It's Feeling a Lot Like 2007

[Dylan Mathias]

Hi All, 

Wanted to start a discussion on peoples outlook on the real estate market and the economy in general. I know it is a controversial topic but I have not seen many discussions on BiggerPocket on this topic and I believe they are important conversations to have. 

Here are my general thoughts on the topic. 

Economies always go through cycles and we are coming up on the longest bull market era in history. If history is any indication of the future their have always been corrections or crashes every 8-10 years. 

Data

1. Interest rates are rising and the yield curve is flattening a tell tale sign of future growth expectations are declining

2. Corporations are turning to stock buybacks because they cannot find internal or M&A returns that can get a high enough return. Once buybacks are done will corporations begin to "restructure" or contract leading to layoffs and the downward spiral of layoff, people not buying as many goods and services leading to more layoffs. 

3. Inflation is another worry when prices begin to increase at a higher rate after almost a century of 2% inflation people are going to be inclined to buy less leading to the ugly spiral as well. 

4. In the stock market is extremely over prices with PE ratios being the highest they have ever been.

5. Housing prices especially in California have increase much more rapidly then wage increases and I do not see this as a sustainable recipe.

There are many other factors and coming from an analytical background i know there are ways to spin the numbers to make it look any way you want. 

I cannot time the market and nor do I think anyone can but I am writing this post to get others perspectives about where we are and what they think of the future outlook of the economy. With the ways things are, my guess is there will be at least a big correction in 2019 or 2020 but I could be way off as well. 

I would like to get peoples opinions on both sides. I am not someone stuck in my ways and truly believe that debating with someone that has complete opposite views is the best way to learn in life. 

[Jason Graves]

@Dylan Mathias I have been a real estate investors in San Diego for 25 yRS. My guess is we’re close to the top. I bought inn09,10 and 2011 and Just sold 2 condos in San Diego and 1031 (traded) into 3 buildings 26 units in Kansas City MO. My CashFlow increased from $2k to $8 so I’m banking cash for next 5 yrs. I would would be very carful buying in calif now

[Jay Hinrichs]

Originally posted by @Tristan Colborg:

@Jay Hinrichs So Jay are you saying that you rather see someone not get into real estate at all, or for a longer period of time if it means they would have to use a heloc on their primary residence to do so? That's the point I'm at currently. I have about $25k in savings that I plan to use as reserve funds on any rental property I purchase, but was planning on using some of the $100k in equity from my primary residence to get started. Now I'm not looking to just buy property to buy it, and anything I'm looking at I'm making sure it cash flows at 100 percent financed. But I feel like if I didn't use this strategy it would be a lot longer of a road before I could purchase my first property.

I cant say what to do or not to do..  what I would not do though is cash out prime CA equity to invest in D class high risk properties NO matter where they are in the US..  

[Dylan Mathias]

@Jason Graves

Hi Jason. 

I just moved from SD. Where did you invest there?

[John W.]

Serious question...Can anyone explain why Peter Schiff is wrong, and that the US dollar will not tank? And lets say the dollar does tank, what does that mean for the value of our rentals?

[Troy Williams]

i often wonder if topics like this actually help contribute to a downward sentiment.

[Andrey Y.]

Originally posted by @Jay Hinrichs:

Originally posted by @Tristan Colborg:

@Jay Hinrichs So Jay are you saying that you rather see someone not get into real estate at all, or for a longer period of time if it means they would have to use a heloc on their primary residence to do so? That's the point I'm at currently. I have about $25k in savings that I plan to use as reserve funds on any rental property I purchase, but was planning on using some of the $100k in equity from my primary residence to get started. Now I'm not looking to just buy property to buy it, and anything I'm looking at I'm making sure it cash flows at 100 percent financed. But I feel like if I didn't use this strategy it would be a lot longer of a road before I could purchase my first property.

I cant say what to do or not to do..  what I would not do though is cash out prime CA equity to invest in D class high risk properties NO matter where they are in the US..  

 You mean like the guy who posted right above you did? ;)

[Ken Maddis]

Originally posted by @Troy Williams:

i often wonder if topics like this actually help contribute to a downward sentiment.

