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. 

[Dan Bayard]

@Sam Shueh you are on to something there. The Trump tax cut was supposed to "increase wages" to the working class but that has not been realized. Instead, the housing has not stopped rising and for the most part, in my area owning a house/condo/apartment to rent is more than the going rates for the rental market. And in most cases, that is only P&I + Taxes + HOA. Not including any contingencies for maintenance and capital costs.

https://twitter.com/business/status/1020645157035704320/photo/1

[Stephen Kunen]

@Dylan Mathias Nobody seems to mention this article: https://www.extension.harvard.edu/inside-extension/how-use-real-estate-trends-predict-next-housing-bubble I only got in the market around 2012/2013, so I can’t say i experienced to know for sure. According to this article, the US real estate cycle is very predictable and is generally every 18 years (with rare exceptions due to events that impact the whole world like WW1 and WW2). So if the last crash was 2008, the next one will be 2026. Will you be willing to wait for that long? Maybe since you are still very young. I’m older than you so I’m still looking for deals and have goals to fulfIll for the next 5 years. Nevertheless, I do appreciate you starting this thread because of the many helpful responses it generated. I also do believe that there may be a dip but not a recession in the next 1-2 years. I buy out of state since where I live is expensive too, and the only deal I was able to find in the last year and half was an off market deal from another investor.

[Account Closed]

@Dylan Mathias why do you feel you need to go OOS to find a cash flowing deal? Sure, they aren’t in Marin County. But what about Sacramento, Richmond, or Oakland? There’s plenty of cash flowing deals there. I am an Oakland investor and have been averaging $600/month/door in cash flow for my last few deals. There’s plenty of opportunity here.

[Sam Shueh]

@Dan Bayard

Last subprime mortgage crisis idea was in part conceived by some biz school students in this area making deal of the century... Only US was greatly affected by the Great Recession.   

We are sitting on a time bomb waiting for the next crisis to ignite which is going to be global. This time is going to be import duty, jobs, deficit. Yes, some service jobs are coming back to the US today at the expense of losing them in other countries. 

As for housing, it is already slower two months ago in SFBA as people sense the peak already past and are cashing out with 20-25% more sellers. The CA real estate investors are looking every small town outside hoping it will fit their requirements. Looking, looking as slumlords.  What most people failed to realize EPA median home prices are over $1M. This is one area people ignored because of war zones and occupants who had low social status.  Not long ago standing at court house no investor would want to touch something for $200K. Same with MV after Silicon Graphics closed its campus.   Certain parts of Oakland is now flourishing....

A few investors now wonder why they went to Midwest with no upside potential and they can do even better in the coast right at in their backyard? We are about ~12 months away from an impending slow down start with a 6%+ interest mortgage triggered by trade, and fiscal crisis.   Conventional wisdom tells you if it does not make sense it is not going well.

[Jay Hinrichs]

Originally posted by @Sam Shueh:

@Dan Bayard

Last subprime mortgage crisis idea was in part conceived by some biz school students in this area making deal of the century... Only US was greatly affected by the Great Recession.   

We are sitting on a time bomb waiting for the next crisis to ignite which is going to be global. This time is going to be import duty, jobs, deficit. Yes, some service jobs are coming back to the US today at the expense of losing them in other countries. 

As for housing, it is already slower two months ago in SFBA as people sense the peak already past and are cashing out with 20-25% more sellers. The CA real estate investors are looking every small town outside hoping it will fit their requirements. Looking, looking as slumlords.  What most people failed to realize EPA median home prices are over $1M. This is one area people ignored because of war zones and occupants who had low social status.  Not long ago standing at court house no investor would want to touch something for $200K. Same with MV after Silicon Graphics closed its campus.   Certain parts of Oakland is now flourishing....

A few investors now wonder why they went to Midwest with no upside potential and they can do even better in the coast right at in their backyard? We are about ~12 months away from an impending slow down start with a 6%+ interest mortgage triggered by trade, and fiscal crisis.   Conventional wisdom tells you if it does not make sense it is not going well.

