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!
Most Popular Reply
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".
Last time I checked the earth wasn't getting bigger. We're not building more land and we haven't colonized Mars (yet) <enter Elon Musk>. Real estate will always be part of my future investing.
Anybody here watch "The Expanse" on Amazon? It makes me question what happens when humans find another planet to live on. Will the demand for property on earth die out? Who knows.
When people stop living in houses.
...
Which is just one of the many reasons it's so powerful.
Yes, yes, in the future, there will be flying cars and all but has anyone tried:
- Changing a diaper in a self-driving Tesla (or a futuristic flying car)? *sorry I'm self projecting here lol*
- Watching the Super Bowl in the woods with super-fast wifi to start a Twitter war over who is going to win the game?
- Telling your friend the zipcode to your flying car location to come over for drinks while serving the drinks and having a party in your car?
The thing is Real Estate plugs right in there with one of Man(Woman)'s basic needs of Shelter and Security and I don't see that need changing anytime soon. Unless there is an apocalyptic event...
Real Estate can only fail when humanity fails.
IE - overdeveloping, overconsumption, etc.
Take the down of Paradise, CA for example. No homes should have been built there in the first place. But they were, humans told themselves meh, we'll prepare for any natural disasters, and then they realized mother nature doesn't care.
Plague's diseases and drug resistant bacteria are also rooted in mother nature. When we cut down too much of the Amazon, Indonesian forests for wildfire, aren't able to grow food through extreme weather conditions and realize pesticides cannot keep away the new pests, then we fail ourselves, and the subsequent loss or migration of life means there's holes that won't be repaired in our lifetimes.
Earth is the perfect system. If you want to live on Mars with Elon Musk in masks and play with red clay all day, you're more than welcome to. Destroying Earth so people can fantasize about having enough resources to teleport to galaxies far, far away, that is the folly of our time.
Never!
Land, they’re not making any more of it. Number of humans on this planet is still growing exponentially.
Fortunately, for the experienced investor, there are infinite ways to make money in RE. Cash flow is only one way. I’m doing more rehab/cash out refis these days.
FYI: there’s no “bubble”. It’s called the real estate market cycle and most markets are entering “recession” phase.
@Kai Van Leuven when the Federal Reserve stops pumping money into the economy thru QE and Repo, and way too low interest rate targets. Bubbles in RE, stocks and bonds (assets) are the result. It will end when the Fed gives up buy raising rates and selling off its ginormous balance sheet, gets back to normal and let's the dust settle. We had a glimpse of what will happen at the end of 2018. This cant and wont last forever.
Google “the real estate cycle” and click on images. This information has been around forever. The market will correct when hyper supply exceeds demand. It’s true in any industry. Private colleges are currently under fire for over building during the boom and now less and less people are signing up and it’s only suppose to get worse. Oil, real estate, marijuana. When the supply is plentiful the price will come down
If you’re paying a couple hundred grand a door for class A in a building next to 3 cranes it’s buyer beware. Especially if you’re buying it on a 5 year arm with interest only for 2 years. This lending is leading us into the next recession. I’ll keep to the value adds and the smaller towns for now.
@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.
@Kai Van Leuven good post and alot of my own concerns. I'm pretty new to all this so I dont have indepth advice. However, point number 2,
I think that's something we all need to plan for regardless. Tons of work from home type jobs are becoming more and more available as well as the entrepreneurship era we are currently in. I foresee it only booming more as people begin to wake up and realize a regular day job isnt achieving financial freedom.
Technology is advancing at a more rapid rate than ever and so we need to expect that more and more buyers and renters will start popping up in more and more suburban / rural areas.
Me for example, I live in Colorado. I moved out of Denver to the western slope. I've been out here for 4 years and already have seems huge influx of people since then. These suburban and rural areas are going up because big city markets are forcing people out or by choice due to pricing increases or people can't handle the massive population increase on a personal level.
I live in Ridgway and am targeting the whole western slope for rental properties, one reason why is because of this. Other reasons being it's close to my primary residence and I know the area.
My 2 cents. 👊😙
The great recession, or ==the even greater, real estate depression== of 2008-2010 was the biggest real estate failure, probably of our lifetimes.
But the cause of this was really a broken lending system, that wounded itself by writing poor quality mortgages. And then lending rapidly decreased, precisely when those properties were being foreclosed.
There are already some profound changes in real estate preferences that is changing the landscape of American Cities. A main one is a return to Urbanism. Urban neighborhoods have become more popular over the last 15+ years, sparking what some call gentrification. Some suburbs are aging, and almost immediately are being re-purposed as more affordable housing.
The future population might well have preferences for housing that is not as automobile dependent. And the market is already starting to produce that type of housing stock. Retail real estate and office properties are also forced to adjust to new changes brought on by technology. I just ordered an online product that 3 years ago, I would have driven to the store.
California has some factors that make it unique for its skyrocketing prices. And that is that there are long term impediments that have made the supply of housing stock unable to grow with the demand for housing.
@Jose Castillo
Your post is good and insightful. What is the most interesting part of this thread is those who feel like real estate is so “fool-proof” that there is no way you can fail investing in it.
Even my idea that their could be threats, makes me some extremist, lol. Most of these folks peddle real estate products all day and have to have the ABC (always-b-closing) mindset. Does that make anyone else look at the industry any differently? You have people who will blindly invest based off of data and ideas that have been held for decades and have not changed.
