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. 

[Account Closed]

@Joseph M.   I am not sure where the money will go.  I just know it is going.  The Russians are leaving the very high end market.  That is not as much of a concern for most people on Biggerpockets.  Chinese investors are leaving the $200,000-$400,000 price range in North Texas.  That is having more of an impact.  As I have mentioned before some subdivisions in North Texas have 20+% homes owned by Chinese investors.

While this issue has been covered in the media, I noticed it before that.  It started here about two months ago when the average time on market was less that 30 days and the prices of listings started going down.  That is always a red flag.  So I decided to look up the sellers and all the players pushing the prices down were Chinese investors.  It has continued ever since.  Some of their listings say "Priced for quick sell".  Considering they do not have mortgages to be behind on, there is something else driving the change.

In Greece, I was talking about real estate.  I would ABSOLUTELY suggest finding a reputable Greek company to partner with.

[Ken Maddis]

Originally posted by @Joseph M.:

@Christian Hutchinson , Yeah I remember there was a VISA program for those that bought a property over $500,000 I don't know if that is still around or not. I spent some time working in  Florida a few years back and there were many Venezuelans  and South Americans buying businesses there.  Venezuelans were eager to get their money out of course and considering how much worse the situation is they were smart to. You would need to have a certain number of employees for the visa. 

Yes, I think that's the EB5 visa, $1,000,000 investment in a commercial business, or $500,000 if it's in a war zone (high unemployment).

[Joseph M.]

@Jay Hinrichs , yeah I agree , low end rentals can be profitable but likely have to be local like you said. Things can look great on paper, but a lot can go wrong and often does. For many that grew up and lived more a middle class lifestyle they probably can't imagine some of the scenarios that often occur in low income areas. 

I do have to hand it to brokers like James Wise that does show the ugly side of lower end rentals , trashed properties , evictions etc . I've seen some of his Youtube videos and they are pretty good . He's also in the management business of course so it's to his benefit to be upfront and set expectations versus painting a rosy picture like everything is going to be totally passive and turnkey ..just sit back and collect the check...and on the path to financial independence. 

[Joseph M.]

@Ken Maddis, it may have been that one.. it seemed that it inflated the prices of local businesses in the area. A lot of small businesses seem to ask a lot more than the business is actually worth though.. and it's not like real estate where the sales prices are public. I imagine most small businesses do sell for quite a bit less than asking price. 

[John Fairbanks Miller]

Originally posted by @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..   

Exactly, this is the big difference in now and 2008...we were way more leveraged then. In my neck of the woods I see a lot of for sale signs, tipping the scales of supply and demand.

[Account Closed]

Originally posted by @Steve K.:

Hi Steve- How you took my post as disrespecting @Jay Hinrichs is confusing- I agree 100% with his post sir. I am actually modeling my change in strategy to his i.e new construction etc and moving to higher appreciation markets and new construction vs my old strategy. Please relax. In terms of all caps- the App on iPhone gets a glitch every now and then lol. And makes my caps sticky etc.

Have a good day sir. 

[Account Closed]

Originally posted by @Joseph M.:

@Jay Hinrichs , yeah I agree , low end rentals can be profitable but likely have to be local like you said. Things can look great on paper, but a lot can go wrong and often does. For many that grew up and lived more a middle class lifestyle they probably can't imagine some of the scenarios that often occur in low income areas. 

I do have to hand it to brokers like James Wise that does show the ugly side of lower end rentals , trashed properties , evictions etc . I've seen some of his Youtube videos and they are pretty good . He's also in the management business of course so it's to his benefit to be upfront and set expectations versus painting a rosy picture like everything is going to be totally passive and turnkey ..just sit back and collect the check...and on the path to financial independence. 

Great post- you are spot on. They look great on paper- and the local realtors get a GREAT KICK out of selling the 10+ cap rates- but unless you have operations in place and on the ground. You are going to get eaten up. I am very much upfront with many clients and customers--- many times to my companies detriment and to the realtors commission checks but I sleep lovely at night. 

I know many people in my area that own 10-15 units self managed and do all of the work. Their retirement plan is to manage their own units making 3-5k a month... Its possible, but not very glamorous. 

[Ed Petras]

@Dylan Mathias No doubt we are headed for a shift. As you mentioned we are well in to a bull market that needs a correction. These cycles have been lengthening so it may be another year or two before we see the correction emerge. Politics and the Fed will certainly play a role. As rates and appreciation increase, affordability decreases. i think this makes a great case to invest in workforce housing. This group is aldeady being hit with rising healthcare costs and stagnant wages. As prices and rates increase, many will be perpetual renters. I my market, Inianapolis, low supply continues to be an issue, but off market deals can be found. Fix and flips are still selling quickly. I am watching DOM on thw coasts, as they are usually a bellwether for the rest of the country. If you see supply increasing, and days on the market increasing on the coasts, it may be time to evaluate your investing strategy. Myself, I see a move out of fix and flip to buy and hold. I am curious as to how others will adjust their investment strategy based on how the economy will cycle? I don’t expect the correction to be as kind or deep as the last. I also think the banks have learned many lessons from the last recession and will not flood the market with distressed assets.

