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. 

[Karl B.]

I agree. My local market (NW PA) has been traditionally cold. The returns are great but it's tough getting good renters and local property management companies are notoriously bad. 

In the past six months A LOT of out-of-town investors have been buying properties (including the cheap houses in the bad areas). 

I'm even getting letters wanting to buy my rentals (something that never ever occurred previously).

Point is, I see some investors doing foolish things - chasing returns in a market they're not knowledgeable in. There's no doubt some of these investors are going to have trouble filling a unit or they're going to have nightmare experiences with the inept PM/bad tenants and will sell for a loss. 

At times, I see dumb money throwing itself around. It's similar to people buying stocks before a crash simply because the stock keeps rising. 

The good news (for the city I invest in) is they'll have additional property tax income and I doubt most out-of-town investors will contest their property taxes to have them lowered. 

I've had a few BP members from out of town contact me (about where I invest) and I commend them for doing due diligence so they don't buy a bad deal (I.E. a property in a bad part of town) but on the MLS I'm seeing a lot of bad properties being purchased.

You're right: there's no way to time the market - we can simply be prepared for it as I 100% believe riches are made in the worst of times (buying great deals or investing in beaten-down stocks). 

Remember when the stock market kept tanking because of Euro debt (Greece, Italy, Spain, Ireland, etc.)? It's amazing - it was talked about on the news daily and the 'reason' for bad days in the market (this was around 2009 or 2010). When's the last time these debt-ridden countries were blamed for a bad market day? 

And then there's that elephant in the room - I also wonder when our insane government debt will 'become an issue' (I quoted that because it's already an issue but it's been ignored for decades).

[Dennis M.]

@Karl B. We invest in the same town and you are spot on in your estimation!

[Nicole Heasley Beitenman]

Corporations are turning to stock buybacks because they like them and they can. They just received a huge tax cut, and they're sitting on giant piles of cash. Profits aren't low. They aren't suffering. 

That being said, I do agree with you about a recession simply because so many analysts are calling for one, and the economy is one giant self-fulfilling prophecy. I'm seeing it all over BP and the news. When speculators start chiming in, people start pulling back. They start spending and start saving because they become worried about their jobs. I'm seeing a lot of that here in NE Ohio--an area that hasn't fully recovered from the last big recession. Or, really, any economic downturn since the late 70's. 

[Jay Hinrichs]

Originally posted by @Karl B.:

I agree. My local market (NW PA) has been traditionally cold. The returns are great but it's tough getting good renters and local property management companies are notoriously bad. 

In the past six months A LOT of out-of-town investors have been buying properties (including the cheap houses in the bad areas). 

I'm even getting letters wanting to buy my rentals (something that never ever occurred previously).

Point is, I see some investors doing foolish things - chasing returns in a market they're not knowledgeable in. There's no doubt some of these investors are going to have trouble filling a unit or they're going to have nightmare experiences with the inept PM/bad tenants and will sell for a loss. 

At times, I see dumb money throwing itself around. It's similar to people buying stocks before a crash simply because the stock keeps rising. 

The good news (for the city I invest in) is they'll have additional property tax income and I doubt most out-of-town investors will contest their property taxes to have them lowered. 

I've had a few BP members from out of town contact me (about where I invest) and I commend them for doing due diligence so they don't buy a bad deal (I.E. a property in a bad part of town) but on the MLS I'm seeing a lot of bad properties being purchased.

You're right: there's no way to time the market - we can simply be prepared for it as I 100% believe riches are made in the worst of times (buying great deals or investing in beaten-down stocks). 

Remember when the stock market kept tanking because of Euro debt (Greece, Italy, Spain, Ireland, etc.)? It's amazing - it was talked about on the news daily and the 'reason' for bad days in the market (this was around 2009 or 2010). When's the last time these debt-ridden countries were blamed for a bad market day? 

And then there's that elephant in the room - I also wonder when our insane government debt will 'become an issue' (I quoted that because it's already an issue but it's been ignored for decades).

 might be time to take some profits there in NW PA..

[Jay Hinrichs]

Originally posted by @Account Closed:

The economy needs a good cleansing of bad fed zirp policy.  It has so distorted the economy.   EZ money means asset prices go up.....what has happened ,   asset prices have gone up.

