It was the summer of 2006, my wife and I had been married a year and we were going on our first real vacation since our honeymoon. It felt very grown-up. As a young-20s married couple the offer of a free hotel room at a relative's hotel in Florida was too good to pass up. I'm not sure we could have afforded anything else. We packed up our late-90s model Accord and headed down to the Sunshine State. What we saw when we got there blew us away, and I'm not talking about the blue waters and palm trees. We arrived in an area that was in a manic state of construction. There was a palatable euphoria in the air. Everyone was getting rich on real estate, and developers were building anything anywhere there was a bare patch of sand.
On that trip I had two unshakable observations. The first was I had trouble envisioning where all the people were going to come from to buy these new construction condos and houses. The second was I couldn't believe how many banks there were. On most street corners stood four branches, all different banks. Again, I couldn't understand what I was seeing. How could there be enough money to support hundreds of different banks?
It turns out my questions were justified, a mere two years later the bottom fell out on the Florida housing market. The state's overextended banks were dragged with housing into the abyss. For a while we were annual visitors to the same free hotel north of Palm Beach and I watched the whole crash and recovery unfold. In 2006 a condo oceanfront in a tower cost $500k. In March of 2009 condos in the same building were for sale for $150k, and in 2013? They were back up to $500k. Most of the bank branches closed, some were redeveloped into Mexican restaurants or stores, others bulldozed, and others still standing with "For Sale" signs.
What I witnessed in 2006 was the euphoric stage near the top of the market. I didn't know what I'd seen until later, but when looking back it became clear.
I've encountered the same thing a few other times. In 1999 I was a wide-eyed college student studying computer science dreaming about working for a start-up and becoming rich through options. I remember going to a party at a frat house with one of the frat brothers bragging about their start-up. The guy was so convinced he was going to change the world that he took us into his room to show off a 36" TV, which at the time was impressive itself. It was a Gateway Computer TV, and the TV was hooked up to a computer. This alone screamed success to everyone in the room. This guy was creating a website where people could order pizza online and have it delivered. You wouldn't have to pick up the phone anymore.
I'm curious by nature. I want to know how and why things work. This was definitely true when I saw the pizza website on the giant TV. I was thinking about how much faster calling would be compared to dialing into the internet and waiting for the modem to connect and then the webpage to load. I even had the gall to ask this guy about it. He made some broad statements about how great the future would be and how no one would use phones. It didn't make sense, especially in the age of modems. And sure enough this guy was out of business a year or two later.
I didn't know what I was witnessing in 2001 when the dot-com bubble bust because I was too young. But I had a vague sense that what I'd seen in the years prior wasn't sustainable.
The last boom I saw was recently, the oil and gas boom in Western Pennsylvania. The formerly lonely highways I'd take to West Virginia to ski became clogged with water, fracking trucks, and giant diesel pickups. I had friends from small towns where farmers were leasing their land to gas companies for $5k/acre per year just so they'd have the right to drill. When drilling took place the farmers would make even more. Hotels appeared in the strangest places to accommodate the gas workers. It was a boom scene.
At one point in 2014 I met with a hedge fund manager who started a fund that only invested in banks that did business in Eastern Ohio and Western PA. Specifically banks with heavy oil and gas exposure. The manager marketed his fund as the best way to play the gas boom.
Gas prices finally crashed and along with it the roads emptied out and drilling activity slowed to a crawl.
In each of these three boom situations I was observing something that I couldn't quite put my finger on. The hysteria was real, it was tangible, and it seemed like it couldn't go on forever. But the energy was such that it's hard to believe something good like that might end.
I was talking with a friend recently and I noticed myself sharing stories that sounded like boom time stories again. The more we talked the more I realized that I've been seeing some of the same things I was seeing in 2006 and in 1999. My experiences and observations are all anecdotal, and maybe this is something only happening in the northern suburbs of Pittsburgh. But what I'm seeing here is crazy, and as an investor a bit scary.
Let me share a few stories. A few weeks ago my wife and I had a babysitter scheduled and the event we needed the babysitter for fell through so we decided to go to dinner instead. It was a Wednesday night, and with her being pregnant I decided to let her pick the destination. She wanted a blooming onion at Outback. I'll say upfront that I'm not a big Outback fan, but it was a night away from the kids, so you take what you can get. Outback shockingly had a wait, the waiting area was full and there were people outside. It was going to be 45 minutes to an hour for a table. We looked at each other and agreed that Outback isn't worth waiting that long for (or in my mind at all, but I digress). We then hit up a number of other restaurants in the area and they all had similar waits. It was simply crazy that on a weeknight these average restaurants would have so many people trying to eat. The thing is this trend has continued, restaurants are mobbed now, we're back to pre-2008 wait times everywhere.
