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Updated over 16 years ago, 04/27/2008
Downward Spiral
What are everyone's thoughts? How much longer do you think we will be in a "down" market? :crying:
Until property values and the long term, inflation driven trend line match up.
Have a look at this graph of MO farm land prices: http://agebb.missouri.edu/mgt/landsurv/07landgraph.htm Notice from the peak in 1981 it took until 1997, 16 years, for prices to come back up to that value. It took six years, until 1987, before prices stopped declining.
House values may well undershoot the long term trend line. The supply/demand equation has changed, since the easy money that drove demand abnormally higher is gone. If we end up in a long term recession (low probability IMHO, though others will disagree), prices will be further depressed.
it's funny you used that reference. MO farmland prices are currently doing very well due to sharp spikes in corn & soybean demand
Yeah, I noticed that. Its been a while since I looked at that graph, and its been updated recently. A new bubble begins. I doubt that's restricted to MO.
Do you think this statement is true? "We generally go through 5 years in a down market and 10 years in an up market"
Or is it the other way around?
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Locally, I wasn't overly concerned until today when there were big news stories about rationing rice. I had felt we would be at the bottom by late this year, now I'm not so optimistic, personally.
No, it's not true. If you do a little googling, you can find charts of historical housing prices. You will discover that after a typical housing boom, it takes about 2 years to reach the bottom and then another 8-10 years for inflation adjusted prices just to reach their previous highs. However, since this bubble involved a HISTORIC runup in prices, I think you can reasonably expect things to be much worse this time.
In addition, our country is at or near a crisis point. Two-thirds of our economy is consumer spending. The consumer stopped saving many years ago. Over the past few years, the consumer was spending money from home equity via frequent refinancings. That is over. The average American is also tapped out on their credit cards. Add in the mix that the baby boomers are beginning to retire and there is no money to pay all the entitlements we have promised them. Furthermore, our entire monetary system is based on NOTHING other than the government's ability to tax us into the ground (fiat money). Every time a government has used fiat money, the economy has collapsed.
Now, add in $4 per gallon gasoline and runaway inflation on food and I honestly believe that we will see a major DEPRESSION in the near future (if we're not in the beginnings of one now). The only real question is whether we're prepared to survive and even thrive during those tough times.
Mike
Thanks for making me dust off my dictionary to read the definition of fiat money, Mike!
Here's a couple more worries: who will the government raise taxes on? Unemployed people? The elderly? No - it will be the greedy rotten landlords who are sqeezing the life out of honest Americans.
And we'll make easy targets, too. Can't hide your rental unit under your mattress, or deposit it in an offshore account.
But wait, now let's add in rent control! Seems pretty popular in New York and California, so why not make it available to deserving people everywhere?
But I'm not worried, oh no sir - I'm gonna start making all my tenants pay their rent with rice!
hahaha @ "But I'm not worried, oh no sir - I'm gonna start making all my tenants pay their rent with rice!" - Typerider
You might want to, rice is getting more expensive!
But I think this entire thing is kinda a result of bubbling with the government messing around with the tax system for political reasons... but regardless of the reason, i wasn't too certain about a full blown "depression" but that very well might happen depending on how badly the gov passed "financial rescue plans" for the mortgage crisis will go... Inflation's gettin worse, and I doubt that we can recover soon, but depression? hmmm... still iffy for me. Economic realignment by the market itself is what I think should happen. It's a matter of enduring short-term economic pain versus long term pain. But with this being an election year, i doubt the gov will allow that.
But the thing is, I think it's because the government has been giving all these "tax breaks" and "bail outs" that is screwing stuff up. They NEED money to run the country and compete with other currencies/countries... but I do understand that increased taxes usually kills the "little man" not the "millionaires"... eh... my 2cents.
In all honesty, I think the rest of the country is just catching up to my area. We have been in a recessioin since the 80's and have never returned due to plant closings. We never had a housing bubble or over inflated market. Our unemployment rate has been a steady 6% for over 20 years. The best part about this is that now that the rest of the country is hurting just as bad, the banks are feeling the pinch corp wide and have to let these REO's go cheap.
Many people got rich during the depression.. Just wish I knew how, because I happen to agree with Mike and my dad, who was a kid during the depression. Things are going to get much worse.
I think you may be confusing me (Jon aka Wheatie) with John Corey (aka REI). I think this is the thread you're referring to: http://forums.biggerpockets.com/about16056.html
However, I would agree with John that there is a serious supply/demand problem with food. Its been in the news frequently lately, including a big spread in "The Economist" about the situation. Demand is outstripping supply for some foods in some places. The Economist article makes an interesting point that food supply does not respond to increased demand like other commodities. For one, it takes a long time to actually increase supply. Farmers must choose to plant, and the crop must come in. For another thing, government intervention (that just seems to keep coming up) often has exactly the opposite effect. If farmers were able to benefit from the higher prices, they would have an incentive to grow more. But when governments slap price controls on food commodities, farmers have no incentive. When the inputs to food, especially fuel and fertilizer (i.e., oil) are becoming more expensive and the prices is restricted, farmers are actually disincented from producing. So, the shortage gets worse, not better.
