Are we in a housing market bubble that is likely to burst?
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Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
9yOriginally posted by @Andrew Johnson:
YES! YES! EVERYBODY PANIC!
What's amazing in that the percentage of people panicking (or predicting a crash) doesn't match up with the amount of people selling/liquidating/going to cash/etc. If the crash predictors are so sure they should have sold 80%+ of their real estate.
Why wouldn't you sell today if you're so sure a similarly performing asset won't be available on 12 months at a 30% discount from today's price? The reality is that they don't know when any correction or crash will come. They don't know how far the pullback will go. They don't know what interest rates and capital availability will be post-correction/crash.
Bottom line, do what your analysis (and maybe gut) tell you to do. Everyone is colored by their past experiences. Half of the investors on BP have never experienced interest rates above 6%, not been in a housing recovery, etc.
I'm selling everything, Andrew.
Of course, I cannot predict when, exactly, the market will correct. But that is why I am selling. The opportunity to sell into a feeding frenzy exists now, and I feel confident that the time window of opportunity for that is closing.
Is it closing fast? That, I don't know. But there are some signs that we are in the final innings - softening rents in many major markets where the big money focuses; pipeline of new construction drying up because of land prices/lending in major markets (Tishman-Speyer, one of the biggest developers in the world, laid off its ENTIRE development staff earlier this year. I know, because one of my friends works there. They did it because it no longer makes sense for them to develop anything in this cycle.); the Chinese government finally acting on its threat to turn off the spigot of Yuan moving abroad for real estate deals. And, on top of all of this, this cycle has been going on for a VERY long time now. Volume of multifamily sales is dropping because there is so little product that has not already been transacted in this cycle. All of these things add up to it being the beginning of the end, in my mind.
When the big money gets scared of what is happening in the big cities, the economics of other markets won't matter much, in my opinion. The big money will pull back from big cities, making deals there slightly more attractive to the slightly less big money that was chased to smaller markets in this cycle. That money prefers to be in the big markets, and when the opportunity comes, they will go back there. The tide will go out from the smaller markets when it happens. The economics on the ground in smaller markets will be irrelevant when the big banks get skittish. That will present a great opportunity for those of us who know what is going on there.
This cycle has been my first go round as an owner. (I watched the last one closely from the sidelines as a real estate litigation lawyer.) One of the obstacles I have had to raising money from investors is that I have never been through a full cycle before. So, selling now is also strategic for me. It is an opportunity to create a track record in amber that gets my clients very strong returns, so that I can go out and raise more money next time, without this objection coming up.
Taking everything together, I look at it this way. It is far more likely that the selling opportunity is going to get WORSE in the next 12-24 months than that it is going to get BETTER. Is anyone out there willing to go on record as saying that cap rates will be lower than they are now in 24 months time?
Now, let me be clear about one thing. I am NOT telling other people they should sell. If you have cash-flowing properties that are doing well, and you intended all along to hold them indefinitely, you should absolutely keep holding. That's the beauty of cash flowing MFRE - it will continue to cash flow for you no matter what the market is doing in terms of asset prices.
However, if you have dogs in your portfolio, I would say the window for dumping them on someone greedy and unrealistic is closing.
108 Replies
- Financial Advisor · Cascais, Lisboa · Member since 2015 · 199 posts · 83 votes9yIf anyone could pinpoint that they would be trillionaires. Don't worry if the market goes up, down or sideways. Figure out how you can get a good deal. At this time its a bit harder to find but they are out there.
"Numbers dont look good at all."
There is compression in cap rates and multi-family rents are softening in many major metros.
"inevitable that todays buyers will lose equity"
In multifamily, much of the debt is short term (5 years or less). Having not been through a full cycle before, I'm not sure what happens when in 3-5 years when it's time to refinance and equity is lower. I guess if there is still some equity, no problem, but what happens if there is no equity?