 As FDR said, the only thing we have to fear is fear itself. I often wonder how much fear plays a part in the minds of consumers when the media starts sensationalizing a potential downward spiral. 

[Nancy Zhao]

Originally posted by @John W.:

Serious question...Can anyone explain why Peter Schiff is wrong, and that the US dollar will not tank?

And lets say the dollar does tank, what does that mean for the value of our rentals?

Peter Schiff is at best a fool and at worst a malicious troll exploiting people's fears to sell his newsletter. He's been doing essentially the same song and dance for decades, here he is in 2002 claiming the Nasdaq will soon reach 500.

https://www.youtube.com/watch?v=rhJaVEWAG24

Needless to say, the nq did not reach 500, nor did the US dollar collapse, nor did all commodities undergo massive price inflation, nor did we experience hyperinflation. If you invested according to Peter Schiff's recommendations, you'd have shorted the stock market in 2002 and gone bankrupt twenty times over during the bull market. Even more hilariously, when the market collapsed in 2008, Schiff's bear fund...lost tons of money. 

Of course, Schiff loses money for his clients during bull markets as well. Here is his primary gold fund, which has lost 25% of its value since its inception in 2013 while the stock market rallied over 50%. Schiff's ability to lose his clients money is actually quite impressive, I don't think I've ever seen anybody lose money during both bull and bear markets. If you had just put your money under a mattress for the past 20 years you'd have done much better than anything Peter Schiff has ever touched.

[Danny Webber]

We are due for a correction based on the values that are not sustainable/interest rate hikes. The danger is a worldwide correction (Australia, China, Japan, US +).

This could trigger a plethora of negative things including currency devaluations, bank runs, more trade wars, more populism, etc

Peter Schiff- You cannot argue with the logic or facts he presents unless you can. If so, I would love to see them. What you can argue with is his timing. The govt has been artificially stimulating the economy through QE for a long time. Eventually our treasuries and bonds will not be able to be sold to central banks. Pity the day the central banks stop buying our paper....

Russia and Turkey both just sold a lot of their US debt. We all need to pray other countries do not follow suit or that could lead to a devaluation of the debt at current value which leads to other things we dare not talk about.....(scary)

I am not a contrarian or alarmist but the facts are the facts.... The US is on a ride that will end some day in a major way.

We cannot keep printing money to pay for the costs of the money already printed and sold via bonds/treasuries if the value of our currency moves down without printing tons more money which in itself will devalue the currency... Circular logic... I am too uneducated to side with Monetarist, Keynesian or laissez-faire theorist. My gut tells me to let things develop how they develop without the govt interfering so that makes me more of a LF Theorist i suppose.

Slippery slope... we are unfortunately already on.

My opinion. FYI- i love intelligent debate on economics

EXCUSE TYPOS/GRAMMAR

Danny

[Mark Nickoson]

Hey I'm just jumping in this thread.  I've watched Peter Schiff for years and though I find him interesting and even compelling in his reasoning, making market decisions based on his recommendations doesn't work.  I once owned an international gold fund based on a speculation of a falling U.S. dollar.  What I didn't understand is all the other world currencies could effect my stock.  I ended up getting out for close to what I got in for, but I learned that each country has investors that are looking for returns and that international money sloshes around in search of good returns.  You might have some investors from Norway who have enjoyed a 25% return from their stock market over the last 12 month decide that they want to move their money into the U.S. housing market so higher and higher it goes.  We can't tell when a bubble may burst.

[Jack Bobeck]

All real estate is local. Forget what the press and CNBC are throwing out there in California or Oregon or Washington, unless you live there. Ceilings and Bubbles, forget all that stuff if you live in Indiana, Ohio, Pennsylvania, Tennessee, Georgia, Florida. Pay attention to your own market. Get to know your local MLS and ITS data. At the end of the day, the only thing that matters is YOUR local data.

California led the nation up, and will lead it down. Real estate, as we all know, is cyclical.  Properties we bought in 2009 should be the ones we look to sell now or roll up into new projects. There will always be new houses, new foreclosures, new short sales, they are all there in your local market, harder to find now, but still there. 

