Buying & Selling Real Estate
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback
Updated over 5 years ago, 09/03/2019
It's Feeling a Lot Like 2007
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.
Originally posted by @Jay Hinrichs:
Originally posted by @John M.:
@Dylan Mathias Good deal, it sounds like you have a good grasp of how leverage works and not all investors do which I find a little disturbing, lol. I agree with you about not leveraging yourself up at this point in the cycle. The more people I see doing cash out refi's of 90% or more of equity, or doing HLOC's etc to turn around and put the minimum down on buying more properties that barely cash flow at this point in the cycle seems crazy to me. Especially if they are leveraging equity in their primary residence.
I understand the FOMO mentality that lots of investors especially newbies seem to have right now, but that may come back to bite them in the a$$ if they don't understand the risks. I am all for risk taking but I am not in a hurry to go from 2 doors to 100 doors in 12 months so I would rather take my time and save up a good chunk of cash between deals since I like to have more than 25% to put down and have reserve left over for cap ex or other expenses. If I can't do another deal for a year and a half or two years so be it. I don't know who said it but real estate is a get rich slow scheme.
I was at a private conference and the speaker was coining the term " refi till you die" I just cringed... I think just the opposite get out of debt as fast as possible.. especially in low value areas were your buying rentals at the 2 to 3% rule.. those you want paid for and let them sit .. putting big debt on properties that don't really move much in value to me is dangerous.. And its like anytime a thread comes on BP about should I take equity out of my house to buy rentals.. 90% get on here and say your crazy not to its dead money blah blah blah. to me NO way your home is your home get that paid for.. and leave it paid for.. but I know I am in the vast minority.
Jay im gonna take all the great advice
You give on BP and the podcast episode you did and compile it into an ebook for millenials amd newbies lol.
Probably you and @Steve Vaughan are most similar to me in terms of opinion on leverage and areas to buy in. We’re from 3 different generations though
Originally posted by @John M.:
Originally posted by @Caleb Heimsoth:
These threads are generally useless in that it creates fear mongering and what not.
I didn't get the impression that the OP was fear mongering.
Just my opinion but I personally think a thread like this with rational, well reasoned discussion can help educate people (especially newbies) that the market doesn't go up forever and buying and selling cycles are natural. You made some good points in your post so maybe someone would read this and decide maybe it's not the best time to go all in on crappy apartments you were referring to, and that could avoid them some major financial pain in the future?
I’m not saying the OP is fear mongering I’m just saying these threads Usually end up there. Main point is don’t buy crappy apartments and don’t over leverage or try to time the market.
Originally posted by @Caleb Heimsoth:
I’m not saying the OP is fear mongering I’m just saying these threads Usually end up there. Main point is don’t buy crappy apartments and don’t over leverage or try to time the market.
Gotcha. And I second your thoughts on not buying crappy apartments. Crap is crap :)
Originally posted by @Jay Hinrichs:
I couldn't agree more Jay - I am not a huge fan of debt myself, I use it very conservatively since I can't avoid it, and eventually I want my properties debt free. Not everyone agrees with me and I am fine with that, I think Dave Ramsey is a bit extreme but on the other hand there's something to be said for knowing that even in bad times you'll ride it out and survive to prosper again when the tide shifts.
BTW saw your past BP podcast recently and enjoyed it very much!
IDK could be 2007 but IMO it is not the same as before. Even if it was it might just be a speed bump according to this chart.
Originally posted by @Tami R.:
Hi Tami,
I agree times like 2008 is devastating for people but i might be a hard *** when saying this but you can't fix stupid. When you have people buying million dollar single family homes on an average salary it just makes me not feel as bad when they loose the house if things hit the fan. I feel for these people but when you try and educate them and they don't care to learn it is harder to feel sorry for them when they loose their home similar to 2008 ect.
Yeah I agree with you. No one can predict the market. The point I am trying to wrestle with is I want to get into real estate but in the Bay Area, CA you are dealing with extremely high prices. Sonoma county is around 690K for medium housing price and San Francisco which is around 1.6 million for a medium price house.
For me personally I worked all throughout college and was able to save up money. I am 24 with no student loans, a decent amount saved up for my age and an okay grasp on the real estate industry.
