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?

[J Scott]

Originally posted by @Assaf Furman:
Here in the Silicon Valley, unless the N. Koreans devise a virus that'll hit companies like Google, Facebook, Ebay, Netlix and alike - prices will keep going high up. That said, they now have a good reason to do so...

Don't discount the effects of a major earthquake!

Seriously though, I actually used to live near you (Willow Glen), and would invest there in a heartbeat...

[Jake Landry]

I've been wondering what the possible end of the oil boom in Texas would do to our real estate values. A couple things that come to mind are 1) The labor force for construction will probably replenish since there are so many oil field workers that will be looking for jobs. 2) If any of the oils field workers saved any of the boat loads of money they made, will they be buying homes or driving the rental market up? I know they have driven up the market for travel trailers resulting in many new RV parks and dealerships that have popped up all over the place. I would imagine this is going to have some sort of effect on the housing market if it does indeed end. With the supply of oil being at its highest and the demand being low, the oil boom may be ending. What do y'all think?

Best,

Jake

[Carson M.]

Originally posted by @Jay Hinrichs:

@Will Barnard 

  along with your thoughts,  the reality is many markets had their bubble burst and its still burst and will never inflate.. Those markets like Detroit metro... and many of the Inner city metro areas of the north east and mid west.. prices got crushed and have stayed crushed.

I mean you can't pop a bubble any worse than say a Detroit home that sold in 2000 for 100k and you can buy it today for 500.00 

I would greatly disagree with this regarding Metro Detroit.  In the few cities I focus on just north of the city (Royal Oak, Oak Park, Hazel Park, Ferndale, Berkley) prices are back at the levels seen before the crash. 

The A-B areas are right where they were, maybe 5% off at most.  This is Royal Oak, Berkley, and Ferndale (even the less desirable parts.)  The interesting thing about these areas are new homes are now being build left and right.  Anyone local can see the trend starting in Birmingham, then moving to Royal Oak/Berkley, and now creeping into Ferndale where a rundown home on a good lot may have a ARP in the 200's-300's, but a new build value of 300's-400's. 

The only areas that still sell at a discount are the B-, C, and D areas, which, for me, are Hazel Park, Oak Park south of 696, and obviously Detroit.  I purchased an Oak Park home for 76k, with comparable homes selling at 140k-150k before the crash.  In Hazel Park I have bought homes for 45 and 47k, with one selling for 102k in 2005. 

I predict these still relatively cheap areas to continue to appreciate rapidly.  The relatively expensive A and B+ neighborhoods will box out a lot of buyers, causing them to flood the next cheapest alternative.  This should cause home prices to eventually (3-5 years maybe?) to reach those 2005 peak levels, like the other cities have.

Then again, with the inevitable interest rate rising and other macroeconomic factors that may come into play in these next few years, it is totally possible something may derail my anticipated rebounding of the discounted inventory still out there.

[Jay Hinrichs]

@Carson M. 

  I am not talking about the burbs I am talking about the inner cities 8 mile and south that kind of thing were in 2002 I know I did almost 100 hard money loans there personally all at 60 to 90k each.. its sad to see whats happened but its not unique to Detroit by any means.

[Paul Donoghue]

Hi All,

The video presenting provided at the being of this string on e-mails shows Mike Maloney presenting his opinion on the housing market.  I follow Mike on GoldSilver.com.

He a sales man pushing gold, silver, emergency food & bullion jewelry.My understanding is he doesn't invest in RE.  He has sat on the side and watched it.  

I too have lived through two housing crashes and remember interest rates at 17%.

Need to remember who is presenting the source of data and if there is a reason behind it.

Food for thought- theory

When the average family income in any given town can not afford to purchase a home in the town what starts to happen?

My .02 cents  

[Karen Margrave]

All of those people that were buying homes and lost them to foreclosure when the market crashed moved into rental properties. Some now don't see home ownership as being as attractive as they once did, and will continue to rent. It was always thought that home ownership was like putting money in the bank every month, gaining appreciation. Not so anymore. Though, in some states like California, Texas, New York, and many others states, appreciation is still very good. (though these states are big, and vary widely from county to county)

It will take several more years for people to dig out of the mess brought on by the crash. Aside from former homeowners now renting, there's the whole issue of credit scores. Many people that once had great scores, no evictions, etc. ended up losing jobs that were tied in some direct or distant way to construction and real estate. Scores crashed. People were evicted. We now have huge numbers of people that are homeless in small town America, unable to rent because they no longer have credit and have evictions on their record. 

As for another crash, I don't see it. I think there were many hard lessons learned, and people are much more cautious. 

[Anthony Gayden]

@Wendell De Guzman I want it to crash. I missed out on the unbelievable deals last time. This time I will be ready with large cash reserves and a focus on buy and hold rental multi-family.

[Tony Tran]

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

Yes.

