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?

[Jesse T.]

Originally posted by @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. 

While local corrections haven't been terribly uncommon in Real Estate, but on a national scale they are pretty rare.  They generally have looked more like a plateau than the recent bubble burst we have seen.  I think it also depends not only on location, but also on the segment of the market that you are talking about.  I think the most likely area to have a major bubble burst would be multi-family, because the fundamentals don't seem to support the asset appreciation that has occurred recently.

There are a couple wild cards related to financing that could affect things.  

The first is the lowering of down payments by Fannie Mae(and Freddie Mac).  On its own, I think it cause an increase in first time home buyers(who should be buying) with out a dramatic run up in prices.  This is because the other requirements are still relatively tight.  However if private lenders decide to compete by offering some of the junk mortgages from the last housing bubble, then it could happen all over again.

The other would be a dramatic rise in interest rates.  While interest rates and housing prices actually seem to move together, part of the generally high housing prices is due to low interest rates.  I think the expected gradual increases in interest rates will lead to a low/no gains scenario as things like higher wages/inflation counteract the affect of the increase in interest rates.  However if interest rates increased dramatically, it would likely hurt housing prices.  If rates go from 4% to 5% the Principal interest on a $300K loan goes from about 1400 to about 1600.  A bit painful, but probably manageable.  If rates went up to 7%, the loan amount would have to be less than $250K to rise only about $200/month.

[Jesse T.]

Originally posted by @Cole Walker:

Talk is cheap..... round here it seems to cost .02 :)

It feels like we are in a bubble.... but as someone else mentioned, there are a few pieces missing.... I think those pieces are gonna fall into place in 2015.

So a "pop"?.... I vote 2016.

 I think at this point there are signs of speculation vs. investment or buying a place to live in some segments.  However in the housing bubble - speculation was everywhere.  I think there is some dumping of cash with no better place to put it on investment properties, but I don't see many signs of speculation in the owner-occupied segments.  Even in the investment side, it seems generally people are overpaying with their own money vs. other people's money.  If some guy worth $20 million pays $10 million for an apartment building that should only be worth $5 million that stinks for him, but it won't have the collateral damage that occurred when you had 20 people buying $500K houses(worth only $250K) that they shouldn't have been(questionable income and/or credit) with borrowed money.

[J Scott]

Originally posted by @Aaron Mazzrillo:

FYI - 65% of statistics are made up.

 It's actually closer to 82%, according to my data.

[Richard Ball]

I think investors are more likely to feel the squeeze in the coming years. As stated people are buying with low cap rates and when section 8 programs are cut to fix the budget / debt issue along with rising interest rates on commercial loans some investors, especially those with heavy section 8 tenants, may find themselves in a bad situation.

[Thomas Fortune]

Agree with @Jay Hinrichs and @J Scott . Some markets seem a little over-hot, but that's not enough to warrant a meltdown. It seems like the number of super hot markets is far less than steady/healthy markets...and until that reverses, or other external factors change, there won't be a widespread burst. 

[Chauncy R.]

Wendell De Guzman If I read your post correctly, addressing cap rates in Texas
... I personally have seen MF with cap rates 8+ for sale, in Texas. Yes, they are few and far between; however, we have sent a few to a client of ours.

[Rob L.]

Great post @Wendell De Guzman ,   I don't know about everyone else but this post made me wonder what indicators were out there prior to the crash of 2006-08 that I could learn from.  I found a great article on how to use real estate trends to predict the next housing bubble, here . 

I know people will argue that RE is localized but I think this has some merit on a macro level. Judging from this were in Phase II of the market cycle, so we have some ways to go before another crash.  

[Mark Ferguson]

The market is different than it was before the last collapse. I don't see it ever dropping like it did before. Everyone in the industry could see problems before with 120% loan to value loans and speculation up the wazoo with 100% financing. Those loans aren't around anymore. 

sure subprime is coming back, but not to the extent it was and it is just now coming back meaning the cycle will take a few years. I think it will be 2016 or later before we see any type of increase in the single family defaults and price drops.  

They didn't build homes for 7 years in most areas and the population kept rising. There is a shortage of houses in most places and that is what has driven prices up, not crazy lending terms like before. 

