Housing crash deniers ???

[Greg R.]

Unfortunately I've been away for a few months while taking care of some personal matters, so I haven't been able to keep up on discussions. 

However, several months ago there were ample amount of folks here insisting that a market crash/ correction was impossible and that prices would only continue to increase.

Curious if there are still people out there who feel this way? If so, I'd love to see some data that supports your view that the market isn't going to crash/ correct. 

[Ryan Brown]

We haven't seen prices dip yet. Sales slowed... but they slowed to 2019 numbers.... which was a record year at the time.

[Michael Magno]

It's still a SUPPLY and DEMAND issue.  DEMAND is still very high.  SUPPLY is still very low.  New listings YoY are down 14% nationwide.  It can't crash if there is nothing to buy. 

[Bruce Woodruff]

Quote from @Michael Magno:

It's still a SUPPLY and DEMAND issue.  DEMAND is still very high.  SUPPLY is still very low.  New listings YoY are down 14% nationwide.  It can't crash if there is nothing to buy. 

 We're seeing demand drop around here....which is raising the supply....

[Michael Magno]

Quote from @Bruce Woodruff:

Quote from @Michael Magno:

It's still a SUPPLY and DEMAND issue.  DEMAND is still very high.  SUPPLY is still very low.  New listings YoY are down 14% nationwide.  It can't crash if there is nothing to buy. 

 We're seeing demand drop around here....which is raising the supply....

And that’s the one thing about RE, it’s hyper local. The supply still isn’t there. Overall it’s still a sellers market statistically. 

[Josh Shaughnessy]

There's a difference between a market slow down, or even decreasing prices, and a "housing crash". Most markets are seeing a pull back of less than 5-10% after multiple years of double or in some cities triple digit gains. We're nowhere near crash territory yet

[Jay Hinrichs]

Quote from @Stephen Dispensa:

ANYTHING is possible. The market could crash tomorrow and homes could be selling for pennies on the dollar. Or the market could surge to unexpected levels as people continue to hedge against massive inflation by investing in RE. 

What's important to realize is that it normally is an outside factor that causes massive market crashes. People who say things like "these prices are unsustainable" are generally off because just looking at the RE market in and of itself can't accurately predict a market swing.

The 2008 crash wouldn't have had half the impact that it did if it was just another stock market crash. The problem is all the collateralized debt that caused the crash was tied up in the housing market. And even THAT wouldn't have caused the RE crash to the level we saw, except for the fact that banks pulled in the reigns on lending. If no one can qualify to borrow, demand goes down. At the same time you had people losing jobs and needing to get out from underneath expensive variable rate mortgages, which meant available supply went up. If supply goes up and demand goes down, you have a price crash, simple as that. It is classical economics 101.

Now, let's think about the world today and some real world problems today and how likely they could lead to a massive crash:

Inflation: Not likely to lead to a crash because as inflation rises we tend to see RE prices rise as people use RE as a hedge. The question I ask all of my multifamily investors all the time is: How often does rent go down? 

Energy Crisis: A massive world wide energy crisis COULD lead to a real estate market impact. If people can no longer afford to heat / cool / power a large home they may consider downsizing, leading to a spike in supply without an uptick in demand resulting in a price crash. Prices have spiked massively in Europe as a result of the Ukraine war, we have also seen prices for gasoline spike in the US in the past few months, however these price hikes are usually short lived. The speed at which the RE market moves is unlikely to be influenced much by an energy crisis for the simple fact that energy crises tend to resolve themselves kind of quickly. If nation states like the US and the European Union embargo Russian fuel, guess what happens? The Russians sell it on the black market. The initial supply drop usually gets offset when the nation who has been embargoed starts selling the fuel at a discount on a black market. This happens all the time and it's why fuel costs have been dropping since the beginning of summer. The fact is RE isn't as liquid as energy is so it will always be a lagging indicator. By the time an energy crisis spurs homeowners into drastic action, the crisis will likely already be abetting.