Do your research, find your markets you want to invest in, and then build a plan. The only ceiling and bubble for you in your real estate is between your ears, so forget it and move on. Don't let the media hype keep you out of real estate, you could be missing your next great deal. 

[George Cavazos]

Originally posted by @Allyson Edwards:

Hi Everyone,

Im reading this thread and learning a lot. I have 2 SFR rentals myself and have not gone much further than that because I have not felt comfortable with the market lately. Ive just been watching, reading and researching. I am in SoCal so that in of itself is another reason I am patient. In reading all these comments I feel a bit better knowing I AM being patient. My question to all the seasoned investors is this,

Can you tell me what common Real Estate indicators I should be following, to know, "ok, we are officially in a downturn, correction, crash". I'll probably know a "crash" but for more subtle corrections what indexes, graphs, news, media should I be looking at and reading (ie) CPI, Wallstreet Journal, MLS inventory, Or maybe I shouldn't look at media at all? I don't know, what I do know is that I use my intuition a lot in Real Estate and so far Ive been ok. Could it be that this is all I need to use?

Any advice is greatly appreciated, thank you for starting this conversation, just because its come up multiple times before doesn't mean we all can't stand to learn a little more and contemplate on it again. It can only improve awareness.

~Ally

 I might be able to help you with that. While I was searching for real estate podcasts, I saw something called Unlisted with Brad Inman podcast.

It only has a few episodes and I haven't listened to it but the description of it caught my interest. It's a guy who looks at trends and issues that could affect the real estate market. He is someone who looks at it from a high level above.

He is featured on another podcast (Real Estate Agent Marketing: How to be an Informed realtor w/ Brad Inman) in which they say in the 90s he was this guy who spoke out against a realtor scam and has been trying to help realtors ever since.

I checked out his website and it looks like a bunch of good real estate news articles at inman.com 

He doesn't do the podcast anymore. It looks like he tried it out but spends all his time on market analysis and news stories with real estate.

Other than that I have always found WSJ to be relatively unbiased, informative, and focused on the right areas for news.

I just recently got an app called Economist Expresso and it gives you a headline with one or two paragraphs giving some details on economy related news. For me it's been a great way to quickly check important things while not spending too much time going through news articles.

Originally posted by @John W.:

Serious question...Can anyone explain why Peter Schiff is wrong, and that the US dollar will not tank?

And lets say the dollar does tank, what does that mean for the value of our rentals?

I'm a fan but I won't say he's 100% correct. I lean towards his view but from.everything I watch I can tell you what his opponents generally say.

He has been negative against the market for a very long time now. At least for a few years before the crash that started in 2007.

So most economists are against him because they are taught a different School of thought. When he makes an argument, the economist doesn't understand him because they are operating under different economic rules. And when they make an argument, it doesn't make sense to him because he is operating under different rules.

So mainstream economist believe that aggregate demand is the driving force for the economy. Basically if you keep consuming then you drive the economy up. Peter's view is that if you keep producing then people will consume. So he says everything is bad because we don't produce anymore and are a nation of consumers.

He is very doomsday like but it's what got me motivated to learn more about money and investing. I appreciate him but it is very tiring to hear the same thing. Hell, maybe mainstream economics is right but I still lean towards the idea that producing a lot more than you consume is much healthier for an economy.

[Ian Walsh]

We are closer to a top than a bottom.

[Ali Hashemi]

My short summary is this:

Politics aside, the current policies are a form of stimulus. However, this time it’s different because future government revenues are being traded for immediate economic boosts. 

Reducing corporate governance & taxes. Huge short term boost at the expense of future stability. 

EPA oversight reduction: huge short term burst at expense of future stability. 

Tariffs: short term gains for domestic manufacturing but ultimates encourages foreign countries to be less dependent on the US which is bad long term. 

Commodities (esp Copper) dropping is good for companies in short term but ultimately means future demand is low (bad thing). 

Doubling standard deduction (good short term) but discourages home buying - bad longer term. 

All these things are why economists and investors are concerned. Short term effects are amazing. Love it. But long term effects are very negative. 

The only way this works is if the short term gains are reinvested wisely. As we see with people scooping up D properties, & Corp buybacks versus wage growth, people & companies are using the short term gains in less than ideal ways. 

