When Will The RE Market Crash?

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When Will The RE Market Crash?

Moises R Cosme
Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes

The history of markets tells us that we will always have a crash.  



This graph shows total consumer debt in the US since 2003

Housing crashes come from over indebtedness, this graph shows that US consumers have more debt today than they did during the housing crisis in 2008

Total US consumer debt in 2008 $13T

Total US consumer debt in 2019 $13.9T

Total debt per US consumer according to US Census Bureau data: $41.77, this exceeds the record established in 2008 of $41.68 (this is total consumer debt divided by the entire population)



So, are we in for a crash?? UNLIKELY

There are two key financial indicators that tell us that US consumers are in better shape today than they were in 2008 (even taking the pandemic into account):

  1. Median household income 2019: $68,703
  2. Median household income 2008: $57,010

Consumers make more money; the median household income is up 20% from 2008, while total debt is only up 6.9%.

The second indicator is the consumer debt delinquency rate

2005: 4%                                   2016: 4%

2006: 4.25%                              2017: 4.125%

2007: 6%                                   2018: 4.25%

2008: 8%                                   2019: 4.125%

Delinquency rates for 2020 are not yet available, but there is no evidence that delinquencies have spiked anywhere close to 2008 levels. 

Anecdotally it seems unlikely that there will be a real estate market crash at any point in the next 3 to 5 years. The federal reserve has dropped interest rates to 3% or less, which is being reflected in current mortgage rates (a recent Buyer of ours put less than 5% down and obtained a 30 year mortgage with a 2.37 interest rate). The federal reserve is now committed to a low interest rate environment for the foreseeable future, IF they were to raise interest rates back to 4% ALL homebuyers and many consumers that refinanced their properties would be under water as purchasing power would decrease and there would be a subsequent impact on sale prices (historically there is an inverse relationship between interest rates and property prices; drop interest rates, property prices go up and the reverse applies).

What do you think?  Many pundits disagree with me and believe that market is long overdue for a correction.  Reply and let me know what you think. 

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
5y

All those "pundits" that agree with you have agreed with you for the last 20-25 years.  Trouble is, they all went to the the University of Chicken Little.  What's really going to be funny, is when the market does crash, they will all claim the saw it coming,...the year before.  What they will conveniently forget, is they also predicted it coming the next year...for the previous 2 and a half decades.

Point?

Setup your RE so you can adjust the the crash.

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  • Dan M.
    Real Estate Investor · Unadilla NY · Member since 2017 · 418 posts · 297 votes
    5y

    I'm with you I do not see a crash coming anytime in the near future. I see a potential spike in foreclosures once the dust settles from Covid which will slightly impact pricing but nothing drastic like the last crash at all. Rates are low enough that people have equity in their homes and can afford it, its the new buyers when higher rates return that have an incentive to walk away if their value is underwater. Like you said there exists an inverse relationship to home value and interest rates tied into income of the buyer affecting the purchase price and value of a home. 

    10Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    All those "pundits" that agree with you have agreed with you for the last 20-25 years.  Trouble is, they all went to the the University of Chicken Little.  What's really going to be funny, is when the market does crash, they will all claim the saw it coming,...the year before.  What they will conveniently forget, is they also predicted it coming the next year...for the previous 2 and a half decades.

    Point?

    Setup your RE so you can adjust the the crash.

    31Reply
  • Walt B Philip
    Member since 2020 · 22 posts · 20 votes
    5y

    The 2008 crash won't happen again, a different one certainly will. Escalating aggregate DTI isn't the cause, it's an indicator of overall societal irresponsibility.

    My guess is the root cause this time around is a weird interlinked syndrome of ETF inflation and zombie corporations, both further inflated by covid emergency facilities, and the unfortunate reality is that the QE spigot is likely to remain open. 1990s Japan looks like America’s fate to me lately.  Sometimes there are things worse than crashes....

    Wait and see what Biden does, a lot can change very quickly.

