How high can property values go?

How high can property values go?

Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes

I have just rekindled my interest in bigger pockets. I have been shocked at how few names I recognize from years ago. I have probably been gone mostly for three or four years. It does not really surprise me how many new investors there are when I look at how high prices have been bid up. The simple old story of more demand than product.

I am old enough to have gone through a few recessions/depressions  and have owned many properties at those times. I saw what happened to so many friends and investors. As I get older, I become more cautious about high risk endeavors.

Here is my reasoning for being concerned about this madness. We all know history repeats itself so let's take a look at something.

I am picking the city of Phoenix just because I know something about it. I bought apartments there back in the 70s and single-family residences there a few years ago. All of those items were successful.

I am not a computer techie, but I know there are many on bigger pockets that are. Six months ago I saw and article where someone that had done a graph of real estate value increases for the years before the big crash. The person then did a graph of what has been going on for the last few years. You could lay the graphs on top of each other and the similarity was scary. We are in that period of time that things turned awful in Phoenix on the original chart. How much longer before history repeats itself? There are some of you that seem to think the answer is never. Others think it will be a 2 – 5% drop. Others say they will be able to see it in advance and bailout. How did that work out last time?

I was visiting a friend of mine in Phoenix at the height of that lunacy. He took me to a lottery of real estate opportunity! A builder had just determined to sell an additional 10 homes in preconstruction phase. There were over 50 people there who put their names in a fishbowl with the hopes they would be the lucky one to be able to purchase one of these underpriced 10 homes. My friend was "lucky"enough to be a winner! A second builder was doing the same thing and my friend was lucky enough to win there also. I remember him telling me during the construction stage that the price of his home had been raised twice in a single day! It was complete lunacy complete lunacy how much the price increased during construction.

It was within one year that he had fallen behind and worked  deal out to deed the properties back to the lender in lieu of foreclosure. That is sad reality.

I know there are locals in Phoenix that witnessed the same things. I don't know of many people that saw it coming and were able to save their butts ahead of time. I hope this time will be different but I'm not sure about that.

I could give other examples of the early 80s when the same thing happened but I don't want to bore you.

I have been told by real estate brokers in the Dallas area that inflation will continue to be 5 to 6% this year. I hope so but I have read other things that say a slowdown is starting. I am talking about multiunit buildings and not single-family residences. I do not know the predictions on those nationwide or in any particular areas.

My decision is to play it safe and sell one property and not do a 1031. I will hold the cash for security and I am not waiting as a vulture for bad things to happen and purchase additional properties. I do not have a crystal ball, but I do have age and a lot of experience. I am old enough to have seen the highs and lows. The highs are euphoric and the lows are disastrous

Any other thoughts?

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
9y

On a long enough timeline there is no cap on prices....because there is no stopping the economic force of inflation. Prices go up, and prices do go down....but eventually they will always be higher. 

See this reply in the discussion

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  • Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    9y

    Regarding "most of them had higher W2s than me :)" Hmm.  All of my tenants have a higher W-2 than me. Well, I exaggerate. My student tenants... they tie me.

  • Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y
    Originally posted by @David Faulkner:
    Originally posted by @Matt R.:
    Originally posted by @Si L.:

    @Matt R. That's a good point about minimum wage in cali. I don't see it mentioned much. But that's one of my reasoning for keeping my properties rather then selling. I think this will likely benefit the lower income regions more In the near term. 

    Good discussions overall. 

     And that is for the Walmart employee...many cops in LA make 100k and one cop and one teacher together start at near 110k+. To round out that since 2000 sfr total returns list...Riverside and Sacramento. Smart move. 

    Yeah ... I literally had a Beverly Hills Cop apply to rent my SFR in Glendale, just a regular cop not a captain or anything, and his salary was well into the 6 figures. And that guy was not the most financially qualified tenant I got ... most of them had higher W2s than me :) Damn, I shouldn't have sold that property :(

    Actually, for SoCal looking at the interactive maps in the original article linked (which are super cool BTW), I got the impression that San Diego may be slightly less overpriced than LA or Riverside as it has not gone as crazy in the recovery and the market fundamentals of supply, demand, jobs, etc. are every bit as solid as far as I know, unless somebody else knows something that I don't (entirely probable).