[Marie-therese Tai]

I couldn't agree more, I have been saying this for ages. The current situation is not sustainable. When this market crashes it will drop like a stone, I believe the tariff war heating up is just hastening on the inevitable, and above all it's the reason why I decided to put off buying another multifamily. The real estate market prices I am seeing right now make no sense . I'd rather work on paying off my home. I have one investment property that I own outright,  and enough cash to buy another property outright when the real estate market tanks, my feeling is , a lot of the people singing the song of leveraging debt are going to be in bad shape. 

[Dylan Mathias]

@Ed Petras

I really like where you are coming from. It has seemed in the past that the coats have the greatest swings and swing faster, having the rest of the country following after. I know in my market we have recently seen price reductions but houses are still selling pretty quickly. 

[Joseph M.]

@Account Closed , yeah that is good you are upfront. 

Yeah with smaller properties it can make sense to self manage if one has a relatively small amount of units. I know most of the syndicators or larger investment firms look for large buildings because after a certain number of units you can have professional in house management just dedicated to the building. 

I know some longtime landlords in L.A with smaller buildings and they'll have a resident manager that handles most of the stuff so cost is low versus hiring professional property management ...but these are buildings with long term tenants so turnover is low. There is also rent control here in L.A which gives them an incentive to stay. They have their buildings paid off though so it's some nice income. 

I always thought it was kind of interesting they didn't scale up..but I guess they never needed to or had a desire to build some kind of big real estate empire. And these multi families today in L.A are selling for over $300,000 per unit these days so if they ever do decide to sell they'll be looking at a big payday ,they might be planning to leave them to their children not sure. 

It is pretty amazing how even one smaller building in a certain area that experiences big appreciation and rent growth can create generational wealth for families. 

[Joseph M.]

Originally posted by @Account Closed:

@Joseph M.   I am not sure where the money will go.  I just know it is going.  The Russians are leaving the very high end market.  That is not as much of a concern for most people on Biggerpockets.  Chinese investors are leaving the $200,000-$400,000 price range in North Texas.  That is having more of an impact.  As I have mentioned before some subdivisions in North Texas have 20+% homes owned by Chinese investors.

While this issue has been covered in the media, I noticed it before that.  It started here about two months ago when the average time on market was less that 30 days and the prices of listings started going down.  That is always a red flag.  So I decided to look up the sellers and all the players pushing the prices down were Chinese investors.  It has continued ever since.  Some of their listings say "Priced for quick sell".  Considering they do not have mortgages to be behind on, there is something else driving the change.

In Greece, I was talking about real estate.  I would ABSOLUTELY suggest finding a reputable Greek company to partner with.

 Oh ok I see what you mean. Since all real estate is local of course if one owns property in that area it would be a concern especially if you were looking to sell at the same time as the investors.  With Greece what type of cap rates are you looking at? Or is it more an appreciation type play? 

[Steve K.]

Originally posted by @Account Closed:

Originally posted by @Steve K.:

Hi Steve- How you took my post as disrespecting @Jay Hinrichs is confusing- I agree 100% with his post sir. I am actually modeling my change in strategy to his i.e new construction etc and moving to higher appreciation markets and new construction vs my old strategy. Please relax. In terms of all caps- the App on iPhone gets a glitch every now and then lol. And makes my caps sticky etc.

Have a good day sir. 

@Benjamin maciel

my apologies for misinterpreting you

you tagged @jay Hinrichs and said "but hopefully you are not using it as an excuse to sit on your *** because “deals” are getting harder to find", so I took that as disrespectful. I consider jay to be a friend and mentor, so I took it personally. once again, my apologies.

good luck in your venture and have a great week

aloha

steve

[Roman S.]

The stock market is inflated, the housing is inflated in many markets, and the tech industry in general is also inflated. So yes, I too think we are heading for a down turn, but I suspect this one might be different, based on some of the articles I recently read. It could take longer to materialize, and it could also take longer to hit bottom. A LOT of investors are sitting on cash and just waiting. Many still remember the previous recession, so they are patient and hopeful (including myself :). Its impossible to time to market, but I think even if my timing is 70% accurate, it can really make a big difference, especially here in Bay Area. Speaking from experience here :). My question is, how would it play out in other cash flow & hybrid markets like Indianapolis, Houston and Nashville. I bought 1 SF (B areas) in each of these this year to force myself to learn more about these and about RIE in general.

