Quote from @John Carbone:
Quote from @James Hamling:
Quote from @John Carbone:
Quote from @Nick H.:
This is a chaotic argument, idk why I'm getting involved. Few points:
1) Easier to look at broad averages here, i.e. all of the US, rather than 1 location. All of the US according to zillow is plateauing but has not dropped. Of course some markets have dropped, and some are continuing to rise.
2) Definitely need to be looking at change from the peak like @Bruce Woodruff correctly indicated. i.e. (this is purely hypothetical) if 12 months ago avg price of homes was $1,000,000, and they rose to $1,500,000 6 months ago, and then back to $1,000,000 today - it's relevant to what we're talking about that prices went down 33% from the peak - and the buyers who bought at $1.5M are in rough shape. We don't simply say "prices are flat" and move on.
I do not think it is very likely that prices are going to go down by 20%+. Maybe a short term pullback of 5 - 10% on average, sure, that's very possible. Let's think about how supply and demand are each affected by interest rates going up. Simple econ 101.
Demand is obvious - demand decreases as rates rise because each dollar of home that you buy becomes less affordable w/ a higher interest mortgage. i.e the subset of people who can afford a given home goes down
Supply - supply decreases as rates rise because fewer owners want to sell their homes, i.e. the subset of people who choose to put homes on the market goes down
So as rates rise, demand decreases, but so does supply. These are the two ingredients to home prices (to prices of anything....). No one knows the magnitude of the demand shift and the supply shift, so we cannot "mathematically" say we know what is going to happen. But, as @James Hamling (and maybe others?) has pointed out - we do have a roadmap of real world data in the 1970's when there was high inflation and quickly increasing interest rates. Real estate did not go down - it went up.
It went up because inflation was high (that increases the prices of all stuff... i.e. wages roughly doubled in the 1970's) and because while the increasing interest rates lowered demand for housing, it also lowered the supply of it (less ppl wanting to sell because they were locked into much lower rates). So you had lower demand / lower supply that may roughly cancel out, and you have a lot of inflation, which puts upward pressure on home prices. So homes went up >2X in the 1970's.
Certainly, as others have mentioned, if unemployment goes way up, to say, 10% like it did in 2009 (I don't think anyone credible thinks that is a likely outcome), then that would be a big risk to home prices because defaults go up, rent ppl are able to pay goes down, etc. Outside of that, there aren't many big risk factors here of a large decline in residential RE. Anything is possible (as it has been in 2011, 2012, 2013, 2014, 2015, etc), but I don't see any data/economic based reasoning that would lead to me betting on a 20% decline. The main argument I've heard in this thread from the "crash" side (outside of anecdotal evidence) is that since rates have gone up so much, it only makes sense for prices to come down - but I (very respectfully - we're all on the same team here) disagree as that ignores the supply side dynamics of rate increases.
Note: for full transparency, imo commercial/apartments probably higher risk of decline (compared to SFH's), given they're tied to shorter term debt
I don’t think it ignores the supply side. The demand shift from buyers is projected (by me) to be significantly more than the supply side. So there will be excess inventory of homes and apartments. Americans find ways and adapt. Apart from places in California in this country, we don’t have people living on the streets in droves everywhere. People are living somewhere right now. If someone doesn’t own a home now, there’s nothing they can do to afford it other than make more money. The problem is, wages are not growing with inflation to have this be a similar situation in the 70s. Wages are growing for the very bottom rung of workers in society, but these people are also experiencing the brunt of inflation with higher food and energy prices along with rents doubling…plus they likely will now owe federal taxes due to bracket creeping. Buyers will find alternatives for living arrangements when they are pushed into a corner…it’s already happening. When demand craters, there will be supply and at the right price a transaction will occur.
This is based on emotion Joe, not facts or data, just your emotion and feelings of things, that's what makes it so wildly inaccurate and incorrect.
We site a more then 6million unit net shortage right now today. That's an unprecedented number, it took an entire decade of the most epic slowdown, and total stop, in home building to create such an epic unit shortage. That is a massive absorption factor your not taking into any account.
As for rentals, i have no idea how you can think there will be any excess of rental units, that's completely opposite of your own argument. people loosing homes RENT. Your own argument is one that makes MORE renters, yet you say there will be empty units all over, and empty homes. Where are all these people going? Your talking more then 18 million people.
What will buyers do, they will adjust there purchasing. It's not to buy or not to buy, it's not an on or off switch. The adjust pricing level, that's it. This is Market Compression; buyers who were 400-500 move too 350-450, those who were at 300-350 move to 250-300, etc.. And as the bottom pricing rungs get stacked with buyers it RAISES competition, which raises pricing, for the lower strata of homes.
And the whole time, rental rates run up, as more and more move into rental vs purchasing.
AT END OF THE DAY, the risk vs reward is HEAVILY risk weighted for sellers in this environment where more then 75% have current rates of sub 4/5%. AND buyers are highly REWARD weighted, despite the higher rates, as it's the same cycle it has always been; a renter is paying matching or more for rents vs ownership, and getting nowhere with the payments, 0 equity, moving nowhere forward just burning $. The #1 reason people buy a home, SECURITY, via accruing equity. This will not change at 8% nor 14%.
SO your premise is dead flat wrong, it's disconnected from the reality of social dynamics. Sellers have greatest risk, lowest reward, and hence they will wait it out, making much MUCH less sellers. Buyers will have exact same motives as ever, just adjusted budgets.
