Will the Real Estate Market Collapse in 2015?

[Wendell De Guzman]

Here's a provocative video...explaining we have a real estate bubble right now in 2014. When do you think this bubble will pop? Back in 2005 (after hurricane Katrina hit), I predicted a real estate collapse as well but I was mistaken by not predicting how severe it would be. My personal opinion is that we're also in another real estate bubble right now but as to when it will pop, no one knows.

What do you guys and gals think?

1. Do we have a real estate bubble right now?

2. When do you think it will pop if you say "YES" to the first question? and 

3. Are you going to do anything differently in 2015 vs. 2014? If so, what are your strategies to prepare for a real estate crash?

[Matt R.]

I am consistantly getting outbid by all cash multiple offers at my price points in SoCal. When are these guys going to pull back? I guess everything I am interested in is worthy but dang these dudes have cash coming out of their you know whats. I think with these low interest rates it stimulates too much at this point. Catch 22 if they go up but I think that is the right call now. I am not going to discount my .02 cents....as I have been mystically accurate the past 20 years:)

[Matt R.]

“Developers are saying that as they look forward to 2016 and 2017, they see no let up in this demand, so they’re out looking at new projects to build even more multi-family housing in the county of Los Angeles.”

- Jerry Nickelsburg,

Senior Economist, UCLA Anderson Forecast

[Jay Hinrichs]

@Chris Clothier 

  as the largest reseller of TK properties on the Planet.. Do you track how many of your props get sold for cash as opposed to financed..

We know that post 2008 virtually all sales until a few years ago had to be for cash .

Would be interesting to see if your numbers are falling in line with national averages.

I know a few of my Vendors only sell for cash and have not made a financed sale in years.

And that in its self in my mind mitigates a big bubble burst.  Now as you state RE is  regionalized so who knows.. I mean look at Blackstone and a few others how many homes did they buy say in Atlanta metro PhX etc and what would happen if they decided to dump them.

I think its going to be very interesting to see the Hedge funds exit strategy or maybe lack thereof... IN many markets they will not exit because they already paid at the 1% rule. and those areas are investor dominated so virtually no retail activity.. those are going to be very long term holds for those boys or there =will be capital loss's on an early exit.

[Account Closed]

One thing we are seeing, especially in multifamily, is cap rate compression due to lack of alternative investment opportunities. I think this cycle has legs as there is some insane amount of capital  chasing deals right now. 

Many funds are more than happy, well maybe not happy but don't have a choice, and will continue to buy real estate at very low cap rates. I was at a seminar the other day where an Asian buyer said they have no issues with a 4-5% cap rate when their cost of capital is almost nothing. And he followed that by saying, "Where else can we place our money right now?" 

Imo, this cycle has seen the perfect storm of demographics, low interest rates, inability or lack of desire to own a home, lack of supply and plenty of equity/debt available. My guess is another 24-36 months of massive transaction activity.

[Jay Hinrichs]

@Account Closed 

the alternative is 1 caps or less on the west coast.. the buyers from china routinely buy 2 million dollar homes on the SF peninsula that rent for 10k a month or less.

[Jose Reyes]

Bubble with an eminent crash, no way. Market pricing correction? Yes. As rates rise, home prices will become more affordable to offset the spike. Credit guideline have been too tight for a melt down, people that purchased in the last few years can afford it on paper, unlike the programs that got everyone in trouble 8-10 years ago. 

But as rates do increase and the market shifts just a bit, I'll have to imagine there will be the return of creative financing. Stated deals with hefty downs I'd imagine. Something veered to the self employed borrower. Nothing near the easy credit guidelines of before though. 

As far as how I'm preparing. I'm probably the most conservative investor I know. I'll only buy deals that I cannot lose money on and have multiple exit strategies for. And in areas that I am very familiar with. I see investing as a marathon, not a sprint. If I do 4 great projects in 2015, I'll be happy. I know several investors that take on way too much and convince themselves into buying deals that were marginal and can't sleep at night when they are in process. 

Overall, I don't see any major waves is either direction coming. Just my 2 cents...

[Payam Dastmalchi]

1- Yes

2- Early to mid 2016; just in time for the Presidential election

However, my gut feeling is that this will be a much shorter crash and less severe than 2008 as there are plenty of individuals, institutions and foreign investors with a considerable amount of reserved cash that are waiting on the sideline to scoop up properties. 

Pro-Tip: If you really want to know what is happening in global real estate; then follow Jon Gray's moves.  He is the head of Blackstone group's real estate division and is also the chairman of board of Hilton hotels.  These guys pretty much control the game and if they are selling their most attractive possessions (like Waldorft NYC Hotel) then you know something is happening. 

[Jay Hinrichs]

@Payam Dastmalchi 

 aren't Waldorf's Hilton products I stay at the one in Chicago when I am there..

[Chris Clothier]

Originally posted by @Jay Hinrichs:

@Chris Clothier 

  as the largest reseller of TK properties on the Planet.. Do you track how many of your props get sold for cash as opposed to financed..

We know that post 2008 virtually all sales until a few years ago had to be for cash .