    Honestly, I wish there was some identifiable crevice in SD. There is not...residential vacancy is 2.1% and commercial vacancy is at a 18 year low. This is gold REI long term normally. Globally, this whole Cali deal enters trophy contest...so value add is investor progression almost solemente.

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Chris Martin:

    Regarding "most of them had higher W2s than me :)" Hmm.  All of my tenants have a higher W-2 than me. Well, I exaggerate. My student tenants... they tie me.

    It's a great thing, isn't it? Somebody once asked me if that was weird or somehow a bad thing if I make a decent W2 and all my tenants made more than me. I told them no, it is perfectly OK with me. Of course, if your W2 is zero and you're all passive income, that is even better even if it is setting the bar a bit too low for your tenants to beat zero :)

  • Kalamazoo, MI · Member since 2016 · 38 posts · 31 votes
    9y
    I was talking with two big developers in my area who have been doing this since 1983. They both said this is really reminding them of 2007. Their advice was don't take any skinny deals right now. Unless it is an exceptional deal, keep your powder dry and you'll probably see better deals down the road.
  • Interior Decorator · Miami FL · Member since 2016 · 26 posts · 25 votes
    9y

    The next turn will be a correction due to slower growth. Coming from a trading background a correction is good and cleans out excess players. Also, the next one will be a simple supply and demand coretion rather than a government generated bubble. If foreign money(Vancouver) or money laundering(Miami) were the major drivers in my Midwest area i would exit. Flipping will slow down since its fundamentally a momentum game and momentum slows down when the market turns direction. I buy and hold only if it cash flows and the demographics are improving.        https://datausa.io

    RE investing is very similar to investing in dividend stocks. The difference is that erosion is compensated for by depreciation. In my area outside Chicago the multi-units are overvalued for their age and cash flow so good luck to the sellers. 

    Remember in any market the cycle is risk-taking and risk-aversion. Is the greed overdone or are we moving toward a more normal market? Really this market was too easy if you stumbled into it the past 5 years.

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @Account Closed

    thank you for your reply to my thread. You list a lot of reasons for your belief. Do you have the same feeling about multi-units in Dallas as you do in Chicago? I have never had an interest in purchasing real estate in Chicago but I own nearly 500 units in Dallas.

  • Norman, OK · Member since 2017 · 4 posts · 0 votes
    9y

    Thanks for sharing this information.

  • Real Estate Investor/Broker · Irving, TX · Member since 2015 · 520 posts · 263 votes
    9y
    Rich Weese I love to hear this and it is further validated by the crazy prices syndicators are paying right now! I have offers on off/on market deals for nearly $20k/door higher than highest sales comps! Your property Tree Top is in a great sub market where occupancy has steadily rose to 94.5%. There has been an 18.8% change in avg rental rate in the last 24 months, which further validates your point about continuing to increase rents and having willing tenants. I think it's mostly due to absorption and low supply. Let me know if you want an opinion of value for Tree Top! I have the perfect buyers in mind as we've sold Spanish Oaks right around the corner.
  • Dawn BrenengenBusiness Member
    Moderator
    Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes
    9y

    @Rich Weese RE salesperson here.  I don't think RE always goes up.  It's very cyclical, and I was fortunate to be able to watch the last recession from the sidelines.  I think for those who are newer in the business, it seems like RE is always such a great thing because they are up close and personal with people making lots of money by buying low and selling high.  When I was 25 years old (in 2005), I was selling new homes in a 400k+ neighborhood.  I watched people come here from CA who sold their home and made enough money to pay cash on the one here.  I was SO jealous!  

    I'm actually looking forward to a correction.  There isn't enough inventory, and it's really putting the brakes on how much I can sell.  Can't sell homes if there isn't anything available to buy!  :/

  • Austin, TX · Member since 2017 · 30 posts · 26 votes
    9y

    Are you telling me that my situation is a blessing in disguise? I kept telling my Thai Princess, this is the time to read, learn and save money or get really creative. I hope I come up with options that will leave little risk for me or no long term further credit damage if the market does crash. Did I mention before that I love this site and the people in it? I have always listen to the voice of wisdom from others with years of experience.

  • Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    9y

    @Rich Weese Personal opinion here, but I think it's pretty tied to interest rates.  When they are as low as they are you have (at least) three things occurring:

    1.) Bonds aren't paying much in terms of returns so you have to put your money is riskier asset classes (like stocks, real estate, etc.) to see any returns.