I have seen a lot of multifamily projects pop up around me and that is the space i would be most worried about as it has already been mentioned. At 5% cap rates you don't do well in a downturn unless you paid cash. It seems like there is a lot of cash out there so that may not be as big a problem either.  

[Jay Hinrichs]

@Mark Ferguson 

  I agree... the loose financing rules.

From liar loans for investors.

Sub prime for renters that wanted to be a buyer but should never have bought. I mean look at what that paper is worth for those that bought with sub prime years ago.. especially NPN seconds.. they are basically worthless.

Speculation = Vegas Phx and other areas.

Cash out refi for investor so that end of the day investors had no cash and just phantom equity in deals.

No control on massive new construction ( IE banks were fast and loose with construction loans for builders) think Atlanta market and Florida.

All of the above does not exist any more.  Then you take the last 8 years with over 50% of investors paying cash for homes... Those home owners that were stable throughout the down turn are still stable. New loans being written at pre 1990 guidelines basically.

All of that considered at least in the SFR space in my mind leads to a very stable future. Now we could see price compression but those that own homes Free and clear will just ride it out... And you will ALWAYS have foreclosures some of my best court house steps buying years were 03 to 05... People get divorced and or just can't manage their credit no matter the market cycles.

And lastly if you look at our regional market PDX we were building 10k door a year from 1992 until 07 08..  In 09 we built 700 !! and the construction industry tanked.

We are just back to building a little over 4k doors a year.. but jobs and population have expanded... this has created the multi family boon in our area.. But at the end of the day we are still short 30k doors... so lots of promise for those of us that build new homes here in PDX... Albiet our profit margins suck because of competiton but we don't hold inventory.

[Jay Hinrichs]

@Aaron Mazzrillo 

  The vast majority of Armando's students in those days paid cash for those houses.  there and Vegas.

[Steve Vaughan]

I'm glad we are at least discussing the possibility of a bubble.  Don't remember talking about it at the end of the go-go years. I would say 2015 is too soon for it to burst, like a lot of you have.  When my 'shoe-shiner' gives me real estate tips, I'll get out LOL.  I am feeling the difficulty finding multi-families that make sense as well.  More so than single-families.   I am considering selling some of my multi's into the froth.  Just got to figure out where to deploy that capital next!

[James Park]

@Wendell De Guzman

Thanks for uploading the video. Mike Maloney is one of the forecasters I do respect. Around 2001-2003, I remember Mike making a bold call that we are in a gold/silver bull market which comes every 30 years. Most people I knew didn't have a clue how to invest in precious metals back then. 

I agree with Mike's reasoning on valuation of Average New Home Price / Average Median household income. I also agree with him that we are in a deflationary environment going into 2015. When the U.S Dollar breaks a index of 90, Euro just about to break support at 1.2 and DOW breaks 18k, my gut tells me that caution is in order, especially for those highly leveraged investors with very little cash reserves to cover. 

I've read a few posts from the Bigger Pockets LA folks that RE markets are sustainable due to high demand of over seas Asian buyers. During deflation, immigration slows down significantly.

That said, Do I believe that the real estate market will collapse in 2015? Not across the board. I believe that the real estate markets across the U.S. will decouple. We may see a correction in metro cities where the ratio between the average home price / median income is above a 7 where as emerging markets (within million+ population inflow in A locations)  with a ratio of 2.5-3 will not be impacted much. In the Atlanta market (2015), I can see pockets of zip codes that will appreciate, remain flat, and even depreciate. In my market, sub $140k homes located where there is a lot of institutional money and 2%/50% rule homes in bad neighborhoods are particularly vulnerable.    

[Jay Hinrichs]

@Steve Vaughan 

  Bruce Norris talked about a bubble and actually sold most of his so cal holdings and then invested in texas and that was about 2006... If I remember his presentation I attended correctly.. He also said he could not wait to get OUT of Texas  ... So you can take that with a grain of salt as well.... This imformation was part of one of his talks at the San Jose Reia meetings 4 years ago or so that I attended.

[Kevin Auyong]

Jay, did he say why he wanted out of Texas so badly?

[Will Barnard]

One item I see missing in all these opinions about if or when the RE market will decline is the following: out of control bank leveraging, hidden derivatives, and absurd amounts of money printing will eventually take its toll on the dollar and the economy. When that happens, RE will be adversely affected. I don't mean to get political here, but the levels at which these items are happening is not only reckless, but scary.