Retirement Crisis: This is an interesting one. Many blue states have large public sector guaranteed pension funds that I don't believe are as well funded as they claim to be. With the largest generation (boomers) retiring, there are massive amounts of guaranteed payments these funds are supposed to disperse. What happens when these boomers outlive the original projections of the fund? How many FDNY firefighters worked an insane amount of overtime their last two years on the job to get pension payments that are above what they earned in their career? How much of this was calculated in when the return formulas for these funds were first generated? I predict at some point in the next ten years you will see massive public sector pensions from states like NY, Massachusetts, New Jersey, Illinois, etc. fail. This will have a massive ripple effect throughout the country. First, you'll have a ton of pain in the states that guaranteed these funds. What happens when multiple counties, cities, and states have to declare bankruptcy? Besides the obvious (their credit rating goes to hell and it becomes impossible to issue bonds for public infrastructure projects), they also get hit with austerity measures. What would this look like at the county, city, and state level in the US? In a word: taxes. You would see an increase to property taxes across the board, increase in sales taxes, and an increase in or implementation of income taxes. And all that results in less buying power for people. Since property taxes are calculated in monthly payments, the mortgage amounts individuals would qualify for would decrease to cover the larger tax rate. Higher income and sales taxes would mean even less money for housing. So what would people do? Well many of them would leave blue states ( a trend we have already been seeing since prior to the pandemic and has sped up in recent years). However, if you think living in a red state with low taxes and a sound fiscal policy would save you from this kind of crisis, think again.

Let's take a fictional example: A school teacher works 40 years in a Long Island school system in NY teaching 6th grade. They retire at the age of 65 on a pension worth 75% of their annual salary. They were making $200,000 per year at the end and their pension is worth 150,000 per year. (If these number sound ludicris, they're not, I legitimately know a teacher who has these exact numbers). Now let's say they decide they want to move to the sunshine and live out their days in Florida. So they sell their Long Island home at a high price to a young couple, and go buy a house in West Palm Beach with cash from the proceeds. Everything is going great the first few years as their pension and social security cover a nice life for them in Florida. They bought their Florida home in cash so they don't have to worry about a mortgage payment. Suddenly the pension fund fails. NY State has guaranteed the pension and is able to make payments for a time, but eventually the state has to declare bankruptcy. Austerity measures are introduced, the young couple that purchased the house from our fictional teacher can no longer afford the taxes and have to sell it at a loss. Less money is coming into the states coffers, eventually the pension fund is written off and the guaranteed pension for our fictional teacher of 150,000 is reduced to mere pennies on the dollar. They need to sell their home in West Palm Beach, but because so many retirees suddenly had to downsize, there's a glut of supply on the market. Prices drop and continue to fall. At this point banks have lost billions on public bond investments in the north east that will never be repaid because of states declaring bankruptcy. Lending tightens, buying power decreases across the board, and real estate prices crash nationwide. 

I realize the above example is a little fantastical, but understand this process can be applied to many outside factors that can influence the real estate market. So YES, a crash is possible, but remember real estate is a lagging indicator and also a hedge against other market conditions, so the correlations may vary depending on outside conditions.

 well this about ruined my day :)  

[David Song]

Quote from @Chris Clothier:

Quote from @David Song:

This is getting really interesting. I just looked at a house today.

SFR in Castro valley, ca

7/17: $925k

7/27: $825k

8/22: $759k.

I have multiple rentals in this area. This house, 6 month ago, will easily sell around 1 m, with multiple offers and a bidding war.

So I called the listing agent and want to know if there is any offer on the table. No.

I am tempted to offer at around 740k range. If there is no crash, the price stabilizes, that will be a good deal.

On the other hand, I also want to wait a little longer to see if the market will further soften and get a bigger discount.

I am surprised that nobody offered at this price point. 

 You make some great points here.  You are an investor who knows his market.  You have identified target properties and know the history of the area, but also the history of the property itself.  You are weighing your options and recognize that when you buy, it is just one property in a bigger portfolio.  You know your own position and know that you can act now and you will have a deal that fits your expectations and your portfolio well.  You can also wait and watch and if you lose it, no big deal.  If it comes down and you buy, you have a slightly better deal.  If it stays the same, then again, you buy or you don't buy - both are the right decision for you when you make it.  

Sometimes, investors can make things way more complicated than they need to be.  Reading or paying attention to too many headlines can only make that worse.  I do hope other lesser-experienced investors read this buried deep in the thread and understand that buying decisions need to be made on your own criteria and needs.  What any of us on BP or any economists in the news has to say doesn't matter a whole lot.  Good luck David and hopefully whatever you decide to do it works well for you.  Best

Thanks, Chris. I have been buying for the last 14 years in Bay Area, 1-2 properties/year. My daily routine is checking out properties in person, open the door, check the floor leveling, estimate repair cost, evaluate lot size and potential for addition, etc. After that, I wait and see what price level that house got sold.

