I believe the best answer to both of these questions is “ten years.”  If this doesn’t really sound like a valid answer for the above questions, please bear with me for a minute and I’ll explain what I mean.

For my answer to make any sense I must explain the context in which I view the questions. I am a believer in owning real estate.  I have been buying property since 1978, and my wife and I have owned over 22 homes since then.  I have been taking loan applications and analyzing people’s financial strength for over 22 years.  It has proven to be true over and over again, with very few exceptions that the only significant wealth that most of us Southern Californians have is the equity in our real estate.  Beyond the equity in our homes most of us seem to have about the same amount in our bank accounts as we owe to our creditors. 

 

If you are mentally adding up the balances in your IRAs and 401ks and you are coming up with ten grand more than you owe on the wave runners in the garage then congratulations, but what I am referring to is significant wealth.  In my experiance significant wealth just about always seems to require owning at least one piece of real estate.

 

Here in Southern California many of us have become self employed in some sort of entrepreneurial career in order to manage to keep up with the cost of living.  As such we have no pension to look forward too. If you are in that boat with me, accumulating a little wealth is not just about affording the finer things in life, it is more about being able to retire someday. 

 

When I came to this realization a few years ago, I did a little research about ways to retire.  I have a file cabinet full of loan applications that I had taken over my career so I pulled out the applications for all borrowers who had managed to put themselves into a position to be able to retire.  I separated the files into stacks based on how they had achieved this feat.  I ended up with four piles.

 

One pile was full of doctors and lawyers who had earned so much over their careers that as long as they had invested in something, they did pretty well.  The next stack was made up of borrowers who had built up businesses, usually large ones with lots of employees. When the time comes, they sell the business and sail off into the sunset.  The third stack was made up of folks who had gotten lucky.  They had been in the right place at the right time.  One couple hit the lottery. Another man swept the floors at Apple Computer back when they had to pay people in Apple stock.  A few folks had done well investing in other things.  By far the tallest stack though belonged to those who had simply owned their home and then acquired another property or two along the way. 

 

By the time I did this analysis it was far too late for me to become a Doctor or a Lawyer. I really did not have it in me to try to grow a large company with lots of employees either. I could not see leaving it up to the fate to put me in the right place at the right time.  Owning a few properties seemed like the most reliable and do-able of the options.

 

So again, I firmly believe owning real estate is the very best way for us here in Southern California to reliably build a little wealth and to be able to retire someday. OK!  I told you that story so I could tell you this story.

 

Here is where I tie the questions to my answer.

 

Buying real estate now is the most reliable way I know to build wealth, and be able to retire, but you must give it ten years!

   

Real estate investing was never meant to be a get rich quick scheme even though it can be at times.  You would be very hard pressed to find a ten year time span where California real estate was worth more at the beginning than at the end. 

 

“Ok Bill I see your point and I am ready to buy but what if real estate values drop even more?” “Won’t I do even better if I wait for the bottom?”  Maybe, but….  how accurate is your crystal ball.  I can assure you of one thing. There are a ton of people waiting to buy “just as soon as the market hits bottom.” The challenge is that none of them will know when we have hit bottom until we are at least 3 months beyond it.    I predict that the vast majority of market timers will miss the bottom by 3-5% in terms of home values.  I predict that those buyers who do nail the bottom will be the ones who are not even trying to time the bottom. 

 

If most buyers are actually going to miss the bottom by 3-5% anyway, I contend that the buyers who buy 3% before the bottom will end up with the better homes. Buyers today have more choices than I can remember in the last 10 years.  Once we recognize the bottom it becomes a bit like the game “musical chairs.”  Once the music stops it may be all you can do to grab the nearest chair.  Worse yet is some folks will wait for the market to bottom only to find the loan program they needed to qualify has just been discontinued.  I’ll write more about that in my next article.

 

I had to learn all of this the hard way at the end of the last market correction in 1996.  I missed the bottom by about 3% and I kicked myself for a long time. Then I learned that it is all relative. Ten years later when my home had more than doubled in value what started as 3% of the initial home value was now more like 1% of my current home value and I rarely ever fretted about it anymore.

 

So back to our original question, has the Southern California real estate market bottomed out?  Is now the time to buy a home?   My answer is as long as you plan to keep the home for “ten years,” the sooner your ten years begins, the sooner your ten years will be up, and the sooner you will be on the road to significant wealth!