This Economist Says NOW is the Time to Buy Real Estate!

16 Replies

Like any other prudent real estate investor, I am constantly monitoring and forecasting as best I can the health of the economy. I have to admit, my heart drops a little every time I see a blog or social media post touting a doomsday scenario the impending crash. 

This past week, I attended the National Building Material Distributors Association annual conference in Colorado Springs. A couple thousand buyers, manufacturers, and distributors of building materials gathered here to network and educate themselves on various topics related to the industry. One of the speakers that addressed the crowd was an Economist named Alan Beaulieu. I found his presentation fascinating, entertaining, and jam-packed with great information and tons of statistical analysis to back his forecasts. I took a lot of notes, and thought I would share those that were most relevant to real estate investing and the housing market.

- No reason for him to believe another recession like the Great Recession from 2008-2009 will occur for at least another 10 years. A repeal of Dodd-Frank is the largest threat to this positive outlook.

- He does predict a slowdown or "bump in the road" as he called it around late 2018 or early 2019.

- We all know interest rates will have to rise at some point soon. Now is the time to invest/borrow money to buy wealth-building assets. He was VERY adamant about this. And remember, this was NOT a real estate conference he was speaking at.

- Residential loan delinquency rate is well below the 10-year average and still declining, signaling a strong and healthy housing market.

- One trend going on now and continuing in the future of housing he pointed out was demand for rentals in urban areas.

- Apartment vacancies are growing in many markets. Large multi-family is starting to look overbuilt.

- California, West Virginia, and Illinois have declining populations.

- Southeastern US, namely the coastal states, are showing strong population growth.

- Toronto, Vancouver, and Seattle are bubbles that will eventually burst and could cause temporary volatility in their respective regions.

- US housing prices projected to continue upward trend overall until 2029. (Again, a repeal of Dodd-Frank would jeopardize this trend). 

- I wish I would have written down his reasons for it, because he had plenty of slides and stats to back it up, but his boldest prediction which he was very adamant about was that the next legitimate Recession or even possibly Depression will hit sometime around the late 2020's to the early 2030's.

Cheers!

@Brad Noe

Nice post with lots of good information. Real estate is a cycle and not if but when next downturn will happen, see cycle below. All factors now point upward, and I feel next 2-3 years will be safe. Beyond that is guessing game. 

Terry

I prefer to remain a skeptic based on the signs I see and may be wrong.

I am not optimistic for the near future and believe the turn will be in the next couple of years. As bad as 2008, not likely. Higher interest rates, absolutely. 

Way to much over building, wages not increasing in relation to cost of living, greater down pressure on middle class, lack of appropriate education of work forces, political upheaval.

In particular to the US...closing of world markets. 

In our market, 34% of the closed sales in the past year had some sort of seller assistance. In addition, because so many deals require seller assistance to close, seller's are inflating their sale price to ensure their net proceeds is where they would like it. I am not implying that this is the same thing that caused the 2008 crash but it is a little scary. 

I believe that there is a discipline that needs to be developed for a person to purchase a home. They need to be able to save money for the down payment! A buyer may have steady employment for two years and that qualifies him/her to qualify for a loan, however what happens when their HVAC unit goes out, or they lose their job? If they haven't shown the discipline to save money (with stable jobs) to purchase their home in the first place why would they have the savings in case they lose their job or unexpected expenses arise? 

With almost half of Americans living paycheck to paycheck, I think these lending practices is an eventual disaster waiting to happen. 

Thoughts?

I would be leery of anyone who claims to be able to predict the future that far out. There’s so many unknowns. If you’re optimistic I could see saying something like having a good strong market for the next couple years with maybe a small blip, but to go out further is just absurd.

I do think millennials will start buying more houses in the next 5 years or so and that will keep a strong demand for housing

I tend to agree with this and it mirrors what Bruce Norris talked about at the oakland event

at least as it related to west coast... SFR strong .. based on mortgage delinquencies or lack thereof. Multi Frothy and a sector to watch.. as cap rates have been crushed .

He made another good point he said that for there to be a bubble or big pull back 40% of MLS homes would have to be short sale's foreclosures of some sort or OREO... and we all know that simply is not the case.

you rarely see short sales anymore.. foreclosures are lower than pre 08... and those getting mortgages are much stronger basically than they were pre 08.. no liar loans.

@Caleb Heimsoth I don't disagree with you if someone is just throwing random predictions out there, but he did have statistical analysis to back up his statement and all he was saying was that based on those metrics (whatever they were, I don't remember), which precluded the previous Recessions and Depressions in the United States, the forecast looked like somewhere around 2030 it would be time for a major market downturn. And I'm not saying he's right or you're wrong, I'm just sharing my notes for discussion. 

@Michael Urti I will have to check our local statistics here in KY for comparison. I will have to say though, I think this could just be a symptom of the low inventory and inflated prices. Or maybe it's the other way around. Who knows...it kind of seems like the chicken or the egg type of thing, LOL.

I have recently heard from several economists and the owner of the company the movie "The Big Short" was based on. They all say the same thing. We are still 4-6 years out from a crash and that the next crash will be a garden variety, unless something changes (major inflation, Middle east, etc). 