Over those years, the prices in Bay Area has jumped about 4 fold. Continuing to find appropriate properties to offer becomes increasingly challenging. Therefore, in recent years I gradually moved away from peninsula to east bay, and then Modesto, Patterson, and Los Banos areas.

Mobile home parks, strip malls, self storage units were my focus in the last few years. The recent drop in prime location SFR prices may present a rare buying opportunity, that I have been waiting for years.

I have a feeling that by end of 2022, I might have a record year of acquisition, assuming the price drop continues.

[Stephen Dispensa]

Quote from @Jay Hinrichs:

 well this about ruined my day :)  

Ha! Well keep in mind this is just me spelling out worst case scenarios, not something I'm predicting is going to happen any time in the  immediate future. But it's an example of how external forces COULD cause a housing market collapse. My point is everybody who keeps saying "Prices can't keep going up, I'm waiting till the crash to buy in. . ." are missing what actually causes the crash. It's usually when external market factors impact real estate, which is normally a fairly stable market. 

[Jay Hinrichs]

Quote from @Stephen Dispensa:

Quote from @Jay Hinrichs:

 well this about ruined my day :)  

Ha! Well keep in mind this is just me spelling out worst case scenarios, not something I'm predicting is going to happen any time in the  immediate future. But it's an example of how external forces COULD cause a housing market collapse. My point is everybody who keeps saying "Prices can't keep going up, I'm waiting till the crash to buy in. . ." are missing what actually causes the crash. It's usually when external market factors impact real estate, which is normally a fairly stable market. 

 or as I thought or many thought a black swan like Covid that affected the market for all of 64 days LOL..  But rates and consumer sentiment are the drivers that lead it off for sure.

[Eliott Elias]

Wether it crashed or not, I’m buying so far below market value that I’m safe. I suggest every other investor do the same 

[Lisa Phillips]

From what im seeing, its going to be location specific (IF there is high inventory).

Any place with low supply and inventory will not suffer. This, unfortunately, are many metro cities with large corporations purchasing buy and hold properties over the last 15 years. Not every market crashed during the 2008 downturn, and honestly Im not seeing a huge crash at all, just localized. 

As long as there are 5x more buyers then homes available, no crash coming. When that flips, and there are 5x more sellers than buyers, thats when it will be a major crash (but again, location specific). 

Interest rates are slowing things down, but with low inventory, homes in different markets are still selling at a premium to the top buyers. 

[Christina M.]

@Greg R.

In 2005 the Government FHA had lost the major share of mortgage loans to conventional lenders. So they relaxed underwriting and modified appraisal guidelines to match conventional mortgages, banks and loan officers pushed FHA loans because all were paid big $$$. FHA Loans to the Borrower very expensive loans.

What could not make it through FHA went to Subprime - we know how that ended. Also at the time Banks were lending conventional 100% with 80% 1st mortgage and 20% home equity lines. Ugly setup if you were not savvy. The 1st mortgage could be a 10 year interest only and the home equity was 10 years interest only. The first 10 years of a mortgage is the majority of the interest.

Borrowers were told to just Refinance out of the loans 1st Mortgage / Home Equity Line in a year or so. The issue most people only paid the interest only on both loans, home equity lines had an early payoff penalty, they had no equity and home prices were in decline. They did not even qualify for a rate-term.

All of the above followed a huge refinance - rate/term and cash out surge ending in 2005. Late 2005-2008 refinancing was rare and very expensive.

So I have no crystal ball although the Government and Banks do. This time majority of Borrowers have equity in their homes at least 20% and even if they over paid - they still had to increase downpayment. Many sold their homes over asking too. Just a little different take on the 100% financing - the bet there will be some X amount of equity to rate/term or cash out. Refinancing is expensive taking a loan back out to 30 years and all the fees, title insurance, appraisal, etc.

Although this time when the Government Banks decide it's time to get things going they will create a Refinance ' frenzy'- lower interest rates and push cash-out refinancing - it's all been planned. Most people forget.

The same as the housing boom and inflated prices. Government creates homebuyers and renters.

There's more just a little different perspective...

[Jonathan Klemm]

Hey @Greg R. - Supply is at an all-time low here in Chicago and thus demand is still high.  There aren't 10 offers for every new listing, but most homes are still selling at asking if listed properly.  There is definitely some sort of correction that will happen, but in my opinion real estate will help carry us through it not contribute to it.