I bought a foreclosure in EPA for 8k in 1975   

[Jay Hinrichs]

Originally posted by @Account Closed:

People sell coasts because of touts like Kathy Fettke.    The more i listen to her the more apparent is she just a saleswoman.  A pretty good one. She keeps saying CA is about to crash,   for the last few years.   One of these years she will be right.      Years after the crash she will remind everyone how she called the crash.

Then there is Del W still pushing $500 rent houses.  He wont say where.   Del has apparently gone national, dont know if this is any signal or just noise.

Then you got Grant,   master of them all.  Give him your money.   Its all good.

 got to lump Clayton Morris in there  he will help you find your financial freedom number.. 

[Justin McFarland]

Here is a great video on youtube on How the Economy Works. It is also important to remember that housing markets are not the same in every state or area. A holistic look at the the country as a whole is sometime hard when your familiar area is increasing in price or stay steady. I agree California's housing has always been an issue especially in tech heavy areas. From what I have read people are starting to move to Colorado and Texas to get away from the high prices. Austin, TX is becoming a tech hub as well as other cities because people can't afford to live there. From what I understand the banks allowing 0% down and Interest only loans as well as other risky behavior was a major contributing factor to the bubble. That on top of bundling loans into packages as reselling them make the problem escalate. Since then the banks have created stricter guidelines. I am not saying that it doesn't mean it will not happen again but speaking from personal experience I have to put 25% down on investment properties and cannot take HELOCs out on anything but a primary residence. the crash of 2008 effected a lot of people and is still in peoples mind. It is hard not to keep thinking about it years or decades later but we should not fall into availability bias and think of examples that are readily available. If you remember people that lived through the great depression of 1929 they still kept there money under mattresses for decades after the crash.

[Joseph Finley]

@Nicole Heasley NEO here and confirming you’re assessment. Seems like most $$ spent in OHIO is 2 hours south on i71.

[Victor S.]

Originally posted by @Sam Shueh:

The clue come from job numbers. This cycle in Silicon Valley & SFBA it is the stock options that precipitate the craze. Can you blame momentum high tech companies throwing huge wage and stock incentives by giving away freebies? These workers will not worth 1/3 what they are getting if they go to another US city. These companies are funded by investment companies and are mostly gambling better technology will produce corporate profits. Many of these high flyers are milking the Dot Com failed ideas. Some ideas get now more support than 10-15 years ago because of better wireless technology. Likewise can we use another social media or bed breakfast or cash out payment systems?

I watched the movie "The Big Short" and contemplate if another crisis is coming this way. This time housing crisis will be based on not having incomes to pay for mortgage. Last time it was the subprime mortgage that costed US 3 trillion dollars and created 2 million homeless families. If the stocks took a 20% loss in value as proposed you will immediate see funding not coming from the VC bankers. Sharp decrease in options.  You will see people stop buying homes and more are opt to unload due to job losses.  The inflation figures reported do not include food and cheap energy. The unemployment figures of 1.5% here does not include people who are stop working.   

One of the articles I was able to find that talked about SF RE (comm and res) after the .com bubble exploded:

https://www.nytimes.com/2001/07/24/business/a-city...

[Jay Hinrichs]

Originally posted by @Justin McFarland:

Here is a great video on youtube on How the Economy Works. It is also important to remember that housing markets are not the same in every state or area. A holistic look at the the country as a whole is sometime hard when your familiar area is increasing in price or stay steady. I agree California's housing has always been an issue especially in tech heavy areas. From what I have read people are starting to move to Colorado and Texas to get away from the high prices. Austin, TX is becoming a tech hub as well as other cities because people can't afford to live there. From what I understand the banks allowing 0% down and Interest only loans as well as other risky behavior was a major contributing factor to the bubble. That on top of bundling loans into packages as reselling them make the problem escalate. Since then the banks have created stricter guidelines. I am not saying that it doesn't mean it will not happen again but speaking from personal experience I have to put 25% down on investment properties and cannot take HELOCs out on anything but a primary residence. the crash of 2008 effected a lot of people and is still in peoples mind. It is hard not to keep thinking about it years or decades later but we should not fall into availability bias and think of examples that are readily available. If you remember people that lived through the great depression of 1929 they still kept there money under mattresses for decades after the crash.

ccand those folks also eschewed debt.. my grand father never paid interest ever.. if he could not pay 

[Ryan Arth]

I constantly see people referring to the 7-10 year business cycle, citing how long this bull market has been running, as justification for a real estate correction (expecting a crash like '08, not just a softening in demand/values, which would be pretty abnormal). The business cycle, generally regarded by the public as the valuation of the stock market ( roughly the current state of business growth and employment), is not directly correlated with real estate prices. 

