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If you are buying when unemployment is 4%, you are buying trouble
I googled the unemployment history of US, and here is the chart... Out of the past 65 years, maybe 10 saw unemployment at around 4%....All other 55 years were higher.... If you are buying RE in today's enviroment when unemployment is 4% and interest rate is 4%, you are buying yourself trouble, in my opinion....
As a matter of fact, RE in the Bay Area is slowing down already, in my observation... My favorite example - Redwood City listing prices is now 15% ish lower than what properties have been selling at in the last 6 months... Big signal to me...
Let’s say unemployment doubles and goes to 8%. What impact would you say it would have on your current portfolio. For both vacancy and rents?
And could you ride that out for 2-3 years while it recovers?
That depends. In my area, I focus on c and C+ properties, and the unemployment rate around here is almost always lower than the national rate. Even when unemployment goes up, these people have to have a place to live, and the jobs that they do are not as affected by a slowing economy.
@ amit kal - my point was that there would be better buying opportunities when unemployment is higher and economy is slower..
Diane G.
It depends on the kind of investing you do. If unemployment goes up, affordable housing may benefit while luxury housing suffers.
what about in areas with relatively flat appreciation/depreciation? Some of those areas also already struggle to meet rental demands as is in regards to inventory... add in some higher unemployment wouldn't that push the rental pool up even higher?
If you don't mind me asking, what is your current strategy during this time of <4% unemployment? Just build up cash and liquidity to prepare?
I am always conflicted between two thoughts. One similar to your view. Which I absolutely agree that when economy is slow there will be better buying opportunity.
The second thought is considering the opportunity cost of holding cash/liquidity while waiting for a downturn which may not come for who knows how long? 1-2years? 3-4years? And if there is an opportunity where you can capitalize right now for a decent return (8-10%) and say you miss out on that for a few years waiting for next downturn, and when you finally invest after several year, how much better would your investment have to be and when would be the break-even point compared to the case of investing several years ago?
Also, I wonder if bay area will have any major dip like 2008... I agree we are definitely at or close to peak and some markets might be even slowing down, but I wonder if it will be more like a flat line or slight decline before picking back up rather than a big dip.
I tend to agree but also plan to keep buying. I work in the bay area in a job that could disappear in a down turn. Today I qualify for 30y mortgages at around 4.65 % maybe I won't next year? Maybe interest rates will finally start going up again and it is a good time to lock in the loan rate? Maybe the economy keeps going up for several more years and comes down slowly?
I hope that buying OOS properties with reasonable rent to value ratios and a buy and hold time horizon will work out even through a down turn of the economy.
But yes the chance of things continuing up the way they have been going seems increasingly unlikely.
Exactly - I am holding cash for better buying opportunites, even though sitting and waiting is hard... But my guess that the wait wont be too long... Before we get a new president, is my guess...
For those comments in regards to slow appreciation area, true, i know nothing about those areas and my comment does not apply there... I am talking strictly of Bay Area markets....
How are these unemployment statistics calculated? If it's gov data, it likely doesn't include people who are not actively looking for a job, but still unemployed. That brings the number much lower than what is commonly thought of as unemployed. I'm not sure if there have been changes in the way it has historically been calculated, but I don't trust unemployment numbers enough to make investment decisions solely based on them.
From US bureau of labor.
click on "max" on the lower left hand corner....
I think the unemployment rate in reality is much higher and wages buy much less. People pay more for housing than they do anything. That’s not changing. If it doesn’t cash flow you’re spending not earning.
I'm not so sure I agree with you on this. Not every city has the same unemployment rates, and every city is in a different real estate cycle as well. So it really depends on where you are investing, and how you are investing.
Take Detroit for example. Its unemployment is around 8.5%. However, there are plenty of REO's and distressed properties to pick up now while they are on sale. The cash flow is great. Pittsburgh is another example. Still a great place to buy low and cash flow nicely.
If you are buying for cash flow, and have good cash flow from the day you purchase, most investors will be able to ride out high unemployment rates. Rents may drop a little. But they won't go to $0. If you are flipping, or hoping to get high appreciation when unemployment rises, you could get caught with your pants down.
So I say stock up on the cheap financing we have today, and buy for cash flow.
I had a thought on this when I woke up. Just a mental game not to be taken too seriously.
If for some reason you could only buy real estate once in your life during the next 6 months...
Would you buy because it will be a good investment eventually? Or pass because the timing is so bad you would be better off without it.
Do you think unemployment numbers are less meaningful since labor participation is at an all-time low?
