If you are buying when unemployment is 4%, you are buying trouble

192 Replies

@ phil mcnally - I dont disagree with you, but I see quicker money to be made in stock market in the next 6-18 months....and I see lower RE price in Bay Area in the next 1-3 years... So will see...

That is a broad statement. If you lived in an area where major industries of the economy were dying and unemployment rose to 20% would you be happy? If you were in an area where major industries were moving in, growing rapidly, and unemployment dropped to 3%, would you not invest? People with jobs pay rent and buy houses better than those who don't have jobs is how I see it.  You can buy in both. Your investing strategy plays a major role as well. 

@Diane G. I get keyword alerts for some of the cities you post about and have also noticed a doomsday mentality that isn't always supported by data. If you saw data that indicated positive market factors, would you ignore it?

I'm of the opinion that if you know how to buy, you can buy in any market cycle. I will PM you some examples. I have colleagues on the Peninsula, some who post here and some who do not, that are doing much much better than I am. If you saw what they were doing you might change your mind.

again, when everyone calls me doomsday, I am not saying economy is bad, I am simply saying that both RE and Stock are way above their fundamentals, do not reflect where personal income and corporate earnings are.... and I see larger downside risk than upside, and I see correction happening in the near future..... AND RE corrections is already happening here in the Bay Area....

@ matt R... that is a great question... Make me laugh...

For me, if the correction is mild, I would buy in the Bay Area... if the correction is severe, I would buy MFG in Phoenix!!!!!!!!

Originally posted by @Diane G. :

This is NOT timing the market.. Instead, this is knowing when investing in a certain asset class does not make sense anymore.... and go to the sideline to wait for the next opportunity...

Again, my observation and analysis is that we will get better buying opportunity before we get our next president... it could even  be as early as 2018

I understand your thesis that higher unemployment is a better buying opportunity. In 2010 when unemployment hit the high point, housing prices were tracking towards a low point. People without jobs have trouble buying or keeping their homes. That has been my argument to those who say a crash is coming. I tell people to watch employment statistics, because they are a leading indicator.

Right now, unemployment is at a ten year low and the current president keeps talking about jobs. He is pushing companies to keep and bring jobs to the US, reducing regulations and pushing tax breaks for companies to bring money back to invest in the US. Every company is hiring right now, which is putting pressure on wages to increase. 

How does your analysis conclude high unemployment in 2018?

@ Joe Splitrock - I don't know if unemployment is going to be higher in 2018, I actually dont know if stock is going to be lower in 2018 either....

My point, on the contrary, is that can unemployment go down AND STAY DOWN at this level forever?  My guess is no, it can't.... It WILL go up.... and THAT is the better buying opportunity I am waiting for...

Same goes for interest rate... Can it go down and STAY down at the level forever? NO.... OK, that is what I am waiting for...

When unemployment is higher, rate is higher, RE price will go down...

@Joe Splitrock - and putting aside my personal like/dislike for our current president, the tax reform plan will hurt economy in the end, slowly and gradually.........Give it 2 years and the impact will show up...or at least that is my view of it....

Like I said, rob the poor to give to the wealthy does not work... Mrs Trump is NOT waiting for a tax check to buy her next fox fur coat, but a working family will use a tax check to buy new shoe for their kid....

Originally posted by @Diane G. :

@ matt R... that is a great question... Make me laugh...

For me, if the correction is mild, I would buy in the Bay Area... if the correction is severe, I would buy MFG in Phoenix!!!!!!!!

 Why not make your own correction and buy at whatever needed % off market price you need to feel comfortable? Not that it would be easy... but deals can be had with little bit of luck and lot of capital haha.

@Diane G. it is hard to argue with your statements that "unemployment will be higher in the future" and "interest rates will be higher in the future".  Given that both are at historic low levels, your prediction is certain to come true. The question is how long are you going to wait and what is your missed opportunity cost? 

My city has had an unemployment rate that has ranged between 2% to 2.8% for the last two years. It hasn't been above 4% since 2012. Why do you think that is?

If you believe Trump will cause short term damage, then investing in the stock market is probably a bad idea. Any damage his policy does will be felt in the market first, because the market reacts emotionally and immediately. Housing is much more resilient.

Ultimately, I will invest no matter who the president is. I am not an emotional or political investor. I just roll with the changes and look for opportunity.

@ Joe splitrock - bottom line is nobody can really predict future with any accuracy.... At this point with RE and stock at where they are, I would much rather miss out on return on money than return of money ....

and like I said before, i believe the wait is going to be fairly short from now on... 

Sympathetic to OP's views, and I've been thinking about this myself, but I wonder: what is the worst case if you buy cash-flowing assets in stable markets now? 

The experienced investors I know buying multi-family are not at all concerned about cap rates or market timing. Their view is that multi-family residential is recession-resistant and will continue to cash flow in a recession. So, why be concerned if the equity goes down. They keep getting paid in up or down markets. As long as the deal makes sense today, they can withstand an equity drawdown.

Trying to time the market, on the other hand, you incur the opportunity cost of having your money on the sidelines.

I don't consider buying homes in the Bay Area investing. It is speculation, since there is little or negative cash flow. The Bay Area is a volatile market and tech is in a massive bubble. I wouldn't buy there right now, for sure. 

Originally posted by @Nate Reed :

Sympathetic to OP's views, and I've been thinking about this myself, but I wonder: what is the worst case if you buy cash-flowing assets in stable markets now? 

The experienced investors I know buying multi-family are not at all concerned about cap rates or market timing. Their view is that multi-family residential is recession-resistant and will continue to cash flow in a recession. So, why be concerned if the equity goes down. They keep getting paid in up or down markets. As long as the deal makes sense today, they can withstand an equity drawdown.

