When will Real Estate Fail?

[Kai Van Leuven]

I spent a few years in the mid west in little towns that mined lead. At one time, the real estate investors there probably thought “we use lead for everything, no way it could fail as a commodity. If I hold onto this real-estate...” The same could be said for a host of other industries (travel agencies, taxis, news papers, ect.).

What will hurt real estate in the future?

My thoughts

1. Stagnant incomes- incomes are the driver for real estate valuation. You can show appreciation but if incomes are not increasing it doesn’t mean anything.

2. Virtual Work- All my investments are tied to suburbs of major/regional metro areas. If folks could live in Montana and have the same job, who would want to pay Seattle housing prices.

3. Basic Income- I try not to be negative but I fear a “race to the bottom” theory is pretty real. A lot of folks are finding it harder to make ends meet and Real Estate prices/rent outpace inflation. Our government will let any company merge or be acquired, creating super companies (antitrust laws). I am not for basic income but see it as a viable solution to some long term problems. That will make coastal areas prices fall and the Midwest and south to remain the same.

4. Transportation- the idea of self driving cars makes a commute not as daunting to many folks. Just sit/sleep in your car. Does the commute really matter?

These are all independent from a Real-Estate/rent bubble. If you got something, chime in!

[Jay Hinrichs]

Originally posted by @Kai Van Leuven:

@John Barrett

We have about the same size portfolio and you seem to take a pretty conservative approach towards investing, I do the same.

I was mostly trying to open a discussion where folks would bring up the “threats” to real estate investing in general.

In our area, the biggest threat would be a Boeing move. No doubt. 

growing up in Cupertino pre computer age.. the San Jose economy went where Lockheed took it.. just like Boeing in Seattle area although its more diverse these days for sure and Lockheed foot print has been taken over by Google :) 

Boeing is one real Charleston SC has been so good to us the last 5 to 6 years.. along with Vovlo  MBZ and BMW.. JOBS

[Kristyl L. Isaacson]

@Matt Walker

Hahahahha yes! We are full!

[Bart Bachrach]

@Kai Van Leuven that’s the risk in real estate ultimately, we’re all in that boat. I think if you pay attention to current trends and stay involved, that won’t happen to you.

[Diane G.]

@Jay Hinrichs

Thanks...

Agreed on no crystal ball...

That said, interesting to hear that there was a crash in 1989 time frame...

So 1989, 2006, 2018...... do I start to see a pattern? I guess so... Lol

[Diane G.]

@Medi Sarwary

Well said...

RE cycle is every 12-15 years from peak to peak.... the previous peak for Bay Area is 2006.... 13 years ago...

While no one can predict exactly when the next recession will hit, it is very likely one can buy for cheaper than today ..

[Kai Van Leuven]

I looked at the chart attached it looks like wages have increased .62% since this data was taken in the early 80s. Not “through the roof” as you may suggest. If you are looking at the most recent 5 years you could say they are climbing at a high rate (5%) but there are 3 periods that have shown growth similar to now, followed by a decline. Not buying anything other than stagnant, even with the chart. You made the mistake of zooming in too far on the chart...

2) Virtual Work - I disagree for exactly the opposite reason. Denver is more expensive than Cleveland. Nothing against Cleveland, but if I could work remote, I'd rather pay more and live in Denver. The best locations because of their geography, culture, climate, etc. will win with virtual work. Not the cheapest place.

It is cool and trendy to live in a downtown area. After the glitter leaves it will just be an overpriced area that has a slew of problems, homelessness to name one. I can’t speak for Denver but Seattle has transformed into a city I don’t want to visit. 

3) Universal Basic income will simply redistribute wealth. If we allow capitalism in any form similar to it's current one to continue with respect to rental real estate, all that will happen is that prices will, within a few years, climb to reflect the current distribution of wealth. This is a complex mathematical/economical point that I do my best to explain in this article. The cost for food, water, transportation, entertainment, clothing, etc. is basically the same in every city in the country. But San Francisco has much higher median INCOME and median HOUSING Costs than a city like St. Louis. Basically, all of the incremental after-tax take home pay in a higher priced market goes to housing. Increase that income with UBI, and the free market will quickly absorb that into housing prices. It will, however, immediately translate to higher taxes and higher home prices and rents - all good things for the leveraged real estate investor (the taxes are really a non-factor because the tax advantages - but not a positive).

Maybe it will add to buyers base for affordability, maybe. I am all for inflation. I  carry a lot of long term fixed debt. The opposite side to that is that folks will feel disincentivized to work and will create higher unemployment, underemployment, and  folks living off the system. There has always been a high correlation between government safety nets and unemployment. UBI is just a government entitlement.

4) If the commute goes away, that gives people more free cash flow to spend on rent.

Uh, all my properties are tied to communities And places to work. I would see those as important.

[Michael P.]

I looked at the chart attached it looks like wages have increased .62% since this data was taken in the early 80s. Not “through the roof” as you may suggest. If you are looking at the most recent 5 years you could say they are climbing at a high rate (5%) but there are 3 periods that have shown growth similar to now, followed by a decline. Not buying anything other than stagnant, even with the chart. You made the mistake of zooming in too far on the chart...

2) Virtual Work - I disagree for exactly the opposite reason. Denver is more expensive than Cleveland. Nothing against Cleveland, but if I could work remote, I'd rather pay more and live in Denver. The best locations because of their geography, culture, climate, etc. will win with virtual work. Not the cheapest place.

It is cool and trendy to live in a downtown area. After the glitter leaves it will just be an overpriced area that has a slew of problems, homelessness to name one. I can’t speak for Denver but Seattle has transformed into a city I don’t want to visit. 

