Are we at Peak Market?

21 Replies

Robert Kiyosaki stated that the historical market crashes every 8-10 years. I know the last crash happened 2008-09, that leaves us at right around that 10 year period. I am curious to know if this is the right time to buy multi family rental real estate. I know no one has a crystal ball and has the definitive answer, however does anyone have any idea or knowledge of how the historical market works and whether you think we are at the peak? Is this the right time to buy? 

Originally posted by @Phillip Kim :

Robert Kiyosaki stated that the historical market crashes every 8-10 years. I know the last crash happened 2008-09, that leaves us at right around that 10 year period. I am curious to know if this is the right time to buy multi family rental real estate. I know no one has a crystal ball and has the definitive answer, however does anyone have any idea or knowledge of how the historical market works and whether you think we are at the peak? Is this the right time to buy? 

There are some people who say it's always a good time to buy.  There are others who say it's a good time to buy when it is easy to find money for deals, as it is right now.

Then, there are some people who look at the historically low cap rates and historically high interest in real estate investing and remember Warren Buffett's admonition to "be fearful when others are greedy."

I won't say don't buy now.  But I will say that you need to be extra, extra careful in your analysis right now.  There are two distinct risks:  (1) a correction in the real estate market; and (2) the risk of a recession - with us pushing past full employment, this looks ever more likely now, hence the Wall Street selloff.

The recession risk is very important. If you pay full market price for an asset at the top of the market, you are taking on an enormous debt service obligation even if you are using relatively conservative leverage of, say, 75% LTV. If there is a real estate correction, but your property is full and people are paying rent, then you can just ride out the rise in cap rates and wait for better times to sell or refinance.

But if there is a recession, and 5% of the people on your property stop paying you because they have lost jobs, and renters start doubling up with friends and family rather than rent apartments because they are out of work, then you may not make your debt service.

So you need to be extra careful right now that any property you buy can pass a stress test of a spike in vacancy or economic vacancy.

@Phillip Kim What few think through is that “peak market” isn’t something that is a randomly independent variable. Let’s say the market does have a hiccup, do you think...

1.) General economic hiccups come along (generally) with employment issues. So there’s no guarantee your W2 will hold up in a “crash” environment.

2.) Will banks be as free with their capital or will restrictions and qualification criteria get tighter?

3.) Will rents be the same on these multifamily properties? Or will they drop so cash-flow ends up relatively similar?

4.) Will interest rates be the same or will (perhaps) rising rates contribute to a plateau in the market?

None of this means that you should buy now or wait until later. Simply that most people look at one variable: price. They ignore everything that would/could/may contribute to a price reduction.

It’s not crazy to think: Oh the price decreased 10%! But now the bank wants 25% down instead of 20%. And their interest rate is 6% instead of 5%. So now my “cash-on-cash” (one metric people on BP like) is actually worse!

Or maybe it won’t go down that way, nobody has that crystal ball.

@Phillip Kim Market is a broad definition, do you mean the stock market, bond market, Real Estate market in Philly? 

I'll also follow up with a second Warren Buffet quote: "In the business world, the rear-view mirror is always clearer than the windshield."

It is hard to make accurate choices by only looking at the past. First off if we are at the top of, say the equities market, how much will a correction hurt the asset class you invest it? Assuming you want to buy multi families in the Philly, the FANG stocks bottoming out won't impact you nearly as much as Comcast laying off 5,000 people. You'll need to think through scenarios like that when looking at each deal. Asymmetric risk gets overlooked a lot. 

Second, you shouldn't put off buying a property because some guy said in a book that market crash every 8-10 years. You could start looking at properties right now and after going through 999 find the 1000th property to work out even if your worst case scenarios plays out. You won't know until you start learning about REI and look at some deals. Once you do that, you'll became an expert in your given area and be able to make a much more accurate decision on investing than the generic "market cycles" advice.

@@Jonathan Twombly Gave great advice how what to focus on when underwriting deals too; advice that holds true whether its a bull or bear market.

I really don't think that we can lump every U.S. market together. I believe that are very individual markets that can be affected more or less with some major event. 

For example, I work in only one neighborhood, that is incredibly central to Downtown, which still has prices about half of the surrounding neighborhoods and which are rising rapidly. Major development is breaking ground on March 10th. This development put a lot of emphasis on bringing up this neighborhood and has been and will continue to educate people in our neighborhood for the construction jobs for this development. 

So, I'm really not worried about there being some major crash. But people in higher end neighborhoods may have to consider other factors. 

I just know the cost/benefit or effort/reward ratio hunting hard for the skinny deals in my market is hardly worth it anymore. I would rather take a nap and invest in other things completely than turn 200 rocks with fingers crossed. I'm doing some local small business lending/ equity partnering and cherry picking some stocks.

But, like Michaela says, RE is local. If I were in the Midwest or something I might could bother hunting again.  For now I'm taking it easy and selling my least favorites as they become vacant.  

Originally posted by @Phillip Kim :

Robert Kiyosaki stated that the historical market crashes every 8-10 years.

Robert Kiyosaki is wrong.

