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?

[Robert Adams]

Originally posted by @Aaron Norris:

I'm actually rushing to edit the book and get it to print by Friday. I think Dad was actually surprised a little by his findings. This book is around 270 pages this time which is larger than usual. We explore a little more on demographics and do chat a little about monitoring the big hedge funds and when they plan on selling. For those that just planned to create the REIT and hold long term, they don't care. But for those that expected a year like 2013 to continue, well, what's their game plan now. I hear rumors of people who invested with some of these funds and they are not coming close to performing as they originally believed (at least from the cash flow perspective). Back to editing!

A lot of the funds are finding out just how costly poor property management can be and it is killing their bottom line. We just did a deal with a fund that had to pay the HOA $3500 in fines for a broken garage window. They were getting charged $100 a week. The funniest part is that the window fell out of the garage door and was laying on the ground unbroken. All they had to do was reinstall the pane. Less than a $50 fix.

[Rob Cee]

Financing post 2008 is nowhere close to 2001-2007.  Not even in the same universe.  And the easy credit is what caused the severity of the 2008 crash.  

I think at the peak in 2005/2006 almost 70% of loans were stated income, interest only and zero down?  There is none of that going on now.  99% of the loans a full doc, rigorous underwriting, more conservative appraisals.   

All of the loans today are also very low rate + fully amortizing.  This means that borrowers are paying large chunks of principle each year building equity even if prices didn't go up.  Add to this the record numbers of properties bought all cash post 2008.

This all means it will be unlikely we will see a flood of inventory needed for a 2008 style crash.  Not enough motivated sellers.  Also many states have new homeowner friendly rules that delay or near eliminate foreclosures, like the CA homeowners bill of rights.  I have a friend that lost his job and is getting $3k/mo from the state of CA for 12 mos to make his payment!  And he never has to pay it back!

But yeah, I think you could see prices go flat or fall back in some areas.  I'm curious what a big stock market correction would do to the heavy tech job cities like SF Bay, Seattle, Austin.

[Marian Smith]

The Crossland Blog thinks Austin real eastate will "keep chugging" along for 2-3 more years due to job creation...with sales and median prices rising...and thinks that low oil prices might bring about the return of constuction labor from the oil industry and alleviate the labor shortage in new residential constuction...adding to sales numbers there.  I agree, and jobs related sales are not very bubbley.

[William Jenkins]

I hear a lot of discussion on all cash purchases and how properties are not nearly as levered as they were during the crash.  I think one is naïve if they think that the money that has come into the market is simply a surplus of cash that has just been sitting around in peoples accounts for the last decade.    

I see many people (mom and pop investors) purchase all cash and then pull their cash out with a refinance. Many times the "all cash purchase" is money that is coming in the from a HELOC on another property. Cash purchase.... yes. Cash hold with 100% equity...no.

Next question you may ask is, "what about all of the hedge fund cash.  I know they are paying all cash and not refinancing the properties."  Wrong.  You would be correct that they do not finance them in a traditional way (mortgage), but make no mistake, there is debt on their books, it is just at the corporate level. God knows how levered these funds holdings are but I am 100% certain that they are not composed of 100% equity. 

I think as a whole the market is set for a downward trend but everything is going to be regional/local.  I would not be investing on the east or west coast at all.  Prices on the coasts do not track any rational family income to purchase price model.  I know it has been like that for years, but things always seem to work until they don't, and I wouldn't want to be there when it doesn't.  I think the Midwest as a whole will trend slightly downward.  The hedge fund moratorium on purchases has slowed the market, and other investors have become more selective.   

[Robert Warren]

The current bubbles are not in real estate.  I see the bubbles in the following markets:

1. Equities Market - the stock market is due for a typical 50% correction and maybe more to return the average PE ratio to under 7. It is now pushing 30.

2. Bond Market - bonds are  way over priced and interest rates are way under historical averages.  As the bond market collapses look for higher mortgage rates.

--

I see inflation moving from these markets into the main economy.  I see that these markets have been artificially inflated due to the massive money printing.  As the inflation moves into the general economy RE prices will tend to rise but as the mortgage rates rise prices will tend to go down. 

General inflation will push commodity prices up and make building and repairs more expensive.

This will all be very turbulent and investors should anticipate price volatility and concentrate on learning all you can about your local market.

