United States Total Housing Inventory, 1984-Present
I doubt I'm going to be around see that event happen and actually be in any position to invest myself. The trend seems pretty damned clear.
?? Inventory always surpasses demand in real estate downturns. That's part of why real estate has regular downturns.
And yet, prices for the last 5 recessions has been up not down except for the crash and once in 1991 at -2%. Everyone is trying to reference this market to the crash (everyone is a generalization, media etc). It's not.
Talk about generalizations....then showing the average price change for the entire country in aggregate? How about individual markets or at least regions??
After the S&L fallout in the late 80s, the Phoenix market was totally in the toilet. In 1990 HUD and VA repos were a dime a dozen, vacant homes were all over Maricopa county. Prices were a fraction of what they were 5 years earlier. Where is that shown in your chart?? It's not.
Because we are talking about the market as a whole...
Hey BP, I think I might have just had the craziest idea ever, and I need somebody to smack some sense into me and tell me it isn’t possible. But if it is possible, then it would be amazing.
So not too long ago I purchased a LLC from an investor, and in that LLC are 10 rental properties. I didn't purchase the properties individually, I purchased the Business/LLC as a whole. I got a sweet deal from the guy, and did 100% owner financing. All the properties in the LLC were payed off and owned in full. I now pay the previous owner of the LLC a set amount each month, for 15 years at a 3% interest rate. The properties were not held as collateral on the loan, and there was no lien placed on them.
Now my question is: what's stopping me from refinancing these properties, pulling out 75% equity and using that money as down payments on more properties that cash flow? And then using the cash flow from the new properties to pay off my loan on the original LLC? I know it would mean I have two loans, but I would definitely make way for money this way.
For example, to keep things easy let's say I bought the LLC for $1,000,000 dollars, and I pay the previous owner $7,000 monthly.
So on each of the 10 properties, I give $700 of the monthly income to pay off my debt.
So say I took one of those properties, and did a cash out refinance and pulled $80,000 out, and spent it on down payments on 4 new properties, each of which cash flowed $200 each month after all expenses. That would mean that 1 property turned into 5 properties, cash flowing $1,000 between them all! I would then use that money to pay of the $700 I owe from the original loan.
And then say I did that on all 10 of the properties! So I turned 10 properties into 50 properties, am now making more cash flow, and am having debt pay down and appreciation on 50 properties rather then 10.
I know it’s too good to be true LOL. Somebody tell me what’s wrong with this idea.
Thanks!!
Why not borrow against the properties and pay off the LLC? Then you have deductible expenses.
United States Total Housing Inventory, 1984-Present
I doubt I'm going to be around see that event happen and actually be in any position to invest myself. The trend seems pretty damned clear.
?? Inventory always surpasses demand in real estate downturns. That's part of why real estate has regular downturns.
And yet, prices for the last 5 recessions has been up not down except for the crash and once in 1991 at -2%. Everyone is trying to reference this market to the crash (everyone is a generalization, media etc). It's not.
BP contributors:
I for one believe we're not going to see a real estate crash anytime soon, and I firmly believe in the power of pessimistic thinking. But I'm also not wholly ignorant of all the aspects of this business, and I look at the fundamentals of what's going on, think about why the housing market is as it is, and I don't see fragility. The system is not about to fall apart. I'm obviously not alone here on Bigger Pockets.
But since at least 2015 when I started lurking in the forums here, there hasn't been a month that's gone by where some wannabe Cassandra or Chicken Little DIDN'T proclaim that a crash was coming. I have seen one mature-male-bovine-scatalogical reason after another why these people felt that way. Sure, there HAVE been commentators with what at least LOOK like well-formed reasons since the very beginning, but they were few and far between, peppered in among the many more wackadoodles proclaiming THE END IS NIGH.
So what I'd like to ask everyone with significant experience to comment on something else this thread: WHAT SHOULD WE BE LOOKING FOR? What WOULD signal the end of the road for you? What will be the warning signs we should be watching out for? None of us have a working crystal ball, but what are you waiting to see before you start to really worry? What, in the end, will signal the next collapse?
