Quote from @Nick Robinson:
@Branden Yang
I was responding to your comment that you had never seen a market crash because of inflation, and I gave you an example. If you read my response, I state that it will cost more dollars in the future to buy the same piece of property. I specifically wrote dollars because something being expensive is relative. If homes, go up 5% but the currency is devalued 10% the property is relatively cheaper. I think you are cherry picking things that my last post said. If you read my post, I said RE went up the same as inflation during a high inflationary time I did not say the RE market was going to crash. I was pointing at a specific market, stock market, that was affected by high rates of inflation.
To go over your second point interest rates do affect demand. If interest rates go up the payment goes up for the same priced house. To keep the payment the same the price of the house has to come down. If you believe because we have near record low inventories the supply is at a level that even with the rise of interest rates and the loss of demand for buying a home, there will still be buyers that is a logical position. Once again, I will remind you, I DID NOT say there was a housing crash coming. I was responding to your statement that you had never seen a market crash because of inflation.
Your last point about speculation. I said buying a home that has a negative CF position and banking on appreciation to make it a good deal is speculation. Even though we all agree the price for that property will be higher in the future you have to get through the times when you have a negative carry.
*The 30yr mortgage was at 5.78% last week measured by the FED, which looks at the weekly avg. There was a day last week that the daily 30yr mortgage hit 6.28%.*
They don't affect housing demand, but they do affect house sales. If 1000 people need a place to live, there's 1000 people in demand for housing, that doesn't mean they can afford housing. My argument was that a market crash was never because of inflation. In 1980s, we had a crash BECAUSE of interest rates, and not inflation. Inflation can go infinite and we could just make another currency. If interest rates goes infinite, we basically went bankrupt at the second we bought the deal and lost the deal. You can't lose $10000 because of inflation, although it can become useless. You can lose $10000 because of interest rates. You can't get into negative net worth because of inflation, you can get into negative net worth because of interest rates. Just because houses go up 5% doesn't do anything against those houses. One acre of land doesn't turn into 1.05 acre of land.
You gave an example of 1980s being an example of inflation making the house market crash. The problem is that no one had the money to buy these houses, where did the money go if there was inflation?
It's true that buying negative CF position to wait for appreciation is speculation, but it's only speculation if the property itself is low-quality. Compare the difference between getting a 300-unit apartment building for 80-100 million dollars in Detroit vs Florida (or any other state.) and getting negative cashflow.
There's this concept called "EV" in blackjack card counting. The concept of the strategy is to count cards and pick the right choice like stand or hit. In blackjack, you have a 4-5% advantage over the house which transforms into 10-20% ROI into 2000-20000% ROI. Now imagine this to be Detroit vs Miami, which one has the advantage over the U.S market? Although you do not know the cards in black jack, you already know which actions to take, if you kept buying infinitely, your EV would always be advantageous.
I'm against buying SFR because if a person leaves that house, who pays the rent? You have to remember that it's better to hold that property that went up 5% because you can just leverage it with debt. Think of this, you got a 800k property, 80k down payment, what is 5% of 800k or 720k? That's 40k per year for putting down 80k. If you were talking about prices going up at the same rate of inflation, that means the house price would've went up 15% (because of shadow inflation).
Lets re-do the math again, 800k, 80k down payment at a 6% interest rate. That's 72k per year, more than what a household would make per year. It's true that you need cashflow to carry it, so that's why I said if your income can reasonably support it, you should buy. It's worse to buy that same house for 500k at 15% interest rate than buying that house for 800k at 6% interest rates. We aren't including higher down payments or low-cost houses. If interest rates go above 8%, you can just get hard money loan, or private investments which is harder to get, but the best returns.
Although, I would still buy a house at 400k, when interest rates are 12% because you can refinance it to 800k and 6% interest rates. You can literally calculate appreciation from interest rates and comps. If interest rates are 24%, that same house would be 200k, if interest rates are 48%, that house would be 100k. Now we can just refinance it for 800k and 6% interest rates. This is why real estate is the best investments against inflation
Even then, I would never buy a house, I would go straight into multi-family if I could afford a house.
Meh, I'm trying to find investors that'll invest in the properties I'm looking at. I'm looking at 12-13% cap rates for 9-10 million dollars, 11-12% cap rates for a million dollar properties, and 40-50% cap rates for SFR. There's so much good houses, but so little good BRRRR deals.
If anything, commercial construction will probably thrive if the market crashes and interest rates go higher because people will start looking for rentals.