- West Long Branch, NJ · Member since 2016 · 21 posts · 5 votes9y
The real estate market is no different than any other market. there are highs and lows, booms and crashes. to predict it would be tough. there are many variables that decide the real estate market specificalljy.
when the stock market is doing very well which it is right now, eventually there will be a correction. as the stock market goes up your suppose to sell on the ups and buy on the downs. real estate is the same way buy low and hold and depending on strategy you can sell on the high or just pull out equity and wait for a market to go down. in real estate though it takes longer periods for market to go up or go down. in the stock market it can happen in a matter of days and weeks.
no reason to predict an up or down movement in any market just be prepared for when it happens! there is going to be correction in all markets soon. remember the interest rates are being controlled by a fed who knows the markets are not so stable. the money being used in real estate for instance is cheap money which causes all markets to inflate artificially.
if interest rates go up to where they should be ( i am referring to the fed rate) of lets say 3-4% you will definately see a housing market correction which would be a good thing. homes prices should take decades to go up. what we see is a fallacy in how a fed reserve and all the worlds reserve basically manipulate markets which cause bigger moves than should happen if the interest rates would float.
i hope that helps
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9yYES! YES! EVERYBODY PANIC! What's amazing in that the percentage of people panicking (or predicting a crash) doesn't match up with the amount of people selling/liquidating/going to cash/etc. If the crash predictors are so sure they should have sold 80%+ of their real estate. Why wouldn't you sell today if you're so sure a similarly performing asset won't be available on 12 months at a 30% discount from today's price? The reality is that they don't know when any correction or crash will come. They don't know how far the pullback will go. They don't know what interest rates and capital availability will be post-correction/crash. Bottom line, do what your analysis (and maybe gut) tell you to do. Everyone is colored by their past experiences. Half of the investors on BP have never experienced interest rates above 6%, not been in a housing recovery, etc.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
The U.S. is in a housing shortage right now due to multiple factors.
The biggest, of course, was the economic crash back in 2007 / 2008. Back then, unscrupulous lenders stimulated housing demand artificially by making lending unrealistically over-available leading to rise in home prices well beyond their actual value. Some 80% of builders and developers went under in the resulting crash while the demand for housing rolled on unabated. We're seeing some recovery now. However, some economists estimate we're still a good five years behind the demand.
More recently, natural disasters have destroyed the existing housing stock in two major areas: southeast Texas and the gulf states, and a large portion of the State of Florida as well as portions of Alabama and Georgia. This is already precipitating a shortage of building materials - lumber and wood products, gypsum and drywall, sheathing, house wrap, ... everything that goes into new construction to replace the homes destroyed in the storms and floods. Prices for these items are already climbing and supplies are being restricted both voluntarily and by other means.
The more familiar concepts of economic cycles are rather offset by these other factors.
Given the state of affairs both here in the U.S. and on the world stage, prognostication at this point would be imprudent.
- Thank you all for your responses. @David Dachtera I can appreciate that forecasting future real estate market projections can not be predefined as there are multiple unforeseen variables that can influence the market. Although, I have witnessed inflated real estate prices where the average property value is 7.6 times the average salary. This accompanied by falling growth rates, and political instability in the Eurozone are signs that the investing in real estate at this stage of the cycle may not be the wisest decision. From speaking to private equity real estate funds, there has been a decline in deal activity and a focus on optimising returns from portfolio assets in preparation for downside exposures (if any). I am not alluding to the thought that a crash is on the horizon; instead I am trying to scope out whether I should start investing in real estate in current market conditions.
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
Originally posted by @Andrew Johnson:
YES! YES! EVERYBODY PANIC!
What's amazing in that the percentage of people panicking (or predicting a crash) doesn't match up with the amount of people selling/liquidating/going to cash/etc. If the crash predictors are so sure they should have sold 80%+ of their real estate.
Why wouldn't you sell today if you're so sure a similarly performing asset won't be available on 12 months at a 30% discount from today's price? The reality is that they don't know when any correction or crash will come. They don't know how far the pullback will go. They don't know what interest rates and capital availability will be post-correction/crash.
Bottom line, do what your analysis (and maybe gut) tell you to do. Everyone is colored by their past experiences. Half of the investors on BP have never experienced interest rates above 6%, not been in a housing recovery, etc.
I'm selling everything, Andrew.