Out of staters buying in the HOOD is always a bad sign.  So whats the play here.   Capital gains play?

 out of state buying in the HOOD has been going on for about 25 years that I know of.. with no stop in sight.   

there was a thread last week titled

" thank you bigger pockets  0 to 15 doors in one year"

Well that got at least 200 responses of which 197 of them were way to go congrats I cant wait to do what you did ..

well what did that investor do.. he ripped a bunch of equity out of his prime CA residence and paid cash for D class in the mid west 

little plex's that have 400 dollar renters in them..  to me I am like OK.... you leverage the family home buy the toughest rentals on the planet and 97% of the people on this site want to do the same thing and cant wait to do the same thing.. so that's your mind set.. 

I hope it works for that guy.. but folks just don't know what they don't know.. and there is this irrational exuberance to get doors at any cost because its the way to financial freedom   ( what ever that means).. for most it means I guess being self employed.

[Jay Hinrichs]

@Dylan Mathias  Having worked most of my RE career from Cupertino to Ukiah.. and starting in 74 as an agent.

we have always had these ups and downs.

and to compare to 07 that I don't see... simply because those that are buying rentals in the tougher areas are not getting 100% financing or in better areas 125% financing.. or lenders letting them have way more debt than they should.

NOW that does not mean the corporate and money side of the economy cant crater.. but it don't think it will crater like 08 where real estate led the party..   

[John M.]

@Dylan Mathias I like these types of discussions even though trying to predict what will happen with any accuracy seems nearly impossible with the number of variables that go into a global economy.  Add to that manipulation by central banks all over the world and artificially low interest rates and who knows what can really happen. 

I do personally find certain things very concerning like the amount of debt and leverage in the system such as personal debt that consumers have piled up (student loan, auto loan, credit cards, mortgage, etc), combined with low wage growth, and rising housing and healthcare costs.  Then add to that government debt and corporate debt, and years of artificially low interest rates.  I have to ask myself is that a layup for a bright future?  I am not an economist but this doesn't seem like the picture of financial health to me.

I probably listen to too much Peter Schiff so I sometimes wonder if we're in for a very rude awakening at some point.   But really I think all you can do is follow the basics like at some point there will be a slowdown and at some other point there will be a recovery and try and plan to the best of your ability to navigate around it.

Do you personally have worries, and if so are you doing anything to mitigate them?

[Chaz Mathias]

@Dylan Mathias you make some great points and I believe that when others are stretching themselves to uncomfortable levels to find value, there is an opportunity for those who are patient. 

[John M.]

Originally posted by @Account Closed:

The economy needs a good cleansing of bad fed zirp policy.  It has so distorted the economy.   EZ money means asset prices go up.....what has happened ,   asset prices have gone up.

Out of staters buying in the HOOD is always a bad sign.  So whats the play here.   Capital gains play?

Unfortunately where central banks are concerned the cure for a debt problem is entice us to go into more debt.   Is NIRP coming to the US in the next recession?  Could be...

[Dylan Mathias]

@Jay Hinrichs

With the banking system tide so closely with corporations  and real estate don't you think they will go hand in hand? I don't think we will get something like 2008 again but it could be a good size downturn. I don't know if these numbers are 100% accurate but I heard the other day in Sonoma County CA that a household needs to make a combined 175K a year to afford living and a mortgage in our county and that only 4% of people meet that criteria. 

[Dylan Mathias]

@Karl B.

I really like your response. I didn't even mention not only our national debt but our countries consumer debt. It is a huge problem and its scary more people are not worried about it. 

I really like your thoughts behind people wanting to get a piece of the action. It reminds me of bitcoin when people wanted to get in way to late because it was jumping 600% a week and then all my friends who did it after me warning them lost their pants when it halved overnight. 

[Jay Hinrichs]

Originally posted by @Dylan Mathias:

@Jay Hinrichs

With the banking system tide so closely with corporations  and real estate don't you think they will go hand in hand? I don't think we will get something like 2008 again but it could be a good size downturn. I don't know if these numbers are 100% accurate but I heard the other day in Sonoma County CA that a household needs to make a combined 175K a year to afford living and a mortgage in our county and that only 4% of people meet that criteria. 

 I think what we do forget is a lot of people have a lot of equity.. so not everyone is putting minimum down they sell one home and move up and maybe they have a 300k down payment on a 800k new build in Coffey park.. ????  and really in the bay area 175k combined I bet more than 4% of the population makes more than that.. at least in the bay area.. I could be wrong..  but 100k is no longer a astronomical salary..   And depend on the situation those 6000 homes that got burnt down there is some massive insurance claims and folks will have cash to put down on houses..   or they may just up and move to Kokomo were they can buy a new build for 200k LOL.. now your right there in the mid west salaries are not as high.. as it tends to be more industrial service worker hourly wage..

than BAy area high tech  make 200k at google and dinks who each make 200k.. 

