Flip That House... Not!

By Author: Lawrence Roberts
Total Articles: 4762
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During the Great Housing Bubble, many speculators tried to make money through trading houses. The vast majority of these traders were not professionals but amateurs who thought they could be professionals. Most amateurs ended up losing money because they did not understand what it takes to be successful in a speculative market.

The first and most obvious difference in the investment strategy between professional traders and the amateurs in the general public is their holding time. Traders buy with the intent to sell for a profit at a later date. Traders know why they are entering a trade, and they have a well thought out exit strategy. The general public adopts a "buy and hold" mentality where assets are accumulated with a supposed eye to the long term. Everyone wants to be the next Warren Buffet. In reality this buy-and-hold strategy is often a "buy and hope" strategy, a greed-induced, emotional purchase without proper analysis or any exit plan. Since they have no exit strategy, and since they are ruled by their emotions, they will end up selling only when the pain of loss compels them to. In short, it is an investment ...
... method guaranteed to be a disaster.

There is evidence that houses were used as a speculative commodity during the Great Housing Bubble. Since the cost of ownership greatly exceeded the cashflow from the property if used as a rental, the property was not purchased for positive cashflow, and by definition, it was a speculative purchase. Confirming evidence for speculative activity comes from the unusual and significant increase in vacant houses in the residential real estate market.

If markets had not been gripped by speculative fervor, vacancy rates would not have risen so far above historic norms. If houses had been purchased for investment purposes to make money from rental income, the houses would have been occupied after purchase and vacancy rates would not have gone up. A rise in vacancy rates would have resulted in downward pressure on rents, and the investment opportunity, if it had existed initially (which it did not), would have disappeared with the declining rent. There is only one reasonable explanation for increasing house prices and increasing rents during a period when house vacancy rates increased 64%: people were purchasing houses for speculative gains and leaving them unoccupied while the owners waited for prices to rise.

Speculators became more and more active in the housing market from 2004 onward. When the credit crunch gripped the markets in August of 2007, prices began to drop quickly. Most markets fell below 2004 price levels by late 2008, and almost all speculators still holding on to properties were underwater and facing either a big loss or foreclosure.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit Flip That House... Not!.