Investor · Tampa, FL · Member since 2017 · 122 posts · 87 votes
I have a few predictions about the economy, and am looking for the strategies of those who have a similar views. I'm not looking to discuss differing views, just if you agree with this view.
First, I believe the economy will crash in the coming 2 years (likely within 1 year). This is due to the stock market being far overvalued, the usual 8 year economic cycle, and the economies of other countries that will likely crash first and then domino around the world (China, Japan, EU). I do not expect a zombie apocalypse or any such thing, but a situation as bad overall or maybe worse than 2008.
Due to this, I would like to both be prepared for such a crash to not lose anything, as well as be able to profit from it.
I am currently focusing exclusively on rentals as I believe the demand will remain or grow stronger, though prices may drop a bit. I want to not only be able to live on my rental income, but have plenty of extra in case prices drop more than i expect.
Regarding debt during a crash, is there any advantage to having loans through big banks versus small banks? I don't believe interest rates will increase during this time, as the central banks will continue their strategy of lowering rates to try to help the economy.
I want to keep a fair amount of cash reserved to cover possible extra vacancies.
For the profit side, I plan to keep some money in gold and silver, as they generally go up during a crash, and are not dependant on currency (i'm not really sure what the dollar will do during this time). I think it's too risky, but I could keep more debt on the rentals and purchase more gold/silver or have more cash on hand, as it may be harder to borrow during/after the crash.
Once the economy has stablized a bit, I want to sell the gold/silver and pool my cash to purchase more real estate at a discount, likely rentals homes, a mobile home park, or a small apartment building. I could also purchase homes with more focus on the appreciation as the market goes up again than the monthly cash flow.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Ben S. OK lets look at the other side of the coin
stock market crawls back investors sell and flee to real estate.. real estate strengthens with this new infusion of capital. ??? possible ?
there are always deals in real estate Always it does not take a crash to create opportunity.
and why would real estate crash in the next 2 years.. just because the stock market crawled back?
unless you had big unemployemnet like in 08 to 2010.. and you have folks who have bought homes in the last decade that actually qualified and are locked in at historic rates.. just because their market stops appreciated or retracts a little .. those folks don't sell they just ride it out.
there is and will always be the US citizen that can't manage debt no matter the market.. gets divorced .. has bad health issues... dies intestate... so there are always deals.
Each market cycle I have personally lived and invested through was unique no two the same.
And now with Foreigners grabbing a huge share of our investment properties for cash and hedge funds doing the same.. why would those folks cut and run especially the cash buyers.
coming into 09 40% or more of all sales were for CASH... so cash buyers don't panic sell generally speaking.
I do see certain markets leveling off the appreciation run up.. we are seeing that big time in Dallas right now the herd mentality of that market has cooled down a bunch.
and here in Portlandia higher end is just holding to little move up.. but middle price range still moving up. Charleston another market I am active in has seen 20% move up in 2016 alone.. unbelievable there. and thankfully I got in 4 years ago. now I look like a freaking real estate genius identify a market all the way across the country pulling the trigger and having properties I thought would be a great exit at say 400k and now I am selling for 550k... LOL.. but I have been on the other end of this as well.
Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
9y
There is a 70% probability of a 6.0 to 6.5 earthquake in the next 7 days off the coast of Washington following the current 3 week long "slow slip" event happening in the Olympic Range to Vancouver Island. Notice, it is 70% not 100%. But, with those odds, I prefer to plan accordingly.
@Jay Hinrichs I don't see that you are concerned about the $200 trillion in unfunded liabilities and the $20 trillion in national debt. These are the most pressing forces on future real estate prices. I think I did leave out Texas. My mistake. Texas property taxes are very similar to Washington's. I invest in both places.
Washington has an ADDITIONAL fee of 2% of sales price when you go to sell a house. That is, 2% of $300,000 sale is $6,000 excise tax to the state from the seller. Seattle has instituted a LAW whereby you Must rent to the first person who applies. They are conducting "sting" operations to sue those who don't comply. My heart burn with real estate property tax is that it is the simplest way for the government to confiscate personal property of those who have paid off their property but at some future date can't afford to pay property tax. Okay, that and 401(k)s are susceptible to government confiscation as well. Watch your 401(k) be taxed to death or disappear altogether. Not pleasant and nothing you can do about it after the fact.