I have always found this graphic to be the best representation. Other than WWII and the Oil Embargo, the real estate cycle normally takes roughly 18 years to run through all  four phases, resulting in a nationwide crash. Different asset classes within real estate also run on slightly offset cycles, further removing the correlation with the equities market. 

So, predicting a nationwide downturn in RE prices, encompassing apartments and homes, from SF to Tulsa OK, based on the length of the current period of expansion in both business and RE, is pretty shaky. Yes, they both crashed at once, but they expand at completely different rates. The equities market can crash tomorrow, MF real estate takes longer, as the point of saturation is reached while many projects are still in production. This hastens the decline as these continue to come to market, well after they were no longer financially viable. 

[Angela Yan]

@Dylan Mathias I agree with you. The wages are just not climbing enough to sustain how expensive everything costs. As oil prices goes up, everything in the Walmart stores will go up. Also we must add to that the baby boomer generation is getting older and most of them don’t have any savings but yet they left behind generation X, which is not enough of them to service the needs to take care of them as for example in healthcare. There will be an extreme nursing shortage and also I might add a truck driver shortage. These fields of industries are just not sexy enough for the millennial to train to do. I don’t know how bad things can get but a correction is eminent.

[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.

[Chuck Bigham]

hmm. New here, will take a stab. I started investing in 1998. Live in Orange County, CA. Made a lot of money from 1998 to 2006. Saw the funny money loans in 04, 05 figured there was another year or two, I was right . 

Back then I did a lot of business with PFF which is now US bank. On my last deal in 2005 a bank vice president and senior loan officer took me to lunch, told me this is the last loan they will do with me for a while. The bank has been around a long time and sees dark times ahead. Very dark. Another deal and I will be too leveraged to survive. I took the advice. Too many easy loans after enough had been let told them time to stop.

My take on today:

-freddiemac recently started a 3% down program to compete with FHA. Sign that the "machine" wants the market to go on.

-TREPP reports and RV stocks are great barometers of where the economy is and headed. TREPP shows commercial mortgage delinquencies DECLINING. RV stocks are up. 

- wealthy people homes last time went first as always. Right now that's tough to read.

-here in LA basin rents are going up 5-8% a year or more depending on location.  If that goes on another 3 years as predicted in the LUSK report, that's a 20% growth minimum, because investors buy into future returns here. What will interest rates be is the breaking point,  and salary growth balance to it.

During the great recession, values on some of my 4plexes went from 2006 high of 940 to 980 down to 650. Know what? People still paid the rent. No increases, few more evictions and in some cases I saw 2 fridges in some units indicating doubling up. Income largely held. Even in the crash, it was a better deal to live in CA. 

If you buy conservative with 25 down and are not too heavily leveraged when it turns south you will be fine. 

You can also do a dollar cost average approach similar to stocks..when you think it's getting closer you sell a highly appreciated asset, cash out clean and pocket it for emergencies and opportunities,  put into a charitable remainder trust and drip the income to you, or you can refinance and set cash aside . Same strategy different outcomes.

Cb

[Ryan Arth]

It is best to look at your investment market and asset class and try to distill where it is in the cycle. I have heard many experts saying we are 18-24 months out from a "crash", for three years. Just heard the last one say it this week, so no one knows.

[Justin McFarland]

@George Cavazos

Here is an article i found on China and US GDP relations and how they are intertwined and not competing. What is unique about economics and productivity is that when countries or people work together they both benefit. China is the largest foreign holder of U.S. Treasurys. In May 2018, China owned $1.18 trillion in Treasurys. That's 19 percent of the public debt held by foreign countries. The U.S. debt to China is lower than the record-high of $1.3 trillion held in November 2013.

[Chaz Mathias]

Hi @Ryan Arth I think we can all agree that if the market turns, the first indicators will happen on the coasts, for example here in CA. We are seeing a severe slowdown in transactions and price reductions. You are absolutely correct that no one can predict these market cycles, we can just look at the data and make informed decisions. 