The last recession gave me tons of opportunities. I have bought property every year from 2011. Most of those properties were from “investors” who probably shared the same feelings as the “real-estate-forever” crowd on this thread.
My understanding has always been it drops every 20 years or so. The data supports this. Actually I think it's every 18. Changes in demographics, changes in public attitude, changes in the economy etc. All mean he market goes up and down. Less volatile than stocks. And obviously I believe in real estate or I w ouldnt be here or investing in it. But this theory that seems to prevailing in this discussion that it only goes up is nuts. It goes up. It comes down. It moves from area to area. We can build taller buildings, we can do more with less in almost every area of life. The tiny house movement seems to be catching on. Are people going to realize they don't need big lavish homes to survive? Because if that becomes the prevailing attitude there's definitely going to be a decline. We can adapt and overcome these issues. Turning lavish homes and apartments into smaller units for example. Honestly I view changes and particular collapsing markets as opportunity so I'm not concerned so much as anxious for it to happen... a large part of today's boom is millenials. I've know of millenials who've sold their cars to buy video games. I really wouldnt count on this demographic to keep their priorities straight and keep this boom going. Real estate is a sound investment and may not be very likely to crash, but let's not pretend it can't...
Dr. Glenn Mueller. Google him and his “market cycle monitor”. He’s foremost RE market cycle expert in the U.S.
https://daniels-pull-universit...
most markets passed hypersupply 12 months ago, but obviously there are many variables that determine each market... ex. strong job market, pop growth, foreign buyers, may mean that price drop won’t be as steep..etc. This is just one source of info. You must look at many other variables and consider all taken togather to more accurately predict the future.
Also, you must accept that your forecast will never be exactly right. Your goal as a real estate investor is it to gather the best information and do the best you possibly can at predicting the future of markets, prices, etc. If you are close, often it will be good enough and you will profit.
FYI: In Real Estate, forecasted population growth and job growth are the two best predictors of price changes
As an investment in my area, RE has already "failed". My stock returns the past couple years far out weigh what I would have achieved in real estate. In the short term RE was a less than ideal investment when you consider your ROI and just as importantly, return on time! I'm not so naive to think this will continue but in this low interest environment its tough to find other avenues for growth.
I feel bad for the folks who a few years ago used their 401K's for investment properties.
For new buyers in the bay, the risk outweighs the appreciation potential since its so heavily priced in..which contributes to the recent Cali capitol in other states.
Not to say that there aren't opportunities everywhere, but when you look holistically at least in the Bay area, the markets past few years have outperformed RE for the layman. That said every investment has its time. If you're buying to hold for 10+ years, your likely very happy with equity you have achieved.
#5 Investor Mindset Contributor
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Most of the replies are not saying that REI is "fool-proof"...or that you are an extremist. People who blindly buy non-value add properties, at retail, in hot markets are not on BP discussing how to prudently invest. That reckless strategy is not worth discussing. Most members are buying in decent locations, have cash flow, prudent debt, reserves, are adding value, and fully expect and are ready for a correction (whether it's tomorrow or years from now). There are ways to pivot and make a profit during all phases of the cycle.
The primary reason many of us invest is to control our financial future and not be at the whims of economic conditions or other peoples' decisions. We invest BECAUSE of market conditions...for most of us, REI provides security, stability, and prosperity when conditions are bad.
#3 Personal Finance Contributor
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#3 Personal Finance Contributor
- Rental Property Investor
- Denver, CO
Some thoughts on your points:
1) Incomes are not stagnating. Incomes are through the roof. Real Wages (inflation-adjusted) are nearly at all-time highs. That's the St. Louis Fred. So, that's a case for prices continuing to increase.
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.
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).
4) If the commute goes away, that gives people more free cash flow to spend on rent.
Actually “recessionary” periods generally occur every 5-7 years. This is because full real estate market cycles last 5-7 years, sometimes longer.
#3 Real Estate News & Current Events Contributor
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#3 Real Estate News & Current Events Contributor
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To be upfront I only had the patience to read the first and last few posts before my statements here.
First point, Real Estate has never "failed" as an investment for more than 10,000 years of recorded human history, not once. Yes, their has been some swings, absolutly, returns have been less in some years and more in others but fail, sorry never happened. Tulips, yes, failed. Paper currencies, yup, some have failed. Spices, lamp oil, rubber, yup yup yup, but Real Estate has never gone to 0, ever, Has never sat at a bottom, ever.
And before anyone goes for the saying that the market collapsed in 2000's, truth and reality is segments collapsed which created the opportunity for others to blossom and prosper, I know because I was one of those and I did awesomely.
Real Estate is 1 of the 3 fundamental human needs (food, water, shelter). For real estate to "fail" people would need to either (a)no longer need shelter (b)God keeps making more land as Real Estates finite supply locks it's ascending value per unit (c) people stop having children making descending population year over year, generation over generation, consistently
Fact is land and real estate is finite, and there is continuously more people, that means need is always ascending. Supply and demand.
By the math of it all Real Estate is poised to grow in strength as an investment unlike ever before, because supply is rapidly coming more and more limited in more and more areas.
Markets and items will rise and fall, humans will forever and always require food, water and shelter. It's just that simple.
And Scott Trench drops the mike... The only thing I would add on point 4 is that self driving cars don't solve the real problem with commutes, which is hours of soul sucking time spent in a car. Even if someone enjoys sitting in a car for hours or makes that time productive, I don't see how that causes real estate to fail. I don't even think it will cause people to leave the city for suburbs. People choose to live in the city or suburbs based on the experience they are looking for.