    2.) Most people are already investing in stocks through their 401Ks, Keoghs, etc. and are therefore seeking another asset class to invest in.  Many people think the stock market is as "overheated" as the real estate market so you might as well diversify into real estate.

    3.) Low interest rates (especially on a 30 year fixed) it make it far easier to cash-flow and get a good cash-on-cash return.  Consequently, you can still make a return and pay more for the property.

    Net results:  As long as interest rates stay low you'll have a push to invest in real estate.  Not to mention that for many properties you're competing with non-investor home owners who want to buy before interest rates go up.  

    Again, this is from the perspective of someone who is in no way an economist!

  • Investor · St. Louis, MO · Member since 2016 · 41 posts · 24 votes
    9y
    So let's say a crash did happen. If you're a long term investor with multiple leveraged rentals, what would the issue be? Property values don't matter at that point as you've already gotten your loan. The only issue I see is if rent dips down or you can't find a good tenant. And all that does is hurt cash flow in the short term. Am I missing anything?
  • Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes
    9y
    Originally posted by @Lane Forhetz:

    So let's say a crash did happen. If you're a long term investor with multiple leveraged rentals, what would the issue be? Property values don't matter at that point as you've already gotten your loan.

    The only issue I see is if rent dips down or you can't find a good tenant. And all that does is hurt cash flow in the short term.

    Am I missing anything?

    When someone is under water there is a higher probability that they will default. So property values carry relevance to leverage. I haven't seen the actuarial tables but Id guess that there is a direct correlation to default rates when you compare them to initial LTV. Hence a reason lenders like to see large down payments. When someone puts 0 down or 3.5% down , there is a higher risk of default then 25% down. While you may pay your loan should property values decline, not everyone might.

  • Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    9y

    @Account Closed Interesting that you mention low down-payment loans. I have sold 4 houses over the last year. Every single buyer has used a 3.5% down mortgage and asked me to pay their closing costs. That kind of sums up for me where things are... I still see a lot of structural problems in the economy that haven't really gotten better. 

    But at the same time we are experiencing historically low vacancy rates and rapidly increasing rents. Very little is being built in our area but the population continues to rise.

    Interesting conundrum, real estate continues to look very attractive and I don't really see any better alternative investments. Yet I can't believe we won't have some kind of serious downturn in the economy in the next few years.

    I'm just in risk management mode. Selling off a few sf houses that have appreciated beyond where they make good rentals but at the same time I continue to buy small multifamily where the numbers make sense. 

  • Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    9y

    Jack,

    The data that folks are looking at on Dallas is class A.  BP folks don't play there, they play in B/C and value add, not retail.  The rent disparity is telling $2k vs $1k/mo rent.  Companies, jobs and then people are coming in droves.  Even that said, class A should be the first to get hit but that is showing no signs.  The Dallas train is still very underestimated IMO.  We saw this in Houston when oil fell from $100 to $50.  Class A gets hit, class B does fine...its very resilient.  With a reason to have low interest rates continue (call it a too big natl debt to handle or not wanting the US$ to climb too high to impact exporters...many bright folks just don't see higher int rates).  

    So what will kill this off? Prices are higher, so more folks can't afford the home.  Demographics favoring renters aren't going to stop just because prices are higher.  Call it the millennials wanting flexibility or boomers wanting to downsize.  Strong powerful trends are at work and just saying things are high, feel high, smell high adds little value to the conversation....what will kill it off?...maybe slow it down, but the Big D train is a long secular move that shows know signs IMO of coming to rest anytime soon.  Sure, it can slow down but growth will continue.

    http://www.globest.com/sites/lisabrown/2017/03/06/...

    http://www.globest.com/sites/lisabrown/2017/03/02/...

    note: if you have trouble opening articles, just note subscription is free to sign in.

  • Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Lane Forhetz:

    So let's say a crash did happen. If you're a long term investor with multiple leveraged rentals, what would the issue be? Property values don't matter at that point as you've already gotten your loan.

    The only issue I see is if rent dips down or you can't find a good tenant. And all that does is hurt cash flow in the short term.

    Am I missing anything?

    Vacancy, both economic and physical. In a down turn, rents don't go down, they stop. Yes, you can start them back up again eventually one way or another, but that takes time and money, which is ok normally so long as a high percentage of them don't stop at around the same time, which is precisely what can happen in a downturn. To what extent this happens depends on the quality of the neighborhood and tenants ... higher initial cash flow areas tend to be lower quality markets ... which is why I always advise that quality of the cash flow is just as important (even more important IMO) than the quantity.