Right at 65% of our closings involved a cash transaction in 2014, but that number includes those that used IRA funds, so it may be slightly skewed. Straight cash closing outside of an IRA is right at 38%.

As of today we are at 578 closings for the year and I think we will have 4 more tomorrow, so that is a pretty good slice of what is going on.

[Jay Hinrichs]

@Chris Clothier 

thanks Chris to me IRA is cash no different than after tax cash.. and in mainly ways these are even more solid as someone who has used IRA funds can't let the property go as they will then have tax consequence's on top of cash loss.

This jives with what my vendors are doing and have been doing.. So for all the other reasons I simply do not see any kind of melt down.. could we have adjustments yes.

Could Multi family hits some bumps it could since much of it is leveraged and those assets are suseptable to rent compression were as SFR 's that are owned free and clear can still maintain them selves even if rent fell 50% before they would be negative cash flow.

Not being a dooms sayer but I have been involved with two companies that lost substantial assets in TX in the multi family realm to rent compression and or desertion of tenants to the new builds.

But for most of us individuals that are in the SFR realm I think we are pretty safe

[Joshua D.]

We will have a 9.7614 % percent increase in housing prices next year.* 

You want to know what the stock market will do next year? 

*this number may be off by 10-30% 

[Jay Hinrichs]

@Joshua D. 

  and I hope so I want to spend a good amount of time on those blue ribbon trout streams!!

[Joshua D.]

Oh man! @Jay Hinrichs your getting me excited just thinking about it. 

[Joel Owens]

Nobody knows for sure. I was around for the last downturn.

I watched the whole cycle ramp up and then ramp down.

Markets like New York and California usually tend to crash really hard and rise really fast versus a majority of the markets. Those types of markets are more speculation drive and more perceived reality by the buyers.

I am not seeing the cycle anywhere close to being overheated to crash like it did before. I think we are a ways off from that. I get contacted DAILY and I mean DAILY by investors from in state, out of state, out of country that have big money.

I am not kidding when I say these are individuals with a lot of money 8 to 9 figures in cash to play with.

The recovery cycle first time homebuyer comes back first, multifamily, then retail, hotels and office when people feel good about the economic recovery and traveling for vacation or new business startups, new development across all spectrums is generally the top of the cycle.

What drives markets is perceived reality from the public which influences their actions.

There are still deals out there to be had. In commercial you can still land 8 to 9 caps for quality areas. You have to look but it is there. Are there sellers who where asking a 7.5 cap and now asking 7?? Sure but my clients say pass all day long.

What is nuts is talking to investors from other states and hearing in Washington people buying a 2.5 caps. I think that kind of stuff is nuts. You want a strong cap so if the market deflates a little and rents dip you have some cushion. These people buying at extreme caps can be upside down on a property in a hurry. They give me reasons why they do it but it's not for me.

As some other commercial brokers have told me they have given up on understanding why a buyer wants to buy something at a certain price. The buyer buys the property they have listed whether it is a good deal or not.

I can tell you that 2015 is going to rock for me. I think the next 2 to 3 years as mentioned it is going to be transacting like I never have before.

[Joel Owens]

Just got another e-mail just now for a buyer wanting a 2 million property.

WHAT CRASH??

[Jay Hinrichs]

@Joel Owens 

  I will be in Atlanta mid Jan.. happy to help you celebrate your success's !

there is no shortage of cash or bigger investors. we know this.

[Karen Margrave]

@Wendell De Guzman I wouldn't hold my breath on buying southern California real estate for .25 on the dollar!  But, good to dream. Supply and demand drive housing, and there will always be a demand for housing in southern California for many reasons. 

• Perfect year round temperature
• Broad based economy
• Highly educated workforce
• Ports 
• Many of Americas largest companies are based here
• An abundance of attractions for tourists
• and so many other things

Various regions of the country are not as fortunate, and in those areas, there will be loss of values at different times. So many investors buying houses in states where they didn't know the market will find themselves with too high management costs, not enough qualified tenants, and will end up dumping those properties and moving into areas where there's a more solid foundation. (My opinion)

 As the saying goes, all real estate is local. The last crash was a once in a lifetime thing, though we've had many recessions. I personally don't think there will be another crash like that again for another few generations.  

[Lee Badragan]

I'm not an expert but I don't see a bubble in Chicagoland. My house is worth 30% less than it was worth in 2007. The purchase price on the house I'm closing on next week is 40% lower than what the house would've sold for in '07. 

Add in all the cash purchases, all the 15-year refinances at all-time low rates (resulting in much faster build-up of equity), and the tighter lending standards, and I don't see a high danger of a bubble.

Also, the most recent housing crash is still fresh in most people's minds, and it will take a long time for that fear of another crash to give way to more balanced perspective. I think there will be volatility as rates rise, but I also think there will be significantly higher inflation in the next 10 years, so owning property is better than sitting on the sidelines in cash. 

[Joel Owens]

Hi Jay,

What part of town will you be in??

I am in Cherokee county about 45 minutes outside of Atlanta. 

