All Forum Posts by: Babek Sandhar

I believe having cash in the bank and safe haven assets (fully owned property, cash-flow property in stable markets, gold, silver, etc.) and waiting for prices to come down is a huge bet financially (opportunity cost). Warren Buffett is holding record amounts of cash. Sometimes doing nothing is the best option, as how I feel now (although places like Memphis and Chicago have been growing on me). Betting on a strong dollar, lower asset prices, a deflationary environment, and locking in cheap assets with low interest rates by having cash on hand, good credit, and good relationships with lenders now is what I'm going to bank on.

I know a lot of people don't agree with this sentiment, but each to their own and I respect all of your opinions. 

We are all in different situations financially so it's appropriate that everyone have different strategies. My goal is to simply buy as many assets in major cities (specifically the Bay Area) and as much farmland as I can acquire (btw can someone refer to me any specialists of farmland/ranches?). I believe I missed my window of opportunity in this last cycle to buy property in the Bay Area. I was dead broke then and had 0 knowledge of real estate (now I have about 2-3% the knowledge which is a start), so I will wait for the next cycle bottoming.

But in essence, the answer for why I won't short this market is simple. Tech stocks and the Bay Area has been the hottest market in the world over the last decade (it's a bubble whether we admit it or not). Bubbles and irrational markets act exactly as that, irrational. This could go on much longer than me and you could ever imagine.

I can't predict the ending and I won't be surprised at all when it goes much higher in the foreseeable future. It would be stupid on my part to bet against a market that could very likely go extremely parabolic regardless of how I feel (no emotional investing for me).

Michael Burry actually talked about this exact problem in the stock market today and compared it to CDOs in 2008. He did predict the housing crash which essentially is something no one saw coming, so he must have some sort of credibility.

If you look at the US stock market before every crash, it tends to move parabolically and irrationally towards the end of the cycle (Probably the crazy move in stocks we'll see over the next few years) before a cataclysmic ending. Here's the Federal Reserve Chart so you can see exactly what I'm talking about (gray areas are "official" recessionary periods).

It's really cool to read everyone's sentiment and thanks to everyone for sharing your opinion. I simply share my opinion because it's very strong and I don't think it's said enough on this forum. I've learned so much from reading discussions and listening to podcasts on biggerpockets. By being challenged and helped by many of you here, I am simply returning the favor by challenging those to think about something they probably haven't given much thought about. It's all food for thought at the end of the day and a fresh perspective.

 This is a great post Jaysen! I really agree with the points you've made and appreciate you responding. 

I think the bigger issue is sustaining this type of job growth and expansion at the exponential growth we've seen. A lot of these companies have relied on Venture Capitalist funding and have failed to churn profits. Here's an article explaining this in more detail. 

Here's an academic article done by UC Berkeley that explains the impact 2008 had on California and how long it took to get back to pre-recession levels. If you don't wish to read it, I'll summarize by saying unemployment was double digit for many years (2009-2012), and took a lot longer to get back to previous levels in 2008. Of the 8.3 million jobs that were lost, 15% of that was in California alone(that is quite astounding number).

Given what I am seeing in the tech industry, it seems that we are on course to repeat this course of action from 2000 where we lost 220,000 jobs or 2008 (where unemployment was double digits) which was less severe here but still saw massive cuts in jobs. For me personally, it's important to understand and be able to answer:

1. What is driving growth in these companies/industry?

2. Who is funding companies these startups?

3. Without funding are they able to operate? If so, for how long?

4. Are these companies profitable?

5. What is the cause and effect of losing liquidity on job cuts? i.e. people losing jobs, not being able to pay mortgages, easy access to credit, leveraging and debt taken out on refinance cashouts and HELOCs

Job growth is most definitely driven by tech and tech alone. However, being they are so reliant on private funding and IPOs for liquidity and have failed to turn profits, I cannot see how job growth can continue to grow at exponential rates without a heavy injection of liquidity into the Bay Area for many companies who seek funding (whether a new source of VC money comes or the FEDs implement heavy QE and flood the market with dollars, not very likely). I just cannot see how unemployment can stay at historical lows for a extended period of time. 

