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Updated almost 5 years ago, 01/06/2020
When will Real Estate Fail?
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!
#4 All Forums Contributor
- Plymouth, MI
So looking down your list, after reading it more than once, for some reason, I couldn't seem to find anything that would make me think would be a cause for RE to fail.
BP needs to coin a phrase for the opposite of irrational exuberance, where people think real estate is forever bound to fail because an artificial bubble popped a decade ago
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Michael P.:
BP needs to coin a phrase for the opposite of irrational exuberance, where people think real estate is forever bound to fail because an artificial bubble popped a decade ago
"The sky is falling", or "The Emperor's new clothes"?
or...
"The Sky is Falling on the Emperor,...and his new clothes".
@Joe Villeneuve and @Michael P.
Sorry forgot, Real Estate is a foolproof industry that can not fail. Got it for next time.
Joe, lead still has uses. The value is just diminished. The local news paper still makes thousands of dollars per year, lol.
Any of those things happening would greatly decrease my returns
If you want a value add opportunity, I see a lead mine in your future.
@Kai Van Leuven I don't think we can predict what will cause the failure of any specific investment. Ultimately that is a kin to market timing. Specifically, if you could predict when a specific investment would fail you would certainly be rich and unlikely to share this insight with the rest of the market.
Ultimately, I think you are better off accepting that you are very unlikely to know the challenges you and your investments will need to overcome in the future. My belief that creating options to protect yourself will serve you much better. Just off the cuff, this would be things like managing debt load, having various exit strategies and diversification.
Best of luck,
John
#4 All Forums Contributor
- Plymouth, MI
Originally posted by @Kai Van Leuven:
@Joe Villeneuve and @Michael P.
Sorry forgot, Real Estate is a foolproof industry that can not fail. Got it for next time.
Joe, lead still has uses. The value is just diminished. The local news paper still makes thousands of dollars per year, lol.
Any of those things happening would greatly decrease my returns
If you want a value add opportunity, I see a lead mine in your future.
Success in life, and other aspects in life (see REI) is, and always will be, about adjusting. RE doesn't fail...REI do, when they refuse to, or lack the knowledge to be able to adjust to all the problems you listed above. I believe that those that won't be impacted the way you think, when all those listed items happen, have the ability and the mindset to adjust. How about you?
@Kai Van Leuven
Serious reply.
I heard David Greene talking about how self driving cars will change the value of downtown areas but I don't believe it. sure things will change some but safe healthy urban areas will always be in demand. That sort of area has always been in demand, looking back through the past century. Sure things might change with technology. The rise of the suburbs initially was due to increased need for housing coupled with cheaper cars and better road infrastructure. The suburbs will be revitalized with more work from home technology jobs and self driving cars too. Many people aren't going to want to move to Montana, making housing in Seattle worthless. Have you been to Montana? Lots of people would consider it boring.
@Kai Van Leuven
Virtual workers are changing. More and more people I meet are working from home. Home can be flexible and this will increase demand for quality rentals with up to date technology. I meet lots of young people who move around the world with the same job, just to experience a different place. They will want to rent in Seattle, although perhaps as a short term.
Change is inevitable, but human nature doesn't change much. People will always need housing, we just need to figure out how they're going to want to fulfill that need so we can stay ahead of the curve.
Been doing it since '68 & have had a LOT of people tell me that I would FAIL. YET, even with a few close calls, failure has remained elusive. We have always concentrated on affordable housing for the mid to lower income demographic. So, in retrospect, there has & will always be a profitable demand for our properties. In fact the returns on our median priced properties has been exponential.
I still love that old saying....
"buy real estate NOW & wait, NOT, WAIT & buy real estate".
Originally posted by @Kai Van Leuven:
@Joe Villeneuve and @Michael P.
Sorry forgot, Real Estate is a foolproof industry that can not fail. Got it for next time.
Joe, lead still has uses. The value is just diminished. The local news paper still makes thousands of dollars per year, lol.
Any of those things happening would greatly decrease my returns
If you want a value add opportunity, I see a lead mine in your future.