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

This is difficult to predict, but it is best to put all the risk mitigation techniques in place.

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?

Buy more with a twist. ;)

[Ron Drake]

No, I don't think the Real Estate Market will collapse in 2015.

It has already slowed down and may slow down some more but won't be another bubble burst this year. 

The difference being the amount of cash purchases and lack of liar loans the last few years. People who actually qualify have been buying houses.

You can't just fog a mirror and get a home loan these days.

[Lumi Ispas]

@Wendell De Guzman ,

This is a classic question in Real Estate. As you probably know, the experts have successfully predicted in the last century 7 Recessions out of the last 2. :)  There are always naysayers out there.

The answers to your questions are:

1. NO! We did have companies like Blackstone buying a lot of foreclosures in 2013 and beginning of 2014 and they suddenly stopped purchasing, which made the investors and buyers wondering what is going on, as the inventory of homes went up a bit, however that does not mean that we have a bubble. I am attaching an article that shows their buying pattern.

http://www.bloomberg.com/news/2014-03-14/blackston...

A lot of homes are owned for cash, and they cash flow beautifully, and in the case of the homes purchased with loans, because of the low interest rates, most payments can be covered from rental income, making homeowners that need to move in hurry able to hold on these homes and not being forced to sell. 

In 2006 the rental income did not come close to the monthly payments, and a lot of the buyers were speculators. In the last several years, the buyers have started purchasing homes with a long term vision, and a good percentage of them plan to hold on the properties when they move into a new home. I speak from experience as I've done over 50 transactions a year for several years now, and I can see what buyers want and do.

The banks have been so conservative in giving loans in the last several years, that the rate of foreclosures on the new loans is way under 1%, which is very, very low, due to the fact that the new buyers are placed in a position where the housing expenses are under 40%, compared to prior to 2007 when the housing expenses was close to 80% on the "non doc" loan. 

The interest rates, which are kept artificially low, make it the best time in the history to buy homes for the long term.  At 4% interest, the money is practically free if you think that the inflation is historically 3%.

2. There is no bubble and the market will adjust in another 4-5 years, will not drop a lot, just adjust.

3. In 2015, what I will do differently is I will buy everything I can to hold. I will get as many mortgages as I can and lock them at these low rates.

Everyone that's on the fence, mark my words: Get in now, otherwise, in the next years you'll be crying that you did not buy homes to hold. Every 1% increase in interest will cost $100 extra a month for each $100,000 in home loan you purchase.

For a $300,000 loan, two years from now, even if the prices don't increase, however the interest is going to be 2% higher, the monthly payment will be $600/month extra compared to the payment you can get now. That means $7200 a year extra, $72,000 extra over 10 years of holding that mortgage, or if you hold the mortgage for the entire 30 years, it will cost you $216,000 more to pay off that property.

Instead of looking for the reasons why the market is not good, we should look for the reasons why it's great: low interest rates, low prices, great tax advantages, increase in value over time, etc...

Happy New Year and let's revisit the subject one year from now, and if anyone wants to bet on the market, get your money ready!

[Derek W.]

Great thread. I'm glad his one got legs and took off with so many great replies. Bruce Norris is delivering another market timing event in January he has titled "proceed with caution." I doubt @Aaron Norris will give us many teasers until after the event. (Huh Aaron?)  I'm more than curious what his conclusion will be after months of studying charts, interviewing major economists etc. I've already purchased my tickets to be in attendance. 

[Bob E.]

After thinking on it some more, there is one other bubble that I see but I have no idea when it will pop.

College education.  There are more graduates then jobs and the debt these kids are taking on to spend 4 years parting while they get their art history majors is a major problem.  I believe in education, got my MBA when I was younger and am better for it, but you need a SKILL when you are done, accounting, engineering, finance, hard science.  

Unfortunately a Lot of young people don't realize they can de better as an electrician, welder or a plumber so they take out 50 or 100k in student loans and now are living in Mom's basement trying to pay off their loans with a Starbucks job.

[Erich Berry]

"Some real estate pros are predicting that 2015 will be a great year for real estate since it will be all about jobs, oil prices and interest rates."

Check out this article for more speculation...

http://westsidetoday.com/2014/12/30/california-res...

[James Park]

@Derek W. 
How has Bruce Norris's track record been? Does he forecast just for the southern California real estate market or across the country?  I have just recently heard of him.
Back in 1996, Irvine's median home price / median household income was a 2.5. Today that ratio is an 8. The average income earner cannot afford a home in Irvine.

Originally posted by @Derek W.:

Great thread. I'm glad his one got legs and took off with so many great replies. Bruce Norris is delivering another market timing event in January he has titled "proceed with caution." I doubt @Aaron Norris will give us many teasers until after the event. (Huh Aaron?)  I'm more than curious what his conclusion will be after months of studying charts, interviewing major economists etc. I've already purchased my tickets to be in attendance. 