    9Reply
  • Joe Martella
    Rental Property Investor · Cherry Hill, NJ · Member since 2015 · 626 posts · 495 votes
    5y

    I don't see a crash, but I do think that there will be price adjustments or correction in the immediate areas surrounding cites like NYC and Philadelphia.  

    The pandemic has reduced inventory - foreclosures/evictions have been reduced, people refrained from listing their homes because they didn't want to invite COVID into their homes, companies moving to 100% remote work allowing people to move to more desired locations, people moving out of cities because of the civil unrest and riots they have been experiencing, etc...  

    Eventually, people will feel comfortable enough to sell their homes and the foreclosure/eviction processes will open up.  Once that happens, I think that inventory will increase and prices will naturally deflate a bit, but not crash.  I don't expect that people are getting loans they cannot afford and will be walking away.  Instead, people won't have equity in their homes, which will prevent them from moving in the future, if they wanted to.  Rates are low and chances are that the 30 year mortgage payments are cheaper than what a city apartment costs.  This, of course, is if the job market keeps up.  If the Biden administration raises taxes on companies as he has promised, you could see companies move overseas and tax increase passed down to consumers.

    I do think that there will be issues with commercial real estate.  As offices are embracing remote working, there will be less of a need for rent.  Companies are realizing a savings in rent, electric, air/heat, phone lines, internet services, etc... which increases their bottom line.  I wouldn't normally think that there would be an impact on commercial real estate if the pandemic was only a couple months, but we are fast approaching a year, which has forced companies to invest and embrace the remote workforce.  We have seen this in the restaurant business.  Those that are surviving the pandemic have had to establish a delivery service that they didn't have, so people could order.

    In addition, people not wanting to go out have increased their online spending, which has led to the unfortunate closing of other brick and mortar stores.  Landlords will have to decrease their rents too.

    Overall, I don't see any doom and gloom for the residential market.  Just remember that you make money when you buy real estate, not when you sell.  As long as you keep this in mind when you buy an investment property, you should be fine.

    9Reply
  • Lamont Chen
    Realtor · Hudson County, NJ · Member since 2017 · 176 posts · 110 votes
    5y

    For new mortgages, loan requirements are stricter, especially now with the pandemic. Also, banks have some flexibility with existing mortgages due to the pandemic so I do not see any crash like 2008.

    In North, NJ close to NYC I still see high demand for homes from folks exiting NYC and some wiggle room for housing prices to higher. Despite everyone working remote my friends whom work in industry describe a future of hybrid work from home/office where people are commuting 2-3 days a week to the office and work from home the rest of the time.

    Regardless whatever deal you wind up picking up should make sense for your circumstance and long term goals.

    4Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Moises R Cosme

    If only I could predict a crash or a pandemic!! If only I could.

    5Reply
  • Account Closed
    Rental Property Investor · Torrance, CA · Member since 2016 · 724 posts · 1k+ votes
    5y

    @Moises R Cosme

    Housing prices don’t always correlate with GDP. There have been recessions where housing prices went unscathed.

    3Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    1032AM 17 January 2021.

    You're welcome, don't say I didn't warn you.

    17Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Walt B Philip I do not see inflation as a driver, particularly if employment trends hold.

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Joe Martella inventory has been an issue for years, absorption rates in major metros has held steady. Big macro factors drive real estate, not local micro ones.

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Lamont Chen lending standards will not be a significant factor in a market crash, interest rates will. Ask yourself, what would happen to the market if rates went to 4.25? What would happen to housing prices? What would happen to inventoru levels? What would happen to mortgage shops relying on refinance revenue?

    1Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Justin Thorpe the market crashing is a certainty.

    1Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Jonathan Hulen I do not argue that real estate market crashes are caused by recessions. What factors do you think will drive the next RE crash?

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Steve Morris what factors do you see that lead you to this conclusion?