[Will Barnard]

Our market conditions today are much different than that of the boom years of 2002-2007. Are we going to "crash" or "pop" in 2015? My money is on no. We still have room for the balance of the cycle and the factors that contributed to the price increases are much different this time than that of the last bubble. Will we gave a correction? Absolutely! But not likely in 2015.

[Brian Burke]

I don't believe that there is such a thing as "The Real Estate Market" so the answer to the title of the post is NO by definition.

Real estate marketS are segregated by geography and also by asset class. Different asset classes can move in opposite directions in the same market and the same asset class can move in opposite directions in different markets. 

I think that SFR in most markets will see relatively level pricing with a slightly upward trend in 2015 and are likely to see continued upward trajectory for the next few years. In some of my markets, existing homes are selling near or even slightly below replacement cost so there is little incentive for hyperactivity in construction. If we had overbuilding coupled with appreciation and euphoria, I'd say we were in trouble. I haven't seen that yet. I'd also expect that the next cycle change is more likely to be subtle rather than 2006-style mayhem.

Multifamily and other income-valued property may present a different scenario in some areas. I think there has been some euphoria here, and "anxious buyers" who are seeking a place to put boatloads of capital.  Construction is ramping up in some areas and shifts in jobs within some industries may create a reduction in demand where employment gains slow or reverse. To add fuel to the fire, a robust economy could eventually result in rising interest rates which will lead to cap rate decompression.  I think that we will see stability in valuation, however, for the next year or so.  After that it's anyone's guess but I think there may be some downside risk for medium-term strategies. Those seeking to hold long-term with conservative leverage will be fine.

If @J Scott 's opinion is worth $.02, I've just given you a penny's worth.  Depending on what you are investing in and where, your mileage may vary.

[Jason Mak]

Originally posted by @Karen Margrave:

@Wendell De Guzman I wouldn't hold my breath on buying southern California real estate for .25 on the dollar!  But, good to dream. Supply and demand drive housing, and there will always be a demand for housing in southern California for many reasons. 

• Perfect year round temperature
• Broad based economy
• Highly educated workforce
• Ports 
• Many of Americas largest companies are based here
• An abundance of attractions for tourists
• and so many other things

Various regions of the country are not as fortunate, and in those areas, there will be loss of values at different times. So many investors buying houses in states where they didn't know the market will find themselves with too high management costs, not enough qualified tenants, and will end up dumping those properties and moving into areas where there's a more solid foundation. (My opinion)

 As the saying goes, all real estate is local. The last crash was a once in a lifetime thing, though we've had many recessions. I personally don't think there will be another crash like that again for another few generations.  

 @Karen Margrave 

you couldn't have said it any better.  To piggy back on your list of reasons, there's an abundance of international (chinese) money willing to park their money in California real estate that earn inferior returns.  That being said, RE is localized and there may be much better opportunities elsewhere.

Unfortunately, the last crash (and HGTV) also popularized RE investing to such a degree that investors themselves may be the ones preventing another sizeable crash.

[Rahul Uppal]

Agree with most of the comments here. We predict that investment opportunities would continue to be available across the country. Though the interest rates are likely to go up in 2015, there are properties across the US that are still available far below their intrinsic values. Happy New Year everyone.

RU

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[Bob E.]

Rarely do bubbles repeat back to back.

If there is a bubble right now it is in overpriced bond debt, I am happy to borrow at 3 3/8 for my personal residence but now way I could justify lending or investing money for 30 years at that rate.

Closer to the real estate world I suspect that there will be an overrun in building muti family. It is the hot segment right now but more and more young people are going to pay off their student debt and look to purchase a home. At that point it would be smart for the hedge funds to reduce their holdings because the MF and SFR markets are going to have higher vacancy. My prediction is that the hedge funds will finance the sale of their properties to continue to benefit from the cash flow.

[Aaron Mazzrillo]

FYI - 65% of statistics are made up.

No idea what the market is going to do. Only see what it has done and that isn't saying much in the markets I gamble on. Been pretty flat and somewhat down trending in certain areas. I've been selling off high equity properties and liquidating problems as of early last year. You never read about the investor who took a profit off the table, only the whiner who held to long and lost it all, then gets on the news crying and threatening law suits thinking it's going to make a difference. 

I'm also refinancing my apartment buildings and A+ properties. I treat houses like stock - hold until they go up, then sell and take a profit. My apartments produce much better cash flow and those I plan on hanging onto for a long time so I'm shoring up the financing and getting rid of risky liability like interest only loans and any balloons that have less than 10 years. Not sure what I'm going to do next year. I'll have to figure that out when I decide to go back to work and that probably won't be for a few more weeks... months?

I've flipped houses every year since the early 2000s and regardless of what the market does next year, I'm sure I'll be doing more of the same. In a bad market you just have to buy lower and sell faster. Doesn't matter what the market is doing, someone out there is shopping for a home. A good hard down turn would be nice though. The L.A. metro area is overdue for a correction and by that I mean there's too many pseudo-investors out there right now. We need a sharp down turn to wipe out some of that wealth and rid the market of some competition. I'd love to buy some rentals from all those people who got on the Armando Montelongo (no idea how to spell his name) bus tours and bought properties through his network out here in 2010-2012.