3) Universal Basic income will simply redistribute wealth. If we allow capitalism in any form similar to it's current one to continue with respect to rental real estate, all that will happen is that prices will, within a few years, climb to reflect the current distribution of wealth. This is a complex mathematical/economical point that I do my best to explain in this article. The cost for food, water, transportation, entertainment, clothing, etc. is basically the same in every city in the country. But San Francisco has much higher median INCOME and median HOUSING Costs than a city like St. Louis. Basically, all of the incremental after-tax take home pay in a higher priced market goes to housing. Increase that income with UBI, and the free market will quickly absorb that into housing prices. It will, however, immediately translate to higher taxes and higher home prices and rents - all good things for the leveraged real estate investor (the taxes are really a non-factor because the tax advantages - but not a positive).

Maybe it will add to buyers base for affordability, maybe. I am all for inflation. I  carry a lot of long term fixed debt. The opposite side to that is that folks will feel disincentivized to work and will create higher unemployment, underemployment, and  folks living off the system. There has always been a high correlation between government safety nets and unemployment. UBI is just a government entitlement.

4) If the commute goes away, that gives people more free cash flow to spend on rent.

Uh, all my properties are tied to communities And places to work. I would see those as important.

@Scott Trench  

Why did Adele cross the road? 

To say “hello from the other side”

[Todd Powell]

@Kai Van Leuven I can see why some industries can fail, and namely your lead example

However, unless one is homeless, all people need a roof over their head, and second to needing food and water, I think this is a very safe bet. I realize RE valuations in the future certainly can fluctuate, if you look at a 100 year period in the past, history tells us that RE is a solid investment, as well as the stock market. RE is not as passive as stocks, but fulfilling a basic need all of mankind needs, makes RE a solid investment. This will hold true unless the entire world collapses, then nothing will be a good investment.

[Angelo Mart]

I completely agree with #1 and #3

[Levi Helms]

Hello BP! This is my first post. Oh boy I could spend a lot of time here! Real estate is such a diverse and powerful arena there will always be opportunity more or less as there are people with freedom.  That said, as much as I love real estate, I don't really believe in good investment types but I believe in good investors. There will always be opportunities to adapt and anything growing is moving. "What would make real estate fail"? Categoric failure would require global change the likes of which have not been seen in recorded history like broad scale depopulation or a sea change in global governance eliminating current incentives. I'm not holding my breath. It's the tax bennies, corporate protection, and government backed lending that have served to sweeten this pot so: remember that when you vote. I can relate to assessing risks and downsides, i.e."Where's the catch?" Most importantly don't let the emotion of fear of failure stop you in 2020 from making moves.  There is no better time than this moment to enjoy creating value.

[Jerry Lucker]

@Kai Van Leuven

Easy answer. Real Estate will ‘fail’ when people stop living in houses.

[Cara Kennedy]

@Kai Van Leuven - Hey, I like the spirit of this post overall in sparking analytical conversation. What I disagree with is the tendency for the failure of REI to be based on external factors. Everything I've learned about this industry stresses the need for investors to be pragmatic, forward-thinking, and analytical to monitor industry-recognized market fluctuations. Most things are cyclical and major technological and industrial changes have warning signs.

Being attentive to one's local market, national trends, and keeping emotions out of the business are the key factors for success.

Regardless, all the best on finding the stability amongst the surfing waves of real estate investing.

[Scott Trench]

@Kai Van Leuven

Love the debate! With Real Wages, it's important to remember that they do not have the same pattern as nominal wages. It's very difficult for wages to significantly outpace inflation in the long-run. The fact that real wages have been generally rising the last forty years means that NOMINAL wages have been increasing during that period at a rate faster than that of inflation. To me, that signals more, not less, disposable income. That's more ability, not less, to purchase housing in the near term. It's all relative - real wages are the highest they've been in my entire life, for example. To me, that signals an ability to pay for property, and that so long as supply and demand stay relatively in line, that rents will increase with inflation. 

I certainly agree with you on the Seattle thing. Hopefully, the rest of this country learns the lessons from the questionable handling of the homeless that West Coast cities are paying dearly for. In general, however, and where urban centers are not being wrecked by homelessness in other parts of the country, and I believe there's a good chance that folks will continue to live there. However, could well be wrong on that and respect your opinion.

[Jay Hinrichs]

Originally posted by @Jon Q.:

Originally posted by @Kai Van Leuven:

I spent a few years in the mid west in little towns that mined lead. At one time, the real estate investors there probably thought “we use lead for everything, no way it could fail as a commodity. If I hold onto this real-estate...” The same could be said for a host of other industries (travel agencies, taxis, news papers, ect.).

What will hurt real estate in the future?

My thoughts

1. Stagnant incomes- incomes are the driver for real estate valuation. You can show appreciation but if incomes are not increasing it doesn’t mean anything.

2. Virtual Work- All my investments are tied to suburbs of major/regional metro areas. If folks could live in Montana and have the same job, who would want to pay Seattle housing prices.

3. Basic Income- I try not to be negative but I fear a “race to the bottom” theory is pretty real. A lot of folks are finding it harder to make ends meet and Real Estate prices/rent outpace inflation. Our government will let any company merge or be acquired, creating super companies (antitrust laws). I am not for basic income but see it as a viable solution to some long term problems. That will make coastal areas prices fall and the Midwest and south to remain the same.

4. Transportation- the idea of self driving cars makes a commute not as daunting to many folks. Just sit/sleep in your car. Does the commute really matter?

These are all independent from a Real-Estate/rent bubble. If you got something, chime in!

Never!

Land, they’re not making any more of it.  Number of humans on this planet is still growing exponentially. 

Land they are not making anymore of it.. was tag lines when my Dad was selling land in the 60s.

the other one was a picture of an Oak tree on a brown hills side.. tag line Location Location location.