Lessons From the Great Depression

Everyone has heard the term recession or can recall what the Great Depression was. Most recently we can think back to the Great Recession in 2008 where the housing market and stock market completely collapsed. Many people have no idea why recessions and housing crashes occur. Does it have to do with banks, stocks, jobs, what's the deal?

I want to discuss some of the factors that happen time and time again in the real estate market and most asset classes in our country.

When times are good this means money is easily earned. People have great jobs, businesses are expanding, people are employed, and incomes are high. This automatically creates a phycological effect for consumers. It creates more spending! People buy luxury items and things they want to have, because they assume times will keep getting better. This also happens with real estate. Investors and consumers will over leverage themselves with debts because they assume the market will keep increasing and their equity will build. This is a common mistake for home buyers in Pittsburgh as well as many areas around the country.

Real estate requires debt which is leveraging money you don't have. This can be great if the economy is in good shape and asset prices continue to rise. The problem is when all this excessive spending stops. Suddenly no one will buy new products, no one will be house shopping, and no one will have excess cash. This causes a trickle down effect where businesses lose money because no one is buying, they have to cut jobs, people lose wages and spend even less, and the spiral continues.

As this issue continues to expand, people stop paying rent or for their mortgages because they can't afford it. They only have debt and asset prices have fallen so their assets are now worth less than the debt! Banks eventually have to foreclose on properties and they stop lending money because they have all these toxic properties on their balance sheet. This cycle continues to where people can't get money, businesses can't expand, and lending is drastically cut.

People trying to sell their house are out of luck. The one thing we have learned from the many crashes in history is it pays to have cash. If you have funds available and are willing to stomach the risk, you can purchase an absurd amount of houses for cash. Sellers are also extremely motivated to find a way to get cash for their home under any circumstance. This creates for a great opportunity as an investor to then buy many assets at a discount and wait for the market to eventually recover long term.

While this image may be scary, it is inevitable. These happen over and over throughout history. The important thing is to learn from them and try to focus on managing debts, containing spending, and always having cash available to buy property if the opportunity arrises.