What I am having a hard time with is if I jump in right now and there is a 40% correction I will have extended myself to get such a high priced house right now I will not be able to take advantage of the correction. On the other hand if there is no correction and prices keep going up I am just in a worse spot.
Just trying to get an idea of what people are thinking because it is a hard decision on what to do.
Amy Elder Berkshire Hathaway HomeServices Arizona Properties
28190 North Alma School Road Suite 111 Scottsdale, AZ 85262
Originally posted by @Dylan Mathias:
Yeah I agree with you. No one can predict the market. The point I am trying to wrestle with is I want to get into real estate but in the Bay Area, CA you are dealing with extremely high prices. Sonoma county is around 690K for medium housing price and San Francisco which is around 1.6 million for a medium price house.
For me personally I worked all throughout college and was able to save up money. I am 24 with no student loans, a decent amount saved up for my age and an okay grasp on the real estate industry.
What I am having a hard time with is if I jump in right now and there is a 40% correction I will have extended myself to get such a high priced house right now I will not be able to take advantage of the correction. On the other hand if there is no correction and prices keep going up I am just in a worse spot.
Just trying to get an idea of what people are thinking because it is a hard decision on what to do.
We’re also about the same age. All my rentals are out of state. I live in expensive areas too just not like SF. I will buy out of state probably almost exclusively as it’s just easier. For someone In your shoes I think that’s a no brainer.
Also in the last crash your area dipped 27 percent so not sure why you think it would drop 40 percent.
Feel free to message me if you want to chat about it more. I did a recent sort of mini blog post on another forum that shows the rough timeline and numbers for all my deals. You should be able to find that on my profile
Jay I totally agree with you and I think you bring great inside and knowledge to these forums. THANK YOU!!!. I also think it depends on many factors (age, risk tolerance, where in the economic cycle etc.). For example for myself if there were great opportunities in the market like 2009 and after I would be much more inclined to leverage myself out investing in good areas. Once I get older I would not be as risky as well as in times like these, I would be weary about over leveraging.
#1 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
- 62,231
- Votes |
- 42,325
- Posts
#1 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
Originally posted by @Dylan Mathias:
Originally posted by @Tami R.:
Hi Tami,
I agree times like 2008 is devastating for people but i might be a hard *** when saying this but you can't fix stupid. When you have people buying million dollar single family homes on an average salary it just makes me not feel as bad when they loose the house if things hit the fan. I feel for these people but when you try and educate them and they don't care to learn it is harder to feel sorry for them when they loose their home similar to 2008 ect.
people lose their homes in all markets by best years buying courthouse steps were 2004.. 2005.... and then again in Atl. in 2012 2013 before the hedgefunds jumped in and booted us little guys to the curb..
also many of the higher end stuff that people lost in the 08 2011 was people speculating on higher end homes.. think Vegas FLA PHX
when they could not sell them .. and could not rent them to come anywhere near their mortgage payment they walked.. you cant buy a million dollar home now without putting a decent down payment and pretty much owner occupying.. so the only reason anyone loses a million dollar home today .. the normal reasons they lose homes in any market 1. job lose 2 Divorce 3. death 4 . illness 5. plain old American mismanagement of credit IE spend more than they make .. and not following Dave Ramsey.. so a lot of those higher end foreclosures in those days as well were what they called strategic.. Homeowners could make the payments but values dropped they were underwater and they just decided it was better to stop paying and trade bad credit score for the ability to live for free for a time and sometimes they made it 2 to 5 years for free.. this Is what happened in Central CA and the inland empire PHX and Vegas and FLA a bunch !!! And those markets a lot of this was because new construction came to a halt. subs left in droves and folks with rentals also lost those properties I had clients lose a bunch of their 4 plexs in PHX because they went 100% vacant.. same with Vegas.. who are your renters in those areas a lot are in the trades.
- Jay Hinrichs
- Podcast Guest on Show #222
This market would need to run 4 more years to be the longest bull market. (1987 to 2000).
The run could end tomorrow, or it could last 10 more years or more. At some point in the future there will be 10 more bull markets longer than tha 87 to 2000 one.
