Is the the RE market about to Burst?

Question

I keep hearing that equity in houses are going to go up 10% next year and possible 15% in the next two years. People are paying for houses way over their appraised value and bidding wars are sparking up all over the country. Yes, there is a housing shortage, which is driving up prices, but there are fuel shortages as well. Didn’t this happen in ‘08?

I don’t think the market will actually crash, but I’d imagine some of theses houses will go down in value since they aren’t worth the appraisal.

Do any of you plan on waiting until the bubble pops before moving in?

Jonathan Taylor Smith · Answer

@Ibrahim Yamini... My primary consideration is - Will the property generate positive cash-flow within a few months of my purchase? And this consideration assumes I'll need to do some amount of rehab to make it rental ready before placing my tenant. And "positive cash-flow" does not mean $100/mo. I need enough coming in that I can discount the rent by up to that amount and still be positive should there be a reduction in rental rates in my area. Now this means that I'm not buying as many properties as I was in prior years - but I have not stopped buying. I just stick to my criteria and let that set my pace. I'm also refinancing everything to lock in these low rates for the next 30 years - pulling out cash where the numbers permit!J.T.

Nick Robinson · Answer

@Corey FrankSimilar things have happened in the US before. In the 70s there was "stagflation" under Jimmy Carter. How did we get out of it? We were hit with a major recession. Ronald Regan, the Gipper, cut regulations and taxes and set us on a rocket ship of prosperity for the next 20 some odd years. The government has a problem trying to reduce hardships for everyone by printing more money and giving more entitlements. All that ends up happening is people get hit harder when it actually hits. Personal opinion but I think this will string out a little longer and then I think it will hit pretty hard. Once it hits Jerome Powell is going to jack up interest rates to its historical avg. ~6-8%. He has to raise it because they say it takes 500bp to combat inflation and you can't keep rates this low long term. The reason I think it will take a couple of years is because we are still handing out money like candy. Unemployment benefits (luckily some states are ending that), stimulus checks, CA is going to give everyone $600 + $500/child.

Nick Robinson · Answer

@Ibrahim YaminiThere is a lot of stuff going on. Everyone has their own opinion whether the market is going to crash or keep going up. Some things to look at is there are a ton of evictions and foreclosures coming up in July. Will that crash the market? Over the beginning of this year we have seen a scarcity not just in real estate but all goods and services. We have also printed a ton of money. Now we have more money chasing fewer goods; INFLATION. Now the current administration wants to increase taxes and regulations. This will further constrict the supply side and increase the costs of goods. On the other hand you say homes are expensive. Compared to what? Jason Hartman has a great video comparing SFR to different assets and commodities. Based on that analysis SFR are actually cheaper than 2006. When you include home payments from '06 and '21 when you adjust for the interest rates and inflation homes are actually ~$600/mo cheaper. Based on that analysis we still have a long way to go 1,2,3 years??What I suggest is to continue to buy property that makes sense. What does that mean? Buy cash flowing assets in working class communities. DO NOT buy negative cash flowing assets and expect to make your money on appreciation. That is speculation and gambling. Can you imagine if you would have listened to everyone that there was going to be a crash in 2016? You would have missed out on making so much money and taking advantage of a great run in real estate. If the market crashes you have a positive cash flowing asset that will allow you to hold the property till the value of the building comes back up.

Nick Robinson · Answer

@Corey FrankI agree everything is ridiculous right now. At least the FED finally admitted there is inflation going on. If you read the post right before the one I wrote to you it talks about how real active to other assets the houses are actually cheap.

Corey Frank · Answer

@Nick Robinson I would really imagine some type of correction would have to happen. Prices of everything are going sky high. But this huge rise in housing prices have a legitimate reason. A year of lock downs and very slow movement coupled with very low housing inventory. Add in Covid related supply chain issues in every sector and we have a problem. I am really trying to figure out my local economy. We have ALWAYS been a bust/boom energy market but right now we are booming with no local backing. Oil was at a record low and our coal mines are drying out. those are the life blood of the area. But yet real estate is still booming. 🤷🏼‍♂️

Corey Frank · Answer

@Ibrahim Yamini I honestly really hoped there would be some sort of a correction. These prices are getting just to crazy (unless you already own a lot!) but I watch very seasoned veterans talk about this and for the most part they say no correction. We have a very low supply (1.5 million houses short) materials are out of this world so that will push the cost to build up more and there is a massive labor shortage. Add all this up with inflation from government spending and this could be the new norm.