  • Investor · St. Louis, MO · Member since 2016 · 41 posts · 24 votes
    9y
    David Faulkner , thanks for the reply. I couldn't agree with you more. Here in St. Louis, it seems like there is a "feeding frenzy" of sorts. I've lost countless deals due to people bidding it up well past where the property makes sense. I buy all my long term rental deals with ~20% equity after repair, $400-$500 cash flow(before maintenance and vacancy considerations), and the way I finance I only have about $8k or less of my own money into the property after refinance. Which allows me to have none of my own money in after about a year or so. I appreciate your, and others, responses as it bolsters my confidence in my strategy, having never been through a market crash/downturn. Good Luck!
  • Riverside, CA · Member since 2015 · 47 posts · 11 votes
    9y
    This is awesome - love these discussions!!
  • Flipper/Rehabber · San Diego, CA · Member since 2010 · 76 posts · 21 votes
    9y
    Originally posted by @Jeff Kehl:

    @Account Closed Interesting that you mention low down-payment loans. I have sold 4 houses over the last year. Every single buyer has used a 3.5% down mortgage and asked me to pay their closing costs. That kind of sums up for me where things are... I still see a lot of structural problems in the economy that haven't really gotten better. 

    That says nothing about the market.  If you are selling 1000 homes and they are all above the medium price point in your area then this would be a worthwhile anecdote.  I'm guessing you are selling lower end homes and this is what the majority of buyers are going to do in any market condition at that price point.  

  • Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes
    9y

    @Matt Welch two of the homes were significantly above the median sales price for this area. Two were just below. But you're welcome to do with my anecdote as you wish. My point was that I still see a lot of people struggling in what is supposed to be a healthy economy.

    What do you think of the economy and where it is headed?

    I'm in San Diego about once a month and will be there next week and I can tell you anecdotally that the reality there is not the same reality as most of the rest of the country. 

  • Rental Property Investor · Friendswood, TX · Member since 2010 · 663 posts · 508 votes
    9y
    Originally posted by @David Thompson:

    Jack,

    The data that folks are looking at on Dallas is class A.  BP folks don't play there, they play in B/C and value add, not retail.  The rent disparity is telling $2k vs $1k/mo rent.  Companies, jobs and then people are coming in droves.  Even that said, class A should be the first to get hit but that is showing no signs.  The Dallas train is still very underestimated IMO.  We saw this in Houston when oil fell from $100 to $50.  Class A gets hit, class B does fine...its very resilient.  With a reason to have low interest rates continue (call it a too big natl debt to handle or not wanting the US$ to climb too high to impact exporters...many bright folks just don't see higher int rates).  

    So what will kill this off? Prices are higher, so more folks can't afford the home.  Demographics favoring renters aren't going to stop just because prices are higher.  Call it the millennials wanting flexibility or boomers wanting to downsize.  Strong powerful trends are at work and just saying things are high, feel high, smell high adds little value to the conversation....what will kill it off?...maybe slow it down, but the Big D train is a long secular move that shows know signs IMO of coming to rest anytime soon.  Sure, it can slow down but growth will continue.

    http://www.globest.com/sites/lisabrown/2017/03/06/...

    http://www.globest.com/sites/lisabrown/2017/03/02/...

    note: if you have trouble opening articles, just note subscription is free to sign in.

     I would maybe say the statement that Class B/C is more resilient than Class A but get some bigger macro trends at play and all asset classes can show weakness in some form or another. The question isn't abut growth , new jobs , expansion etc. The rent growth has been substantial   and pricing of assets has increased.  I think people are pricing that stuff, going forward, into acquisitions where they are dependent on the success of the market which may, or may not continue and how much of a premium is being placed into the cap  due to those factors.

    Sure, it can slow down but growth will continue.

    This is a statement of certainty that can carry great risk for an investor.  I believe the statement should be: It can slow down but growth MAY continue. Additionally , and what I feel is more important  , what are investors paying today for the probability of future growth? This is of great importance.  Just because things may to do well, their is a point that it becomes  a question of overvaluation.