Trying to predict when this market ends is a fools errands. The problen is with 300 million fools in the countey, some will be right by share chance of luck. The problem is the lucky think they are geniuses.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”— Peter Lynch
- Russell Brazil
- [email protected]
- (301) 893-4635
- Podcast Guest on Show #192
#1 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
- 62,231
- Votes |
- 42,325
- Posts
#1 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
@Russell Brazil Russell I also feel that you cant start this run in 08... to me 08 to 2012 was its own separate cycle and that we did not really start to rebound until 2012 to 2103.. so in my mind and it could be very diluted thinking as I am no economist or expert in high finance .. but it seems to me we are 5 or 6 years into a 10 year cycle.. it took in my mind from starting in FLA in 07 ish to 2012 to 2013 just to flush through the hangover inventory reset capital markets un thaw credit and get back into business.. again just my thoughts on the matter.. I have nothing to point this to other than all how I feel about it..
We are definitely seeing prices level off and that is a GOOD thing.. And in my world were I have to work backwards to see what we can pay for dirt.. those that have their dirt priced sky high its just sitting so you just wait them out a bit they start to drop and then you can buy at a price point we can still maintain our margins.. AS we are not competing against the average US buyer who can buy a home with 25k in their jeans or a rental.. those are the folks that can cause a run up .. and you know run up is hey I was paying 50k for that 800 rent last year now its 55k to us on the coast and probably you in your market those kind of moves are meaningless.. but to someone who lives and works there they see it as prices have skyrocketed LOL they went up 10% or 20%... but the dollars are already so small..
@Dennis M. Also I got curious on Erie I had heard of it of course only because of the Erie canal as a kid 50 years ago. But it seems it the 4th largest city in PA I thought it was one of those little cities in the middle of the state with maybe 15k people .. but I see on line that median price is 83k.. with median rent about 900. so pretty good numbers.. so I suspect you guys get some of those 20 to 30k deals and rent for 900.. and your spoiled rotten on your cash flow..
- Jay Hinrichs
- Podcast Guest on Show #222
Originally posted by @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.
I think the problem with going down a check list of "signs of impending recession" is just as often these signals turn out to be false. Take the flattening(not inverted) yield curve for example, half the time they do predict a recession and the other half nothing happens, that's before we consider the massive distortions central bank policies have had on the yield curve. The Fed today is actively manipulating the short vs long term bond rates, something it has never done in the past. Plus even with an inverted yield curve it took an average of 24-30 months before a recession actually occurred, are you willing to sit out this market for 2-3 years?
The same goes for the other items on your list. Corporate profits are strong, the buybacks are largely driven by tax policy and low yields. Stock market PE ratios are high, but stock market corrections do not necessarily trigger economic recessions and especially not housing market corrections. During the dotcom bubble in 1999 the S&P reached a PE ratio of 34 and the stock market crashed in early 2000, yet it did not trigger a significant economic recession until 9/11(and that recession was still short lived) during which the housing market kept accelerating. You wouldn't be able to tell there was a recession at all during the early 2000s by looking at housing prices.
I don't know when the next market correction will be, but I know it won't be anything like the last one. The more people talk about impending doom, the less likely I think it will happen.
#5 General Landlording & Rental Properties Contributor
- Rental Property Investor
- Erie, pa
- 9,406
- Votes |
- 6,023
- Posts
#5 General Landlording & Rental Properties Contributor
- Rental Property Investor
- Erie, pa
Originally posted by @Jay Hinrichs:
@Russell Brazil Russell I also feel that you cant start this run in 08... to me 08 to 2012 was its own separate cycle and that we did not really start to rebound until 2012 to 2103.. so in my mind and it could be very diluted thinking as I am no economist or expert in high finance .. but it seems to me we are 5 or 6 years into a 10 year cycle.. it took in my mind from starting in FLA in 07 ish to 2012 to 2013 just to flush through the hangover inventory reset capital markets un thaw credit and get back into business.. again just my thoughts on the matter.. I have nothing to point this to other than all how I feel about it..