Of course, I cannot predict when, exactly, the market will correct. But that is why I am selling. The opportunity to sell into a feeding frenzy exists now, and I feel confident that the time window of opportunity for that is closing.
Is it closing fast? That, I don't know. But there are some signs that we are in the final innings - softening rents in many major markets where the big money focuses; pipeline of new construction drying up because of land prices/lending in major markets (Tishman-Speyer, one of the biggest developers in the world, laid off its ENTIRE development staff earlier this year. I know, because one of my friends works there. They did it because it no longer makes sense for them to develop anything in this cycle.); the Chinese government finally acting on its threat to turn off the spigot of Yuan moving abroad for real estate deals. And, on top of all of this, this cycle has been going on for a VERY long time now. Volume of multifamily sales is dropping because there is so little product that has not already been transacted in this cycle. All of these things add up to it being the beginning of the end, in my mind.
When the big money gets scared of what is happening in the big cities, the economics of other markets won't matter much, in my opinion. The big money will pull back from big cities, making deals there slightly more attractive to the slightly less big money that was chased to smaller markets in this cycle. That money prefers to be in the big markets, and when the opportunity comes, they will go back there. The tide will go out from the smaller markets when it happens. The economics on the ground in smaller markets will be irrelevant when the big banks get skittish. That will present a great opportunity for those of us who know what is going on there.
This cycle has been my first go round as an owner. (I watched the last one closely from the sidelines as a real estate litigation lawyer.) One of the obstacles I have had to raising money from investors is that I have never been through a full cycle before. So, selling now is also strategic for me. It is an opportunity to create a track record in amber that gets my clients very strong returns, so that I can go out and raise more money next time, without this objection coming up.
Taking everything together, I look at it this way. It is far more likely that the selling opportunity is going to get WORSE in the next 12-24 months than that it is going to get BETTER. Is anyone out there willing to go on record as saying that cap rates will be lower than they are now in 24 months time?
Now, let me be clear about one thing. I am NOT telling other people they should sell. If you have cash-flowing properties that are doing well, and you intended all along to hold them indefinitely, you should absolutely keep holding. That's the beauty of cash flowing MFRE - it will continue to cash flow for you no matter what the market is doing in terms of asset prices.
However, if you have dogs in your portfolio, I would say the window for dumping them on someone greedy and unrealistic is closing.
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
Originally posted by @Adam Butt:
Thank you all for your responses.
@David Dachtera Dachtera I can appreciate that forecasting future real estate market projections can not be predefined as there are multiple unforeseen variables that can influence the market. Although, I have witnessed inflated real estate prices where the average property value is 7.6 times the average salary. This accompanied by falling growth rates, and political instability in the Eurozone are signs that the investing in real estate at this stage of the cycle may not be the wisest decision. From speaking to private equity real estate funds, there has been a decline in deal activity and a focus on optimising returns from portfolio assets in preparation for downside exposures (if any).
I am not alluding to the thought that a crash is on the horizon; instead I am trying to scope out whether I should start investing in real estate in current market conditions.
I saw this starting to happen two years ago, when I attempted to raise a fund from private family offices. After "we don't invest in funds," the next objection I got was: "we are full up on real estate." I distinctly remember one investment manager being very nasty to me about why any fool would invest in real estate anymore at that point. Now, obviously, he was wrong about the timing, but the sentiment was already forming two years ago that the real estate market no longer offered a buying opportunity.
As I have said elsewhere, I do not expect a 2008-style crash. There are many reasons for this that I won't go into here, and people like David Dachtera has already laid them out better than I could. However, many people on this site never knew or have forgotten that real estate is cyclical. It does not always go up, and many, many signs are pointing to the fact that it pretty much cannot continue to go up from this point. A correction is due. It's not a matter of if, but only a matter of when. And even thought that is always true, I think that "when" is closer than many people believe.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes9y
Finally! Someone who is putting their money where their mouth is. Kudos to sticking with your thesis @Jonathan Twombly. I'm still in the catch-22 of low interest rates. Put a water-gun to my head and ask about 24 months out and I'd say that values will be the same or lower and that interest rates will be higher. How much lower in value? I don't know...5%? 20%? Who knows. Not me anyway. Will rates be at 5%? 6.5%. I can't even figure out if the fed raises rates in December. Heck, maybe rising interest rates play into prices lowering.