[Eric Bowlin]

Here in MA we have a bubble for sure.. Irrational..yes...but this bubble won't pop. A number of factors have me very concerned. I studied Economics at the PhD level before dropping the program to get into real estate. Though the saying still holds true for Economists that opinions are like A-holes..everyone has one... I can look at it a bit more analytically than most.

@Matt R. Full employment is a farce. The economy is a part-time economy now and has forever changed. Full employment is defined that everyone 'able and willing' is employed. With at least 3/4 of all my tenant applications filing with extensive disability income due to 'personality disorders' I know that the system is broken. These able bodied people don't work legally and generally work under the table (I get approached weekly to provide under the table work..which I decline to do). Of course though, I would never discriminate against source of income.

I live in an urban 'suburb' of Boston. When Boston real estate gets too hot, people invest in Worcester.... 1 year ago a 3 unit building would sell for 150-175.. Today it sells for 300-350. In one year there has been 100% appreciation in 3-decker buildings. Pre-crash 3-deckers sold for 300-350. Additionally. at 300k, they do NOT cash-flow. I have run the numbers for clients of mine (Im also a REALTOR) and the cash-flow is 0 or negative....they are speculating on appreciation as well as tax benefits.

Finally. I do not believe this bubble will crash like before. The old bubble was built on bad debt..This bubble is built on 5 years of pent up demand. The demand will subside and prices will go down..but there is no underlying fundamental misalignment. The rental market is far more stable and I believe the banks are far more conservative this go-round.

Additionally...MA has very strict foreclosure laws which means there is a very high 'shadow market' but many of these buildings trickle slowly to the market. This keeps supply low and prices high.

Just my opinion on my local market. Do not make any investing decisions on my insights as I'm not qualified to give you advice on investing decisions.

[Mark Forest]

I like this thread and it is helpful to think and plan about these things, but anyone who says they know for sure what will happen is still just guessing.  Bill Gross and other made a large fortune on the last housing crash by basically selling short.  If you think that will happen again do the same. 

[Mark Forest]

Originally posted by @Joel Owens:

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

Well said, and that is why such things are impossible to predict. 

[Assaf Furman]

Originally posted by @J Scott:

Don't discount the effects of a major earthquake!

Seriously though, I actually used to live near you (Willow Glen), and would invest there in a heartbeat...

 Sure, a major earthquake will have a big impact on real estate. My point was that unless an extreme event happens (e.g. earthquake, N korean virus, flood, space invasion) I don't see what else can cause this market to decline, at least not in 2015. I'm assuming your comment supports that claim.

[James L.]

I'm a newbie from Austin tx. I'm really enjoying the thread and insite. We never had a bubble pop here, and while seeing RE appreciate 100% in some areas, rents double all in 5 years with wages not keeping pace. That coupled with high property taxes makes me nervous. 

Thanks for the thread and for sharing all of this insite 

[J Scott]

Originally posted by @Assaf Furman:

 Sure, a major earthquake will have a big impact on real estate. My point was that unless an extreme event happens (e.g. earthquake, N korean virus, flood, space invasion) I don't see what else can cause this market to decline, at least not in 2015. I'm assuming your comment supports that claim.

Absolutely agree.

Longer-term (10-30 years), I believe there are additional risks with the majority of the area's economy being tied to tech, but that's not a 2015 problem...

[Alvin Taylor]

I expect the government will continue to tinker with the free market which will keep financing low and at the same time drive up inflation which I suspect will lead to being able to charge more in rents in 2015.

[Marian Smith]

@EricBowlin  Hi Eric, I hope you don't mind if I go off topic, but you seem a good person yo ask.  In places like Somerville MA, were most all the triple deckers built like that --multifamily--originally, almost 100 years ago?  And does MA require landlords to insulate the old places to a certain standard before renting out--rip out walls and add 19R?  My curiosity was piqued when you said prices for triple deckers had doubled in a couple of years in Worcester from as low as 150k ...I had always assumed Somerville prices were so high partially because it was so expensive to build in MA with basements and no immigrant workers like Texas has.  I guess it is all location !

[Marian Smith]

Forgot to say thanks in advance.

[Karen Margrave]

@Eric Bowlin You've made some great points, some of which go along with what I was mentioning in my post regarding how many things have changed, that are fundamentally different than they've been in the past for buyers and tenants. (part time low wage employment, income from social programs, etc.) 

Here's a question for you and others. When the new Congress comes in, should they begin trimming back on Social Security Disability and other similar programs, finding ways to deal with student debt, banking regulations, etc. what effect is that going to have on the real estate market? I think that, not 'bubbles' is what we need to be thinking about. 

Please, let's keep this ON TOPIC (potential changes that will affect real estate) and not get out into the weeds of politics everyone. 

[Bill Gulley]

No Wendell, it won't crash! :)

Thought I'd put you over the 100 hump, there ya go! Happy New Year! :)