MARKET CRASH - Thoughts?

Wholesaler · Houston, TX · Member since 2015 · 78 posts · 30 votes

I hope those people that are in finnacial woes do well when it does crash but im getting my surfboard ready i want to ride the REI crash wave like so many have done in "00, "08, "12. thanks for the insightful post! btw better learn about sub2

5 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

@Mark Alexander A little confused as it looks like you're using a front-end ratio of 46% to say that he qualifies. I'm assuming it's FHA since it looks like you're using 5% down. That's probably the cap (or near it) when it comes to a back-end ratio. I won't argue the point that someone making $50K probably shouldn't be buying a $200K home but did FHA change their guidelines?

http://www.fhahandbook.com/debt-ratios.php

1 Reply

Brett Goldsmith

Investor · Los Angeles, CA · Member since 2012 · 1k+ posts · 500 votes

9y

Here is my opinion.

Yes, people are over extending, they always have and likely always will. People will always chase the shiny object, not get a great deal, serial refinance, and many people will run into financial difficulties for a myriad of reasons. I see job loss, medical issues, family issues, etc daily. Short sales are still rampant, just not as bad as 08-012, the tail end is still enormous though.

There will be another adjustment, as history has always shown, but who knows when it will be? My opinion is don't get caught on the side lines for years to come. To me it always makes sense to buy a great deal if you see one, anything otherwise is too speculative. If you're cash flowing or can weather a potential storm, in the long run, you'll make out fine. When a crash happens, just ensure you are in a place to continue buying!

9 Reply

Chinmay J.

Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes

9y

Originally posted by @Mark Alexander:

Let me start off by saying that I am no means making an excuse to not invest in real estate. I am actually looking to make my first purchase (house-hacking) within the year. Here is what triggers me though:

My full-time job is in the Mortgage industry, and on a daily basis, I see home-buyers getting themselves into loans with little to no money down leaving them with barely any equity in the property. In my honest opinion, I believe that we are in a personal debt bubble (credit cards, student loans, car loans, etc) because of people over extending themselves credit wise.
Let me show you an example:

Average Joe wants to buy a home for $200,000 putting 5% down:

His income Pre-Tax is $4,200 monthly ($50,400 annual)

The column in the picture on the left represents how mortgage companies qualify somebody for a conventional loan - in this case, Joe's max Debt-To-Income ratio is 46%. On the right however exemplifies Joe's real life monthly expenses vs his AFTER tax income leaving him with a Debt-To-Income ratio of 122%! (Sorry for the bad handwriting!)

If a market crash is upon us and home values see a major decline, my worries are that myself, along with many others are going to be underwater on their mortgages. Is now a bad time to buy? Or does if you find the right deal under market value, should you be safe?

I don't say this to scare anybody or drum up drama, I simply want to know others thoughts on buying in today's expensive market with little equity.

Cheers!

The lenders might be getting a little lax on lending, but they are certainly not lending as recklessly as they were prior to the last market crash. Will the prices come down a little bit? Maybe. In fact, I would say there is a strong possibility, but if the will they dip to the levels that would constitute a major crash?

You are in the mortgage world. You do this day in and day out. Will the lenders not tighten their lending standards if they see things going south? You tell us.

1 Reply

Mark Alexander

OP

Miami, FL · Member since 2017 · 11 posts · 12 votes

9y

Andrew Johnson sorry for the miscommunication. This is for a conventional, 5% down. Normally you can't extend more than 46.9 DTI on the back end. I used Fannie as an example because of the new student loan guidelines put into place today

0 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

@Mark Alexander You should probably just to an apples-to-apples comparison with/without the student-loan debt! I think it would be a little more clear and that's the material change. You're right that Average Joe (on a pragmatic basis) shouldn't buy a $200K home. Then again, I don't think that loan programs with 3.5% down or 5% down are the greatest thing since sliced bread either. But if your numbers for Average Joe hold true then a huge portion of buyers should never be able to make their first payment! We would have seen a mini-crash of foreclosures already, but instead:

http://www.businessinsider.com/us-delinquency-and-...

I don't know why there hasn't been a mini-crash yet. Maybe there will be with rates moving from the 3's to the 5's. Who knows.

Yes, there will be an inevitable correction or (at the very least) a plateau. But there are so many differences between today and 2005. I know, you were 9 then :-) Those were the times of interest-only loans, no income documentation, etc. If this were 2005, Average Joe would have just written down that he makes $150K per year (provide no supporting documentation) and received an interest-only adjustable on a $500K home. And then he'd do it again for an "investment" property. Average Joe was also convinced that it didn't matter because home prices were going up so fast they would be able to sell (and profit) before it reset in 5 years. Not to mention that Average Joe #2 didn't know that his teaser-rate refinance was actually adding to him loan balance (even thought he was making payments). Interest-only loans have made a small comeback but at least they require 20% down so there's some insulation.