    1Reply
  • Dennis Cosgrave
    Rental Property Investor · Member since 2019 · 304 posts · 462 votes
    5y

    I don't see a crash occurring over the whole country. There is currently an exodus going on from high tax, high regulation urban areas to lower tax areas. Cities like NYC, Chicago, Atlanta, Los Angeles, Portland, and Seattle will suffer significant price declines. Smaller communities and rural areas will see price appreciation. This trend is likely to continue for a few years. 

    3Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    @Moises R Cosme

    I then think you will be the richest man in the world soon for calling it - as long as you are putting your money behind that call. Good luck.

    1Reply
  • Eric Bilderback
    Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
    5y

    I will steel/paraphrase someone else's line that agrees with me.  "I have accurately predicted 10 of the last 3 crashes.  Things look bad but the Fed has made it work this far we will see if they can keep kicking this can down the road.  

    5Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Dennis Cosgrave migration to the suburbs is temporary, businesses are starting to figure out that remote work is not as productive. Once a vaccine is widely available (I would guess next summer or early fall) we will see metros re populate.

    4Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Justin Thorpe I am not claiming that I will get the timing right; the real estate market is due for a correction, I am calling that BUT I am not smart enough to predict the timing.

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Eric Bilderback the fed is out of tools, and there are a couple of really big problems on the horizon: (1) baby boomers, (2) Fannie & Freddie are insolvent. I do not believe a crash is imminent, but the market will crash inside of 7 years.

    1Reply
  • Steve Montgomery
    Rental Property Investor · Ellensburg, WA · Member since 2019 · 1 post · 0 votes
    5y

    @Joe Villeneuve I agree to a point. Real Estate has correlation to the stock market. Proven in 08. That’s a potential for a correction. Currently, the market is being “funded” by central banks. If/when that eggshell cracks we’re going to go for one hell of a ride. Bottom line: have strong liquidity and be able to ride those loans for at least a year.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Steve Montgomery:

    @Joe Villeneuve I agree to a point. Real Estate has correlation to the stock market. Proven in 08. That’s a potential for a correction. Currently, the market is being “funded” by central banks. If/when that eggshell cracks we’re going to go for one hell of a ride. Bottom line: have strong liquidity and be able to ride those loans for at least a year.

     When I say the two have nothing to do with eachother, I don't mean there isn't a connection economically.  What I mean is you can't use the same analysis methods for both.

    0Reply
  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y
    Originally posted by @Steve Morris:

    1032AM 17 January 2021.

    You're welcome, don't say I didn't warn you.

    You moron.......it’s more like 9:32 AM. 

    6Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Wayne Brooks:
    Originally posted by @Steve Morris:

    1032AM 17 January 2021.

    You're welcome, don't say I didn't warn you.

    You moron.......it’s more like 9:32 AM. 

     You're both wrong.  You're both right about it starting in the morning, but wrong about the date and exact time.  The 17th is a Sunday.  It's more likely to start in a Monday when businesses open, so the date will be the 18th.  I also think it will start out west and move eastward, which means it will start at 8am PCT, that would be 11am EST.

    Now just because we are making light of this doesn't mean we don't take this event to be a serious thing.  We just figure that since the so called experts have had their tries at predicting when it will happen, over the last 10-15 years, and missed the mark avery time, that we might just as well make our predictions and see if we can guess predict the "when".  Maybe one of us will be right, and we can call ourselves the next experts.

    6Reply
  • Michael Ablan
    Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Moises R Cosme - I think the crash will be more area specific, than nationwide

    I'll tell you what I think will crash my market.  Increasing interest rates + property taxes (through re-assessments to MV).   

    These two things make up 50% of our mortgage payments.  If those increase, then people's monthly payments will increase (which will lower the amount they can be pre-approved for).  It will also knock a good chunk of buyers out of the game completely. 

    Once those pre-approval amounts get lowered, we will see an inventory surplus , which will lead to price cutting.  Only issue is, our market is military.  So they buy/sell every 2-3 years.  Everyone buying a house in today's market will NOT be able to resell their houses 2-3 years later IF there's a drastic price drop from an inventory surplus.

    Smells like foreclosure and short sale city eh?

    2Reply
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