[Account Closed]

Las Vegas just experienced a rapid shift from a severe seller's market to predominately a buyer's market. We now have over 5 months of inventory on the market in Southern Nevada. It's being noted as the fastest shift in history including the great recession.

Our City slogan was updated in January 2020 just before the pandemic and the timing couldn't have been more appropriate. Our slogan changed from What Happens in Vegas Stays in Vegas to....What Happens Here Only Happens Here. This statement could not be more true for our pandemic housing trends.

[Nicholas L.]

@Account Closed

With prices still so high and interest rates up, is it really "predominantly a buyer's market"?  I'm not disagreeing with you, I'm genuinely asking as LV is not my market.

It seems to me that prices would need to come down proportionally to the interest rate increase to even start to correct... has that happened? 

[Andrew Syrios]

Housing crash deniers, lol. 

I don't think I've seen a single person say that housing would only continue to increase. What most have said (including me) is that a 2008-style collapse is unlikely given a variety of factors. I've been expecting prices to at least level off and probably correct some from the ridiculous increase over the past two years, especially with rates going up. That would seem to be the most common sentiment amongst us "deniers"

[Andrew Syrios]

Quote from @Greg R.:

Quote from @Bruce Woodruff:

Quote from @Greg Scott:

The market may correct, but I firmly believe there won't be a crash.  The reason is simple, equity.

There is no  house of cards here to come tumbling down.

I respectfully disagree. The house of cards is this - too many people....millions.....bought houses with hugely inflated prices in the past few years. This is especially true in certain areas. It's gonna suck to own a home that you bought for $800k that is only worth, say, $500k....especially if you bought that with any type of adjustable loan.....

I do agree that it will not be a full-on 'crash', but more a serious correction. It has already started. look at the stats...

Very true... not too unlike the 2k8 crash, people are buying homes they cannot afford. Especially when hyper inflation kicks in and costs for necessities start skyrocketing. Are we considering the new 87,000 IRS agents, and when they turning over every stone and looking for money we owe, revenue we never claimed, filing errors, etc.

What is the max DTI one can get an approval at? Depends on the loan and several other variables. Regardless, the max DTI is more than what most people can afford. That DTI calc is putting them at a very thin margin where all a minor expense could mean not making the mortgage... It doesn't account for child care, health care, auto/ transport, food, skyrocketing utilities, raising property taxes, materials/ maintenance, etc., etc. Yeah on paper someone might be able to afford a mortgage w/ 35-40% DTI, but the day after closing they go and buy the new car, put the long awaited family vacation on the credit card.

Most home owners are not investors, for them a house is a liability, it's a very high op-ex. For investors it's the opposite, if we're doing it right we're positively cash flowing and making a strong ROI. 

"Especially when hyper inflation kicks in and costs for necessities start skyrocketing." 

Ummm, if hyperinflation kicks in, real estate prices will go through the roof. Yes, this will only be in nominal terms, equities tend to go up nominally but lose value in real terms during hyperinflation. But nobody talks about the great real value housing crash in Weimar Germany during the 20s because real estate values weren't increasing nearly as fast as commodities. Hyperinflation and massive deflation (i.e. a housing crash) don't tend to happen at the same time.

[Account Closed]

@Nicholas L. prices are coming down quickly in Las Vegas. Here's a snapshot from our local MLS hot sheet from this morning:

New Listing (255)
Back On Market (44)
Price Decrease (312)
Price Increase (15)
Under Contract - Show (57)
Under Contract - No Show (90)
Sold (145)

 Houses that would have sold for $475k in March now aren't even getting Buyers through the door at $445k w/ a $5k Seller closing credit. Too many listings to pick from, not enough Buyers and increased interest rates all play a factor in our local market. Real world example: 11650 Nardo Court 89183. This neighborhood was flooded with institutional investors (they were buying up until May 2022). Institutional investors won't even offer $380k for this house today. For a primary offer the Seller needs to be under $400k but most Sellers can't stomach such a quick drop in paper value. I've been following our housing trends vigilantly since our market started shifting Fall of 2020  (I've been investing here since 2009 which is why we started our PM company in 2010) . I bought my first two bedroom condo back in 2009 for $55k. Crazy low prices from 2009 - 2016...our low was December 2011/January 2012 and our high was March/April 2022. I've since sold it and transitioned to exclusively detached single family residential rentals 2012-2016. Here's an article if your interested in getting up to speed on what just happened in Vegas. I love residential investment real estate...it's my hobby and my passion.