@Phillip Kim you have some incredible responses and fundamental investment points that have been made below. If you are specifically looking at multi-family in Philadelphia it makes sense to look at supply and demand for what you are investing in. The consensus in Philadelphia is that we will end up somewhere in the range of 5000 to 10000 rental properties short by 2030. This would drive rental costs up, not down. One of the best points made below is that not all markets can be treated the same or be looked at similarly. Philadelphia performed far differently than much of Florida in the last recession, for example.  Also, we have been in a shifted market in Philadelphia and the surrounding area for quite some time. All shifts do not look the same. Currently, we are in a low inventory market where the last shift, documented by the Big Short, was an over leveraged under capitalized market shift. Each shift that occurs effects the market differently. Finally, much of the Canadian market, and I understand that is global however it offers a unique perspective, has not experienced a correction in 15 years. There are markets in the United States that have similar outcomes even in a shift or a correction. 

If you bought single or multi-family real estate in Philadelphia in 2006-2008 the value of the property is roughly the same now as it was then, with the exception of a few micro-markets. That being said are you investing for cash flow, are you investing for appreciation, or are you investing for both? Your criteria and ability to hold the asset changes the answer to these questions dramatically. Below are some articles that offer some insight into where housing, rentals, affordable housing, and inventory are and are going in Philadelphia. It is important to understand the nature of that particular market and all the factors that effect it. 

http://www.philly.com/philly/business/real_estate/...

https://philly.curbed.com/2018/1/23/16922626/phila...

https://philly.curbed.com/2017/7/18/15982162/phila...

It's always impossible to call a peak or a bottom but let's just say we are far away from the bottom we formed in 2010. Are we at a peak? It's impossible to say.

Few things that are going well, the employment market is solid, corporate earnings were strong, consumer confidence is high.

Few things that bother me, interest rates are rising, the stock market is acting very confused. Growth markets like the smart phone or social
networking etc are peaking in terms of usage and growth.

But like I said, who knows where we are in the cycle. Likely more to the end of expansion.

Originally posted by @Phillip Kim :

Robert Kiyosaki stated that the historical market crashes every 8-10 years. I know the last crash happened 2008-09, that leaves us at right around that 10 year period. I am curious to know if this is the right time to buy multi family rental real estate. I know no one has a crystal ball and has the definitive answer, however does anyone have any idea or knowledge of how the historical market works and whether you think we are at the peak? Is this the right time to buy? 

 I have no idea and am not an economist, but I'll share two changes on the financing side newly in effect as of 2018:

- Loan limits increased across the nation. In the Bay Area, someone with 5% down can now get a $715k SFR using a Fannie loan.

- This is California specific and I don't know anything about your area (lenders in other states want to chime in?), but the down payment assistance income limits are now ridiculously high (>$200k/yr is now recognized as "modest income" in some areas...) and a few have switched to using "borrower income" instead of "household income" to test if you're over the limit.

To whatever extent you think availability of financing plays a role in driving home values: think about the two things above together... "modest income" down payment assistance for a $350k/yr married couple buying a $715k home (put one spouse on the loan, not both, since we're looking at 'borrower' income not 'household' income). The stereotype that high income millennials can't buy homes because they are spending their money on lattes instead of a down payment savings, is no longer true. That might give the current cycle several years yet -- you can get your lattes, your high income, AND your down payment covered when you buy a home. None of the income documentation requirements have laxed up a single iota, so these folks with minimal savings can actually make the payments, meaning it's more likely to be a bump than a crash.

Also: Fannie Mae's HomeReady program used to be for first-time homebuyers. So did Freddie Mac's Home Possible program. Within the last few years, both have lifted those restrictions. More gov't subsidized money is being put out there, no longer just for FTHB. 

But, availability of financing isn't the only thing that drives/impacts real estate values, so I've probably just confused the picture even more than it might otherwise have  been. :P

Anything can happen. What will not happen is everyone looks at the calender and says oh it has been 8 or 10 years, lets pack up , it is over and we can come back a couple years later. Markets don't care what someone says about cycles. I get your point still. Good luck!

I am not sure where Robert Kiyosaki got that from, but the national real estate market overall crashes every 17-18 years. If that holds true, then the last peak of 2006 puts us around 2023-24 for the next peak. If you look at the demand in the market, interest rates keeping housing affordable, wages increasing and overall low inventory, I would say we are likely not at a peak level. 

This last crash was massive and continued from 2007-2011 or so. We have only had 4-5 years of solid positive growth nationwide and are just above the previous market cycles pricing for homes. Usually in market cycles the new peak is much higher than the previous peak. 

Whether I am correct or not, the smart thing to do is to be conservative and has cash available to get you through. For me, when looking at buying an apartment I am looking at resident affordability, adding some sort of value to the property to create equity, strong sub-market fundamentals, being properly funded with large reserves and an overall conservative approach. Markets always bounce back, so if you are prepared to get smacked around, then you will be ok in the event of a downturn. 