If everything came crashing down tomorrow, people still need a place to stay. The far bigger risk, historically , has been to NOT invest. Could the next crash be the end of America as we know it? I suppose it could be, but if it is, I will adjust course then. If economic armageddon is coming, you won't be bailed out by the few bucks you "saved" by not investing. The difference between a house people actually live in locally, and a lead mine, where the low cost producer that can be located anywhere in the world, is a stretch.
Hi @Kai Van Leuven, I think that you have asked a very insightful question and you have highlighted a number of things to consider.
To answer your question generally I would say that you should select areas where there is diverse employment and you can future proof things a bit by ensuring that some amount of the employment is in industries like technology and life sciences. Cities will always be popular because at our core we thrive by interacting with other people however technology will enable people to work in city jobs whilst in non city areas. Whilst incomes overall have been somewhat stagnant, so has inflation and there are always some sectors where significant increases in income offset decreases in other sectors.
@Kai Van Leuven
I have thought about these same issues as well (especially stagnant income growth effecting appreciation).
This is a real thing and it seems income growth has stagnated for quite awhile for a lot of folks.
My input would be that, as others have pointed out, people will always need a place to live. There may be an overhaul of "the system" at some point (topic for a different thread haha) but as long as you haven't overbought on properties with zero cash flow in ND at the height of the fracking boom, you'll more than likely be fine.
Chances are, people will always want to live 🎶downtown🎶 and the folks that currently are are already paying thousands per month for a shoebox. I'd be willing to bet that gentrification continues in coastal areas and becomes even more exclusive than now. At some point there will need to be more vouchers and such in place so that the workers at the bottom will be able to live in these places to support the economy.
Here's my story about my stubborn dad.
He had a business located in a mixed use property, two stores, two apartments, and 4 garages. Purchased it in 1963 for $25K so he wouldn't have to move the business. down payment of $10K, assumed a $15k mortgage at 5%. Otherwise, says he wouldn't bother. The property mirrored the value of duplexes through the years. I was 15 years old at the time.
In 1972, new duplexes were built in the area, asking price $72K. He inherited 120K a year of so before and told him to go for it, buy one or two. His answer? The runup of prices is a fluke. Real estate is gambling. What does a 24 year old know. Didn't buy any.
Then by 1982, the area was developing, developers were soliciting him to buy it for $250K. He can't believe his luck. Asked me about selling it. Something he bought 19 years before went up TEN times. To him, something doesn't sound right. He only retired the year before, besides living rent free, rents he collected was far more than his social security and pays his retirement. He thought the real estate market was going to crash. I convinced him to stay, telling him he'll have to pay cap gains, needs to a place to stay anyway, and why move if you have everything you need. So he stayed, waiting for the market to crash.
The market did go through two corrections here, in 1986 when prices went down 25%, then zoomed again till 2006, another correction, down 25% at the bottom. It has since doubled. He held on to it. Both he and mom passed and 3 years ago we sold it to a developer for over $1.1 million.
It took a while, from 1963 to 2014, the price of his property went from $25K to $1.1 million. Yes, we had corrections, went down 25% or so each time, then zoomed to double it last peak.
My dad, god bless him, if he was around today, would still be waiting for the market to crash.
As to the issue of affordable rents, in other parts of the world, like Japan, living spaces went from renting by the room to renting by the bed. While we talk wistfully about remote work, living in Montana for instance, people will be tired of no one around, driving miles to get a cup of coffee and seeing another human. So I see further development of urban area, where many people yearn to be.
@Kai Van Leuven - I like your train of thought, and will add my unsolicited $0.02....
1) Real estate is extremely niche. Those who I know who are most successful have picked a niche based on their skills and know it inside and out, including the demographic forces behind it. I think that anyone who doesn't take this approach is not in the game.
2) There is a gentleman out there, goes by "Warren Buffet", who is known for having made a couple of shekels over his career. Google him if needed. He is, among other things, obsessed with demographics and their effects on different markets. Real estate is no different. To me, knowing the long-term demographics as best as you can beats about anything else out there.
3) Given a long enough time line, 2 things happen: 1 is that survival rates drop to ZERO, and 2 is that most storms can be weathered. Hedge your bets. Keep liquidity high enough to not get caught. Know your niche enough to stress-test your assets. If you took a 25-40% hit in rental income for 12-18 months (possible, and even probable in some markets) would you be able to hang on? Put some hedges in place against market risks. Inflation does us in the property world a lot of good. Stagflation? Not as much. Hedge your worrying! One day we will all be gone, and none of this will matter. Collect the rent, and go enjoy life. Its short.
