What makes an investment look good? In Michael N. Kahn’s book “Technical Analysis Plain and Simple” he lists a few points that indicate a good stock, bond or commodity investment. I contend the same principles can be applied to real estate investing. This post takes those points and adds the 20/20 hindsight principle. Here is why real estate looked so attractive, and yet so astoundingly precarious as an investment before the crash. Why didn’t we see it?

A rising price trend as more investors jump on board.

Certainly prices rose at arguably unprecedented levels during the real estate boom of the 00′s. A large portion of your friends, family and coworkers may have been getting into real estate in some manner. Maybe even you. “Everybody’s doing it. There’s money to be made!”

Rising volume as investors become more aggressive in their purchasing.

The increase in properties being built was of course a function of supply constructed to satisfy demand. In Atlanta Magazine there was a story titled “The Manhattanization of Atlanta” as high-rise condo developments sprouted across the city from Downtown, Midtown to Buckhead. They even began to dot the Perimeter area. I kept waiting for one to be built-in Cherokee county, ala Thomas Wolfe’s novel ”A Man in Full.” The signs of overbuild began to appear. The reports of more units available for sale at current buying rates that would take decades to shake out were popping up in the local papers. Volume had reached its limit. Why didn’t we listen?

Strong, but not excessive, price momentum.

Price momentum could have been considered strong in the early stages. Later, excessive to ridiculous.

Strong market. A rising tide lifts all boats.

Well we certainly know the adage of improved property value for my neighbor means the same for me. Yearly price appreciation was assumed at 5%! And that was probably a conservative estimate. I know this because it’s what I used in my investment models. And so the introduction and use of the HELOC as ATM began to occur as a byproduct on this tide of euphoria. Another sign the bubble was reaching its limit.

An environment that consists of low-cost of doing business, and favorable supply and demand.

Hello zero down payment, covered closing cost incentives, upgrades galore, minimal credit requirements, etc. When you’re being strongly advised by your mortgage broker, your agent, uncle Lou and even your sweet mother to finance to the maximum amount you can possibly afford, use HELOC to leverage investment property or take a vacation (also known as pulling cash out) and you are getting pre-approved credit card and line of credit offers in the mail in the hundreds, not tens, of thousands for no points/cost then you have a low-cost of doing business on your hands. Personally, this to me, was a major red flag.

All the above should be lessons learned for anyone considering or currently investing in real estate. Or for that matter, equities. If it smells like a bubble, looks like a bubble; you know with all those colorful swirly patterns in it, then it most likely is a bubble! Due diligence is of paramount importance.