I do agree with you that foreign buyers have no intentions of selling regardless of prices fluctuating up and down as this had more to do with securing assets and cash, outside of their home country (in this case China). If you PM me I will be more than happy to give you more detailed answer as global economics and US economics is something I've studied extensively over the last 6-8 years.

Here's an article, that will give you a better outlook at the housing market in Bay Area. Usually we've seen 10% declines (except for 2008 where we saw 27% decline in price) and I think this is where my opinion differs from the rest. I think it's possible we see something very similar if not worse than 2008 given a multitude of factors. 

The reason I've decided to post more in this forum page is to at least give out an alternative perspective and flash these warning signs I see ahead. A combination of drying up funding, high stock evaluations, historically low interest rates, debt per households, etc. lead me to believe a sharp decline is upon us in this decade. I don't mind waiting, and if I'm wrong, well I guess I'll be looking elsewhere :(

I can't predict exactly when a recession will come, but I can say we are closer the top than we are to the bottom of an extended bull cycle that typically spurns economic growth and prosperity. I don't wish to offend anyone here, but simply sharing my opinion and I want to here everyone else's. I acknowledge I could be completely wrong, and I'm willing to bite the bullet. But I'd rather not put my savings and take a mortgage on something without doing my full due diligence first.

@Jaysen Medhurst my answer to explain my logic as to why prices can drop that much (I personally think it could go down further, but I’ll play it by ear) is much too complicated for this post, but I’ll try my best to keep it sweet and simple.

In a recession, a lot of these tech companies which have been heavily dependent on private funding and IPO/stock evaluations will lose value very very quickly. This changes the whole dynamic of the real estate market as a whole. Chinese buyers specifically had flooded the Bay Area markets from around 2012-2018 (when China began imposing capital controls limiting how much money Chinese citizens could invest abroad). Many people in Seattle, Vancouver, and Bay Area (amongst a few other major cities) would tell you that these were the cash buyers of million dollar houses and were the ones who created bidding wars on homes (5-15) bids per home. I haven’t followed Bay Area real estate as close since end of 2018, but I can say with almost absolute certainty that there are not even close to half as many bids per home, and probably only a fraction of cash buyers.

Yes, I think it is simple supply and demand economics, but we’re seeing a fundamental shift in demand, so it’s why I have to ask myself if this market is bound to cool off significantly.

@Minh Le that’s really awesome Minh! My goal is to do what you are doing! I was working with a flipper from early 2016-2018 and we did about 5-6 SFHs all in the East Bay in that time span (was an amazing experience).

Unfortunately for me, after 2010 there was no way I was going to be able to get approved for a loan for a property or better yet afford one (was in high school). However, over the last 8-10 years I’ve been able to save up a bit and build my credit. But buying property is such a big decision and because I am very adamant about buying one in the Bay Area (unless I find some good ones out of state), I would like to be sure I’m not buying at the top of a business cycle (again this is the longest bull market in US history dating back over 100 years).

Given affordability, tech evaluations of many companies who generate 0 or negative earnings (too reminiscent of the dot com era), and the disappearance of Chinese buyers (I made a post about this in another forum pondering how much influence they really had in major cities).

I don’t see the same fundamental drivers holding adrift a market that’s been one of the hottest in the world.

But Minh, if you’d like to connect for lunch one of these days I’d love to discuss real estate and markets over a lunch. I’m in San Jose too! Just let me know.

@George Pauley I absolutely agree George! I’ve been very interested in some out of state properties in stable markets with good cash flow. Just not really sure what markets to look into out of state. I’ve looked in Nashville & Chicago. Planning on taking a few trips to a few states to scope out some properties. Any recommendations?!

@Jaysen Medhurst I agree we can be waiting for years. Being I want property in the Bay Area, I can see prices coming down significantly over the coming years.

When? I don’t know. But I’d expect 30%+ drop in property values. I don’t mind waiting for a dip but personally I would find it fiscally irresponsible to buy at these levels and in the midst of the longest bull market in US history.