When I mention subject to I am assuming not everyone on BP reads every post of everybody who ever posted. Only those who are interested and find this thread would have any interest in looking for alternatives. I believe that is what this thread is discussing. Threats & Solutions. ;-)
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Account Closed excise tax or transfer tax is alive and well in WA but property tax's are lower than Oregon. and there is no State income tax. if your flipping properties then yes WA will take its pound of flesh. if your buy and hold in Texas and say you live in CA.. I see that as the worlds worst place to own rentals.. sky high tax's you pay big state tax in CA... foundation issues in Texas and storms .. not keen on Texas unless you live there..
tax man cometh and tax man taketh...
were folks do good in our area is work just across the border in WA and do all your shopping in no sales tax Oregon.. lots of airline pilots reside right across the river from PDX for example.
excise tax sure cuts down on the wholesaling though and I like that .. keeps the deals real.
Not sure about the rental rules as I am not in the rental game on the west coast nor have I any interest in that in this area.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
9y
@Account Closed Ken, I think you have a valid concern for high unfunded liabilities. But if you think thru it, what is the most likely outcome? Without high growth, the Treasury will be forced to print money to cover those obligations, and that will eventually create inflation. Possibly super high inflation.
Now if you assume salaries go up approximately the speed of inflation, then rents probably stay close to inflation, (same with taxes, insurance etc.)
But if you have long term amortizing fixed rate debt, and your properties are cash flowing, why do you care? Yeah in the short term property prices might come down a little as mortgage rates go up and make it more difficult to buy, and investors require a higher return on their money.
But 10 years down the road you have a property whose rents and values have gone way up.
Real estate investors only get hurt if there is permanent/prolonged deflation, if they have short term debt that needs to be refinanced in a rising interest environment or if you are unable to cash flow during a short term recession.
One of Real Estates big advantages is that it is a hedge against inflation. All the more reason to own it if you are afraid of the debt imo.
Investor · Hayward, CA · Member since 2015 · 83 posts · 72 votes
9y
After losing my shirt in stocks in 00 and 08, as well as tons of Vegas paper equity (didn't sell, still swinging baby!) in 08, I no longer invest heavily in stocks and like all my RE to cashflow enough that I don't care about appreciation. I have heard about upcoming deflation, hyperinflation, solar flares, 200 trillion in liabilities, Yosemite erupting and Trump declaring himself Emperor (c'mon Rand Paul!). I happily admit that I don't have a freaking clue what the future holds and there is a certain peace with being ok with that. I still buy cashflowing RE in places where people want to live and work. I spend far less than I earn and am always looking for a deal. I like silver too... I'm just going to enjoy the ride.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
9y
ken, the US Federal government is the monopoly supplier of the US economy, i.e. a currency issuer, whereas you and I, states and businesses are currency users. The federal government is monetarily sovereign and NEVER CAPITAL constrained. This is a huge flaw in your worry about the $20 trillion in national debt and "unfunded" liabilities.
ken, the US Federal government is the monopoly supplier of the US economy, i.e. a currency issuer, whereas you and I, states and businesses are currency users. The federal government is monetarily sovereign and NEVER CAPITAL constrained. This is a huge flaw in your worry about the $20 trillion in national debt and "unfunded" liabilities.
That may be true, but what about the relative value/devaluation of the dollar and inflation as we keep printing money with no end in sight? Even though the U.S. dollar is the world's reserve currency, how can this continue forever without consequence?
1) I hear it posted a fair amount on blogs etc. But why do we think the stock market will 'crash'? What part of the market is super over valued? Last I looked PE ratios were a little over 20, something like 21x's earnings. Which is on the higher end of historic norms. But Interest rates are freakishly low. If you look at expected returns, maybe some people have fled bonds and moved to equities, but otherwise there is little reason to believe equities are super over valued.