[Karen Schimpf]

I believe 2015 is going to be a great year!  I don't believe 2015 will collapse in real estate. As gasoline prices go down, interest rates will also go down, which means payments will be low.  But I agree with Cory Adams, always be prepared for the worst by building up your liquid cash reserves to weather any storm.

[Account Closed]

This is highly unlikely! In fact, rates are at an all-time low and the President just lowered the monthly MIP amount for FHA financing. Many bankers are actually predicting a uptick in housing in 2015.

[Ben Bakhshi]

No bubble, most people still can't get a mortgage. People can requalify for mortgages 7 years after foreclosure, 3 under special circumstances

2008+7, 2009+7, 2010 +7, 2011+7, 2012 +7 =

2015, 2016, 2017, 2018, 2019.

I expect 2015 to be a great growth year, along with 2016. I expect people to cry bubble again in 2016, but prices will keep rising through 2018 and even 2019. 

In the markets that I invest in, I will be nervous of a bubble when the cost of renting is lower than the cost of buying (based on monthly payments alone). Right now, throughout the country it is MUCH cheaper to pay down a mortgage (incl. taxes + insurance) than it is to pay rent. That wasn't the case in 2007 for many of these same markets.

TL;DR, not in a bubble, the bubble may come when demand picks up again.

[Brent Coombs]

Originally posted by @Aaron Mazzrillo:

FYI - 65% of statistics are made up.

Sorry, but the real figure is only 61.3%.  Stop exaggerating!

[CK Hwang]

Problem with this question is that we're looking at the entire US market as a singular market. So specifically for my little area that i invest in, no I don't see a crash, I feel we are at slow and steady appreciation, maybe 2-3% just in line with inflation. That's about it.  

[Mike G.]

Curious on thoughts/consensus of this guys predictions...? 

http://youtu.be/nKq1STLI17g

http://youtu.be/JKCvB6rTO0k

Seems to have some interesting analysis points.

[J Scott]

Originally posted by @Mike G.:

Curious on thoughts/consensus of this guys predictions...? 

http://youtu.be/nKq1STLI17g

http://youtu.be/JKCvB6rTO0k

Seems to have some interesting analysis points.

Given that he clearly doesn't have much of an economics background and he likes to draw statistical conclusions off of extremely small samples, I'd say he's doing nothing more than throwing darts at a dartboard.

I clicked on one of his videos from 2009, and that predicted that we'd hit bottom of the past market recession in 2014.  He was off by a couple years there.  Given that he wasn't able to predict 36 months in advance last time around, I'm skeptical that he can predict 12 years in advance this time around.

In other words, I'd put his long-term predictions on the same level that I'd put my 5-year old's predictions (or my own predictions, for that matter). 

[Mike G.]

@J Scott

Thanks for the feedback. Sounds like you have a smart 5 year old, putting his predictions on par w/ yours..:)

The videos seemed a little out of touch, but I liked how sure of himself and optimistic he was. It will be interesting to see how this rolls out in the next few years..

[J Scott]

Originally posted by @Mike G.:

@J Scott

Thanks for the feedback. Sounds like you have a smart 5 year old, putting his predictions on par w/ yours..:)

My 5-year old is about as smart as a typical 7-year old.  And when it comes to predicting long-term real estate trends, my take is that we're all about as smart as a typical 7-year old.

[Jay Hinrichs]

@J Scott

  well if its going to crash in 2015 it better hurry up half the year is almost over

[Cliff C.]

New investor here...great thread! Would someone explain why a small multifamily (4plex) C property with a 10% cap (including PM fees) is more at risk than a SFR? I really want to start investing but am being patient for right time and deal in either the Nashville or Huntsville markets. Nashville seems very inflated right now and Huntsville seems to flux less.

Thanks and great discussion!

[Jesse T.]

Originally posted by @Cliff C.:

New investor here...great thread! Would someone explain why a small multifamily (4plex) C property with a 10% cap (including PM fees) is more at risk than a SFR? I really want to start investing but am being patient for right time and deal in either the Nashville or Huntsville markets. Nashville seems very inflated right now and Huntsville seems to flux less.

Thanks and great discussion!