Nope, too much money chasing to few goods (properties). This is inflation similar to that of the 1970s thanks to the government. I'm still astounded townhomes in LA right now are going for 200k over asking...
Hi Fellow BP Fans,
I'm currently UC on a triplex that I snagged off the MLS last week. It was a competitive bidding war.
The MLS listing noted the combined square footage of the three units was 3,600sf. During the walkthrough, I felt like 3,600sf might be a stretch but I still fought to win the property. The seller's property condition disclosure notes that the square footage was pulled from county records but upon my personal review of county records, the property only measures about 2,800sf.
I contacted the listing agent over this and got no response. A few days later, the MLS listing square footage was updated (after it was noted under contract) but I still received no feedback from the listing agent. Luckily, I had saved a PDF of the prior measurements.
My partner and I decided we're going to use this as a due diligence finding and therefore concession request to try and knock down the price since I had to compete with several other parties for a largely misrepresented property.
My question is - what is the most effective way you've done or seen to get a large concession when purchasing a home? It's one thing to ask for a new water heater, it's another to ask for $30,000 off for a misrepresentation. Any hot tips on knocking down a sales price significantly aside from simply explaining why and asking for it? What have you found to be the most effective negotiation technique when talking larger numbers?
Thanks in advance,
If you used a Realtors contract, you were duly informed that the verification of property conditions and square footage, etc is your responsibility to investigate. It is important for buyers to be proactive during the process. If you discovered during due diligence, then you can ask for an adjustment, but likely going to get kicked back. If this affected your appraisal and you have that contingency, your odds are better. In a highly competitive market, it is really hard to negotiate credits from sellers, they will just go to the next buyer. it won't always be like this, but it is right now. Please reach out with questions.
Thanks for the insightful post @Michael P. Lindekugel.
I tend to agree with you that there is a market correction coming. I am absolutely astonished with the amount of people who insist that prices are going to rise indefinitely despite all the signs we're seeing. There were many reasons why prices soared over the last couple years, but one of the biggest reasons was because of historically low rates. If rates were between 4.5-5 over the last 2 years would the market have done the same exact thing? The answer is obvious. A question I've asked and have never got a good answer to is: how can the market NOT change when rates go up by 50-100%, and hyper inflation thrashes the country impacting the affordability of basic necessities, food, gas, clothes, etc.
The same life changing reasons are going to keep coming up that force people to sell, e.g., divorce, relocation, death in the family, etc. It's very reasonable to think that the pool of buyers is going to shrink as rates increase. Even if millennials hit the market, for the more part they are going to be looking at condos/ lower end properties. Look at the stats about how most millennials are doing financially. A significant amount of them have insane amounts of student debt and many live in expensive metro areas where they're living check to check. I don't understand the idea that millennials are going to flood the market injecting millions of qualified buyers with bulging pockets into the real estate market.
Seems to me like a lot of the people who are refusing to accept the possibility of a recession/ market correction are doing so out of self-interest. Brokers, realtors, lenders, etc., are going to be heavily impacted by a recession/ market devaluation. If the consensus becomes that homes are grossly overvalued (as they are), rates are sky rocketing (as they are), we are battling hyperinflation (which we are), and that pay rates are not increasing quick enough to keep this trend going (which they aren't, and not by a long shot), that could be the start of the downhill slide. In my opinion the denial of these facts is why the market correction hasn't happened sooner. Plus, rates just started shooting up very recently... we very well could be feeling the full effects of this by the summer if rates hit the 5's.
Oh, and I forgot to mention the food shortage. Does anyone care about these things anymore? Or should we all just ignore what's happening around us and assume that real estate values will continue a meteoric rise despite the US being on the brink of financial collapse and a significant amount of people being a single paycheck away from homelessness.
I agree with much of what you are saying. Hyperinflation by definition is prices rising more that 50% per month. With the continued escalation in prices particularly energy, which impacts food, I think we will see a compression in demand fairly quickly as people continue to focus on staples. This will induce a recession. However, people are also considering fixing their housing costs over the long term. Rents and interest rates rise in an Inflationary environment, this causes higher housing costs. So fixing it for the next 10 years if that is your time horizon is smart. We are still in a supply / demand crunch in housing. Watch flipping come back as cost of new construction out paces renovations.