[Jay Hinrichs]

@Dylan Mathias  But your absolutely correct no matter what happens.. if credit freeze's like it did in 08 and 09 then we are all in trouble all over again.. and to a varying degree.. depending on what you do for a living.

[Karl B.]

Originally posted by @Dennis M.:

@Karl B.

We invest in the same town and you are spot on in your estimation!

@Dennis M. It's amazing, isn't it? The headaches some of these investors are going to experience! You know the areas/streets I'm talking about (Wallace, Ash, German, etc.). 

It's just amazing. No doubt local RE agents are loving this too. And I bet Howard Hanna, Marsh, Agresti, etc. are going to inflate asking price (Howard Hanna always has) but it simply means we'll need to adjust our game plan and adapt. 

Also, - who do you use for window replacement and installation in your properties? 

---

@Jay Hinrichs There are a few I will hold onto but you're right - if the price is right it makes sense to sell and 1031 into something else. My siblings and I own some commercial properties in Erie and we're ready to sell those. So far, activity has been good - just a matter of working with buyers who can deliver (maybe that out-of-state money will consider buying commercial!). Selling large commercial is a much slower process but is exciting to be a part of. 

---

Originally posted by @Dylan Mathias:

@Karl B.

I really like your response. I didn't even mention not only our national debt but our countries consumer debt. It is a huge problem and its scary more people are not worried about it.

I really like your thoughts behind people wanting to get a piece of the action. It reminds me of bitcoin when people wanted to get in way to late because it was jumping 600% a week and then all my friends who did it after me warning them lost their pants when it halved overnight.

 Many thanks. I believe Warren Buffet said it best: "It is wise to be fearful when others are greedy and greedy when others are fearful.” I learned this the hard way (stock investing). 

[Dylan Mathias]

@John M.

I couldn't agree with you more with all that you said. Since it is impossible to time the market it is important to do your best to set yourself up for success and not failure. I think most people can agree that their is a greater probability to the downside then upside but currently in the stock market I am slowly moving my funds to more conservative investments. I am 24 and just got out of college so I have not jumped into the real estate market yet but if I was I would probably be putting  more capital into the equity of my houses instead of getting more leveraged unless I came across a good deal. 

That is just me though. Every persons situation is different depending on who they are as a person and their current situation. Personally I would rather be more conservative and grow my wealth over the long haul rather then do the get rich quick which I think is more based on luck and gambling. 

I am a little worried about where we are and do think their will be a big correction it is just a matter of when. I am just doing what I can to help mitigate against the downside. 

[Tami R.]

Good points. How many of you actually started buying real estate between '08 and '09 for the first time. We got interested in real estate when the market tanked and never looked back. We put more cash into the loans and now we have 200 doors. I do not want another years like 2007 2008 it hurt so many families but that's what got our real estate career started

[Chaz Mathias]

Hi @Tami R. listening to BiggerPockets podcasts, a vast majority of investors started in that timeframe like yourself. It worries me for new investors jumping in now or individuals purchasing their first home if history is going to repeat itself again. Congrats on all of your success in the past 10 years!

[Dennis M.]

Originally posted by @Karl B.:

Originally posted by @Dennis M.:

@Karl B.

We invest in the same town and you are spot on in your estimation!

@Dennis M. It's amazing, isn't it? The headaches some of these investors are going to experience! You know the areas/streets I'm talking about (Wallace, Ash, German, etc.). 

It's just amazing. No doubt local RE agents are loving this too. And I bet Howard Hanna, Marsh, Agresti, etc. are going to inflate asking price (Howard Hanna always has) but it simply means we'll need to adjust our game plan and adapt. 

Also, - who do you use for window replacement and installation in your properties? 

I just drove those streets this morning actually  looking for some deals to be had ...  . Just driving through those areas can cause a mans mental attitude and outlook to change to the negative .It’s actually quite depressing . As lousy as that neighborhood is there is still plenty of money to be made . I don’t have a window guy specifically, I do have a reasonable handyman though that can hook you up 

[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.