 The main risks in Real Estate are lack of liquidity and transaction costs.  The typical house in an owner occupied community will generally sell at some price, even if the market isn't favorable.  

For a multifamily you have a much more limited set of buyers. Duplexes will have some popularity as an easy entry point of investing with financing similar to a SFH. A 4-plex(especially in a C neighborhood) won't be as appealing. You will have to find an investor with the money to buy 4 units, but who isn't on the scale of buying apartment buildings.

Your valuations will likely be based on income.  Right now it is fairly easy to leverage at a 5 or 6% interest rate.  If a bank account pays 3% and interest rates are 8 or 9%, the valuation of an income property will look a lot less attractive.  There may be some rental increases, but they likely won't offset the increase demanded in the cap rate.

[Account Closed]

I agree with everyone here.  There's not a sure fire projection of what is happening.  I can see the point of those who say this is a market recovery, but also I have lived in California all my life, which is all too familiar with RE bubbles.  I'm seeing anecdotal evidence in people's conspicuous consumption all over town that was happening right before the last crash.  There's also some troubling economic news out there that points to a crash coming, but again, nobody knows when.  We've never been in this economic environment before.  There is no history I've found that indicates a trend, so it's anyone's guess.  My gut tells me 4th quarter of 2015 we will see a crash.

http://www.zerohedge.com/print/506050

http://davidstockmanscontracorner.com/mind-the-76-...

[Account Closed]

One more link:

http://www.marketwatch.com/story/death-of-the-amer...

[Bill Gulley]

The End Of Days is scheduled for March 15, 2016 according to the guru holding the tin cup carrying his sign.

And I said in that late 90s that prime loans were a ticking bomb! :)

[Account Closed]

Originally posted by @Mark Mosch:

Also - a big question is if we are talking about SFR's or Multi-family. Anyone seeing a divergence between the 'frothiness' of these two markets?

I'm trying to find a good B neighborhood to invest in, for multi families in Bakersfield, CA, and the asking prices for multis is high right now, which make cashflow hard to come by. I've seen some posts from Los Angeles investors saying they're buying with $0 cashflow and looking at the appreciation game only. SFR's are also high in my area. I don't want to be a slum lord, so we may sit this out until the market turns and buying opportunities abound.

In my mind, this has to turn soon, as energy prices are rising again, good paying jobs are hard to come by, and the oil industry is shedding people buy the thousands, which really affects our local market here.  I see tons of SFRs for sale, and not many are buying right now.  I fear we may be looking at another wave of foreclosures, which is bad for the community in some ways, but good for those of us ready to purchase screaming deals.  Thoughts?

[Account Closed]

 @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...

 I like your strategy, we too are conservative investors, liking to mitigate risk as much as possible, while still achieving a good return.

[Account Closed]

Originally posted by @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.

 I couldn't agree more, good points all around!

[Gene Hacker]

@Will Barnard,

I fully agree that there is some scary things happening with the big banks, massive derivative markets. Many of the biggest issues that create the crash in 2008 are even bigger today.  

But in terms of currency printing and issues...

Are you sure absurd amounts of money printing will hurt real estate values? Do you think real estate would be a bad investment if there was a currency collapse? 

[Jose Tamayo Jr]

1. Not A bubble yet in my area, but I can see similar patterns going on now than what happened in 2005-2008... some houses that need to be fixed up are selling close to market value or at a small discount... and you still have to put lots of money in to the houses to fix them up actually be worth market value. It doesn't make sense? But one this is for sure that i wish I knew more about economics and what happens to the economy when the Minimum wage goes up? If anyone can have some sort of insight?

Because Out in my area "LOS ANGELES — The nation’s second-largest city voted Tuesday to increase its minimum wage from $9 an hour to $15 an hour by 2020" 

http://www.nytimes.com/2015/05/20/us/los-angeles-e...

I think that this may have a huge effect in the Real Estate Market in the Los Angeles area and surrounding areas... Am I wrong on thinking that some prices of homes in these areas might still go up because these people that are now going to have more money will potentially want to move of renting and buy a home or at least have more money towards a better property for rent??? I might be ignorant but that is why I am asking for peoples opinions?

2. Possibly the bubble can pop any time after 2020?

I agree with @jay Scott because it is an election year they cant afford a crash at this moment... I also see that the banks are more willing to lend to people...