If it continues then in 10-12 months there will be a pull back in the market. 

Investing 101 - buy & sell when others aren’t. Right now everyone’s buying but the good investors are changing from bull to neutral. 

[Jim Edmonds]

Originally posted by @George Cavazos:

I found my way to these forums from Joe Rogan's podcast.

One day he was interviewing Peter Schiff who pretty gave me my first lesson in economics. I've had the class in high school but it was of no interest to me. But when this guy comes on the podcast saying how the economy will crash, it made a lot of sense to me.

I ended up buying his book that explains how an economy works. I learned that there are competing theories on how economies work which are our mainstream Keynesian versus Peter's Austrian theory. From there I learned more about how to save money, investing in stocks, and finally investing in real estate.

Even Alan Greenspan admitted his ideology was flawed and he was the main finance guy for the U.S. government. I live in Miami and most people I know do not make a lot of money. People work and can barely pay for their rent down here. I know someone who has a master's degree and gets paid $13 an hour.

The only job that you can get into relatively easily without having a lot of money is being professional in the medical field. They are the only ones who can afford anything. But I think there will be another bubble, and the question is how big will the burst be and how much it will affect?

If you follow Peter Schiff's reasoning, he believes it's going to be massive. That there will be a currency crisis and there will be many kinds of bubbles popping from real estate, student loans, and the healthcare field. Now on his podcasts he kind of "covers" himself by saying he "believes" and "if I'm right" so he isn't 100% on the line.

But I do agree that just because we currently have been the global world standard for currency reserve with our U.S. dollar, doesn't mean we're permanently going to be like that. With China's PPP already outpacing us and their GDP to outdo us not too long from now and their much better debt to GDP ratio, it does not sound crazy to me that one day we aren't going to be the big guys in the world anymore with everyone trading in U.S. dollars.

These thoughts did go pretty meta and look at things far above and outside the American real estate market, but if we have another crash then people may start thinking about putting their faith into another currency that isn't American and this would definitely affect the real estate market here.

Man, I just joined this forum today as I'm learning real estate investing but when I saw this topic, this is something that has been on my mind for a few weeks now. So, this is my viewpoint on that matter so far. But I'm still trying to learn a lot and I've been learning accounting and economics to try to figure out what is good info and bad info.

For the record, people like Schiff have been predicting doom & gloom for years. I remember watching Schiff in 2011/12 where he predicted imminent hyperinflation & collapse. His strategy to maintain wealth: buy gold in 2012 for record prices. The US is still the strongest country globally. The China threat is overblown IMO, like when the USSR was guaranteed to overtake the US in the 60's. China is solely dependent on US imports and if we start making our own manufactured goods falls out their entire country will fall apart. 

Compared to 2008 (at least in my region) there isn't wild speculation and massive homes being built that no one could afford. It's the opposite really, home starts are much lower than demand because of building prices so there's a strain on existing inventory (real demand, not speculative). 

[John M.]

Originally posted by @John W.:

Serious question...Can anyone explain why Peter Schiff is wrong, and that the US dollar will not tank?

And lets say the dollar does tank, what does that mean for the value of our rentals?

I gave my opinion on this earlier in this thread.  He's assuming that the in the next economic slowdown that the Fed will reduce rates back towards zero again (which I would probably agree with) but he thinks investors will sell the dollar when they realize the Fed can't normalize interest rates.  He's assuming they don't already know this like it's not apparent.  Anyone can see with interest rates where they are now, they haven't been able to normalize and the dollar hasn't crashed.  If anything the dollar has been rallying this year.  

I think Peter Schiff makes some very good arguments.  Where I think he's wrong is every problem doesn't just have one extreme outcome, and his worldview is based on extremes.  Extremists can sell lots of books, however.

[Justin McFarland]

Originally posted by @Aaron Taylor:

Originally posted by @Justin McFarland:

@Aaron Taylor Federal Housing Administration (FHA) loans were created to promote homeownership. These loans have lower down payment requirements and more liberal underwriting standards than most conventional mortgages. Because of their stated purpose, FHA loans are, for the most part, restricted to buyers who intend to occupy the houses they are purchasing. An FHA loan typically cannot be used to finance a second home, a rental home, a vacation home or investment property. However, there are a few exceptions to the general rule.