If we're talking P/E's - the Shiller P/E ratio (average inflation-adjusted earnings from the previous 10 years) is at the third-highest level in the last 130+ years.. And this is when corporate earnings are high due to lots of spending, general (slow) economic recovery, very high consumer confidence etc. If corporate earnings dip and we have a slowdown, P/E ratios go up even higher if stock prices stay the same. You can see what typically happens to the market after P/E's creep this high - http://www.multpl.com/shiller-pe/
Interest rates are also being raised, with talk of 3-4 more times this year alone. This historically does not bode well for the stock market. Granted P/E is just one metric, but it seems to be an important indicator.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
9y
Erin, The value of the US Dollar is backed by the productive capacity of the US economy. Mathematically the federal government must run a deficit at least equivalent to the trade deficit in order for the private sector to achieve sustainable growth. Do you think the lives of Americans would be better today if the amount of US Treasuries (national debt) had only gotten up to $15 trillion? That would mean that there was $5 trillion less in the US economy. I do not see how anybody could make a case for that being better especially considering how weak of a recovery we have had since the "great recession".
The biggest problem facing our nation's future is not the federal government lacking the funds to spend and meet its obligations but rather having the assets for the economy to function on. What is a bigger problem, there being more US treasuries in the global economy or our nation's infrastructure continuing to fall behind because of lack of government investment.
When one understands the operational realities of our monetary system then it is apparent that monetary and fiscal policy should be focused on increasing the productive capacity of the US economy with inflation as a hedge. Inflation is still a minor risk with literally decades of folks predicting imminent hyperinflation whereas since the recession we can't even hit 2%.
Investor · Hayward, CA · Member since 2015 · 83 posts · 72 votes
9y
Kyle Hipp your argument is that the Feds need to spend more than they collect to ensure private sector growth? That we'd be better off if only our National debt was higher? Rather than go all Thomas Sowell here, I think you could explore the terms "malinvestment" and asset inflation. Manipulating interest rates to goose the economy is also destroying both savers and pension funds. A lot of Keynesians fail to account for secondary and tertiary effects of their policies. Those effects are quite evident and there will be a price paid eventually.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
9y
Brent, not a Keynesian. Most of them also fail to understand that the federal government is monetarily sovereign as well. When the US economy has a trade deficit that is Dollars out of the economy. The private sector can only take on so much debt as we learned (should have) again with the great recession being a balance sheet recession focused on the household sector of the private sector. The public sector is the only entity able to fill the void in the US economy via deficit spending. Of course foolish spending is not beneficial but I have a hard time seeing how you could infer that my example of infrastructure spending would be unwise.
Would you make the argument that the US economy would somehow be stronger with $5 trillion less in it as I suggested above, how about only $2 trillion.
I addressed inflation, again after years of folks saying that this nation's reckless spending we are guaranteed hyperinflation or at least high inflation and it never comes, not even close. Heck deflation has been a greater risk over the last decade than inflation by far.
I did not touch much on monetary policy and have not supported all their moves. Many folks again fail to understand the key point that the federal government is monetarily sovereign when related to monetary policy and believe that the debt for some reason bucking nearly all US history in that the debt should be paid down and or that the FED needs to unwind its investments. Through all this concern the US Dollar remains extremely strong in the global market
@Ben Silone, honestly I will give an answer that may not be politically correct but one of the best hedges against inflation and instability is firearms. Quality firearms are always easy to buy and sell and not only retain value but appreciate.
And they also would come in real handy in case the recession morphs into a zombie apocalypse ... still, I see firearms as an insurance policy more than an investment. Both insurance and investments are important, but there is a BIG difference in my mind as to how they are valued and analyzed, and poor decisions can be made when you try to mix or confuse the two.
There are some firearms that have a historical appreciation rate of 15% annually for the past 30 years. Those are what I own and also deal in. I don't hold them for appreciation but rather the fun of shooting them and the appreciation is just icing on the cake. I would rather put my money in something that pays me every month--that that is rentals.
1) I hear it posted a fair amount on blogs etc. But why do we think the stock market will 'crash'? What part of the market is super over valued? Last I looked PE ratios were a little over 20, something like 21x's earnings. Which is on the higher end of historic norms. But Interest rates are freakishly low. If you look at expected returns, maybe some people have fled bonds and moved to equities, but otherwise there is little reason to believe equities are super over valued.