I will agree with REI on this point. This is not inflation. Inflation is when money becomes worth less, usually because the government is printing it like crazy. The value of stuff stays the same, but since the money is worth less, it takes more money to buy it. Look at Zimbawbe, where they now print $50 MILLION dollar bills that will barely buy a hamburger. Their government is running the printing presses full speed, resulting in money that's worth less and less every minute. Fiat money doesn't CAUSE this, but you sure can't do it without fiat money.
Rising food prices may well have an inflation component in them. But, much of the increase is due to supply/demand imbalance and the increased price of inputs. Housing prices rose dramatically from 2001 to 2006 (in many places, not all) not due to inflation, but due to supply/demand.
Exactly why oil prices are so high is an even more complex question. There is supply/demand factors in play. I think there is also yet another bubble in play, too. Now that their CDOs and SIVs are worthless, the big money managers need another place to put their money. Stocks look shaky. Real estates a no-no. Bonds don't have the expected returns. Hey, oil looks safe.
To go back to Crystal's original question, I think the answer is very hard to predict. The economy, both the US and the entire world, is really in a precarious position. Maybe things will settle down and, after a few years, prices will begin trending up. Maybe things will collapse into a depression. Its not impossible, IMHO, that we could end up with a really bad situation as this all comes to a head, and end up in a major shooting war. Leaders in some countries are already pointing to the US efforts on biofuels as the cause of the food shortgages. The US is insisting OPEC boost production. The middle east is the same powderkeg its been for centuries. Any surprise gold is over $1000/oz?
That's exactly right. We're sitting on a powder keg and all we need is a spark to blow the entire economy into oblivion. Wheatie is exactly right, a major shooting war could literally happen any day. The US has not had the stomach to do what it needed in Iran, even though they are killing our soldiers. The Iranians are VERY FORTUNATE that someone like me isn't president, because I would have already turned their country into a parking lot. Fortunately for the rest of the world, Israel has already said that if the US doesn't act, they will. I saw a report last week that Israel is planning an attack on Iran in May or June. This thing could go nuclear so fast that it would make your head spin. Regardless of the nature of the war, oil prices could double literally overnight. I think that would be enough of a spark!
If you go back in history, you'll see that there hasn't been a single generation that hasn't experienced an economic collapes - except this one. Of course, the pundits will say that somehow things are different this time. :roll:
The US is printing money (or more accurately adding computer digits) at an alarming pace also. That's where all this bail out "money" is coming from - THIN AIR! Based on last month's inflation number, (1.2% as I recall), even the government is forced to admit that annual inflation is even now at double digits. Of course, if you don't eat or use fuel, inflation is a little lower!
I'm buying a shopping cart, so that I can fill it with cash if I get hungry for a Big Mac!
Mike
here is a question.... DO you think that over the past decade the production of new homes and resale of existing homes has out paced the rate of those looking for homes?
I'm not sure that's a meaningful question. I guess you could look at the total for-sale inventory 10 years ago vs. right now. The difference would be the answer. My guess is that the difference is small, compared to the number of sales that took place in the last 10 years.
If you're asking a supply/demand question over time, that's much easier to answer. Real estate agent groups track that data very carefully. Home sales rate and inventory are carefully recorded. Agents often talk about "months of inventory", meaning the number of homes currently for sale divided by the number of sales per month. Getting this data isn't always easy, though. I'm on one of the local agents mailing list, and he often includes this data. As of 4/7/08, in the Denver area, there were 20,575 homes for sale, with 3,187 sales per month. That's 6.5 months inventory, which this guys shows at being right at top edge of a neutral market. Any higher, it would be a buyers market. At lower prices, there is less inventory while at higher prices, there is more. Its a buyers market over about $400K and a sellers market under $200K.
So, if you mean was the inventory low or high over the last 10 years, I think I can be pretty confident in saying the inventory was low, maybe very low, from about 2001 to about 2006 in some areas. Now its high, and getting higher. Demand exceeded supply in the early 00's, and that's what pushed prices up.
I'm in real estate and my family has tightened our belts significantly just in case the future becomes worse. But I look around and on a Wednesday night there is still a wait at P.F. Changs, people are still buying SUVs, Target is packed with people buying knick knack crap...If we are heading toward a depression, I'm not sure everyone has the message yet. Personally, I feel like the US economy could tip either way, but I feel like I'm in the minority watching our budget.
Didja ever see "The Roadrunner" when Wile E. Coyote runs off a cliff?...
The current inventory level nationwide is almost 10%. Here is the data from the National Association of Realtors (although I believe that their data is optimistic):
http://www.realtor.org/Research.nsf/Pages/EHSdata
Mike
IMO, there are two distinct advantages to REI: 1) it's a local market, meaning situations vary from town to town depending on many variables that are not simple to quantify using 'national averages'; and 2) it's an inefficient market, unlike, say, the stock market.
The economics of the pond I swim in are driven by a growing university system and a growing regional medical center. At present my target renters are those connected with the university (students), and the low-income people connected with related service and support industries. Anecdotally, while one group has much more money than the other, both exhibit remarkable similarities in irresponsible destructiveness and a necessity for 'parent-like' guidance from me.