Ah, memories of the good ol' days of pure insanity...

0 Reply

Jo Lyn Cornelsen

Investor · Puyallup, WA · Member since 2017 · 12 posts · 13 votes

9y

Markets continually cycle. And lots of things contribute to crashes.

Two things we didn't know much about when we first began investing were
1. Exit planning and
2. Market cycle investing.
Thank goodness we're more educated now.

3 Reply

Chinmay J.

Investor · Northern, VA · Member since 2016 · 1k+ posts · 904 votes

9y

Originally posted by @Jo Lyn Cornelsen:

Markets continually cycle. And lots of things contribute to crashes.

Two things we didn't know much about when we first began investing were
1. Exit planning and
2. Market cycle investing.
Thank goodness we're more educated now.

Yep ! Ever since the stock markets rallied since 2009, I have seen people predict market crash. Yes, there have been some dips, but overall market is pretty strong. Real Estate is no different, although the dips and peaks are not that drastic and cycles are slower.

2 Reply

Phil Reames

Kalamazoo, MI · Member since 2016 · 38 posts · 31 votes

9y

I was talking to one of the bigger developers in my area recently and he said this is starting to feel like 2007 all over again. Doesn't mean he has stopped doing deals. Just leaving the skinny deals alone.

1 Reply

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

9y

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

[email protected]301-893-4635 Podcast Guest on Show #192

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26 Reply

Ralph R.

Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes

9y

Mark Alexander Russell Brazil Mark Your making a mistake sort of. If your looking at this from an investors point of view most of us can't get a 5% down loan. Heck I haven't seen a 20% down loan in 3 years. Today they are all 25% down commercial loans. So do I have a risk of the market falling absolutely. Do I have good odds the market and the associated rents won't fall 25%? We better hope so because there will be a huge amount of other things to worry about! That's why they call it buy and HOLD. you need to properly manage your leverage because you don't want too much leverage if the market falls. To little leverage and your missing opportunity. If your leveraged right you can hold through the tough low markets. Maybe a mix of paid off unit and some higher leveraged ones?? Russell is correct. It's hard enough dealing with known problems. It's better to try not to create ones based on opinion. I've lowered my leverage for just this reason. Also it's important to mention I'm 62 years old. That changes my risk tolerance and the way I leverage as well. RR

8 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

If you are the Average Joe borrower in your sample calculation, then yes you should be worried. Lesson learned: don't be average. If your plan is to be average, then buy a S&P500 index fund. One thing I will say to be cautious of in your case, though, is that your primary income is tied to the RE industry, so if you have a housing recession you would get a double whammy in that your income could go down at the same time your property value goes down ... not something that can't be overcome with proper planning, just something to be aware of, plan for, and be extra cautious of in your case.

5 Reply

David Fernandez

Real Estate Agent · Vienna, VA · Member since 2016 · 289 posts · 253 votes

9y

@Mark Alexander market cycles are hard (impossible?) to predict. RE is a long term game for me, I don't do flips, at least is not my intention although sometimes it happens. If you have a long term view for your RE investments, you can invest in RE any time as long as:

- you have a good personal financial situation that will allow you to carry your property if things go south (have reserves, don't empty your bank account).

- the property will cash flow or, at least, break even in a worse case scenario.

- you still have or can save capital and have access to financing if there is a crash. You really want to buy then.

Now, I notice you are in Miami. I live in Miami too. The market is weakening (especially condos) and I'm not investing here anymore. Not all markets are the same, thus you will receive many different answers. Miami real estate market is too volatile, the spread from the top to the bottom is bigger than in other markets.

3 Reply

Account Closed

Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes

9y

@Mark Alexander

Markets are always local.

Subject To Works in All Markets.

Mortgage Brokers lost jobs big time in 2008.

The country is $200 Trillion in Debt. A correction has to occur.

Why is being underwater on your mortgage a problem? You bought the house to live in, not to gamble with.

I’d look for a backup source of income, like investing instead of assuming being a mortgage broker will always be there for you.

3 Reply

Hersh M.

Engineer · Carlsbad/San Diego · Member since 2014 · 285 posts · 97 votes

9y

@Mark Alexander Why student loan debt is 0 on left side in the pic? DTI should account for that, right? I do agree on increasing credit risks in the economy. Interest rates have recently gone down in spite of FED trying to raise them, that might help borrowers kick the can down the road.

0 Reply

Ian WalshBusiness Member

Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

9y

You can buy in any market but the deals are skinnier at the top.

0 Reply

Nichole Stohler

Rental Property Investor · Scottsdale, AZ · Member since 2017 · 116 posts · 136 votes

9y

Agree with @Ian Walsh, @David Fernandez, @Phil Reames and others here. If the numbers work, the property cash flows and you are in a long-term mortgage then you can ride the waves in the market. Now, take multi-family which seems to be at the top of the market in my area which makes the deal very skinny and then you have a 5-year commercial loan.... what happens in 5 years? Possibly 2007 all over again?