If we're talking P/E's - the Shiller P/E ratio (average inflation-adjusted earnings from the previous 10 years) is at the third-highest level in the last 130+ years.. And this is when corporate earnings are high due to lots of spending, general (slow) economic recovery, very high consumer confidence etc. If corporate earnings dip and we have a slowdown, P/E ratios go up even higher if stock prices stay the same. You can see what typically happens to the market after P/E's creep this high - http://www.multpl.com/shiller-pe/
Interest rates are also being raised, with talk of 3-4 more times this year alone. This historically does not bode well for the stock market. Granted P/E is just one metric, but it seems to be an important indicator.
I could be mistaken, but I think the PE ratio you are posting shows some sort of weighted 10 year average earnings which would include 2008 and 2009, ie times of incredibly low earnings.
The current forward looking PE ratio is 18 and some change which is above average but not all that not all that high historically.
if you look, earnings are very low even now for Banking and Oil & Gas. AND PE ratios often go up for cyclicals BEFORE earnings come on. So if the Caterpillars and GE's of the world start to show real earnings in a growing economy we might end up with incredibly low forward PE's.
Look at Apple, are you telling me that APPL at a pe of 17, or Bank of America trading at 15 x's earnings are super high?
There are significantly fewer stocks, and a fraction of the shares available to purchase on the exchanges from 20-30 years ago.
In addition there are huge corporate buybacks. Apple is sitting with 200-300B dollars in cash and other securities, if their stock drops by 30%, the stock buybacks would kick in.
Look, could we go down 20% on the S&P? sure, those kinds of corrections are pretty common. And that would get you back to where the market was about 12-18 months ago.
But right now with interest rates at near all time lows, you would expect the market to be on the higher side of things from a PE ratio, and there is little as of right now to suggest earnings would crater. (outside of some major geopolitical event).
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
9y
"Account Closed"? That was an interesting article. BUT, "Mack" already had a problem in 2010 when he said: ""Our model is long-term appreciation," - which in the mid west - is fraught!
Seems to me the BANK has largely caused his problems: "FirstMerit sought to collect nearly $7.3 million on loans for 65 properties". But I agree - he aided their risky lending!
Why, if as the article says "the core business of Mack Industries — buying, rehabbing and renting residential property — is still relatively healthy", are the Banks needing to push push push?
My question to his Banks/Creditors is - why did YOU let it get to this? Is it REALLY "Mack's" fault?
Investor · Tampa, FL · Member since 2017 · 122 posts · 87 votes
9y
Thanks for all the great replies everyone! A few comments:
I probably should have defined "crash" better in the beginning. I would consider 2008 a crash in the housing market, and would call that time a depression, and the current time a recession. It's more common to lighten up these situations with nicer sounding terms (especially if you are a politician), but I think they are serious situations and should be labeled as such. I don't expect that we will collapse into chaos anytime soon, but I do expect the stock market to "crash" significantly in the coming year or two, and that that will impact the rest of the economy. I also expect other economies (Japan, China, EU, in particular) to have significant crashes as well, which will all contribute to our economic depression.
That crash will be a correction of over inflated markets, and will involve the real estate market too some degree, though real estate will not be the focus of it (and it will more greatly impact certain over inflated local markets). It need not last a long time, unless government intervention drags out the corrective process to prop up inefficient businesses and industries, as it has done to various degrees since 2008. Such a crash wouldn't need to be severe, if people were managing their money well and kept reserves on hand, though with the amount of total debt and negative savings the average person has, this will not be the case.
As for government spending and debt, a trillion dollars spent by the government is not equal to a trillion dollars spent by the people. The government will blow up a chunk of that money (in war) and will inefficiently spend the rest. It's not merely money being spent that drives an economy, but money that is efficiently spent to increase production. Competition in business and individual spending in a free market leads to greater efficiency of production which results in long term economic growth. Government inflation and injection of cash provides temporary growth and creates bubbles that will eventually be corrected by the market.