People are not going out and buying investment properties with a FHA loan in mass. While there Is little equity it is also there primary residence and without this option most people could never afford the down payment.

Read more: Can FHA loans be used for investment property? | Investopedia https://www.investopedia.com/ask/answers/112515/can-fha-loans-be-used-investment-property.asp#ixzz5OgHoTez8 Follow us: Investopedia on Facebook

 Oh I totally understand that, the one post just mentioned that we aren't overleveraged and I was just pointing out that 25% to 40% of the loans made today are at a high leverage point.    Not that it means anything other than maybe people are being stretched a little thin possibly, and if housing dropped you could have a large number of homes under water mortgage wise. 

 I didn’t see your percentage of the loans. I agree with you on that. Worst case scenario there are an increase in foreclosures or uptake in note repurchasing. Both cases can be capitalized on.

[John W.]

Thanks for the input everyone. @Ali Hashemi @George Cavazos @Mark Nickoson @Danny Webber @Nancy Zhao and everyone else
I am trying to learn and plan for the future/invest wisely. 
I agree that trying to time the market is futile, but based on what I see I can't help but agree with the overall message, that our economy is artificially propped up and the way it is is not sustainable. If that is true, what's the best way to invest? 
I thought real estate was a pretty good bet. But if the dollar does eventually weaken, maybe they aren't the best bet long term. 

[Jay Hinrichs]

Originally posted by @Ian Walsh:

We are closer to a top than a bottom.

 Ian we all know the bottom was 09 to 2011 in 90% of the markets you have other areas of the market were the top was in the 80s and they never recovered until now .. were you at least see some stabilization.

at least and as others have stated all real estate Is local.. but in our market our values run has basically run.. we see a leveling off and that's fine..  the listings that we see where they drop price are those that tried to go yet higher again this year and the market is saying NO so we see some price drops..   So I agree we are most definitely close to a top or a level off in many west coast markets.  Silicon Valley does not count … the economic factors there are no germane to the rest of the country. 

[Ian Walsh]

Yup.  I just post the obvious statement when this question usually comes up.  

[Karl Hinkel]

Originally posted by @George Cavazos:

I found my way to these forums from Joe Rogan's podcast.

One day he was interviewing Peter Schiff who pretty gave me my first lesson in economics. I've had the class in high school but it was of no interest to me. But when this guy comes on the podcast saying how the economy will crash, it made a lot of sense to me.

I ended up buying his book that explains how an economy works. I learned that there are competing theories on how economies work which are our mainstream Keynesian versus Peter's Austrian theory. From there I learned more about how to save money, investing in stocks, and finally investing in real estate.

Even Alan Greenspan admitted his ideology was flawed and he was the main finance guy for the U.S. government. I live in Miami and most people I know do not make a lot of money. People work and can barely pay for their rent down here. I know someone who has a master's degree and gets paid $13 an hour.

The only job that you can get into relatively easily without having a lot of money is being professional in the medical field. They are the only ones who can afford anything. But I think there will be another bubble, and the question is how big will the burst be and how much it will affect?

If you follow Peter Schiff's reasoning, he believes it's going to be massive. That there will be a currency crisis and there will be many kinds of bubbles popping from real estate, student loans, and the healthcare field. Now on his podcasts he kind of "covers" himself by saying he "believes" and "if I'm right" so he isn't 100% on the line.

But I do agree that just because we currently have been the global world standard for currency reserve with our U.S. dollar, doesn't mean we're permanently going to be like that. With China's PPP already outpacing us and their GDP to outdo us not too long from now and their much better debt to GDP ratio, it does not sound crazy to me that one day we aren't going to be the big guys in the world anymore with everyone trading in U.S. dollars.

These thoughts did go pretty meta and look at things far above and outside the American real estate market, but if we have another crash then people may start thinking about putting their faith into another currency that isn't American and this would definitely affect the real estate market here.

Man, I just joined this forum today as I'm learning real estate investing but when I saw this topic, this is something that has been on my mind for a few weeks now. So, this is my viewpoint on that matter so far. But I'm still trying to learn a lot and I've been learning accounting and economics to try to figure out what is good info and bad info.

