Über die Autorin bzw. den Autor

R. Donahue Peebles is Chairman and CEO of The Peebles Corporation, one of the nation's most successful real estate investment firms. A leading developer and entrepreneur, his portfolio includes four-star hotels and residential and commercial properties in Las Vegas, San Francisco, Washington, D.C., and Miami Beach. He is also the author of The Peebles Principles, from Wiley.

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Find big profits in any marketâ??with expert advice from real estate mogul R. Donahue Peebles

A few years ago, the experts said you couldn't lose in real estate. Now, they're saying you can't win. The truth has always been more complicated. Even when the market was only going up, people made plenty of bad deals. And even now, you can still find plenty of good ones. You can always win in real estate, provided you have the right knowledge and exercise good judgment in the deals you make.

In The Peebles Path to Real Estate Wealth, multimillionaire investor R. Donahue Peebles shows you how to follow the path he took to real estate richesâ??by starting small with smart investments and building up to bigger, more profitable properties. Based on his own personal experience and examples from across the nation, Peebles shows you how to measure real value and find deals in any market.

If you want to invest smart and earn big profits, The Peebles Path to Real Estate Wealth gives you all the tools to succeed:

• A full explanation of the current housing crisisâ??how it happened and where the markets are going

• Fundamental investing tools, including a crash course in property valuation, practical data and resources, and proven tips on negotiating with lenders and sellers

• A proven plan for building wealth in the new real estate climate with expert guidance on understanding your local market, measuring real value, investing in residential and commercial properties, and structuring your deals

Markets go through natural cycles of ups and downs. With The Peebles Path to Real Estate Wealth, you'll understand those cycles, learn to measure the true value of properties, and grow your real estate empireâ??especially when the market is down.

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Find big profits in any marketâ??with expert advice from real estate mogul R. Donahue Peebles

A few years ago, the experts said you couldn't lose in real estate. Now, they're saying you can't win. The truth has always been more complicated. Even when the market was only going up, people made plenty of bad deals. And even now, you can still find plenty of good ones. You can always win in real estate, provided you have the right knowledge and exercise good judgment in the deals you make.

In The Peebles Path to Real Estate Wealth, multimillionaire investor R. Donahue Peebles shows you how to follow the path he took to real estate richesâ??by starting small with smart investments and building up to bigger, more profitable properties. Based on his own personal experience and examples from across the nation, Peebles shows you how to measure real value and find deals in any market.

If you want to invest smart and earn big profits, The Peebles Path to Real Estate Wealth gives you all the tools to succeed:

• A full explanation of the current housing crisisâ??how it happened and where the markets are going

• Fundamental investing tools, including a crash course in property valuation, practical data and resources, and proven tips on negotiating with lenders and sellers

• A proven plan for building wealth in the new real estate climate with expert guidance on understanding your local market, measuring real value, investing in residential and commercial properties, and structuring your deals

Markets go through natural cycles of ups and downs. With The Peebles Path to Real Estate Wealth, you'll understand those cycles, learn to measure the true value of properties, and grow your real estate empireâ??especially when the market is down.

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The Peebles Path to Real Estate Wealth

John Wiley & Sons

Chapter One

Between 2000 and 2006, mortgage interest rates in the United States fell in half. That started a feeding frenzy, which sent housing prices to dizzying heights.

An investment bubble is just what it sounds like: a pocket of air, rising upwards until it bursts. In real estate, just as in other financial arenas, bubbles occur when demand for a product pushes its price well above what is rational. A kind of investment fever sets in, with one buyer selling to the next, until the final fool has paid the final inflated price: the time when the music stops and someone is left standing without a chair.

When the bubble pops, people can never quite believe they bought into the mass hysteria that drove prices so high. They come to their senses, as if waking up from a collective dream. They remember saying to themselves: It can't be this easy to make money. But they ignored those thoughts and kept going. Well, they were correct. It's not that easy.

The great real estate bubble that rose between 2000 and 2006 was not the first of its kind. History is littered with the wreckage of past buying stampedes. From today's vantage point, many seem ludicrous, if not downright frightening. Even a cursory student of history is aware that the Great Depression followed that enormous bubble known as the Roaring Twenties, capped off by Black Tuesday and the collapse of the wildly overblown U.S. stock market.

Perhaps the most bizarre bubble in history was the tulip bulb craze of Holland, from 1634 to 1637. In retrospect, it is astonishing. At its peak, when the price of already expensive tulip bulbs rose 2,000 percent in one month, Dutch citizens were willing to trade their life savings, their land, even their homes for a handful of these unborn flowers.