Think about all the baby boomers getting set to retire in the upcoming years. Technically, their numbers won't affect the unemployment rate, but they will affect the labor participation rate. Is this the new normal?
Originally posted by @Diane G.:
Exactly - I am holding cash for better buying opportunites, even though sitting and waiting is hard... But my guess that the wait wont be too long... Before we get a new president, is my guess...
For those comments in regards to slow appreciation area, true, i know nothing about those areas and my comment does not apply there... I am talking strictly of Bay Area markets....
Can you put that cash into some income-producing investments and grow it while you wait?
Private lending on rehabs and fix-and-flips maybe?
You could be right, you could be wrong. You could also be right and still lose.
What is the factor that matters in our business? Employment? Income? The stock market? Inflation? Supply? Demand? Interest rates? Leverage ratios? What the millennials are doing? What the boomers do?
We hear this song and dance about impending crashes all the time on BiggerPockets. I heard it in 2013 when I was planning to buy my first property, I heard it in 2014 when I bought, I heard it in 2015 when the first property appreciated, I heard it in 2016 when I bought again, and I hear it now coming off a recent purchase.
One day, the doomsday prophecies WILL come true. You WILL be proven right eventually. But, will that be this year? Next year? Five years? What if the correction comes in 7 years? What if the bottom of that correction has real estate prices and rents higher than where they are now? Those sitting out will be right, and still lose.
I personally prefer to adopt a strategy where I win in three scenarios:
1) I win if the market goes up. If you don't own real estate, you lose if the market continues to appreciate.
2) I win if the market goes sideways. I produce cash flow and self-manage to ensure as much profitability from my real estate business as possible if rents do not go up at all.
3) I win if the market goes down. You win if the market goes down if the following two things are true:
A) You have the personal financial position and stability in your portfolio to make it through even serious market drops, particularly in rent. This means a substantial cash cushion and substantial cash flow from existing properties.
B) The reputation to convince lenders and potentially other investors to invest alongside you when/if bargains do begin popping up. Guess what? If you own no real estate, you cannot develop this reputation. I am not investing alongside someone that owns no properties and tries to convince me that they've known all along that the crash was coming. I am investing alongside someone with years of experience and the conifdence to say "sure, I've lost some equity, but I couldn't care less, every month I achieve a 10%+ CoC return, and I'm ready to buy more now at a 20%+ CoC return!"
No one can predict when the market crash will happen, how severe it will be, or what it's effects will be. The market crash could be due to unprecedented inflation after over a decade of the Federal Reserve pumping trillions of dollars into the economy and/or a relaxed fractional reserve ratio. If that's the cause of this next crash, everyone holding cash will see the real purchasing power of their holdings decline dramatically... which in turn means that we will sure be glad to have bought real estate before the crash!
I believe the best policy is to adopt a conservative, winning formula, and apply it consistently.
I do not believe that buying now will put me in trouble.
Now, all this said, I CERTAINLY do not believe that now is the time to overextend. I buy well within my means, with a rock solid personal financial foundation and spend extremely little on my lifestyle to maintain a huge savings rate and avoid potential problems. In case you ARE right (and we are certainly at least four years closer to the next market correction than we were when I started investing) I do not want to be caught with my pants down.
But I am not staying out of the market entirely, and will buy a solid cash flowing rental property again next year to maintain my system of dollar cost averaging, regardless of the conditions.
I think while the economy is doing well, these statistics are artificially high at the moment.
Part time employment has increased a statistically significant amount since Obamacare was put into place. By requiring that full time employers provide benefits to their employees there has been a financial incentive for businesses to keep their employees part time.
If there are less hours available to an individual, other people need to come in to make up the workload which has led to more people having a job, but not necessarily a more productive economy.
Check out the graph here and go back 10 years:
https://tradingeconomics.com/united-states/part-time-employment
This is a terribly misleading statement...
If you are buying RE in today's enviroment when unemployment is 4% and interest rate is 4%, you are buying yourself trouble, in my opinion....
When you buy a property you buy a property and a local market. Unemployment rate is only one piece of the puzzle. You might be able to land a homerun deal in an 8% unemployment rate and come out like a king.... You might be able to buy in a 3% market and get slaughtered.
You have the employment rate and future prospects, are employers coming in , leaving, people coming , going.
While unemployment rate has its place in the world , to solely make an investment based up this is just plain foolish.
I would consider it as one part of an analysis but that statement i feel should be disregarded......