@Greg R. Speaking of the food situation I have been seeing were several countries are banning export of Ag products and or fertilizer. The US will have food but it will cost more and the variety will be less than many are accustomed to. The cost may be a problem for lower income people.
Yes, if you look at stock prices of CF, MOS, and NTR they are skyrocketing. Food prices are going much higher.
The Fed information is factual. House price over valuation is national from economic research firm Rosenberg Research & Associates.
I provide my economic and financial opinions based on my education and experience to all clients – residential, commercial, investment. A prospective home buyer with a large down payment, significant cash reserves, and long-term employment has very little financial risk when there is home price deflation. If they should or shouldn’t buy a home is complex analysis. Home price deflation is a risk for someone at risk of default. Those are not my clients.
real estate markets are mostly local. Seattle is not boom or bust as is historically Las Vegas, Phoenix, and Miami.
I don’t know what experts you are referring to in your statement “I know the experts that screamed about the 20-30% decline in 2020 and again in 2021”. I don’t know any economic research or credible financial research that was claiming those declines in 2020 and 2021. I told my clients our hot market was going to get hotter. Nationally, the US is short 4 million units of housing of all types. Seattle has had a supply problem since the early 2000s. There is the supply constraint. There is the demand outstripping supply which not the same as the supply constraint. Those two economic problems persisted over the last two years causing home price inflation (not appreciation. Not the same) and rent price inflation.
Each ¼ point increase in 30 year fixed mortgage rates decreases home buyer purchasing power by 2.5% to 3%. When mortgage rates hit 5% the cumulative decrease in purchasing power is 17% to 20%.
The Federal Reserve definitely does not want continued hyperinflation. home price inflation makes up a large part of US GDP.
Couple things on this Michael. I appreciate your concern, but we are not experiencing HYPERINFLATION. By definition, hyperinflation is 50% inflation PER MONTH. Next, higher overnight rates means fewer profits for banks. It does nothing in an environment which inflation is caused by money flooding the system. "Prices rise when governments print too much money." This is essentially what is happening. The FED and OTHER Central Banks are continuing to print money through asset purchases including MBS and Treasuries in our case. This was extended through Summer essentially. So rate hikes, meh. Means little. In order to curb this they are going to have to contract the money supply. They are going to have to reduce their balance sheet. This will contract the M2 money supply. The action is actually deflationary.
The Fed is walking a tight rope. They are trying to buy assets and then sell it again on the overnight market. It is not a safe game to play. Again, contracting the money supply is really the only way out. However, they do not want to collapse the market at the same time. This means the stock market and the housing market. We have the largest and wealthiest generation in history. If they suddenly lost that wealth, it would be a disaster.
So will housing prices fall, probably. How much? Hard to say. People have lots of cash right now. I'm getting offers on listings where people are putting 700k on a 1.5M house. And the amount of equity in homes right now is unprecedented. Almost 50% of homeowners own their homes outright. So no, no crash. People learned their lesson after 2009.
As for supply and demand imbalance, not going to normalize any time soon. Supply is held up by boomers who are not downsizing, they are staying put and going out on a stretcher. Part of the reason the builders are not creating more supply.
I will post two videos separately on my complete thoughts on the subject just incase BP tries to take them down.
In the technical definition created by Cagan in 1956, yes, it is 50% and described as created by money supply. Hyperinflation or high inflation for that matter is not always from money supply anymore. from behavioral economics we know inflation can be demand driven as described by Khan in 1975 called adaptive expectations which is what happening today. consumers expect higher prices, so consumers buy more now in anticipation driving up prices and companies charge more knowing consumers expect higher prices and will pay higher prices. That is upward spiral of demand driven price inflation.
Higher federal funds rates won’t eat into bank profits for while because banks will increase interest rates to customers until customers decide those interest rates are too high to borrow. Banks are flush with cash and have no incentive to pay higher interest on deposits.
The Fed is ending QE in March and beginning QT in May. Instead of letting assets mature and roll off the Fed will sell off assets prior to maturity to increase supply, decrease prices, increase yields and increase mortgage interest rates to directly target demand driven house price inflation part of GDP.