Purchase "Buy n hold" properties in a buyer's market when they're cheaper and sell (or flip) your properties in a seller's market when you can get top dollar. The key to a downturn is being properly prepared for the acquisition phase. Yes, this is a bit simplified...it's meant to complement all the good advice above. Best of luck to you

When mortgage interest rate jumps to 5% or higher buyers will freak out and hesitate. In both West and East Coast many home owners carry $1M+ mortgage and get barely get by with two incomes. If one is out of a job the $11000 monthly payment will be a strain.  Economists are advising that 18-24 months away there will be a recession. You will start hearing inflation is real now. 

It feels like it could cool off for sure.

"The sky is falling! The sky is falling!

I'm buying at a price that even after refinancing, I have enough spread between my expenses and rental income, so if I had to lower rents (which I don't anticipate) it wouldn't get me in trouble. 

- The real estate crash didn't happen in 2008-2009. It peaked in 2006 and bottomed out in most markets in 2010-2012. 

- Every market performs differently. Some peak sooner or recover later. Some have remained flat while other markets soared. It comes down to supply and demand. The economics of an island or coastal city are different than middle America.

- There are real estate cycles, but crash isn't really accurate. The 2008-2009 event that you are referring to is not normal in the history of cycles. Several factors played into that cycle being more severe. Expecting something similar to happen every 8-10 years ignores history. That being said, there are definitely cycles, but they happen in more like 5-15 year spans and severity varies greatly. Really impossible to predict.

- People spend too much time worrying about how today's price compares with last years price. If you are purchasing an income producing rental property, you should be worried about cash flow. If market prices of properties and rents are both increasing, the higher purchase price may still cash flow just fine. The point is evaluate the deal rather than trying to predict the market.

@Joe Splitrock However its good to know if your buying at a near peak or near bottom of market. 

Don't you think so? Wouldn't you want to make an informed decision if you were buying high or buying low? 

Originally posted by @Phillip Kim :

@Joe Splitrock However its good to know if your buying at a near peak or near bottom of market. 

Don't you think so? Wouldn't you want to make an informed decision if you were buying high or buying low? 

 My view is you will only know in hindsight.  Few people predicted the Great Recession and associated housing depreciation.  In 2012 I was hearing reasons why to stay away from RE investing.  In 2018 I am hearing reasons to stay away from RE investing.

I think timing the RE market is as difficult or more difficult than timing the stock market and that most people cannot do it reliably.

I purchase properties that make financial sense but because of the market I am in the COC is not good upon purchase. It would not take much of a downturn to cause my recent RE investments to be negative cash flow. Fortunately I have been doing this a while and I have investments that cash flow very strongly and would need to take a huge cash flow hit to not cash flow (the type of hit that has not occurred in my lifetime).

Have I always timed my purchases at ideal times.  Heck No.  I have made 2 separate purchases that lost nearly 20% of value.  One of those purchases today looks like an outstanding purchase.  The other is up over $150k and looks to be a pretty good purchase.  The point is that if the market goes down but you are not over leveraged and therefore do not need to sell it has always come back up.  Sure I could have made more if I could have timed the purchase so that they did not depreciate 20% but timing this is difficult and being wrong could cause you to miss a lot of appreciation.

To answer the OP question: I do not believe we are a peak but if the prices fall I will be purchasing and if prices do not fall I will be purchasing.  In both cases I plan to purchase properties that look to be good investments.

Originally posted by @Phillip Kim :

@Joe Splitrock However its good to know if your buying at a near peak or near bottom of market. 

Don't you think so? Wouldn't you want to make an informed decision if you were buying high or buying low? 

I purchased a property in 2004 that was worth about the same in 2010 after the crash. Theoretically I could have just waited until 2010, but that doesn't include the opportunity cost. From 2004 to 2010 I collected over $70,000 worth of rents from that $105,000 property. 

I agree that you should be aware of market conditions, but if the numbers work, they work. 

Too many people wait for the right time and it never comes. I say this because I also purchased houses in 2010-2012 and nobody was buying. So theoretically everyone wants to wait, but then they get scared. If you don't have the courage to buy when the market is going up, you sure won't buy when the market tanks. It is just human nature.

Originally posted by @Joe Splitrock :
Originally posted by @Phillip Kim:

@Joe Splitrock However its good to know if your buying at a near peak or near bottom of market. 

Don't you think so? Wouldn't you want to make an informed decision if you were buying high or buying low? 

I purchased a property in 2004 that was worth about the same in 2010 after the crash. Theoretically I could have just waited until 2010, but that doesn't include the opportunity cost. From 2004 to 2010 I collected over $70,000 worth of rents from that $105,000 property. 

I agree that you should be aware of market conditions, but if the numbers work, they work. 

Too many people wait for the right time and it never comes. I say this because I also purchased houses in 2010-2012 and nobody was buying. So theoretically everyone wants to wait, but then they get scared. If you don't have the courage to buy when the market is going up, you sure won't buy when the market tanks. It is just human nature.

 Joe I wish I could vote multiple times for your previous post.  It reinforces much of my investing philosophy to continue to buy and invest whether the market is high or low.  For most of us we are only going to be investing for about 30 years on this planet from age 30 to 60.  With that time frame I dont have time to wait 5 or 10 years for market downturns that might never come. Buy something that works pretty good and ignore the temporary ups and downs, because the time value can not be replaced.

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