1 Reply

Mark Alexander

OP

Miami, FL · Member since 2017 · 11 posts · 12 votes

9y

Originally posted by @Account Closed:

@Mark Alexander

Markets are always local.

Subject To Works in All Markets.

Mortgage Brokers lost jobs big time in 2008.

The country is $200 Trillion in Debt. A correction has to occur.

Why is being underwater on your mortgage a problem? You bought the house to live in, not to gamble with.

I’d look for a backup source of income, like investing instead of assuming being a mortgage broker will always be there for you.

I couldn't agree with you more Ken! I always have some back up sources of income just in case, although my goal right now is to begin my REI career. I will be pulling the trigger on a house hack with a year; in the meantime, self education & saving more is key.

0 Reply

Mark Alexander

OP

Miami, FL · Member since 2017 · 11 posts · 12 votes

9y

Originally posted by @Hersh M.:

@Mark Alexander Why student loan debt is 0 on left side in the pic? DTI should account for that, right? I do agree on increasing credit risks in the economy. Interest rates have recently gone down in spite of FED trying to raise them, that might help borrowers kick the can down the road.

Fannie Mae just announced yesterday, for conventional financing, you go off of the payment on the credit report. In a lot of cases that is $0 due to a deferred payment or a payment structure worked out with their employer. It varies case by case. They also announced that you can roll your student loans into a refinance if you have enough equity.

0 Reply

Mark Alexander

OP

Miami, FL · Member since 2017 · 11 posts · 12 votes

9y

Originally posted by @David Fernandez:

@Mark Alexander market cycles are hard (impossible?) to predict. RE is a long term game for me, I don't do flips, at least is not my intention although sometimes it happens. If you have a long term view for your RE investments, you can invest in RE any time as long as:

- you have a good personal financial situation that will allow you to carry your property if things go south (have reserves, don't empty your bank account).

- the property will cash flow or, at least, break even in a worse case scenario.

- you still have or can save capital and have access to financing if there is a crash. You really want to buy then.

Now, I notice you are in Miami. I live in Miami too. The market is weakening (especially condos) and I'm not investing here anymore. Not all markets are the same, thus you will receive many different answers. Miami real estate market is too volatile, the spread from the top to the bottom is bigger than in other markets.

I couldn't agree with you more. My views are definitely long term and if you have reserves you should be fine. My post was geared more to the average home-buyer, not investors. Send me a direct message; I would love to connect and get your take on the South Florida market & share a few ideas I have.

0 Reply

David Zheng

Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes

9y

If you are going into the buy and hold realm, shouldn't matter much anyways. As long as you have a conventional loan, and youre still making monthly payments, your place could be worth $1 and nothing bad will happen. just ride it out until your value goes back up.

3 Reply

David Zheng

Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes

9y

the only thing I was confused about. $1000/month on food?!?! Wish I came close to eating that well...

3 Reply

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

9y

History repeats a recession every 7 years. Its time is close. Say people realize government can not change things and lose confidence in fiscal policy. Right now it is the stellar housing cost that will induce an inflation. Spend 1.5M on a townhome, 1.9M on a 3/2/1500 sf modest old home..... It is excessive.

0 Reply

Derrick Dill

Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes

9y

Yeah, I saw the 1k/month on food. This basically means he is eating out everyday, every meal. spending over 10$/meal. If he got some groceries, he could cut down on his food to about 300$/month. 350$ on his car means he is living beyond his means as well imo. I have 6 figure salary I have a lease of 150$/month for a 2017 Corolla.

This man in your example is simply living beyond his financial means.

2 Reply

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

9y

Thanks for sharing what you're seeing as a mortgage originator @Mark Alexander. It is scary to think there are so many avg Jack and Jill undercapitalized home buyers out there trying to keep up with the Joneses.

We on BP, however, do not pay full retail (hopefully) and look at the numbers without emotion. I haven't been seeing much that makes sense on the buy side, so I am selling some. The smart money here (for now) is building new, though labor rates are rising. RE is so local - town to town and neighborhood to neighborhood. Make sure your area has good employment and analyze it and each opportunity independently of the 'real estate market'.

@Nichole Stohler makes an excellent point about commercial loans and their 5-yr calls and rate adjusts. Only get those if you are financing commercial assets! The risk is real.

If you are forcing yourself to get these higher risk, higher PITA loans on your little houses because you've crammed them into an LLC, you may have a rude awakening in a few years. Lots of factors determine whether a bank will call your loan or not, regardless if you are a good risk. Asset protection. LOL Always get long-term fixed rate residential mortgages for residential property.

0 Reply

MARKET CRASH - Thoughts?

MARKET CRASH - Thoughts?

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