Impacts will be seem in relation to areas household median incomes, far as which pricing levels have compression in what direction. An area with median incomes of $700k will have downward pressure on homes upward of $1m mark where areas of household median income of say $65k will see compression on pricing at entirely different levels, including much more upward pressure on the lowest pricing strata.
It will NOT, I say again NOT be a universal downward pressure on home prices. There will NOT be mass vacant units.
Print this out, save it, my e-mail and # is here. I have a greater then 90% certainty score on this forecast. That, in forecasting, is absolute certainty, as close to 100% as anything gets. I am trying to help people by sharing this, I get paid considerably for this advisory. I don't need to post such here, I am trying to help the "average Joe" from making a horrible mistake via following the loudest arm-chair quarterbacks and not knowing the difference from solid analysis and guesstimates.
You are entitled to your opinion, but even you said a 10 percent drop is definitely in the cards coming up. So under your assumption, how does it make sense for someone to purchase a home right now, staring a 10 percent haircut in the mirror, 3 percent closing plus, add in liquidation costs of 7 percent if they need to sell, looking at 20 percent negative equity in 6 months according to your projected “market adjustments”
let’s look at a median home buyer. $425k purchase price and putting 20 percent down. A true qualified buyer. So that’s 85k (plus 12k closing) let’s call it 100k out of pocket. They have a mortgage of $340,000 30 year fixed 7 percent rate.
here is how it breaks down.
$2,262 payment (23k interest and 3k principle first year)
so after 2 years, they only get 6-7k in principle reduction (doesn’t even cover half of closing costs), the rest is “rent” payments.
this doesn’t include property taxes or homeowners either which can vary significantly by location.
I just don’t see the bull case to buy a home right now for personal use.
That prospective homebuyer can take that 100k down payment and buy 20k of ibonds (if married) earning 2k a year and the other 80k at 4 percent in 1 year treasuries for $3200
that's $5,200 in risk free gains on the 100k down payment. Whereas their principle payment first few years is around $3500 a year buying into a market that is unstable and momentum shifting downwards. Telling people to buy right now is a disservice.
Your argument makes no sense in reality, it only applies if someone has 0 equity today, sells a home to buy another. Rates could be 1%, I'd tell that person there dumb.
Here is reality.
Take Jon and Jane Renter, they now have 2.5 kids a dog and a cat. They have outgrown apartments, there squashed like sardines in there rental townhouse, and rents keep rocketing up, and there now burning through something like $2,300mnth in rent to some Jag-Off landlord called "James", lol.
For Jon and Jane Renter, does it make sense to buy a place, at a monthly cost of $2,500, which sits at less then 45% net monthly household income? ABSOLUTLY! That price Jon and Jane Renter will pay on OWNING, is locked. They have now fixed there household expense. As rents average a 5% annual increase it is not long until market rents exceed there locked in household cost basis. Not to mention where 100% of there payment previously were just gone "poof" into the ether, now every time they pay a portion of that $ goes into a nice little retirement account we call "equity".
Could they have waited another year or 2 to try and "time the bottom" sure, at what cost? It would cost $28k-$56k to wait things out to time the bottom, IF they got lucky enough to thread that needle with a Camel.
Ok let's flip gears to Investors.
Dave and Phil are middle class couple who had to move for a job relocation in 2014 and as things sucked to sell, they rented out there place instead. It all worked out so well that in 2017 they bought another home just for purpose of investment real estate and since have added 2 more, sitting on what is a heck of a portfolio, in there eyes, and by all rights Kudos for them, right.
Dave and Phil are focused in GROWING there portfolio. They want to retire younger, achieve freedom, quit there day jobs and travel the world as food and travel bloggers. How to do such? It takes a whole year to save enough $ to buy a property, and at that they have to sacrifice some things they want to do int hat year. How to hit that goal before 60?
Turns out that 2017 home, well they got one hell of a buy on it and even though the market has cooled down, they got in at $165k in 2017 but now, today, market price by comps has been around $345k.
So, even as things have dipped in activity, and comps are coming in at nearly 4% off market highs, they know math and WISELY follow there REI Realtor and get set to sell. The sale goes through and "disaster" hit's, they sell it for a whole 5% off market highs, $327,750. What they owed on the property, a whopping whole $118,800. Dave and Phil just pocketed after selling expenses etc. $176,175.00. Rents keep pacing up and up, not at crazy 20% leaps but solid 5-10%. They wisely do a 1031 exchange and utilize that $176,175 to buy 3 properties, townhomes, in great performing areas, with 20-25% down. One is a nice 2br with a loft so down the road it has that value-add of turning loft into 3rd bedroom. The other 2 are 3br's in nice trendy areas that are really popular with a higher price point to buy a single family home making for a really strong tenant market.
Dave and Phil just turned there 1 performing property at $2,300mnth gross rents, into more then $6k in gross rents, without a penny out of pocket. And, as rents keep stepping up over time as rents do, the returns keep getting better. Tenants are now paying down 3 mortgages for Dave and Phil where months ago, just 1. There equitable returns are a multiplier. Not to mention the depreciation cycle they are back to enjoying which interestingly enough, there CPA says there set to save nearly $10k on there overall tax's end of the year from that little movement.
This is the difference between novice investing, and professional, informed, strategic Real Estate Investing. Compounding returns beat interest rate hikes every day. Not to mention CONTEXT, taking the whole picture, all the details, the complete picture into account.
Dave and Phil are at the x-mas retreat in Sachells, and have a cheers along the beach with a giggle "to not timing the bottom".
