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!

[Alexander W. Schuyler]

@Kai Van Leuven It will never fail.

People need a place to live.

People like eating out and shopping etc.

People need a place to work. Real Estate is forever needed and will only grow in demand as the world population dramatically increases.

Only way Real Estate fails is when you fail.

I don’t see RE going anywhere, maybe the physical person. But not the entire entity. Plus Lead and Real Estate have no common ground at all. That is like comparing crayons to glue.

[Dennis M.]

Originally posted by @Ola Dantis:

@Kai Van Leuven 

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! 

Agreed ! 
when folks can’t afford to live in their expensive home anymore where will they live ? In a bush ? Under a bridge ? In a tree? The reality is they are not making any more land but they are making more people . And those people will all need a place to live regardless of a big employer Is leaving town or a bad economy or a new president or whatever  . It Just boils down to common sense 

[Matt M.]

@Kai Van Leuven

In my opinion Real Estate will never fail. Un savvy real estate investors will fail.

By buying rentals that are not only affordable for me, and for my tenants, I don’t see it happening. When they foreclosure on their $2000/month mortgage, they’ll be renting from me.

[Susie Fabrocini]

My take is that your concern is realistic but your terminology is off.  Real Estate as an investment vehicle doesn't "fail" but the investments one makes can make you or break you.  In 2006 I was living in LA and the real estate prices were going up fast and the mortgage rates were low and everyone around me insisted it would continue because the job market and the CA economy was strong and the weather was great.  Then I heard an economist say we were at 4% affordability and I sold my townhouse, which I bought for $150k during a previous downturn, for $530k and did a 1031 exchange and bought a 4plex and 2 houses in the Austin area where the prices were depressed because that area had housed a lot of techies who left town when the Tech bubble burst. 

Now I live in Boise, ID, where the real estate prices have been skyrocketing over the last few years.  Again, I am hearing about the great job market and quality of life but I'm keeping an eye on the affordability situation because incomes are stagnant.  Yes, people will always need a place to live, but there is always someplace cheaper they can move to - or move back in with their parents, or cousins, or friends. 

My safety strategy is to keep my debt to income ratios on my properties low.  I'm interested to hear what others do.

[Keith A.]

The real question is at a state or regional level ...  but at any time in America, people have always needed a place to live... good or bad.  Regional or state issues that make investing in real estate attractive or not in those areas mainly depend on laws that are passed (and thus who is elected). I for one would not invest in a state that makes it very hard for a landlord to evict someone, hard to raise rent, and forces property owners to pay large taxes.  We are in a golden age in America right now whether some people want to admit it or not....  investments in the United States have turned to gold over the past 3 years. There is bound to be a downturn in some parts of the country in the next decade... and I would predict it would be in states that people are currently fleeing from as they migrate to the midwest. My bets are on coastal california being an area to keep an eye on for failure. Meanwhile other states such as texas will flourish as companies and people move in due to low taxes, sensible laws and people not sh*ting in the streets. 

[Joseph ODonovan]

@Kai Van Leuven The day humans no longer need to live in houses is when real estate will fail.

[Gary L Wallman]

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!

Real Estate is just that, real.  Finite assets and commodities will rule all asset classes because they have real, intrinsic value.  The US or other governments can print money and dilute the purchasing power of money.  Government can't print houses which take real commodities and labor to build.

The combination of Federal Reserve money printing (or debt expansion) will continually cheapen the currency. Real Estate doesn't need to appreciate in real terms. It will likely always continue to appreciate versus the always depreciating dollar.  Don't believe me?  Try Levittown Long Island as an example. In the 1940's returning GI's bought these tiny homes for 8k. They are currently selling for 45 times as much. 
https://www.zillow.com/homedetails/56-Azalea-Rd-Levittown-NY-11756/31280238_zpid/

This isn't just RE appreciation.  No need to worry about that at all.  Rest assured our government will always debase our currency.  That's the no brainer bet of your lifetime.

[Jaylan Archer]

@Kai Van Leuven

I’ve always wondered about how a potential devastating war could change housing demand. If a few million people were unfortunately killed, demand drops, supply rises and I would assume prices would stagnate and potentially fall.

Of course, there probably wouldn’t be many “safe” investments if this did happen.

Any history buffs out there that have statistics from the last two world wars?

[Diane G.]