[Jay Hinrichs]

Originally posted by @Chaz Mathias:

@Dylan Mathias you make some great points and I believe that when others are stretching themselves to uncomfortable levels to find value, there is an opportunity for those who are patient. 

 are you guys related :)

[Caleb Heimsoth]

@Dylan Mathias There are lots of threads on this so not sure where you’re looking but they’re there. These threads are generally useless in that it creates fear mongering and what not. Will there be a crash? Sure. Will it be next year? Or this year? Personally I find that doubtful. If you believe you can predict the market you should sell all your real estate now and stick with cash to wait for the impending crash. People have been saying this since 2014. Some areas still aren’t above their previous highs. Is the bull market long and likely slowing down? Yes. Does that mean a giant crash? No. Could be stagnation. Could be mild drop. Could be large drop. I plan to buy using moderate leverage in good, up, down and sideways markets. Hold long term. You do that you’ll be fine. One last thing, I agree with Jay. Don’t go buy dumpy crappy apartments (especially in Memphis). I was on that thread and what that guy was doing is generally ill-advised. I think he leveraged his cars to, buy that stuff. Yikes.

[Karl B.]

Originally posted by @Dennis M.:

Originally posted by @Karl B.:

Originally posted by @Dennis M.:

@Karl B.

We invest in the same town and you are spot on in your estimation!

@Dennis M. It's amazing, isn't it? The headaches some of these investors are going to experience! You know the areas/streets I'm talking about (Wallace, Ash, German, etc.). 

It's just amazing. No doubt local RE agents are loving this too. And I bet Howard Hanna, Marsh, Agresti, etc. are going to inflate asking price (Howard Hanna always has) but it simply means we'll need to adjust our game plan and adapt. 

Also, - who do you use for window replacement and installation in your properties? 

I just drove those streets this morning actually  looking for some deals to be had ...  . Just driving through those areas can cause a mans mental attitude and outlook to change to the negative .It’s actually quite depressing . As lousy as that neighborhood is there is still plenty of money to be made . I don’t have a window guy specifically, I do have a reasonable handyman though that can hook you up 

It's just tough getting money from a lot of those renters. I'm all about buying on the cusp of B-neighborhoods. Though I believe there's opportunity in small commercial properties in those areas. My house is on a rather quiet street but is near a sketchy street. The corner stores make a lot of money. The foot traffic is amazing. It will be interesting to see if cheap Erie land/lots start being bought up. Let me know if you've noticed this - I haven't looked into it yet. 

Please let me know who your handyman is. I work with two handymen but they're both so busy their client list is backed up for months. Many thanks. 

[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 Hinrichs]

Originally posted by @Karl B.:

Originally posted by @Dennis M.:

Originally posted by @Karl B.:

Originally posted by @Dennis M.:

@Karl B.

We invest in the same town and you are spot on in your estimation!

@Dennis M. It's amazing, isn't it? The headaches some of these investors are going to experience! You know the areas/streets I'm talking about (Wallace, Ash, German, etc.). 

It's just amazing. No doubt local RE agents are loving this too. And I bet Howard Hanna, Marsh, Agresti, etc. are going to inflate asking price (Howard Hanna always has) but it simply means we'll need to adjust our game plan and adapt. 

Also, - who do you use for window replacement and installation in your properties? 

I just drove those streets this morning actually  looking for some deals to be had ...  . Just driving through those areas can cause a mans mental attitude and outlook to change to the negative .It’s actually quite depressing . As lousy as that neighborhood is there is still plenty of money to be made . I don’t have a window guy specifically, I do have a reasonable handyman though that can hook you up 

It's just tough getting money from a lot of those renters. I'm all about buying on the cusp of B-neighborhoods. Though I believe there's opportunity in small commercial properties in those areas. My house is on a rather quiet street but is near a sketchy street. The corner stores make a lot of money. The foot traffic is amazing. It will be interesting to see if cheap Erie land/lots start being bought up. Let me know if you've noticed this - I haven't looked into it yet. 

Please let me know who your handyman is. I work with two handymen but they're both so busy their client list is backed up for months. Many thanks. 

lots and land in areas were existing houses can be bought for far less than replacement cost generally have no value..   but you time it right and its a great play.. I went into Charleston SC into the SKETCHY area ( locals would have called it the hood) and starting buying lots at 20k each 6 years ago... put up a 350k new build like the crazy California investor.. but I sold it.. and that literally started a flood. Well me and one other local saw the same thing.. so between us we have built about 100 new constructions and now I am paying 150k for lots and selling the homes for 550k  10 years ago you could have bought the HOMES for 30 to 70k..  the existing ones.. 

but generally speaking these areas when they become renter dominated go the other way..  WE are seeing this in areas of Indy.. Portlandia of course..  And I have been buying lots in Richmond CA.. and most think I am not nuts to do that.   but I love a good land play no tenants   

[John M.]

Originally posted by @Caleb Heimsoth:

@Dylan Mathias

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?