We are definitely seeing prices level off and that is a GOOD thing.. And in my world were I have to work backwards to see what we can pay for dirt.. those that have their dirt priced sky high its just sitting so you just wait them out a bit they start to drop and then you can buy at a price point we can still maintain our margins.. AS we are not competing against the average US buyer who can buy a home with 25k in their jeans or a rental.. those are the folks that can cause a run up .. and you know run up is hey I was paying 50k for that 800 rent last year now its 55k to us on the coast and probably you in your market those kind of moves are meaningless.. but to someone who lives and works there they see it as prices have skyrocketed LOL they went up 10% or 20%... but the dollars are already so small..
@Dennis M. Also I got curious on Erie I had heard of it of course only because of the Erie canal as a kid 50 years ago. But it seems it the 4th largest city in PA I thought it was one of those little cities in the middle of the state with maybe 15k people .. but I see on line that median price is 83k.. with median rent about 900. so pretty good numbers.. so I suspect you guys get some of those 20 to 30k deals and rent for 900.. and your spoiled rotten on your cash flow..
Jay , a fella like you could probably buy up the whole city . If you decide to invest over here leave some scraps for us little guys lol the best part about investing in Erie is mace pepper spray and bullet proof vests are tax write offs
#1 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
- 62,231
- Votes |
- 42,325
- Posts
#1 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
Originally posted by @Dennis M.:
Originally posted by @Jay Hinrichs:
@Russell Brazil Russell I also feel that you cant start this run in 08... to me 08 to 2012 was its own separate cycle and that we did not really start to rebound until 2012 to 2103.. so in my mind and it could be very diluted thinking as I am no economist or expert in high finance .. but it seems to me we are 5 or 6 years into a 10 year cycle.. it took in my mind from starting in FLA in 07 ish to 2012 to 2013 just to flush through the hangover inventory reset capital markets un thaw credit and get back into business.. again just my thoughts on the matter.. I have nothing to point this to other than all how I feel about it..
We are definitely seeing prices level off and that is a GOOD thing.. And in my world were I have to work backwards to see what we can pay for dirt.. those that have their dirt priced sky high its just sitting so you just wait them out a bit they start to drop and then you can buy at a price point we can still maintain our margins.. AS we are not competing against the average US buyer who can buy a home with 25k in their jeans or a rental.. those are the folks that can cause a run up .. and you know run up is hey I was paying 50k for that 800 rent last year now its 55k to us on the coast and probably you in your market those kind of moves are meaningless.. but to someone who lives and works there they see it as prices have skyrocketed LOL they went up 10% or 20%... but the dollars are already so small..
@Dennis M. Also I got curious on Erie I had heard of it of course only because of the Erie canal as a kid 50 years ago. But it seems it the 4th largest city in PA I thought it was one of those little cities in the middle of the state with maybe 15k people .. but I see on line that median price is 83k.. with median rent about 900. so pretty good numbers.. so I suspect you guys get some of those 20 to 30k deals and rent for 900.. and your spoiled rotten on your cash flow..
Surly you Gest !!! I was just thinking about what you were talking about with lots and new builds.. with price points you have there I suspect new builds have to be in new communities in the burbs.. unless there is some edgy place downtown near the cool resturants and clubs or along the lake or something like that.. most older cities have that little vibe going.. its not like here in Portland were you can build new in every quadrant of the city and sell and make a profit.. IF you can buy the lot hard to get lots.
- Jay Hinrichs
- Podcast Guest on Show #222
As far as frothy PE in the market, look who (surprise!) contributed to the S&P gains in 2018 so far:
https://heisenbergreport.com/2018/06/30/just-10-st...
http://thereformedbroker.com/2018/07/16/tech-stock...
tech goes belly up and so do those Bay Area folks Jay had mentioned earlier in the thread. we've already felt some tremors with fb and nflx dropping bigly just recently. flamazon might be next ( though I do love buying companies that get hit with "Amazon just acquired x and going to dominate the industry" news - Kroger, Walgreens, etc.).