    I think saying things smell and feel high maybe do not add value in themselves but feel its a conversation that carries merit when I see an investor like Rich Weese considering selling. You have to pay attention to what some of the other smart money is doing. I love to watch smart money and love to listen and watch guys who have bee in the game longer than I. When a market is on a lot of peoples radars, that always changes the schematic of pricing, inventory, and additionally, pricing.


    Regarding interest rates, they just went up, i read that there is a high probability of them ticking up again at the next meeting this moth and further increased rates down the road. The majority of what I read  increasing rates the prime question becomes how much so I'm not sure who is saying they are not going up...... and betting for low interest rates in the coming future I think is a game that carries a great level of risk with it...... 


    I have no vested interest in promoting nor defending the Dallas market. I actively market for deals in the metroplex as of today, and have been involved in a couple deals since 2014 . I think its important for newer investors to be aware of potential  risks in the market place. I think this quote from Warren sums it well......

    "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities ¾ that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future ¾ will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands."

  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @Account Closed

    I loved your post. I got such a thrill out of it that I even read it to my wife! She does not participate on here but likes cute comparisons. We both smile that your last paragraph. I have received several private mails from investors that had serious difficulties in the last downturn. I have asked them to enter that information in this thread, but I haven't seen it yet. Reality can cause euphoria but when the reality changes it can definitely cause doom.

  • Rental Property Investor · Niceville, FL · Member since 2017 · 88 posts · 136 votes
    9y
    I remember back before the last RE crash in '08-'09 and how it felt to look at our balance sheet and see those paper profits going up and up and up each year. The banks were going away loans left and right and we signed up for them. My wife and I owned 20 or so properties that we purchased during the run up mostly in the Atlanta area. They were Single family homes, duplexes and triplexes. We were doing very well, or so we thought. A few years later we lost pretty much everything and then some. The wife waited tables for a while and I went out and managed a gas station!! Fast forward to now and we have recovered nicely. We moved to the FL panhandle and live not too far from the sugar white sand beaches on the Gulf of Mexico. It is absolute beautiful and we feel truly blessed. We are far far less leveraged then we were back in '08. We currently have a couple triplexes out of town and a 30 unit apartment complex here locally. We are at $30K + per month in gross rents. We owe $0 on our primary residence and only about 400K on our appx. $2M market value of our rentals. The rental market here like most other area is extremely strong. We stay mostly 95-100% full. Two summers ago we went on a 3 month 16 state RV road trip out west (I grew up and still have family in Nor CA). We visited 18 National Parks and about 25 State & local parks along the way. We had such a great time that we're getting ready to hit the road again on a 5-6 month vacation trip with our 5 & 7 year old boys to Alaska and then back down the West coast. Planning to hit another 20 National Parks. We plan on renting our 4,300 sq. ft 2 year old primary residence out fully furnished, which will more then pay the expenses of our trip plus some. And we have managers that help us with rentals when we're on the road. As far as this area, Florida Panhandle, the prices are going up and up. There seems to be floods of people coming to this area from what I can tell. This is a big military area so a lot rides on that also here in this area. It is also a big vacation/second home market as well. I am always very optimistic. Prices seem to be at or near the '06, '07 prices in some areas here and even a little higher in other parts around here. And I feel like things will never go down. But I remember that same feeling back in '08. This time we are not nearly as leveraged. It feels much better and like we could weather a big downturn at this point. We would be able to reduce our rents drastically and still sustain with our low mortgages. So I have no clue how high these prices can go. I hope they continue to go up for the next 20 years! But I can tell you that we're not going to get "over leveraged" ever again in our life times. Cheers and happy travels!
  • Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    @Charlie Price

    I wanted to thank you for posting some historic reality. I have lived through two different times like that and seen dear friends go down the tubes. Just like a rocket ship that goes up and up and up, it eventually comes back down to earth.

    Enjoyed your post and I hope many others read it.

    Have a great week and I will have happy travels. I leave in the morning on a romance and 70s rock 'n roll cruise..... I promise to be happy!

  • Interior Decorator · Miami FL · Member since 2016 · 26 posts · 25 votes
    9y
    Originally posted by @Rich Weese:

    @Account Closed

    Sorry i dont have a feel for about multi-units in Dallas. I will not buy inside the Chicago county called Cook County. People are leaving that beautiful cesspool of corruption based violence. Only outlying counties because I live there. Congratulations for your success in Dallas. The only other states I would invest in must be republican. 

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