From my perspective, I'd rather lock-in (for an SFR at least) a 30 year fixed rate at a low(er) number and ride out any valuation changes. As opposed to try and catch a falling knife but getting 30 years at a higher rate. Not that I'm saying I wouldn't buy in a declining market too :)
However, I'm 100% with you on either dumping underperforming dogs. I certainly wouldn't be holding a "bad" deal to hope that I can "appreciate my way into profit!"
- Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes9y
Originally posted by @Andrew Johnson:
Finally! Someone who is putting their money where their mouth is. Kudos to sticking with your thesis @Jonathan Twombly. I'm still in the catch-22 of low interest rates. Put a water-gun to my head and ask about 24 months out and I'd say that values will be the same or lower and that interest rates will be higher. How much lower in value? I don't know...5%? 20%? Who knows. Not me anyway. Will rates be at 5%? 6.5%. I can't even figure out if the fed raises rates in December. Heck, maybe rising interest rates play into prices lowering.
From my perspective, I'd rather lock-in (for an SFR at least) a 30 year fixed rate at a low(er) number and ride out any valuation changes. As opposed to try and catch a falling knife but getting 30 years at a higher rate. Not that I'm saying I wouldn't buy in a declining market too :)
However, I'm 100% with you on either dumping underperforming dogs. I certainly wouldn't be holding a "bad" deal to hope that I can "appreciate my way into profit!"
And I definitely would not be buying right now if my play were 100% appreciation, either.
- Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes9y
Buying for appreciation is not "investing", it's speculation (read: gambling).
- Winston Salem, NC · Member since 2016 · 94 posts · 111 votes9yIf you are buying for cash flow. It doesn't matter if there is a crash. You will still be getting your cash every year from the property assuming the rents don't crash.
- Developer · Cincinnati, OH · Member since 2014 · 13 posts · 17 votes9y
Thanks for all of the different perspectives. During the last correction I was buying steeply discounted pre-foreclosure properties. They have performed extremely well. This coming cycle I plan on doing the same thing. I have been focusing on getting liquid to take advantage of the "black friday" real estate discounts. Success; where preparation meets opportunity.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Jonathan Twombly from my vantage point.. those with massive debt tolerance or the refi to you die or the I have to have max debt to show the best return numbers for my investors.. so they lock into short term 5 year notes.. those are the one's who are vulnerable in a correction. in a correction rents do stop they do go down and if your maxed out on debt you do risk the chance of failure in a syndicated deal.
lets look at as you state all these folks that have never been through a correction.. and lets look at all the screaming deals that came up post 08.. most were debt related .. debt to high.. rents crashed.. lenders would not renew and or they could not find lenders to replace their current debt.
Lets look at those that had massive equity or paid cash.. those rode it through no problem.. but the problem is you out there trying to compete with the syndicators of the world who have to show great returns.. to attract investor dollars how do you do that MAX leverage... So there is nothing wrong with taking your chips off the table at ANYTIME in the cycle is my thought process.. No one can criticize you for making a profit ( that's what my daddy always told me).
I think the mom and pop turn key I own a few rentals can usually weather the storms.. its the big players that when you have a crash it can be a wipe out.. ERGO the selling of individual rental houses to investors is as hot as I have ever seen it in the 20 years I have been funding this stuff.. through corrections etc.. the numbers at today's values still make sense.. and especially at the price points were many pay cash.. they mitigate the risk hugely.
Development of course is totally regional some areas have never come back some like Portland were we develop are propped up artificially by govmit regulations that keep land at a premium and over building non existent.. in other markets this may not be true.
Although your correct even in red hot Portland you are seeing over building in the MF space with rent compression already happening.. the issue is you have to start these project 3 years ago.. to bring them to market today..
What I saw and lived through in 08 in 2001 in 1989 in the mid 70s was different market issues that caused recession or wipe out like 08.. but it was pretty much based on lack of credit for those that were mortgaged to the hilt with short term debt..