@Jay Hinrichs

You probably have not even back to Palo Alto for more than a day or two ...

Where do you find a house for $2.5m in Palo Alto? Excuse me, but $3.5M is a starting point now....

[Joe Villeneuve]

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.

 Go rent the movie, "Other People's Money"

[Joe Villeneuve]

No, but individual markets sure can go to hell. Ask anyone who owned property in Flint, MI. 

If you buy a dozen eggs, and find one cracked, when you got home. You checked them at the market. This either happened after you bought them, or you didn't do a good job when you checked them. Does that mean the other 11 will automatically meet that same fate?  If you go back and find that all of the egg container have at least one cracked egg, then buy eggs at a different market.

If you find that cracked egg, either throw it out or eat it then.  If your RE market "cracks", either sell the property and "eat the loss", or keep it and wait until that market recovers.  If you did a good job in your initial market analysis, your property's cash flow should allow you to "wait it out".  If not, then sell it and buy a new one with what remains (cash) and start over.  The next property should be less to buy if all the markets went down together.  If it's just your market...then just move your money to a property in a better market.

[Nick Gann]

@Kai Van Leuven

Some of these are interesting ideas.

But a for instance: not everyone lives in Seattle for work. Some people just dig it. Same as Montana, people in Montana... like Montana.

[Billy Smith]

I am with Jay on location location buy class A, B do your homework, solid job growth, good schools, city in infrastructure keeps up the parks, roads.

My personal house has gone up 86 % since 1998. All rentals bought 5 years ago or more are up sharply.

Do the younger generation want to live there, entertainment districts, that can mean gentrification at some level.

[Jose Castillo]

@Kai Van Leuven

The fact that this post has generated a diversity of responses from all kinds of investors makes it a good one regardless of what anyone here thinks of it.

But, is this post a product of today culture of “content creation”? We all want to have that very creative post that (triggers) stimulates everyone’s reaction. Many others want to come up with bold predictions that may or may not matter, or make or not make any sense as long as is controversial.

Regardless of where this interesting well put together post come from or its intentions, it is a good one and brings to light a very good question.

The apocalyptic ending of the real estate industry as suggested in this post would be far, far, far from happening if ever. Who knows? Those who know, or believe to know, would be betting everything in their possession to cash in on it. To the last square inch in their name.

What your post fails to recognize is what real estate really is. The land and its natural resources and artificial structure will always be in demand. We need land for farming, manufacturing, logistics, housing, recreation, et cetera.

Comparing San Francisco, Dallas, Phoenix, New York City, Orlando, Boston, Tennessee, Los Angeles and to a small lead mining town would be preposterous. But that’s not the comparison that Kai used. Let’s look at few examples (concerns) in the post.

Driverless cars. Or other jobs being replaced by technology. Automation?

More than a hundred years ago we started replacing horse pulled cars with electric cars. Yes! Electric cars. It wasn’t till Henry Ford and the Rockefellers introduced the combustible car that we started using oil to power our motor vehicles. The only people who lost business were those in the horse carriage business that refused to adapt to the new changes.

Approximately 30% of car manufacturing jobs since the 80’s have been lost to automation. Alternative energy has eliminated coal mining jobs. Technology has eliminated many farming jobs (almost all of them). The number jobs in the rail road industry has decreased percentage wise since the late 1800’s because of automation.

We have lost millions of manufacturing jobs since the 1980’s and at a very fast pace since NAFTA was passed in 1993.

The entire industrial revolution eliminated millions and millions of jobs over generations, but on the same token it creates many many more.

Basic income? Stagnant income?

I am not an economist, but numbers seem to indicate that since the 70’ wages have not kept up with productivity nor inflation.

Now, many cities and states around the country have taken the initiative to increase the minimum wage. It’s only a matter of time before the federal government decides to increase the national minimum wage. It regardless of all this, millionaires are popping up literally everyday in this country. The way we make money has changed tremendously in the last 20 years. Who would’ve thought that an entire family with no skills whatsoever would make billions of dollars originating from a “leaked” sex tape from one its members? Just through reality television, sponsors, cosmetic products and social media. Speaking of social media, there are literally children making millions of dollars through social media apps as I type this. Many jobs and industries have been created during the last generation.

Can real estate fail?