Since all real estate is local, the average home price and the average rent growth nationwide doesn't tell you much. What matters is the numbers in the specific market where you are looking to buy. Along the same lines, the national unemployment rate is not very useful either when deciding to buy. The job market where you are looking to buy is way more important. If the unemployment rate is 2% where you are, and companies are continuing to hire, and the jobs are not solely based on one volatile industry (e.g. oil), I don't think it matters that the unemployment rate is 8% 1000 miles away. Of course, if you think the jobs are coming back in that 8% area, then you'll probably do better buying there than in the area with 2% unemployment. But I don't think it's necessarily risky to buy when times are good, as long as you have a cushion.
If I buy a class C apartment complex that makes good cash flow at 90% occupancy, OK cash flow at 75%, and can still cover the debt service at 50% occupancy, I don't think I am buying trouble, as long as I believe a downturn will only be temporary.
Completely agree that it depends on the type of property you are looking to purchase.
If you have a lower middle class property in a good location I see no reason to fear in any market.
Rents are typically more resistant to the economy than home values. Flippers get stuck holding the bag in a downturn. Buy & hold with solid properties should hope for a recession so they can buy more - I certainly wouldn't mind one.
Timing the market has never been a good plan whether stocks, real estate, etc. Low interest rate environment is still very attractive for borrowing as long as you don't over leverage. Value add strategies will reduce your risk significantly. Conservative underwriting is vital. Buying in the strongest markets that have diversified employment and still seeing large employment move in (not a light switch, talking 2-3 years moves) and have history of resiliency is where you should be ok continuing to buy w/an exit strategy that has flexibility.
I do this exercise a lot w/investors. In the heart of the downturn (2009 seemed to be it for the market that we are in), MF delinquency was 1% while SF was 5%. That's a huge difference. We looked at market data on lowest avg occupancy in one of the submarkets we were in and it hit 85% in 2009 as the very low point while our sensitivity model showed we can make money at 80% and B/E at 75%...and this was a pretty deep recession. Now, if we were forcing a sale to happen then it probably would not have worked out for investors, but we can still pay the bills and wait the market out. If your model can't wait the market out, those are the folks that get hurt in down times.
Originally posted by @Diane G.:
Exactly - I am holding cash for better buying opportunites, even though sitting and waiting is hard... But my guess that the wait wont be too long... Before we get a new president, is my guess...
For those comments in regards to slow appreciation area, true, i know nothing about those areas and my comment does not apply there... I am talking strictly of Bay Area markets....
I took my measly bay area down payment money and bought OOS... Right now it's just equity/high cash flow but I could just as easily refi it out. I'm using it as a savings account that pays me a monthly check... granted I could get screwed and not be able to refi out if things got bad really fast.
@Diane G. I disagree with your analysis of the data for two reasons.
One correlation does not mean causality, especially when using macro data to make prediction of an asset class that mainly derives its value from local conditions.
Second, and bear with me on this one, You said "If you are buying RE in today's environment when unemployment is 4% and interest rate is 4%, you are buying yourself trouble, in my opinion...." Ok, so we have low unemployment, which is usually seen as a sign that the economy is doing well, and a historically low prime rate. If we can substitute prime rate for inflation for a moment, since the fed uses that rate as a tool of monetary policy to control inflation, we have low inflation. If inflation is to many dollars chasing too few goods, than low inflation means that the dollars and goods are close to being at equilibrium or a not so health economy; at least one where people are not spending their money.
Two indicators that tell us two different things. Huh? The short run Phillips Curve says lower unemployment means higher inflation and in order to curb inflation, the fed raises the prime rate. That isn't what we are seeing. What we have is low unemployment and low inflation, or the opposite of the stagflation from the 1970's. What is going on? Welcome to a world near-zero.
Stopping all this nerd talk and asking the real question: Will a large correction occur that drastically impacts the price of RE? No.
Lots of people have hindsight bias exacerbated by a misunderstanding of the 2008 Financial Crisis that drive them to expect when RE prices get to high the bottom drops out everywhere. 2008 was a credit bubble that drove a Real Estate bubble. In 2017 if prices are rising in your area that's inflation at work again and its impacts will be limited to your MSA.
Statements like this pretend that the United States (I assume we are talking about the US) is a homogeneous market. I know the OP clarified she was talking about the SF market, and that might be right out there. The only thing I can say is that my market has been a slow and steady ship for the 25 years I've been here, without any crazy highs or lows. I would suspect my experience mirrors most of the US, but the places that get airplay are Vegas, Phoenix, FLA, Cali, etc - places that experience a lot of change and upheaval all the time.