4) Educate yourself. Learn new ways to make money on property. Try them out. Talk to other investors. Rental marketing is still in the fkn dark ages. Most rental property management is total garbage. Be better. What can you do to make your property more appealing in a downturn? Can you creatively get extra revenue from it? Can you get better at negotiation? At buying property for a discount? What would be a skill you can learn to profit from a market correction?
The point being, is that there are risks out there we can't control, and no point in worrying about them. buy right, stay away from stupid risky loans, keep your properties in good condition, and just go be happy. Isn't that the point of all this?
#4 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
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#4 All Forums Contributor
- Lender
- Lake Oswego OR Summerlin, NV
Originally posted by @Frank Chin:
Here's my story about my stubborn dad.
He had a business located in a mixed use property, two stores, two apartments, and 4 garages. Purchased it in 1963 for $25K so he wouldn't have to move the business. down payment of $10K, assumed a $15k mortgage at 5%. Otherwise, says he wouldn't bother. The property mirrored the value of duplexes through the years. I was 15 years old at the time.
In 1972, new duplexes were built in the area, asking price $72K. He inherited 120K a year of so before and told him to go for it, buy one or two. His answer? The runup of prices is a fluke. Real estate is gambling. What does a 24 year old know. Didn't buy any.
Then by 1982, the area was developing, developers were soliciting him to buy it for $250K. He can't believe his luck. Asked me about selling it. Something he bought 19 years before went up TEN times. To him, something doesn't sound right. He only retired the year before, besides living rent free, rents he collected was far more than his social security and pays his retirement. He thought the real estate market was going to crash. I convinced him to stay, telling him he'll have to pay cap gains, needs to a place to stay anyway, and why move if you have everything you need. So he stayed, waiting for the market to crash.
The market did go through two corrections here, in 1986 when prices went down 25%, then zoomed again till 2006, another correction, down 25% at the bottom. It has since doubled. He held on to it. Both he and mom passed and 3 years ago we sold it to a developer for over $1.1 million.
It took a while, from 1963 to 2014, the price of his property went from $25K to $1.1 million. Yes, we had corrections, went down 25% or so each time, then zoomed to double it last peak.
My dad, god bless him, if he was around today, would still be waiting for the market to crash.
Yup just like when houses in the late 70s got to 100k in Cupertino and silicon valley we lived in Cupertino . how could they go higher.. or when I sold my primary home in Palo Alto for 450k in 91 to move to the Napa valley .. I could have kept that house but it would have been an alligator it would have sucked 300.00 a month out of me. Same theory your talking about.. Cupertino that house we lived in is worth at least 2 mil my Palo Alto house i paid 185k for in the early 80s is worth probably 2.5.
its location location location.. during the GFC coming back from an extended stay in the deep south I drove through Texas once I got to Dallas and I took the smaller highway that went through small Texas towns one after another.. one thing was clear.. Main st. in all those towns was DEAD vacant buildings get to the outskirts of town and of course you have a walmart and a few fast foods. But at one time those downtowns in rural Texas were probably pretty robust.
Money is made in real estate predicting the paths of progress in many instances.
You have some nice traction in the Inner city or infill of many larger cities as folks tire of commuting and the thing called Walk Score has really become popular.. So change is wants and needs of the newer buyers. Then you have others who may have lived and worked in the city they want to retire they move out a little bit buy cheaper home bank equity.. this is a lot of what happens in Oregon where folks come from CA.
Then you have quality of life.. you simply cant compare the coasts with much of the inner parts Of the US for things to do both recreationaly and socially and WEATHER.
HOwever it does boil down to industry and jobs.. you got them you have a nice vibrant community the Mill be it steel lumber textiles closes down and now you have out flow and dead and dying real estate.
I mean there is a reason that many of the landlords on this site can buy rentals for under 30k in many many parts of the central US and rust belt.. comes down to supply and demand there is more supply than demand..