The real estate industry has stood the test of time and cultural changes. The ups and downs of economies. Yes, real estate can fail in pockets. Take Michigan as an example of what can happen when an economy dependent on one specific industry loses that industry. Small lead and coal mining towns would be other very specific examples. Coal mining has been on a fast decline since the 70’s. Who knows what would happen if Silicon Valley corporations decided one day to move to...... Luxembourg? And most of its employees decided it would be best to virtually work from Wisconsin or somewhere in the Midwest. Yeah, real estate would fail in SILLICON VALLEY. That has happened many times in small pockets. When little lead mining town failed New York City didn’t even notice. Not Miami or Phoenix.

In conclusion I might be overly optimistic about real estate. I found it irritating every time you join a real estate group, forum or meeting and there is the one person or people that want to know “when is the next recession happening?”, or what are the speakers or members of the group doing to prepare for the next apocalyptic economic downfall. This question/topic of the next recession is now starting to become a synonym with real estate investing.

[Nick Gann]

@Keith A.

I hope so... I've been itching to get my wife a cheap beach property! Shhhhh. She doesn't know

[Nick Gann]

@Gary L Wallman

Is there a roulette table with that on the wheel? Because id bet all my money and your money and my neighbors money and my grandmothers money that you are correct.

Monetizing debt and debasing currency is what the top US economists do.

[Mike Dymski]

Your concerns are valid...any three of those items will be opportunities. We pivot with what the market bears. Humans have been living in structures for 10,000 years.

[Henry Lazerow]

The vast majority of US real estate is selling for far below it's replacement cost. Major cities are in strong demand so the prices are higher but they are higher for a good reason. The trend of millennials wanting to live by their favorite coffee shops, etc. is not changing. At least in my market the higher income people are buyers the lower income people have room mates, etc. The media often makes it sound like no wage growth to push a political narrative but it simply isn't true. The US saw wage growth of 5.34% from last year which far surpassed our inflation rate of 1.6%.

Cap rate wise US cap rates are much higher then many overseas of similar quality markets. I also think the FED will drop rates once/if we start to enter a recession. Real estate prices are directly correlated to interest rates. This will very likely make real estate increase in price or at the very least stay relatively flat. I don't expect a huge drop.

[Scott Rogers]

Just like the stock market needs short sellers and "doomsday advocates" to help it rise, real estate investment also has an element of this.  If everyone in the world was had the financial means and mental preparedness to invest then it would be a very crowded market.  Most rational people have come to grips with the fact that 2008 isn't going to happen again in our lifetimes and work with what's in front of us. I welcome a recession or a migration of mass populations to Wisconsin for remote work.  

Scott

[Syed H.]

Originally posted by @Shane H.:

I'd also like to point out that I'm confused as to why everyone thinks that 2008 was the only time real estate crashed...

 Because before that, the largest crash was 80 years ago. Crash and normal cyclical downturns are 2 different things 

[Jay Hinrichs]

Originally posted by @Diane G.:

@Jay Hinrichs

You probably have not even back to Palo Alto for more than a day or two ...

Where do you find a house for $2.5m in Palo Alto? Excuse me, but $3.5M is a starting point now....

well I don't want to exaggerate.  Also we were in Barron Park which is not the most desirable area.. for the BP audience the thought of a 1200 sq ft home on a 5k sq ft lot and nothing really special for 3.5 million would seem kind of shocking.. I cant think of shoulda woulda coulda on that one.. all because I did not want to have a 300.00 a month negative at the time.. crazy right ?

[Diane G.]

@Jay Hinrichs

Lol...

While I agree that longer term, real estate is always up,up, up, it is a real possibility that one could buy at a peak and watch his price go down for the next 5-8 years....

I saw my neighbor buying in Feb 2018 for $2.45M and now worth $1.85m if that

Since I am only in Bay Area and don’t see things outside, I am curious on your view for the next 2-3 years...

Care to share?

Happy new year

[Corby Goade]

These kinds of posts always make me smile. It's always "when will XXX happen?" It's rooted in a scarcity mindset, which will always keep people from reaching their potential. I talk to people every day who are waiting for the next crash, recession, whatever, while they are complaining about their job, their house, their boss, etc. Still, they wait. They missed the opportunities in 2012, so they wait for the next one. The problem is that even if we were at the bottom of the market right now, those people would be waiting for a better deal or cheaper loan or more equity- it would never be the right time. 