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes9y
When people stop posting the "are we in a bubble" posts, then we will be in a bubble.
- @Todd as previously mentioned, this is not a discussion to suggest that we are in a bubble. This post was intended to help aspiring investors like myself, to understand market conditions before making any purchases. Once again, thank you for your thoughts and I do believe that deals that yield favourable cash flows will sustain any investor through peaks and troughs of the cycle.
I think so. They'll probably blame Equifax somehow rather than multiple rounds of QE and everything else on the banking side that has us here again. Interest rates after a certain point will affect sale price, and we should know how that will goes from 2008.
Personally I'm locked and ready with a certain % of cash ready to buy reverse real estate ETF's like SRS, REK, DRV (which in theory go up when "the market" goes down).
Much easier and faster to re-position some money into something like that (like, the next week day basically) to mitigate sudden "unexpected" big drop in real estate values, imo.
Originally posted by @Nate R.:
Everything moves in cycles. We're 7 or so years into a massive boom, so we're due for a correction.
Do you suppose those cycles have anything to do with 7 and 10 year marks bankruptcies leave on credit reports affecting both rate and ability of masses of people to purchase homes?
Look at this chart. You can see 2005 was HUGE for bankruptcies prompting new regulations. The second BK peak after regulatory changes was in 2010. Now go back and look when the market started picking up again and then gauge how that might effect were we are today and where we're going tomorrow. It's almost like.... purchasing a home at the wrong time is a trap or something.
- Rental Property Investor · Ventura, CA · Member since 2016 · 62 posts · 34 votes9ySome great info. Appreciate the insight. For those getting your cash out - how do you do that without the capital gains hit? I'm doing 1031 exchanges right now to exchange equity in CA for cash flow in a different market. I'd love to know how jose cashing out are doing it. Thank you!
Originally posted by @Andrew Johnson:
YES! YES! EVERYBODY PANIC!
What's amazing in that the percentage of people panicking (or predicting a crash) doesn't match up with the amount of people selling/liquidating/going to cash/etc. If the crash predictors are so sure they should have sold 80%+ of their real estate.
Why wouldn't you sell today if you're so sure a similarly performing asset won't be available on 12 months at a 30% discount from today's price? The reality is that they don't know when any correction or crash will come. They don't know how far the pullback will go. They don't know what interest rates and capital availability will be post-correction/crash.
Bottom line, do what your analysis (and maybe gut) tell you to do. Everyone is colored by their past experiences. Half of the investors on BP have never experienced interest rates above 6%, not been in a housing recovery, etc.
The number is probably closer to 80-90% of investors on BP not having lived through a full housing bear market. Myself included.
Originally posted by @David Dachtera:
The U.S. is in a housing shortage right now due to multiple factors.
The biggest, of course, was the economic crash back in 2007 / 2008. Back then, unscrupulous lenders stimulated housing demand artificially by making lending unrealistically over-available leading to rise in home prices well beyond their actual value. Some 80% of builders and developers went under in the resulting crash while the demand for housing rolled on unabated. We're seeing some recovery now. However, some economists estimate we're still a good five years behind the demand.
More recently, natural disasters have destroyed the existing housing stock in two major areas: southeast Texas and the gulf states, and a large portion of the State of Florida as well as portions of Alabama and Georgia. This is already precipitating a shortage of building materials - lumber and wood products, gypsum and drywall, sheathing, house wrap, ... everything that goes into new construction to replace the homes destroyed in the storms and floods. Prices for these items are already climbing and supplies are being restricted both voluntarily and by other means.
The more familiar concepts of economic cycles are rather offset by these other factors.
Given the state of affairs both here in the U.S. and on the world stage, prognostication at this point would be imprudent.
Do you predict that the cities in Florida that were not affected doing even better in the coming months and years, due to inflow and increased demand of housing (and limited supply in the areas that were affected) ?
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Account Closed part of the reason of the Vancouver BC slow down is BC ( Vancouver) imposed a 15% flipping tax about a year ago.
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