Stock speculators moving into real estate are causing a bubble.

[Michael Rutkowski]

Alright, I apologize if this becomes controversial, or offends anyone.

As an investor and agent, I am seeing a lot of speculation in the market. It seems to me, that stock market speculators, are looking to unload their money into tangible assets across the country, but focusing primarily in large urban areas, where housing prices are reaching insane levels. 

In my opinion, real estate is a commodity and should be treated as such, but it is being speculated on because of the types of investors moving into the markets. Is that good or bad? It's all relative. For me it is fantastic, for those just starting out, it makes it very difficult to break into certain markets. Independent individuals who are looking to build wealth with REI are pushed into marginal markets, while large REIT's and institutional investors are building and building large complexes with inflated rents, and driving up the price of everything. This is a form of the 'syndication' we were seeing in the 80's and 90's, which is now a dirty word.

I've already survived one bubble with flying colors, and have a bomb-proof strategy to survive another. Do you? If your CAPs are low now, you may soon be underwater, just a heads up. What happens in large urban areas will trickle out into the hinterlands, depressing all markets. Some areas will be 1-2 years behind, but it will affect all markets this go around, I promise. In my opinion, I see this market either plateauing or bottoming out in 1-2 years from right now. I like to reference the Case-Schiller Index, but there are so many worrisome indicators out there. The trajectories that we are seeing are by no means sustainable. 

Housing and building is strong now but remember, wealth through real estate doesn't happen overnight, as many new investors are seeing. There is a limit to the rents people can afford. Employment is very strong, but what is more important to look at is the average wage. It will take only a few quarter point rise in the prime rate, or one major Fund collapse, and I can see it all coming down. At that point, I am going to gobble up properties left and right, as oversupply outstrips demand. Watch what you are doing, and do not be blinded by the prices out there. A major worry of mine is these 401k's just dumping money, bi-weekly into ETF's. Can we not remember more than a few years into the past? Are we being blinded by the stock market? 

Anyone else out there thinking along these lines, or I am just crazy over here?

[Steve Vaughan]

Not sure if the bubble is related to paper equity transitions or not, but something to consider, especially related to foreign buying I would think.

I have a couple metrics and a very crude leading indicator I follow, ready to sell.  I refuse to look at 200 deals to find one.  I'd rather take a nap as most of you know.

As far as houses, I can sell, easily by owner, my smalls that become vacant anyway and are facing cap ex. Did 3 in the last 9 months. Old roofs and HVAC, for instance.  I discount less than it would cost me and I didn't have to do or schedule or oversee the work. None of those owner-occ buyers cashed out of the stock market though.  It's simply related to population growth and lack of inventory here. Demand vs supply. 

As far as commercial assets, you have to know what your market cap is for that asset class and that neighborhood.  The trend line obviously has had downward pressure for a while about everywhere.  When they compress down an additional 1% (from 6% & 7% in my case) in my 2 markets, I'm out.  I estimate that to be next spring, but will see. Time to exchange into something else.  It is too easy to beat 5 & 6% without the hassles of buildings and tenants. Those cap rates are also an historical floor.

My last leading indicator I call MSA dominoes.  Yours may be different, but learn the markets your area follows.  Like dominoes, you may have time and see clearly what may happen.

For me in the west, I watch the Bay Area.  3-6 months later will be Seattle.  6 months later will be me, 3 hrs east of Seattle.  6 months later will be my other little market to the north.    Crude seat-of-the-pants observation, but it may give me up to 12 months to find a chair when the music stops. Cheers!