yet. Those take years to play out fully.
Anyhow, the people who bravely responded and were mentioned in the video above are the beginning of a huge wave of motivated home sellers coming soon. That will be followed by a huge wave of foreclosures, since home prices are already dropping in some cities, Phoenix being one of the worst. A lot of people who bought houses in 2020-2022 will be upside down within the next year, and many won't be able to sell. That's when the serious real estate investors start buying properties, at much lower prices.
Yes, I realize some people will rake me over the coals for this post, considering my own current housing situation. But this post is good advice, either way. Haters gonna hate. Whatever.
* Not a paid link
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