I think the major key for all investors is to stay conservative and prudent with your investing. The second you let your guard down is when the bubble pops and takes you out. 

@Brad Noe

Such a great post with huge information. The real estate investment is the only sector that has seen it all. It has touched the highest limits during the late 80’s and early 90’s, remained stagnant, and experienced a revival in the early 2000’s, to the slowdown during 2008. Now, the real estate property market is growing every day.

Originally posted by @Thomas S. :

I prefer to remain a skeptic based on the signs I see and may be wrong.

I am not optimistic for the near future and believe the turn will be in the next couple of years. As bad as 2008, not likely. Higher interest rates, absolutely. 

Way to much over building, wages not increasing in relation to cost of living, greater down pressure on middle class, lack of appropriate education of work forces, political upheaval.

In particular to the US...closing of world markets. 

 Higher rates should come natural, as demand for money increases (business growth, etc.).  We are not seeing that at this point. What the Fed has been doing is playing safe with their quarter of a % increase here and there, just so Yellen can leave without causing anything drastic, imho. Inflation (other than medical & housing) is not going where they (the Fed) want it also. Of course, you have oil going thru a bust for the past 3 years, so that helps the average American (nobody remembers cash for clunkers, while getting that "fuel efficient" SUV). What will happen when oil keeps climbing higher? We were at $26/barrel in early 2016. Close to $60/barrel now. I don't see rates rising when another SHTF. Fed will have a lot less ammo this time around, tho. Oh, don't forget the current tech and crypto bubbles. Snapchat worth $20 billion? One bitcoin over $8k? Getouttahere.

Everyone is looking for "history to repeat itself." Which, sayings aside, it rarely does. Recall that the full saying is "those who ignore history are doomed to repeat it." OK, great. No one is ignoring history, everyone is constantly on the lookout for a repeat of 2007, and looking for data to support that notion. Absent such data, the common conclusion is that 2007 will not happen again.

I agree with that conclusion, simply because no one is "ignoring history" and all these non-ignorers are coming up short on data to support that 2007 will happen again.

What I wonder about is student loans. I feel like I decline a loan a day due to six figure student loan balances appearing on credit reports that are not compensated for by income (to any 18-21 year old reading this, please ignore your parents when they tell you to take out a bunch of student loan debt and "study what you find interesting," unless what you find interesting is STEM -- college was dirt cheap when mom/dad went to school, they do not understand your reality, and are living in lala land). Interestingly these folks can still find rentals without issue since landlords look at housing-to-income ratio ("income should be 3x rent = 33% HTI") instead of the debt-to-income ratio that I look at. So these households, on one end of the spectrum, continue to be renters.

And then on the other end are the millennials that are so convinced that 2007 will happen again that they're afraid to buy a home. It doesn't matter that there's not really any data to support the "history will repeat itself" thesis, they just say things like "when will the next great recession happen?" without asking the "if." So these households, on the other end of the spectrum, continue to be renters. They might even continue "waiting for the next crash" for another two decades, while writing rent checks to landlords.

In the middle there are of course a bunch in between those two above - young FTHB families buying homes because they want a place to live with no landlord (we rarely see the "buying a home to live in is an investment with guaranteed returns!" attitude, but preferences are still a thing), move-up buyers, empty nesters, etc.

I wonder if there might soon be a market for landlords that over-charge on rent in exchange for overlooking FICO scores associated with perpetually delinquent student loan debt, for folks with no other lates. I know that some landlords did well over-charging on rent for folks just out of foreclosure, but with no other lates, during the recession.

No big predictions about the future from me. Just observations about a possible elephant that it might be worth not ignoring.

Chris Mason, Lender in CA (#1220177) and California (#1220177)
415-846-9211

@Jay Hinrichs I went to Bruce Norris forecast seminar here in riverside and it was very interesting. I would recommend the book big Shifts Ahead, by John Burns, I think it’s John Burns lead economist of Fannie Mae. That was a great read with charts and data. I do believe that interest rates could fall into
The 2% range like bruce stated and that real estate could be the big thing to bring America out of the next recession, whatever and whenever that may be. I also listened to bruce black tie event of “I survived real estate” on his podcast with some pretty big guys and there opinions on real estate and where things could be headed.

I have no clue what the market or rates will do.  I just try to invest in properties and in locations that are not as susceptible to negative national swings.

@Mike Flora   one thing I like is I do EXACTLY the same business as Bruce Norris short term capital and he is now into new construction  ( from what he said in Oakland) in FLA.. I just funded a 54 lot development in Orlando... so we will see

Real estate is local. We did not have an owners bubble burst in 2007 we had an insanity driven bubble. That was due to a meltdown of credit/liquidity. That may never happen again in our lifetime. Locally we have over 50% cash buyers. Those people will not be forced to sell when the market turns. Over-leveraged investors with no reserves, etc may get caught in a pinch. The sky will not fall but it will turn grey and rain for a bit..and then the sun will reappear. We don't have blood in the streets but I am still a buyer for the right property at the right price. 

John Thedford, Real Estate Agent in FL (#BK3098153)
239-200-5600

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