[Marland McKinney]

Originally posted by @Ryan Arth:

I constantly see people referring to the 7-10 year business cycle, citing how long this bull market has been running, as justification for a real estate correction (expecting a crash like '08, not just a softening in demand/values, which would be pretty abnormal). The business cycle, generally regarded by the public as the valuation of the stock market ( roughly the current state of business growth and employment), is not directly correlated with real estate prices. 

I have always found this graphic to be the best representation. Other than WWII and the Oil Embargo, the real estate cycle normally takes roughly 18 years to run through all  four phases, resulting in a nationwide crash. Different asset classes within real estate also run on slightly offset cycles, further removing the correlation with the equities market. 

So, predicting a nationwide downturn in RE prices, encompassing apartments and homes, from SF to Tulsa OK, based on the length of the current period of expansion in both business and RE, is pretty shaky. Yes, they both crashed at once, but they expand at completely different rates. The equities market can crash tomorrow, MF real estate takes longer, as the point of saturation is reached while many projects are still in production. This hastens the decline as these continue to come to market, well after they were no longer financially viable. 

 This chat should be taken with a grain of salt.  Economics before 1890 do not relate to modern economics.  By many standards, 1890 is considered the beginning of the Industrial Revolution, and the starting point of modern economics.  This leaves the 18 year intervol occuring only 3 of 7 times.   

[John M.]

@George Cavazos  I am a Joe Rogan fan and like Peter Schiff as well (I even mentioned Peter in one of my earlier posts in this thread).  I saw that podcast as well as another one they did a year to two ago.

I do like Peter's common sense approach to economics, however the basis for his entire thesis is that a dollar crisis would happen when investors realize that the Fed can't normalize interest rates.  I do agree that in the next economic slow down the Fed will probably go back to ZIRP (possibly even NIRP), however I don't think this would necessarily cause investors to have some moment of clarity that they didn't have before.  Could it happen?  Sure.  Will it happen?  I don't know, that could be a stretch since he's trying to get into the minds of investors and predict their behavior.  So while I think he makes very good arguments for his case, making bets on human psychology isn't something I am willing to do.  Personally I am planning for some possibly rough times ahead but not the end of society as we know it...

[Nicole Heasley Beitenman]

The student loan crisis in itself is enough to trigger another recession. 

[Jeffrey Isenberg]

There are definitely some valid points that have been addressed and of particular interest those on CA real estate.   As a buy and hold investor in the SoCal Market, it is important to consider that without over-leveraging that what happens in the short-term will have little effect on an overall investment plan.  Get Rich Slow, it's a long term play.

The three recession/recovery cycles prior to 2007 in the South Bay area of Los Angeles played out as follows:

1967-1981

4 year downturn of $1.00/sq. ft. or 5.6%

11 year recovery of $69.00 sq. ft. or 406%

1981-1991

1 year downturn of $1.00/sq. ft. or 1.2%

8 year recovery of $55.60 sq. ft. or 65%

1991-2007

4 year downturn of $26.40/sq. ft. or 18.8%

12 year recovery of $216.00 sq. ft. or 189%

No need to wait for the big drop as there is really no way to tell when it will arrive and real estate does not always move in line with the stock market.  Invest conservatively for the long term in appreciating markets and you will prosper.

[Clancy Catelli]

I agree with everything except that PE ratios are at an all time high. That's a false statement. 

[Frank Wong]

Great posts everyone.  Markets go in cycles, but past performance is not indicative of future returns.  They do give us warning signs on when to tighten up and be conservative.  We have been on a tremendous bull cycle which we could be on the tail end of things.  A correction is surely in the cards given the scope of everything mentioned. 

I try to keep it simple. Not every home in the area can be a million dollars.  Million dollars in West Oakland, please good luck with that.  Incomes don't justify these prices.  I see the crises starting with tech, drops in stock prices in tech companies that are making money and not making money.  Job layoffs in tech will have a ripple effect.  How bad the ripple effect we don't know.  We also have a major currency crisis that is going on.  The big thing we have that no news outlet is talking about is QT.  When you pull 30billion out of the markets each month you are draining liquidity.  Its that simple less money in the system equals a contracting market add that with rising rates.  Well, that's bad news bears. 