Like many of you I too,  would love to get a nice, cashflowing fourplex, but the recent appreciation in these markets and the slow down in sales in some markets like SF Bay area is giving me a pause. There are several new construction turnkey opportunities in many markets with mediocre cashflow. They are interesting for a passive investor like myself, but what happens when the economy tanks? Would all Bay area investors flood these other markets with rentals and drive the rents down and prices up? Or would they pause and slow down? I am cashflowing $100 - $200 a door, so I can only take so much rent reduction for these. 

Still, I wonder if I am better off buying a new construction turn key fourplex in areas like Jacksonville or Springfield/Houston TX now, or wait? These are NOT great deals, but is it better than doing nothing with the money?

[Neil Quinn]

I'm torn as one.  One thing that bothers me is... if RE takes a dip in 2-3 years, what will interest rates be at that time?  Can easily be 2-3% higher given the expected fed hikes.

[Carlos Gonzalez]

@Dylan Mathias It’s not that easy to predict In order for the stock market or real estate market to crash some big factors need to happen. Fox example: there is gotta be flexible rates in loans like those that were being sold in the mortgages There is gotta be NINJA loans that literally give loans to people with no jobs There is gotta be some product which people consume or use in a daily basis that increases considerably in price, like GASOLINE or groceries, you know something basic for survival because that’s priority for us people. As soon as that happens then we will not be able to make payments to other THInGS we deem not a priority.

[Roman S.]

Originally posted by @Neil Quinn:

I'm torn as one.  One thing that bothers me is... if RE takes a dip in 2-3 years, what will interest rates be at that time?  Can easily be 2-3% higher given the expected fed hikes.

 I would expect that feds would be sensitive to too many hikes, when we are in this "inflated" territory... but, technically economy is generally healthy, so who knows.  

[Neil Quinn]

Originally posted by @Roman S.:

Originally posted by @Neil Quinn:

I'm torn as one.  One thing that bothers me is... if RE takes a dip in 2-3 years, what will interest rates be at that time?  Can easily be 2-3% higher given the expected fed hikes.

 I would expect that feds would be sensitive to too many hikes, when we are in this "inflated" territory... but, technically economy is generally healthy, so who knows.  

I'm not sure about that.  They've already scheduled 7 or 8 conferences after their upcoming meetings.  If you assume a 0.25% bump each time that's 2% right there, which is a massive difference in total interest cost over 30 years.

[Victor S.]

Looks like fannie and freddie are feeling confident in SFH rental market without their additional involvement:

https://www.fhfa.gov/Media/PublicAffairs/Pages/Fannie-Mae-and-Freddie-Mac-to-Conclude-Single-Family-Rental-Pilot-Programs.aspx

[Ed Petras]

@Dylan Mathias Funny how when you focus on something it tends to expand. Per my earlier comments here is an article that provides some Zillow data in changing prices: https://mtgpost.com/SocialNews?id=Scott_4088_1599_636703688446040001 Prices are dropping in certain market segments. Something to keep an eye on.

[Nancy Zhao]

Originally posted by @Joseph M.:

@Nancy Zhao , it doesn't seem to have affected the U.S economy at least , we are seeing 4.1% GDP growth. 

https://www.forbes.com/sites/randybrown/2018/08/14...

For the housing market it doesn't seem there has been a large slowdown either. 

Dow almost to 26,000 today a year ago it was under 22,000. Where are the signs of the large slowdown here in the U.S?

 Large slowdown in foreign investment...

[Dustin Ruhl]

@Dylan Mathias It really doesn’t feel anything like 2007. Inventory is moving nicely or lack there of, companies are trying to hire, unemployment rate is at a good level, stock market isn’t crazy, fairly normal daily gains/losses. Mortgage companies still need to take your 3rd born to give a loan. Banks still arent eager to lend to small business unless thr business would take a large fee SBA Loan. To me this seems like a normal market for the most part.

[Pragati Soni]

@Dylan Mathias I am in a similar situation. I am working a full-time job as an analyst and will be 25 soon. Also, I am in the Atlanta area so if you are interested in investing in particular surrounding neighborhood let me know if you need any insight! I am currently looking for my first deal.

[William Huston]

I am confused what is going on in the market here in Tampa Bay area.. June we had 1.8 months of inventory, and july 1.71 months... then recently i have been getting bombarded by yellow letters at my personal home. I bought it less than a year ago, so they are getting pretty desperate on finding deals to pay cash for....

I got a yellow letter recently offering me 85% of the market value blindly, without ever seeing the inside of my house to know the shape its in.. just dont understand how these investors can get this desperate with all the signs of a downturn about to happen in the future. 

[Dylan Mathias]

@Pragati Soni

I am always interested in talking with people. Send me a message and we can set up a time to talk!