I for one will watch the warning signs carefully and be prepared to act swiftly to protect my assets.

[Steve Vaughan]

Great point, @Jay Hinrichs .  Is Bruce related to Chuck? haha  That's cool you actually attended to hear him in person back then.  Thinking of one of your investing strategies just gave me an idea for the cash at time of sale.  The landlord thing is getting tiring so I will consider notes and other secured paper investments until commercial comes back to earth.  Thanks, man! 

[Jay Hinrichs]

@Kevin Auyong 

  it was 4 or 5 years ago  and I don't know that he went into specifics however I could surmise its the same old out of state tune... and with Texas property tax's soil conditions and lack of any appreciation in those days.. and not being local that probably added up to his desire to sell and get back into the CA.. market.

Before I posted on BP I was a frequent contributor on a site in AU... and there was a running debate on Texas vs other markets.. IE Texas did not get crushed as much as say a Vegas or Atlanta did.... I mean there were deals in Atlanta were homes that were 150k we were picking up for 30k... same home you paid 100k for in Texas at the time never went up or went down... so what was the better play.. Invest in stable Texas in 2011 or buy at the bottom of the trough in Atlanta.. well for me I choose Atlanta and bought almost 50 homes that promptly almost doubled in 24 months.. If I would have bought in Texas I would not have gotten the same capital gains.

I think with Bruce he saw opportunity in 2010 to come back to his home roots of the inland empire and snatch up houses that got crushed in value instead of hold on to Texas or really most mid west properties that don't move a lot in the way of appreciation.

Aaron may know more or Even Bruce's son post on BP he might be able to fill in the blanks but that was what I surmised from his presentation in San Jose that evening and again its just my reading between the lines I could be way off on why he told texas to return to CA.

[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 

[Aaron Mazzrillo]

Originally posted by @Kevin Auyong:

Jay, did he say why he wanted out of Texas so badly?

Texas is where California investors go to lose all the money they made here. CA investors do not know how to invest in Texas.

[Guy Gimenez]

Based on a radio interview back in 2009, Norris said he was still is was still living on his 700 acre ranch in Texas. 

[Jay Hinrichs]

@Guy Gimenez 

  actor or hard money lender from So cal ?

[Guy Gimenez]

Actor.

[Jay Hinrichs]

@Guy Gimenez 

different Norris... the Norris we are talking about is a HML from So cal and one of the most popular speakers at CA REIA's and other events. In his presentations he gets into the nitty gritty of economic cycles etc.. so in San Jose with all those engineers they really dig it :)... from my perspective most HML like him have really seen it all... And again why he sold in CA he said was because of a bubble and why he went to Texas I can't really say for certain.. and why he left I only surmise from his talks that he was experiencing what many out of area land lords experience and that is lack of control.. compared to what he could do in So Cal. and I don't know what area of Texas he was in Either I fully understand that Austin is not like the rest of the state vis a vi values. .. and at the time there were great buys to be had in So cal and those So cal properties shot right back up so no doubt he did much better than if he would have held on to Texas... then I ran into him about 3 years ago at an Entrust event in Vegas were he was speaking and we got to chatting and he was very big into buying court house steps deals at that time.. and how to handle CA.. squatters that what end remember about that talk.

[Assaf Furman]

Originally posted by @J Scott:

Originally posted by @Aaron Mazzrillo:

FYI - 65% of statistics are made up.

 It's actually closer to 82%, according to my data.

And according to you're statistics, there's a high probability the statistics you two have on the percentage of statistics that are made up - is wrong :-)

Anyway, even as a new-out-of-the-box investor I can clearly see there's a huge difference between RE markets, and in each a difference between SFRs, multi, apartments etc. 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...

[Wendell De Guzman]

Originally posted by @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.

Once again Brian, your answer makes perfect sense. Your experience is triple mine (only been in this real estate game 10 years) so you've seen more ups and downs than I did. So if you, @Jay Hinrichs, @Joel Owen, @William Barnard, and @JScott are correct, 2015 will be a year where SFRs in most US markets will likely go up in price. It is likely that the SFR pricing will go down in most US markets but as to when, no one knows. Thanks!