Because of the future potential of my pond many large investors are pouring a great deal of money into real estate development. Personally, I cannot compete with anyone who can write a million dollar check. But I can certainly find and exploit market inefficiences.
When Ross Perot was building his mega-succesful company many years ago he stressed the importance of recruiting the right personnel. His quote about that was, "Eagles fly high and by themselves and must be gathered one by one."
Thus it is in my own endeavors buying property.
So bad times may certainly come, but they will be distributed unequally throughout the land, IMO. My feeling is that if you're in this business one worthwhile strategy is to find and define your market and then become a local expert. Opportunities will present themselves.
Let me also add, FWIW, that I also have a good half acre reserved should I ever need to grow vegetables. It helps me sleep at night.
wheatie your stats show that as of 4/7/08 there were 20,575 homes for sale, and they were selling just over 3000 per month. Just like any other stats these number can be taken in a number of ways...
1) You need to look at the length those 20,000 homes were on the market.
2) how many new home sales are being sold vs. used home sales.
Now this is where my questioning comes in... are the builders building too many new homes? building them too fast?
I guess it is a supply and demand issue that i am trying to ask (and these are just some hypothesis that i am throwing out)
Is there a point in time where the builders have built enough new homes? Or possibly there are too many builders building new homes, while people are buying existing homes?
Originally posted by "Wheatie":
If you're asking a supply/demand question over time, that's much easier to answer. Real estate agent groups track that data very carefully. Home sales rate and inventory are carefully recorded. Agents often talk about "months of inventory", meaning the number of homes currently for sale divided by the number of sales per month. Getting this data isn't always easy, though. I'm on one of the local agents mailing list, and he often includes this data. As of 4/7/08, in the Denver area, there were 20,575 homes for sale, with 3,187 sales per month. That's 6.5 months inventory, which this guys shows at being right at top edge of a neutral market. Any higher, it would be a buyers market. At lower prices, there is less inventory while at higher prices, there is more. Its a buyers market over about $400K and a sellers market under $200K.
So, if you mean was the inventory low or high over the last 10 years, I think I can be pretty confident in saying the inventory was low, maybe very low, from about 2001 to about 2006 in some areas. Now its high, and getting higher. Demand exceeded supply in the early 00's, and that's what pushed prices up.
Everyone is targeting students...that's the problem. It's not enough that every Georgia developer has thrown up student apartment buildings and busing them to the university...they're now building 4 bedroom homes with one bath per bedroom/common areas etc. They're going to trap that $500/month income and deprive all local investors out of the business. Developers who planned townhomes and urban loft condos are now building cities of apartment buildings. We're beginning to make Florida's mistakes.
The only decent rental left is grad students, new hires at the university. Everyone else is dependent on low wages which converts to no more than $650-$950 for a house regardless of the amenities.
I used to be in the book business and the independents just sat back for years and fought technology as a group while B Dalton/Barnes and Noble etc.etc. chewed them up. Hope that's not happening with real estate but it's getting very hard to compete.
I'm certainly seeing that kind of fanatical building targeted toward students here in my college town. Toured one place with heated pool, billiard room, tanning salon, full-sized indoor basketball gym, exercise room, movie room, and so on and so forth. Fully furnished and utilities included. But it is far from town and campus. Cops ride the bus every weekend evening handing out $50 tickets for barfing and arresting underage drinkers - still drinking! Some major drug busts occur out there, too. I swear I didn't see one ugly co-ed in a bikini by that pool, all of 'em with a well-stocked cooler close by.
Imagine turning 'Animal House' into 'Animal Complex'. Were I single and twenty years younger I'd find a way to live out there myself!
However, my bet is that ten to fifteen years from now these may very well turn into high-density section-8 tenements. That pattern has already occurred in Durham.
Students gravitate to the 'latest and greatest'. An investor's only real defense is location. But even so, common sense and cash flow rule. I'm already seeing several foreclosures and 'don't wanters' in the good college rental areas. Unless Daddy Bigbucks comes along to buy them for his college-aged daughter, they may sit there for a while. At least until the price comes down enough to make the numbers work.
I think South Carolina gets it's ideas from North Carolina. I first noticed this way out, student-gets-everything trend in Greenville N.C. 5 years ago when I visited my uncle and staying at a motel. We just copied the $$$ down here. The only other trend is parents buying houses in formerly great neighborhoods for kiddies. There's a sloppiness that's developed as a result.
I say formerly because the neighborhoods are now dependent on students to keep the yards (not) and keep the college Joe look down with flags etc. When a neighborhood gets sloppy yard care and lots of student flags and beer kegs, older residents move out and even investors will buy. This student rental/purchase has moved into neighborhoods out 2-2.5 miles or so all within the last two years. Seems the little darlings love houses in the best neighborhoods. That's what they're used to. Try and rent a 1 bath home to students. Not how they grew up..sharing, I mean.
The parents don't care until they've got to sell. They've just contributed to lowering the value of that "golden egg" investment and the neighborhood. But, hey they're from out of town and out of state. That "me" principle all over again which they pass on to their kids.