- Jay Hinrichs
- Podcast Guest on Show #222
I definitely think you bring up some good points. There is a blind optimism you see in this forum and other parts of the real estate world that I don't see in any of the actual investors I know. Real investors plan for downside risk and understand those scenarios and what they may entail. You can never have a 100% watertight plan, but you diversify, and understand what it means to have a rainy day.
#2 on your list has always been of interest to me. This was actually the big prediction at the end of the 90s. People would choose space and material quality of life and we'd all be telecommuters as early as 2002. Obviously, the exact opposite happened for the knowledge industries and many of the people affected.
That said, I think we are finally going to see some of the return on that prophesy. There are a growing number of tech employers in my industry fed up with the coastal cities that refuse to build housing. Furthermore, these cities have made a small brand for themselves antagonizing the industry. With people starting families, remote work is a bigger part of the picture, and certainly something I have made a bigger part of my strategy (in the tech business) moving forward.
Here is where I see opportunity in that, however. San Francisco's poor governance is to the benefit of real estate investors in Boise, Idaho. I do think a number of mid-size, sleepier markets like that are ready for revivals. For the well-positioned investors, it's good news.
Not full safety by any stretch, but there's two sides to every negative forecast. We should never assume what worked in the past will always work in the future. If we can stay nimble, we'll stay on the right side of history.
@Kai Van Leuven
You listed 4 things that have been prevalent in major metropolitan areas for ten years.
1. Incomes of my renters have been stagnant.
2. SSI is being used by the same class heavily (income for all)
3. Public transportation is completely government funded and provides free travel (income based)
4. Living & working downtown - Uber takes you to work each day while you read emails on your phone and is cheaper than owning/parking
The market has been in an upswing.
Watch Birkshire Hathaway
When they sell off all of their RE holdings, you should too.
@Kai Van Leuven Kai, some good points here. I don’t think planning for a downturn is irrational, or Chicken Little (Sky is falling). Not investing in RE whatsoever due to dread of a future unpredictable downturn, however,is definitely irrational.
My take is: analyze analyze analyze, make sure the numbers make sense, protect the downside as much as possible, and get after it. Oversimplified maybe, but sometimes the simplest solutions are the best.
@Jay Hinrichs well said.
@Kai Van Leuven it will fail when homelessness is the cool/trendy thing in society.
Originally posted by @Joe Villeneuve:
Originally posted by @Michael P.:
BP needs to coin a phrase for the opposite of irrational exuberance, where people think real estate is forever bound to fail because an artificial bubble popped a decade ago
"The sky is falling", or "The Emperor's new clothes"?
or...
"The Sky is Falling on the Emperor,...and his new clothes".
There is a psychological explanation for this. Recency effect causes people to put more mental weight on recent events. That is why people have been talking about the "next crash" since the last crash.
A persons brain actually looks for reasons to support the irrational belief. That explains the list of reasons we were presented with. It is no different than any other fears, which are born out of the inability to look at things objectively.
Honestly my biggest concern is the socialism movement, and the possibility of a combination of Hugh taxes, rent control, and failing infrastructure around my properties. I think "fail" is the wrong term, and why some people became irrationally upset by the discussion. Become less lucrative definitely. The business is far tougher now than it has been at some times in the past. It's far easier than at others. As someone pointed out above we will have to adjust. Many investors will fail. Real estate will likely not. I disagree with everyone who thinks urban real estate won't decline. I don't think people actually want to live like sardines. I think we will see a decline in urban real estate value, relative to suburban and rural. Many peoplenwish we could afford to live in wildly rural areas while earning wages that were reasonable. If that becomes a reality there will definitely be people moving rural. To what extent I don't know... now taxation and rent control. Those are real problems that can spell disaster. I don't buy real estate where I live because the taxes are outrageous and the rent is minimal. Renting an apartment is like $400 and a house $700... taxes on the same house are over $3,000. Creates a tough market. Doable but tough. What happens when the socialists win? Schools get bigger and more expensive RE taxes shoot up. Federal tax laws start taking away our incentives. Done a increase rents right? No big deal. Except. Socialists are running the show. They don't think it's fair we increase the rent. So they stop us... that's my fear.
When will Real Estate Fail?
When humans stop needing a place to sleep, procreate, rear kids, entertain friends, and call home. That last one is one of the basic human need: Shelter.
To answer your question: When will Real Estate Fail?
NEVER!