Real estate bubbles do not seem quite as perverse, if only because at the end of the day you are still at least holding onto tangible property. And their causes seem more logical. The Florida real estate frenzy of the 1920s, for example, was predicated on a thriving U.S. economy combined with Florida's burgeoning popularity for people who were sick of being cold. The state's population was growing rapidly, and housing could not keep pace. By the mid 1920s, houses were quadrupling in value in less than a year. Condolike properties were going for more than $4,000,000 in 1925. And these are not adjusted prices!

The U.S. real estate bubble of the 2000s bears remarkable similarity to the Florida land boom of the 1920s. Back then, credit was easy to find, and people took on huge mortgages. Houses were trading hands like poker chips, and everybody was jumping in, even people with little money. Big capital was poured in as well, developing large residential tracts, golf course communities, retirement villages, and so forth. In one unique barometer of the boom, the Miami Herald was so jammed with real estate ads that in 1922 it became the heaviest newspaper in the world.

In the case of the great real estate bubble of the 2000s, the trigger was the availability of credit. The prime rate for the majority of top U.S.-chartered commercial banks, which had hovered at 8 percent or better for the last half of the 1990s, hit 9.5 percent in 2000. The rate then swiftly declined, sliding from 9.5 percent on Jan. 1, 2001 to 4.75 percent on Jan. 1, 2002. By mid-2003 the rate had bottomed out at 4 percent.

This fall in the prime rate-the interest rate charged by banks to their most creditworthy customers, including mortgagees-was the result of a parallel drop in rates by the Federal Reserve. This rate, officially the Federal Funds Target Rate, is the short-term, overnight rate at which banks can borrow money from the Federal Reserve. Its fall was even steeper, tumbling from 6.5 percent on January 1, 2001, to 1.75 percent on January 1, 2002, bottoming out in mid-2003 at 1 percent (see Figure 1.1).

The Federal Reserve lowered its interest rates partly in reaction to the dot-com bust and the consequent economic slowdown at the end of the roaring 1990s, a bust many believed was caused by too much tightening of Fed rates in the final years of that decade. The Fed wanted to restimulate the economy, and it did. Its 1 percent rate from mid-2003 to mid-2004 opened the door to massive liquidity in the marketplace. The rate climbed back to just over 5 percent by 2006, but by then the cat had been let out of the bag.

The cat, in this case, was a huge increase in purchasing power for home buyers, and it unleashed a buying fever that sent home sales soaring. And what a fever it was.

Sales of new homes in the United States had remained fairly steady for decades prior to 2000, rising gradually as the twentieth century came to a close. In 1965 a total of 575,000 new homes were sold in the United States; ten years later the number was similar, at 549,000 new homes sold. By 1985, annual new home sales had inched up to 688,000, staying at that level for more than a decade; in 1995 the total was 667,000, for example.

But when the prime rate dropped and people could borrow money at much lower rates, all hell broke loose. In 2002, the number of new homes sold in the United States reached 908,000; by 2005, at the peak of the real estate boom, 1,283,000 new homes were sold. In other words, after increasing less than 20 percent over the three decades from1965 to 1995, annual sales of new homes then doubled by 2005.

A similar rise took place in new home prices. While the average new home in the United States cost about $100,000 in 1985, and climbed to about $158,000 in 1995, by 2005 the average price of a new house came in at just under $300,000. By 2006, with the momentum still rolling, the average price had reached $305,000.

The median price for single-family homes in the United States-the combined price for new and previously owned homes-also rose at a good clip. Between April 2000 and April 2005, the median U.S. home price rose 55 percent to $206,000 (it would cross $230,000 in 2006). (See Figure 1.2.) Key urban markets climbed much faster, at blistering paces: up 135 percent in Los Angeles, 132 percent in San Diego, 117 percent in Las Vegas, 128 percent in Miami, and so on (see Figure 1.3).

This paints only part of the picture, however. Not only were average and median prices rising, but the quantities of more expensive new homes were also soaring. At the beginning of the house buying frenzy, in the year 2001 for example, 75,000 new homes were sold in the United States for less than $100,000, while only 25,000 new homes were sold for more than $500,000. By 2005 the ratio had flipped. In that peak year, only 33,000 new homes sold for less than $100,000, while 144,000 homes sold for more than $500,000. The quantity of midpriced new homes that sold had escalated as well: The total number of homes selling for between $300,000 and $500,000 jumped from 110,000 in 2001 to 315,000 in 2005. Americans were trading up, and they were doing so with a vengeance.

There were other indicators, too, of how Americans took advantage of the lower interest rates to fuel their new buying mania.

Back in 1988, when the U.S. Census Bureau first started keeping...