Does this mean a crash does this mean stop investing?  No, not really.  Just know your risk.  Don't be over leverage.  I am conservative and hate debt.  When you have no debt or very little it gives you one thing to survive any downturn.  HOLDING POWER.   I think Jay mentioned a guy cashing out his house to buy Hood homes in Memphis.  That's crazy to me.   I think a lot of people have only seen one cycle which is up.  They don't remember the last real estate crash or dot come bubble of the early 2000s.  Risk Management is key. 

If you are not overleveraged and have cash.  You can survive the downturn whenever it happens and you can also buy some deals.  I look to buy when the markets are going up and down.  Like Warren Buffet says "The market transfers money from the impatient to the patient"

[Lincoln James]

@Dylan Mathias I did a similar analysis a while back on a different forum. You list several reasons why you think we are headed for a downturn shortly. You may be right. However, I like to think of the economy as more complex than recession vs expansion - especially when it comes to housing. What is clear is that we suffered a massive demand shock at the end of the last decade, a recovery from which should be expected to be longer than usual. In fact, the recovery period after WWII was something like 42 years. That said, our present recovery has been quicker than usual. I personally believe technology is to blame for this. Whereas there were once opportunities only afforded to those who did hard dirty research, now any putz with a computer can get onto realtor.com and run deal after deal. Also, consider that in this most recent period, the M1 money supply has more than doubled, thanks in part to low interest rate policies across the globe. This money flows to those who own higher interest assets. For instance, if I can borrow at .25% and buy a asset yielding 5%, I will do that until it is no longer economically feasible. Those who could, did, and now deals that once looked attractive look overpriced. Finally, I think it’s important to look at the market not as one large clump but as a highly fractured and increasingly diverse asset class. From the demand side, an A type multifam will be negatively affected by a recessionary period. Ironically, from the supply side, you’ve probably noticed as I have a glut of A type multifams popping up. This class will likely get destroyed in the coming years. On the other hand, there’s not a lot of people building C class multifams because the economics don’t work for developers, and also these properties tend to do OK as fewer people can afford the more expensive alternatives in recessionary periods. Then consider single fam. The millennial generation is JUST NOW paying off student loans and looking for a place to raise kids. There is barely any supply for single fams in the existing stock and this generation is going to want some. That doesn’t mean prices will skyrocket for single fams, but in traders speak it lays a good resistance level. TLDR: there’s too much cash floating around and not enough good ideas. Different housing sectors should be affected differently by a recession which may or may not come any time soon. If your deal makes sense, don’t get in your own way.

[John Kunick]

@Kraig Kujawa, totally agree about resting easy via cash flow.

Here are other key things perhaps many on this thread will consider about how different we are now vs. 2007:

1.  The real estate bubble in 2007/2008 was primarily based on government-induced loans that were then backed by government via taxpayer.  In short, due to government intervention in the market place and the consequent greed, money was too easy to get.  There were people getting loans that had no business getting loans and the house of cards fell.  This is not currently the issue.  While loans are easier now than they were five years ago, they are nothing like it was in the early-to-mid 2000's.  No comparison.

2.  Those people that were getting loans that shouldn't have, are now renting and that has propped up the rental demand and thus the cash flow for investing.

3.  Savings rate - In mid-to-late 2000's, the savings rate was 1-2%.  It is now almost 7%

4. Not all markets are like California - Like many have commented on this thread, CA seems to be out of bounds. Perhaps there are other markets like that. But, there are still many markets where real estate has acted normally the last ten years. Even in Tulsa, where I own a significant portfolio of SFH, the prices still have room to run up. Sure, they are not as attractive as they were after the crash, but there are still bargains to be had - and rents have increased as prices have gone up.

5.  Equity - In early 2000's there was very little equity in most rental properties (and real estate in general).  That is not the case now perhaps due to loan requirements.  This will curb panic selling should a recession hit.

So, all in all, I see a lot of differences between now and 2007.  That is not to say that a recession or correction might not take place (they are usually psychologically driven), but I do believe the fundamentals are significantly different now