Trying to time the market, on the other hand, you incur the opportunity cost of having your money on the sidelines.

I don't consider buying homes in the Bay Area investing. It is speculation, since there is little or negative cash flow. The Bay Area is a volatile market and tech is in a massive bubble. I wouldn't buy there right now, for sure. 

 Idk if tech is in a bubble or at least nothing close to previous bubble values...lets say on average 2/3s less bubbled values based on earnings for the apples, facebooks, googles, microsofts types. Amazon is one of the more insanely high valued ones but they do 75 billion a quarter and still 50% less bubble than the averages during dot com bubble times. 

Volatility in the Bay area is not across the board location wise as some of the more prime locations were very stable last GFC. There are some who will pay more for that less possible downside history even during the bad times if that makes sense. As usual location really really really matters.

Many so called stable locations we see marketed on BP today, last gfc,  lost their renters, not that rents went down...the renters disappeared altogether. Many OOS investors and especially from Cali it was then game over. Few seem to remember that part. 

Let's get out the time machine and look at the history:

https://drewbecher.com/ups-downs-in-bay-area-real-...

Of course, these are median prices, which is somewhat misleading. During the last financial crisis, what happened was that high-end homes stopped selling, so sales of lower-priced homes brought down the averages.

In SF, the median price declined 23%, in Santa Clara, 37% and Oakland 60%.

Originally posted by @Matt R. :

Many so called stable locations we see marketed on BP today, last gfc,  lost their renters, not that rents went down...the renters disappeared altogether. Many OOS investors and especially from Cali it was then game over. Few seem to remember that part. 

Yeah, you have to be careful about some of these. The Midwest is "stable" but has seen anemic growth. Texas, on the other hand, never really took a big hit. Demographics is key. Places where people are moving, with job growth and affordable housing will withstand a slowdown.

I guess if I lived in California I would worry about more than just the RE market. I'd worry about jobs leaving for places like Texas, for example. Toyota Financial just moved its HQ and thousands of high-paying jobs to Dallas, and a bunch of other companies are moving, too.

California is super-leveraged. When things are going well, property prices shoot up, but they will come crashing down in a liquidity crisis. The first things people will want to get rid of in a downturn are high-end homes and negative cash-flow properties. Your economy is so tied to debt and tech sector speculation. Amazon is so much cheaper now at 259 times earnings than it was during the last crisis, but that's because investors expect it to show a profit, lol.

If I was the "typical" person there, with a tenuous job situation and a huge mortgage on one or more properties, I think I would have some sleepless nights.

I used to live in L.A. and remember when everything abruptly contracted in 2008-2009. I left for Texas in 2010 and didn't look back. Plentiful work (in tech), affordable housing, cash-flowing RE. It's nirvana, except we have no beaches and the weather is not nearly as nice. :p

@Nate Reed - there are a couple of things that I have to agree with you... Even though I would never live in TX... A vacation is fine.. Lol...

1. people are leaving the Bay Area... Recently, one friend moved to Seattle, one moved to Austin, one moved back to Argentina, one moved back to Europe... In the 15 years I have been here, other than this wave, I have only seen one person leaving and that was about 10 years ago.. Now, all of sudden, I find myself losing friends left and right...

2. Unless you bought 10 years ago, I know a number of people recently bought a 1.8m house, take out 1.4m loan, have to think twice to buy a coffee... I just don't see how price can keep going up....a couple making $300K is just getting by these days....

Low affordability, ageing bull market, confrontational leadership, taking on the whole world as our enemy, rob the poor......I just dont see upside in any asset class now...Cash sounds pretty good to me...Lol

Assuming that some of you play golf.  Whenever I see threads quoting national real estate statistics and whether people should buy or not buy based on those statistics i think of an engineer friend who is always asking me for golf tips.  i am a single digit handicap so I play golf fairly well.  My friend asks me questions along the lines of:

Where is your elbow at the midpoint of your golf swing? Is your front foot point out when you start your downswing.  Are you focused on the front, middle or back of the golf ball?  Frankly, if I knew the answers to any of these questions I would probably shank every other shot and not be able to break 100 !

Aside from being in the Army, this is the only job I have ever had and I have been an investor since 1989.  If I thought about national statistics my head would spin and I never would have bought property #1.  Real Estate is market specific.....it just is.  Know your market and you will do just fine.  I have bought properties in up markets and down.  Just be conservative and know that it is not personal and there will always be another deal

Originally posted by @Diane G. :

@ amit kal - my point was that there would be better buying opportunities when unemployment is higher and economy is slower..

 Maybe, maybe not.  What if the next recession is caused by a leg up in inflation.  Say we go back to 7 or 8% inflation.  It doesn't take too long at that rate to make a fully amortized loan look very cheap.  Those payments don't change, but the rents might go up with inflation.  So what if prices come down by a couple percentage points if the cash flow goes up?

10years from now you might see rents double and land values double.  IF your rates are locked in, seems like you are in great shape.

Sitting on a pile of cash for a couple of years in defense mode while prices go up 10%/year  just isn't going to get you ahead.  The next correction is probably only going to be 10-20% max nationally for real estate. (yes I get it all markets are local)

Originally posted by @Clint E. :

Do you think unemployment numbers are less meaningful since labor participation is at an all-time low?

Think about all the baby boomers getting set to retire in the upcoming years.  Technically, their numbers won't affect the unemployment rate, but they will affect the labor participation rate.  Is this the new normal?  

 Over the long term you will see a decline in the LFPR.

There has been over the last 6-8 months or so an increase in LFPR.

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