I have never said crash. That is your words. A correction or a bear market does not equal collapse or a crash in housing. We don’t have the same over leverage problem or unemployment loss of income that existed prior to the Great Recession that could lead to a lot of default.
@Michael P. Lindekugel "Housing on a national level is overvalued relative to inflation by about 35%" - A 35% correction in the housing market would be a crash when compared to and with previous 'corrections' so yes while you didn't say it, the implication you are making is as such. Case-Shiller Index fell ~27% during the housing crash as a reference. I fully agree with your comments on over leveraging. Second, you did use hyperinflation in reference to the 1970's which inflation did not happen as the 1979 rate did not exceed 14%. I do agree there is a potential correction, pricing will adjust to new cost of ownership. However, people and buyers are still flush with cash (albeit that is dwindling). I think we both can agree that the Money Supply and printing is out of control. Inflation does feed on itself with higher expectations. The continued printing of money is facilitating massive spending in Congress exacerbating the problem combined with really bad policy. More money in the system leads to more spending for fewer goods with higher COGS.
The Fed information is factual. House price over valuation is national from economic research firm Rosenberg Research & Associates.
I provide my economic and financial opinions based on my education and experience to all clients – residential, commercial, investment. A prospective home buyer with a large down payment, significant cash reserves, and long-term employment has very little financial risk when there is home price deflation. If they should or shouldn’t buy a home is complex analysis. Home price deflation is a risk for someone at risk of default. Those are not my clients.
real estate markets are mostly local. Seattle is not boom or bust as is historically Las Vegas, Phoenix, and Miami.
I don’t know what experts you are referring to in your statement “I know the experts that screamed about the 20-30% decline in 2020 and again in 2021”. I don’t know any economic research or credible financial research that was claiming those declines in 2020 and 2021. I told my clients our hot market was going to get hotter. Nationally, the US is short 4 million units of housing of all types. Seattle has had a supply problem since the early 2000s. There is the supply constraint. There is the demand outstripping supply which not the same as the supply constraint. Those two economic problems persisted over the last two years causing home price inflation (not appreciation. Not the same) and rent price inflation.
Each ¼ point increase in 30 year fixed mortgage rates decreases home buyer purchasing power by 2.5% to 3%. When mortgage rates hit 5% the cumulative decrease in purchasing power is 17% to 20%.
The Federal Reserve definitely does not want continued hyperinflation. home price inflation makes up a large part of US GDP.
Couple things on this Michael. I appreciate your concern, but we are not experiencing HYPERINFLATION. By definition, hyperinflation is 50% inflation PER MONTH. Next, higher overnight rates means fewer profits for banks. It does nothing in an environment which inflation is caused by money flooding the system. "Prices rise when governments print too much money." This is essentially what is happening. The FED and OTHER Central Banks are continuing to print money through asset purchases including MBS and Treasuries in our case. This was extended through Summer essentially. So rate hikes, meh. Means little. In order to curb this they are going to have to contract the money supply. They are going to have to reduce their balance sheet. This will contract the M2 money supply. The action is actually deflationary.
The Fed is walking a tight rope. They are trying to buy assets and then sell it again on the overnight market. It is not a safe game to play. Again, contracting the money supply is really the only way out. However, they do not want to collapse the market at the same time. This means the stock market and the housing market. We have the largest and wealthiest generation in history. If they suddenly lost that wealth, it would be a disaster.
So will housing prices fall, probably. How much? Hard to say. People have lots of cash right now. I'm getting offers on listings where people are putting 700k on a 1.5M house. And the amount of equity in homes right now is unprecedented. Almost 50% of homeowners own their homes outright. So no, no crash. People learned their lesson after 2009.
As for supply and demand imbalance, not going to normalize any time soon. Supply is held up by boomers who are not downsizing, they are staying put and going out on a stretcher. Part of the reason the builders are not creating more supply.
I will post two videos separately on my complete thoughts on the subject just incase BP tries to take them down.
Hello, inflation is on everyones mind, but do you understand what caused it? Where it is going? How bad will it get? We are reviewing the major concepts and information in this TNT.
Watch Inflation Unleashed on YouTube