The market is always relative, but if you understand the game and how equity and leverage works, there is always a deal to be had, you just have to know what a deal is and act, therein lies the problem. 

The older I get, the more I believe that "Oh the Places You'll Go," by Dr Seuss might be the best REI book there is. I read it to my kids all of the time and it always gets me motivated.

[Jay Hinrichs]

Originally posted by @Diane G.:

@Jay Hinrichs

Lol...

While I agree that longer term, real estate is always up,up, up, it is a real possibility that one could buy at a peak and watch his price go down for the next 5-8 years....

I saw my neighbor buying in Feb 2018 for $2.45M and now worth $1.85m if that

Since I am only in Bay Area and don’t see things outside, I am curious on your view for the next 2-3 years...

Care to share?

Happy new year 

No crystal ball here.. I try to stay in my lane.. real estate is totally regional.. one market cools another is hotter than a fire cracker.

One thing that I see as a constant though is refurbed 125k and under properties that rent for about the 1% rule are still wildly popular 

and I don't see that stopping unless its like 2008 the GFC and investor loans were frozen and the big banks stopped doing them.. As long as there is 80% or 75% leverage for smaller or beginner investors that market I think will trundle along just fine.

As for high end appreciating markets in my mind that has softened some in the last 18 months.. SALT could be a part of it. buyer fatigue 

etc.. Keep in mind even on the Peninsula from Marin to Los Gatos in 89 to 92 ish properties dropped 50% in some cases.. My brother in law bought a great Los Altos hills home for 1.2 in 91 that had sold for 2.0 in 88.. and I had a loan on a great home on Green st. in SF that we had an Mai appraisal on for 2 million  5k sq ft totally remodel there was a first at 800k and we were second at 200k.. that house went to foreclosure even though it would cash flow no problem.. but then it was not until about 97 98 that prices got back up to 89 peaks. and then of course we know what happened since..  So can it happen yup is it going to I don't know.. but late 80s there was no facebook google and all the other social media companies  apple was in re org  etc etc. follow the jobs..  That's my view from the cheap seats.. I left in 91 to Napa valley ( just loved it there) and commuted to Oregon and completely flipped my business to buying Timber land and Timber rights so just did not stay engaged in CA real estate much after that.. I did buy a cool 4 acre tract in Rohnert park for path of progress.. and that one is paying off end of this month.. Paid 27k for unbuildable no cash flow 4 acres and watched the city grow to me.. we are exiting for 1.9 so that is going to be a nice hit of course it was negative cash flow IE had to mow it and pay tax's about 500.00 per year.. so again all those that simply wont buy real estate that does not cash flow.. I get that but to me there are other things you can take calculated risks on.. this property is now right across the street from the Graton casino hotel built next door up zoned etc.. Luck maybe good for sight maybe.. but hey I will take it.

[Kristopher Kyzar]

The key to all of this is that with the exception of catastrophic failures caused by forces of nature or economics, Real Estate is like a wave.  Most areas will look like this:

There will be corrections in the market.  This isn't a crash.  In good times, when confidence is high, demand will drive the market upward.  In bad times, people get scared, and the market turns back down.  It's because of this natural ebb and flow that Real Estate is able to remain attainable to the middle class.

There will always be those who will never understand RE, and they will rent for their entire lives.  There are those who will give it a shot at the wrong times, and they too will go back to being life-long renters.  Those are the short sighted.  They take a snapshot of what RE is, and make a generalized assumption that it will never work for them.  Then there are those who take a 40,000 foot view.  They get a better sense of the whole scope of what RE has to offer, and they take action.  BP is full of those kinds of people.  The ones that really make it are the ones that look at RE not only for what it can do for them, but what it can do for those with the short view.

If your goal is to provide quality, affordable homes or places of business for those without your ability to see the bigger picture, then we all benefit. Businesses grow, more jobs are provided, more people are employed, more people need homes to live in, more homes/apartments are built, providing more jobs for more people, and so on. It's a virtuous cycle, and those of us who truly care about our communities will strive to make them better. Those who go into REI with the quick-buck mindset are no better off than if they played the lottery. Sure, they may hit the mother-load once or twice, but eventually, they'll buy another lottery ticket because they've squandered their resources. They aren't going to put in the effort of understanding their community, and therefore understanding the socioeconomic forces at work within them. It's because of this they will likely not see the issues driving the community to the proverbial cliff.