I do think we are close though. 2/10 yield curve inversion, corporate bonds getting close to bottoming out, and Germany in a recession are just some key indicators that have been followed a US Recession in the coming years. I don’t think real estate prices begin to drop until we see a sell off in the stock market, which typically lags when GDP has actually begins to fall on a Q-Q basis.

Other areas? I’m not sure they’re hit as hard as places like Seattle, Bay Area, and New York

Hey everyone.

Just wanted to gauge sentiment here. If you are planning on buying property on the next dip, what percentage decrease (I.E. 10%, 20% decrease from price highs) would you target for adding to more properties to your portfolio?

Also if a recession does come, do you think it’ll be significant (similar to 08 or worse) or a correction (<10%).

What’s your strategy?

@Angelo Girimonte great job! Keep learning and educating that’s the best way to learn. A YouTube channel I like to learn about economics which may give a new perspective as to how to look at real estate and the world in general is Real Vision Finance.

A great self help book is Can’t Hurt Me by David Goggins

However, if you believe dollar strength will diminish and rate will rise, then property is the best hedge vs inflation and disregard everything I am saying!

 That's true, credit and lending does get tighter. I've actually focused the past couple years building my credit, saving up, and building relationships with lenders so I can be in a better position when the time comes. But it's important to note that these extended lines of credit are also what drive up the price in the first place so tightening of credit will have the opposite effect and those ready to buy will be in best position with good credit and savings!

I would ask myself, 

1. If the price of this home goes down and I took a line of credit against my home to pay for a house, would I be ok assuming the risk of the asset price going down and being tied down to these payments? If so, for how long can I comfortably make these payments? 

2. Do I want to be tied down to a loan on a house that is depreciating or saw a significant fall in price and rent price commanded is not the same as it once was?

3. Is it possible that renting market can heat up or cool down due to fundamental changes in that specific market (More jobs/job loss, inflow/outflow of population, etc.)?

4. What are the effects of depreciating housing prices on you specifically? Can you afford that risk?

It would be good to research how people were affected by buying properties at the top of the market with extended lines of credit, HELOCs, leveraging, etc. and how those people were affected by falling prices. Prices falling would indicate that something is fundamentally changing so important to understand why it's falling as well.

If you feel this will not happen and prices should continue to appreciate in foreseeable future or in that specific market, then by all means I would say go for it! I try to be as skeptical as possible as this is one of the biggest decisions you will make. I am not trying to scare you out of a decision because there are great markets that probably won't be affected by a downturn and are indifferent to the outcome, but it's definitely important to answer as many of these questions as you can. 

Like I've said, if we are at the top or nearing the end of the bull cycle (longest in US history might I add again), then I'm sure there will be more opportunities with some patience, especially in a deflationary environment. For me I want a house in the Bay Area, and I feel it's extremely overvalued IMO, so I do not feel comfortable as prices have appreciated significantly.

Deflationary crisis throughout history has created the most wealth for individuals. Please take my opinion with a grain of salt, as my opinion is probably most unpopular amongst a majority of the population and individuals on this forum. Just playing devil's advocate so you can answer every question you need to make the right decision!

If you have a stable income and savings, you should be able to get a loan and even put a down payment down on a home in the near future without a problem!

Just curious for any home buyers or investors with heavy skin in the game. What metrics do you rely on most when scouting out a market and evaluating a property? What would tell you it's undervalued vs overvalued? 

BTW a good research article that may provide more insight to this topic than I ever could. Good luck.

https://scholar.harvard.edu/files/glaeser/files/housing_bubbles_nberwp.pdf

@Michael Lopez

Hey Kudos for saving for so long! I think some areas definitely have value but I saw a comment that I agreed with. We are at the top of the longest bull market in US history and towards the end of an intermediate term bull cycle. Just my two cents, I want to buy when their is “blood in the streets.” I think it’s important to understand interest rates.

They’ve been falling since 1980 so what’s to say they won’t fall further down from here?! I think a very special period in history is coming where we will see prices fall and interest rates. That would be the time to lock up those low term rates and stack up on as much as you can.

Just my personal opinion, but whatever you do, good luck. If you buy now I’d say make sure the numbers make sense to you!