 Hi George, I also listened to the podcast. I think that everything that he said is very relevant and important to consider when evaluating the economy. He is a very intelligent person and I think that while he is guaranteeing a crash in the next 2 years essentially I would be wary of this. I personally listened to this podcast and thought that it is a great time to set the bearings for mitigating risk - not betting against the house. I am not sure if you are familiar with Ray Dalio, in his book "Principles" he talks about his experience in 1982 where he very publicly predicted that the economy was destined to fail in a few short years at the latest and that it would be a depression that could potentially be worse than 1938. 

With the fundamentals of the economy it only made sense that the economy would have a recession. This was not the case and the economy saw an 18 year bull market. He nearly bankrupt his whole company betting against the US and Global Economy. This inspired him to focus on mitigating risk. 

Really enjoyed Peter Schiff's take and prediction on the economy. I see it as an opportunity to mitigate risk, not to bet against the house. Be wary of people who can predict with 100% certainty an event such as a major global economic collapse. 

[Todd Dexheimer]

@Dylan Mathias

This topic is posted every month or 2 on BP. Corrections in RE happen every 16-18 years, not every 8-10. RE is also local, so just because California or Florida crash, doesn't mean Arizona or Michigan crash. 

A few other points: 

1. Rising interest rates typically mean inflation, which means rising home prices. Some may argue that rising rates mean the prices will go down, but historical facts tell us otherwise. 

2. Prices have not gone up faster than wages if you look back more than just a few years. We had a big crash so naturally prices have came up a lot from that low spot, but if you measure from 2006 house prices to today's house prices vs the increase in income, you will see that income has gone up faster that house pricing

3. Lending standards are still rigid compared to the pre-crash era

I do think that the stock market is over-priced and ready for a correction, which may trickle down to a small real estate correction, like we saw in the early 2000's, but overall, I would say we are in good shape for the next few years. 

There are of course outside and political factors that could change the trajectory on all of this. 

[Ali Hashemi]

Originally posted by @John W.:

Thanks for the input everyone. @Ali Hashemi @George Cavazos @Mark Nickoson @Danny Webber @Nancy Zhao and everyone else
I am trying to learn and plan for the future/invest wisely. 
I agree that trying to time the market is futile, but based on what I see I can't help but agree with the overall message, that our economy is artificially propped up and the way it is is not sustainable. If that is true, what's the best way to invest? 
I thought real estate was a pretty good bet. But if the dollar does eventually weaken, maybe they aren't the best bet long term. 

 The way I see it @John W. , is there are always opportunities - what changes is an investors risk tolerance. As others get more risk tolerant, the smart investor becomes more adverse. So do what Buffett does and invest on value as opposed to trends. Just because a certain neighborhood has been on a long upswing don't invest on the assumption that the upswing will continue. Invest if the value is there - ie distressed property, strong renters etc. Not a matter of invest or not... it's a matter of higher level of scrutiny / higher standards.

[DJ Dawson]

Richmond, CA is DYING for development, and with that location? that can be a HUGE return. Good luck

[JD Martin]

Originally posted by @Jay Hinrichs:

nice post.... and I high light APPRECIATING markets  and LONG TERM  … if its the rental game I like that and pay down your debt.. you retire when your rentals are paid for .. you get a huge increase in income and off into the sunset you go.. without having to own so many units that is a J O B unless you want it to be.. some people are very pleased to live the life of a landlord.. I see many hubby and wife teams in the mid west do this..  Wife is the leasing agent and hubby is the handy man .. they pay cash for low value assets they know they are not really going to go up much.. but they have no debt and they collect a few a year end of a 20 year run they own 30 to 40 free and clear making a nice living especially if they are in a small rural mid western town..  

 Hey! You're giving away my retirement secrets :D  . Seriously, that's more or less my situation. We bought a bunch of old homes, where we live (a growing population area in a college town) for cash, rehabbed them, and rented them out. It's not the 100 doors model I see people raving about but it's manageable and you barely notice you have them. It's a fairly simple existence but coupled with some other streams of income a pretty good one, and stable at that - when you own a house outright you don't worry too much about having to pay the mortgage on that house.