Some Thoughts on Investing in a “Down” Real Estate Market
by Clarence Jones
This article was written by my father, Clarence Jones, in 2006, before Alzheimer’s disease stole much of his memory.
Clarence has been investing in real estate since the 1950s and has ridden out more weird real estate cycles than most of us will ever see. Although he focuses primarily on the effect of higher interest rates on property prices, his advice for what to do applies whether the market’s down because rates are up, or it’s down because buyers are just not buying.
Every time I come across this article, I think about how convinced I was as a teen that my parents knew nothing about anything—and how much smarter they seemed to get as *I* got older.

My fellow Okie Will Rogers said it best— “Anyone can make a million dollars in the stock market–all you have to do is buy low and sell high. If it isn’t going to go up, don’t buy it.” If you’re looking for an investment that you can pretty much know will always go up, look at real estate, especially when prices are dropping.

I was born almost exactly 2 years before the stock market crash of 1929. I remember a lot of the Great Depression, and I lived in Oklahoma, where the dust bowl made things even worse. I remember that banks were literally letting people live in foreclosed houses for free—just to keep the places maintained, because no one could afford to buy a house.

Now, we’re never going to see that kind of depression again. But even if we do, the important lessons of that decade are that 1) no matter what, people still needed a place to live and 2) people who owned real estate were a lot better off than people who owned stocks!

My family actually owned the house next door to ours, and my parents kept it as rental property. My father sold it in 1939 for $8,000, and my mother never forgave him for it. She kept track of the value of that house until the day she died. When someone sold it in 1970 for $60,000, she kept saying that if he’d only kept that house and rented it, we could have had all that money.

The real estate market is like that—it always goes up in value over the long term. The thing that affects property values the most isn’t the job market or the national economy—it’s mortgage interest rates. The reason housing has been going up so much in the last few years is that interest rates are so low. To understand why that is, you have to look at the mindset of the biggest consumer of housing—the retail homebuyer.

People who are buying houses don’t buy an $80,000 house. They buy a house that has a payment of $800 a month. At 8% interest, that’s a $90,000 house; at 12% it’s a $70,000 house. Now, most people have certain things that they want in a house—a good school district, a particular number of bedrooms, a certain neighborhood. If they can’t afford the payments on the house they want, they have 2 choices: wait until they CAN afford the payments (because they’re making more money or the rates go down) or stay put. This means that the SELLERS of these houses have 2 choices: wait until interest rates go down, or lower their price until the payments match what buyers can afford.

A perfect example is the first house I bought after I was married. It was a big 5 bedroom 2 bath in a decent neighborhood. When I bought it in 1967, I paid $10,000 for it and assumed a 6% FHA loan. This meant that my payments were $51 a month.

When I wanted to sell it in 1982, the loan market was completely different. Inflation was going crazy, and interest rates went up to 21% for house buyers. Even though the same type of property in the same area had been selling for close to $70,000 just a few years earlier, my house just didn’t sell even at $60,000. Why? Because the buyer’s monthly payment would have been over $1,000 a month at 21% interest!

Unquestionably, wages went up from 1967 to 1982, but for me to have been able to afford the same house in 1982, I would have had to have been earning 20 times what I did in 1967. Obviously, people’s paychecks did not increase 2000% in 15 years, so at 21% interest, houses were just not affordable in 1982—at least not at market interest rates. The market effectively went dead at that time.

Of course, for real estate investors, that was a great time to buy properties. When payments get unaffordable, buyers get out of the market, which means sellers who really NEED to sell have to get cheap or get creative. Around the same time I was trying to sell my house, another, bigger house went up for sale down the street. It stayed on the market for about a year. It turned out that the seller had inherited it along with 2 other rental houses and just wanted to get rid of them. I offered to buy all 3 houses for $500 down, taking over the 11%-13% loans on the houses. He agreed instantly.

Now, although I paid a little more for that house down the street in terms of overall price than I would have if I’d paid cash, it was still a great deal because my payments on it were only $370 a month at 11% interest, and the property rented for $600 a month. And when people can’t afford to buy a house, what do they do? They rent.

During the 80s, I bought over 50 houses on loan assumptions with little or no money down. I lease/optioned them for what they would rent for, and when interest rates started to go down, the tenants refinanced and bought the houses. Eventually, those 50 houses turned into almost 200.

When properties aren’t selling because of high interest rates—or for any other reason--that’s a great time for you to get creative and buy houses. You can always rent them until the mortgage market improves, then sell them for top price. Or, you can keep them forever—the point is that, unlike home buyers, investors aren’t limited by what the “market” is offering. If interest rates rise significantly, yes, real estate prices will drop. But that’s exactly the time for you to be out making creative deals to buy properties.

Great fortunes are made in “bad” real estate markets. No matter what happens to house prices, people will always need a place to live. If you can make a profit providing it, you’ll be truly financially free.