Originally posted by @Victor S.:
As far as frothy PE in the market, look who (surprise!) contributed to the S&P gains in 2018 so far:
https://heisenbergreport.com/2018/06/30/just-10-st...
http://thereformedbroker.com/2018/07/16/tech-stock...
tech goes belly up and so do those Bay Area folks Jay had mentioned earlier in the thread. we've already felt some tremors with fb and nflx dropping bigly just recently. flamazon might be next ( though I do love buying companies that get hit with "Amazon just acquired x and going to dominate the industry" news - Kroger, Walgreens, etc.).
What does stock price have to do with corporate profitability? Do you think Google is issuing new shares to pay their employees?
Originally posted by @Nancy Zhao:
Originally posted by @Victor S.:
As far as frothy PE in the market, look who (surprise!) contributed to the S&P gains in 2018 so far:
https://heisenbergreport.com/2018/06/30/just-10-st...
http://thereformedbroker.com/2018/07/16/tech-stock...
tech goes belly up and so do those Bay Area folks Jay had mentioned earlier in the thread. we've already felt some tremors with fb and nflx dropping bigly just recently. flamazon might be next ( though I do love buying companies that get hit with "Amazon just acquired x and going to dominate the industry" news - Kroger, Walgreens, etc.).
What does stock price have to do with corporate profitability? Do you think Google is issuing new shares to pay their employees?
We are talking PEs, so everything. Lots of those folks are paid via stock-based compensation as well.
Originally posted by @Victor S.:
Originally posted by @Nancy Zhao:
Originally posted by @Victor S.:
As far as frothy PE in the market, look who (surprise!) contributed to the S&P gains in 2018 so far:
https://heisenbergreport.com/2018/06/30/just-10-st...
http://thereformedbroker.com/2018/07/16/tech-stock...
tech goes belly up and so do those Bay Area folks Jay had mentioned earlier in the thread. we've already felt some tremors with fb and nflx dropping bigly just recently. flamazon might be next ( though I do love buying companies that get hit with "Amazon just acquired x and going to dominate the industry" news - Kroger, Walgreens, etc.).
What does stock price have to do with corporate profitability? Do you think Google is issuing new shares to pay their employees?
We are talking PEs, so everything. Lots of those folks are paid via stock-based compensation as well.
How do stock price ratios affect employment in the Bay Area? When the dotcom bubble collapsed in 2000, did California real estate prices crash along with it?
As for stock based compensation. Let's use an example of a hypothetical Google employee with say $150k salary, $50k bonus, and $50k stock. If the price of Google falls by 50%, this person would only lose 10% of their salary, assuming they always sold their stock and assuming Google didn't increase their compensation accordingly.
Originally posted by @Nancy Zhao:
Originally posted by @Victor S.:
Originally posted by @Nancy Zhao:
Originally posted by @Victor S.:
As far as frothy PE in the market, look who (surprise!) contributed to the S&P gains in 2018 so far:
https://heisenbergreport.com/2018/06/30/just-10-st...
http://thereformedbroker.com/2018/07/16/tech-stock...
tech goes belly up and so do those Bay Area folks Jay had mentioned earlier in the thread. we've already felt some tremors with fb and nflx dropping bigly just recently. flamazon might be next ( though I do love buying companies that get hit with "Amazon just acquired x and going to dominate the industry" news - Kroger, Walgreens, etc.).
What does stock price have to do with corporate profitability? Do you think Google is issuing new shares to pay their employees?
We are talking PEs, so everything. Lots of those folks are paid via stock-based compensation as well.
How do stock price ratios affect employment in the Bay Area? When the dotcom bubble collapsed in 2000, did California real estate prices crash along with it?
As for stock based compensation. Let's use an example of a hypothetical Google employee with say $150k salary, $50k bonus, and $50k stock. If the price of Google falls by 50%, this person would only lose 10% of their salary, assuming they always sold their stock and assuming Google didn't increase their compensation accordingly.
Nancy, looks like you might be one of those employees, and that's great. I didn't mean to ruffle feathers and hurt your feels. If tech crashes and goes out favor, people will lose their jobs. No jobs = potential foreclosures, as well as RE cooling off and causing prices to go down. In order to compare the first crash to the potential of this one, we'd need to look at far more indicators, but something tells me the current tech bubble is quite a bit more far-reaching. Again, I'm simply throwing stuff out there for a discussion, not calling for an imminent crash.