[Nicholas L.]

@Account Closed

all that makes sense... but if I look at the one you used as an example, it seems to have sold for $205K in 2013...  that's still a huge run up even if it heads down to 350 or even 300!

[Account Closed]

@Nicholas L. very true but to an Owner who thinks their house is worth $475k this downward trend is a hard one to stomach and/or to an investor who purchased in Vegas during the pandemic. A majority of the appreciation the last 18 months appears to have been superficial and impacted by a once in a lifetime pandemic. Either way I love Vegas, live here and own many investment properties so I'm vested on the success of our city as a long-term hold. I do believe there will be opportunities for investors to enter our market in 2023 and 2024 if prices continue to dip and rent rates hold at these higher levels.

[Carlos Ptriawan]

Quote from @Account Closed:

@Nicholas L. prices are coming down quickly in Las Vegas. Here's a snapshot from our local MLS hot sheet from this morning:

New Listing (255)
Back On Market (44)
Price Decrease (312)
Price Increase (15)
Under Contract - Show (57)
Under Contract - No Show (90)
Sold (145)

 Houses that would have sold for $475k in March now aren't even getting Buyers through the door at $445k w/ a $5k Seller closing credit. Too many listings to pick from, not enough Buyers and increased interest rates all play a factor in our local market. Real world example: 11650 Nardo Court 89183. This neighborhood was flooded with institutional investors (they were buying up until May 2022). Institutional investors won't even offer $380k for this house today. For a primary offer the Seller needs to be under $400k but most Sellers can't stomach such a quick drop in paper value. I've been following our housing trends vigilantly since our market started shifting Fall of 2020  (I've been investing here since 2009 which is why we started our PM company in 2010) . I bought my first two bedroom condo back in 2009 for $55k. Crazy low prices from 2009 - 2016...our low was December 2011/January 2012 and our high was March/April 2022. I've since sold it and transitioned to exclusively detached single family residential rentals 2012-2016. Here's an article if your interested in getting up to speed on what just happened in Vegas. I love residential investment real estate...it's my hobby and my passion.

 Vegas is the worst market right now as new listing is increasing YoY while closed sales decreasing YoY too

[Carlos Ptriawan]

Quote from @Nicholas L.:

@Account Closed

all that makes sense... but if I look at the one you used as an example, it seems to have sold for $205K in 2013...  that's still a huge run up even if it heads down to 350 or even 300!

 In Bay Area market the run up is something like this for particular zip code :

2020 psf: $650
2021 psf: $850
2022 psf: $650
 
While bay area had experienced price reduction too between 2018-2019, but the price reduction this time after price melt up of 2021 is quite significant.

One reason that I noticed is the whole bay area cities experience $300K appreciation between mid 2018 to mid 2021 (SF,SJ,Peninsula all the same regardless the baseline number). In absolute number, the prices reduction is around $100k or at least 10%. Since SJ area has lower baseline and has higher appreciation in 2021, the weakness is also the most noticeable in this city. What's interesting is, that the cheaper the homes, the more higher the price reduction is. It seems buyer doesn't want to downgrade their desired homes/neighborhood.

[Carlos Ptriawan]

Quote from @Carlos Ptriawan:

Quote from @Account Closed:

@Nicholas L. prices are coming down quickly in Las Vegas. Here's a snapshot from our local MLS hot sheet from this morning:

New Listing (255)

So looking at your blog, it seems the explanation for the huge price reduction in Vegas is the institution unloading their assets. It just doesn't make sense why only Vegas keep having more new listing every month. Other city doesn't experience the same pattern.

[Account Closed]

@Carlos Ptriawan institutional investors are not unloading their assets (not selling). They've simply halted their purchases. They have been Buyers in our market for 10+ years but noticeably increased their purchases starting Summer/Fall 2020. Now they've noticeably slowed/stopped their purchases.

[Carlos Ptriawan]

Quote from @Account Closed:

@Carlos Ptriawan institutional investors are not unloading their assets (not selling). They've simply halted their purchases. They have been Buyers in our market for 10+ years but noticeably increased their purchases starting Summer/Fall 2020. Now they've noticeably slowed/stopped their purchases.

so what type of seller that's selling the house? it's the only market nationwide where the new listing is growing. Nationwide we have negative new listing YoY except in Vegas.