A few things to consider: China inflates and falsifies their economic statistics, as every communist nation does (and most other nations do to a lesser degree). They have severe economic problems, and though they probably won't be the first domino to fall, their crash will impact every other nation. Japan has negative interest rates, something just a few years ago economists said was impossible. They have massive debt, and are desperately trying to prop up their failing economy. Greece, Italy, and Spain, to name a few, are draining an incredible amount of money from productive nations in the EU, and along with the Brexit and immigration, may result in a crumbling of the EU. The USA has high unemployement (when including underemployment and those who have left he job market) and stagnanation across the board. Money is pouring into the stock market because there are no more safe investments (bonds and savings, which can't beat inflation anymore) for investment funds ( pension, etc) causing it to be over inflated. Numerous states and cities in America have gone bankrupt, and this will continue as they are unable to fund promises made prior to 2008. Current debt and unfunded liabilities aren't a cause for a crash, but they will be severely impacted by a crash and will lead to a worse overall economy.
Cycles have been fairly consistent running about 7-10 years for the past several decades. I don't see any indicators that we will not continue this pattern, though with interest rates already so low, the feds will have fewer tools to try to prop up the economy in the next cycle down, leading to a worse crash than before. Gold/silver is not a long term investment, but a long term insurance policy and a short term investment in a down economy. With uncertainty not only with our own economy, but those around the world, insurance against loss of wealth is important. Cash generating residential real estate will also continue to perform to some degree, though rising taxes and dropping rental rates could significantly impact the cash flow. As some mentioned, guns also are a solid and stable investment, though less liquid than cash or gold, and possibly effected negatively by new government laws (while also being helpful in fighting off the zombies).
I plan to continue to invest in real estate, but only with very low debt and a very high cap rate. I will also build up cash reserves in dollars and gold/silver and prepare to buy after the market drops. If it doesn't drop, then I have good cash flow from my current RE investments and a bit more from my conservative near future RE investments. If I miss out on some opportunities I won't regret it, as I don't consider that potental reward to be worth the potential risk, which is a decision we all have to make with every investment.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Ben S. based on your last post I think I will pour some brandy into my coffee and just quit while I am ahead....
I am not an economist by any means and don't play one on TV...
but I agree Markets and economies are always in motion up down a little sideways.
I just don't see the point of sitting on the sidelines right now.. awaiting a RE crash.. at least not in many markets.
fundamentals of the last 10 years of buyers to me indicated an ability to weather the storm well and not panic sell like happened in09 to 2011.
1. too much real estate owned free and clear
2. literally millions of loans out there will rates from high 2's to 4% payment less than rent
3. New construction at least at this point is not over built like the last free fall.
some areas in the country as you say have been in decline for decades with only very slow movement to the better ( think Detroit and some rust belt areas)
Other markets are on fire and given job growth and lack of buildable land a major retrench is not likely think ( Charleston SC and Portlandia as two).
in the meantime I know my teams are killing it right now.... so its like in football you have a 3 touchdown lead going into the second half you play not to lose and you end up losing..
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
9y
The investors that have the ability to raise capital are uniquely positioned to take advantage of market corrections.
For me, I just purchase properties and in markets that are insulated from large potential downswings. I invest in real estate because I don't want to be at the whims of market forces (other than modest appreciation plays that have limited downside risk). I also force appreciation rather than having to wait for it. I read a lot of BP posts on market forces, challenges that it creates for other investors, the precision of execution needed for certain strategies and get thankful that those items largely do not impact my investing and my family's financial well being.
It's funny, this is an investing site, we are investors...and there are weekly posts on the problems created by a good market.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
9y
@Ben Silone, The problem in Europe is that they formed a monetary union without a fiscal union. Before the Greek currency was valued less than the German currency and that balanced things out. Now that they share a common currency, neither nation is any longer monetarily sovereign. In the US the state's all use the same currency and none of the state's are monetarily sovereign. However a weak state like Alabama, received more money back from the Federal government that the state send in whereas as strong states like California gets less than it Paul is in. So in the US the federal government performs fiscal transfer to correct imbalances. The imbalances in Europe can not mathematically go away without intervention. A trade deficit nation such as Greece cannot overcome the currency outflow being related to a currency users status since they gave up their monetary sovereignty