Another area I like to keep an eye on is my local craigslist. I will buy and sell on there when I see deals, and I browse to keep a pulse on the market. The prices have gone nuts in the past year. Twenty year old F150s with rusted out bodies and 200k miles are selling for $5k, about $2500 too much. RVs are similar, late 1990s RVs are selling for a few thousand dollars less than models 10 years newer.
Beyond RVs and trucks I like to look at rural land as well as heavy equipment and businesses for sale (can you spot the trend? Items with titles..). A few years ago I picked up an acre of forested land in Northern PA for $300, and I've been on the hunt for larger tracts in the 10-20 acre range in the same area. A year ago there were a few sellers who wanted $1,500-2,000/acre for forested land, but there were always caveats. The places would be next to a sewage treatment facility, or there were easements. Now in the same area prices have jumped to $10,000/acre. Same types of lots, same location, just 5x more expensive. Right before the oil boom you could buy almost any tract for $1,000 an acre or less, when gas crashed I went hunting again. While prices fell demand remained strong as people looked for lots for second homes.
Even worse is the housing market here. I sold a house last year, a nice 1,300 sq ft starter home for $160k, what I thought was a reasonable amount. Similar houses are now listed a year later for $200k, a $40k jump in a single year. What's worse is some of the stock at $200k needs another $25-30k worth of work to make it livable. That is unless you like living in a house with decorations circa 1975. What's crazier is these places are selling almost instantly. We have friends whose house sold the day it was listed, they're having trouble finding a place because everything is either an overpriced dump or is selling the day it lists.
I find myself asking the same questions again. How can people at their first job afford a $230k house? Who's paying $5k for a 20 year old truck that will probably need another $2,500 in parts and a hundred hours of labor? Is there really demand for this stuff? And what is the demand that pushed starter home prices up 25% in a year?
As we discussed some of these stories my friend suggested a theory. The demand for these items is coming from the marginal overtime dollars of middle class and lower middle class workers. These are hourly jobs that pay $20-25/hr in wages. Now that the economy is hitting on all cylinders a company might ask employees to pick up a few extra hours a week before they hire additional employees. For someone making $25/hr ($1,000/wk) picking up an additional five hours of work per week is a 12% pay increase. Where does that additional $500/mo go? It creates demand for restaurants, for vehicles, for RV's, for vacation properties, for houses. Some are using it to pay down debt, but when everyone is offering all the neatest toys with low monthly payments there are a lot of takers.
This isn't just seen in the hard goods realm either. Where are the net-nets? Where is the distressed debt? Where is anything that isn't having the best quarter and year ever?
If you believe in efficient markets then this doesn't matter. Because the good times are here to say, they're "right" and "perfect" after all. I know there is a large contingent of investors who believe that we're just starting a giant bull run and this euphoria won't end. Maybe it won't. On the other hand trees don't grow to the sky either.
The problem is when you're in the middle of a situation it's hard to gain a large enough context to make a macro decision. You can observe and go with your gut, but you can't really ascertain what's happening until after it's happened. Once it's happened everyone is an expert and everyone has seen it, but in the midst no one knows what they're seeing.
I guess what I'm saying is that we're in the midst of something, it looks like a movie I've seen before, but I'm not sure. I've had stocks run like crazy since Trump was elected and I'm starting to take money off the table as prices rise. Unfortunately it's putting me in a spot where I'll have excess cash that needs to be put to work. Some of it will sit on the sidelines until I find deals on land again. But for the rest I'll have to look abroad to countries that aren't running as far and fast as the US.
When I consider everything I'm seeing it's easy to say that we must be nearing a market top. But it was another two years from what I witnessed in 1999, 2006, and 2014 before the top finally blew off. Oddly I've been consistently two years early in noticing these trends, so maybe the bottom won't fall out until 2019?
It's been hard to find deals both in the market and out of the market. Every official government indicator says it's clear skies and sunny ahead, and maybe it is. But what I'm seeing on the ground has me questioning things. Is this demand sustainable? Can it just last forever? How many new retail strip malls can be built? Especially when there is vacancy in prime locations and the world is moving online?
In the end I just don't know. What I do know is I'll continue to sell as positions become fairly valued. There are pockets of value here and there, but one needs to dig very deep, or get involved in complex situations. Maybe in two years I'll look back and this and think "I saw it again.." or maybe I'll be thinking "I wonder how big of a house can I buy with my Tesla gains?"