Its beginning to feel a lot like 2005 everywhere I look

98 Replies

So I have been watching the interest rates as they have begun to rise and the notional value of risk free treasuries and ten year treasury bonds are approaching 3% . Given that the CAP rates in the San Francisco bay area are now approaching the 3-4 % rate do you think its time to start moving some money off the table in the coastal areas in into more risk free assets or into areas of less price appreciation and more rental yields (Atlanta, Minneapolis , Kansas City )

I said that in 2013 too. But you never know how long things will last and yet you don’t want to sit on the sidelines because that is just an excuse people use not to do anything.

Align yourself with expert people with doing 0.001% deals and you will be ok in a correction. If there is cashflow... that’s the hedge.

I would never buy on the coasts so yes. I buy for cashflow and am only really comfortable with the south and Midwest as that’s where I’ve always lived.

cap rates at historic lowes, so i think your asking....can they go lower? Sure why not! Sweden, Switzerland with negative interest rates, and all the financial insanity of the last 10 years would lead me to believe someone would buy as a negative return investment, for tax reasons. Just PLEASE dont come here and buy stuff at cali cap rates, you guys are making it nearly impossible to get any "fair" deals for us natives:-)

Don’t look at Minneapolis, the deals are sparse and duplexes are selling in good neighborhoods for 300k. Cap rates are under 1%. I bought my duplex 4 years ago for 179k. Outrageous sales happening.

TBD! But a good long term cash flowing rental property is always good to hold onto for a long long time. The longer you plan to hold the more you can afford to sacrifice on the buy-end from one standpoint. Hind sight is only in the future.

the major difference is those investors entering the space ( rentals) are far more qualified and have far more skin in the game than in mid 2000's  this alone makes for a much stronger over all mortgage market.

@Drew Y. I like to look at unemployment as a measure to see where we are at. Jobs drive the economy. Here is an interesting chart trending back to 1980. There are four cycles during that time where unemployment peaked; 1983, 1992, 2003 and 2009. It is interesting to look at the timing of these cycles, which is every 9-10 years. If you go back further in history, there is no peak to peak that took more than 10 years. Last peak in 2009 indicates we are due in this cycle. I think it feels more like 2007.

Originally posted by @Joe Splitrock :

@Drew Y. I like to look at unemployment as a measure to see where we are at. Jobs drive the economy. Here is an interesting chart trending back to 1980. There are four cycles during that time where unemployment peaked; 1983, 1992, 2003 and 2009. It is interesting to look at the timing of these cycles, which is every 9-10 years. If you go back further in history, there is no peak to peak that took more than 10 years. Last peak in 2009 indicates we are due in this cycle. I think it feels more like 2007.

I hear ya on the ten year cycles but in the markets I am working in.. job growth is continuing at a rapid pace .. not sure what would slow that down and with the new tax laws its even stronger.. Maybe we change history and have a 15 to 20 year run between cycles.. nothing says we have to have 10 year cycles.. and the 09 was so deep seems to me it took 5 years to really come out of it and we are really only in year 5 or 6 of the up cycle. ?

Originally posted by @Marcus Johnson :

Don’t look at Minneapolis, the deals are sparse and duplexes are selling in good neighborhoods for 300k. Cap rates are under 1%. I bought my duplex 4 years ago for 179k. Outrageous sales happening.

My guess is the prices are being driven up by gentrification in these neighborhoods and duplex are prime for house hacking. Emotion drives house hackers, so they will pay more than a seasoned investor. Still I don't think the cap rate would be 1%. That means a $300K duplex is netting $3000 after expenses a year. That would put annual gross rents around $6000, assuming 50% expenses. That means you are collecting $500 a month in rents or $250 per unit. 

Originally posted by @Jay Hinrichs :
Originally posted by @Joe Splitrock:

@Drew Y. I like to look at unemployment as a measure to see where we are at. Jobs drive the economy. Here is an interesting chart trending back to 1980. There are four cycles during that time where unemployment peaked; 1983, 1992, 2003 and 2009. It is interesting to look at the timing of these cycles, which is every 9-10 years. If you go back further in history, there is no peak to peak that took more than 10 years. Last peak in 2009 indicates we are due in this cycle. I think it feels more like 2007.

I hear ya on the ten year cycles but in the markets I am working in.. job growth is continuing at a rapid pace .. not sure what would slow that down and with the new tax laws its even stronger.. Maybe we change history and have a 15 to 20 year run between cycles.. nothing says we have to have 10 year cycles.. and the 09 was so deep seems to me it took 5 years to really come out of it and we are really only in year 5 or 6 of the up cycle. ?

 I agree with all your points. To play devils advocate, I remember clearly in 2006 as people pointed out we were nearing the peak of a cycle, experts came in and said, "but it is different this time". They claimed the "rules have changed" and we would see a longer cycle this time. So although I agree it is different this time, I can't help but wonder, is it really?

Originally posted by @Joe Splitrock :
Originally posted by @Jay Hinrichs:
Originally posted by @Joe Splitrock:

@Drew Y. I like to look at unemployment as a measure to see where we are at. Jobs drive the economy. Here is an interesting chart trending back to 1980. There are four cycles during that time where unemployment peaked; 1983, 1992, 2003 and 2009. It is interesting to look at the timing of these cycles, which is every 9-10 years. If you go back further in history, there is no peak to peak that took more than 10 years. Last peak in 2009 indicates we are due in this cycle. I think it feels more like 2007.

I hear ya on the ten year cycles but in the markets I am working in.. job growth is continuing at a rapid pace .. not sure what would slow that down and with the new tax laws its even stronger.. Maybe we change history and have a 15 to 20 year run between cycles.. nothing says we have to have 10 year cycles.. and the 09 was so deep seems to me it took 5 years to really come out of it and we are really only in year 5 or 6 of the up cycle. ?

 I agree with all your points. To play devils advocate, I remember clearly in 2006 as people pointed out we were nearing the peak of a cycle, experts came in and said, "but it is different this time". They claimed the "rules have changed" and we would see a longer cycle this time. So although I agree it is different this time, I can't help but wonder, is it really?

of course we have no way of  knowing what lies ahead ..  I just look at the strength of the areas I am working in.. and there is no real bubble other than pricing is back to market highs.. which markets make new highs all the time and maybe that's what will happen markets will now make new highs above 07 peaks.. ?  its certainly happening in the bay area.. in Portland we are just about at our 07 peak so it stands to reason just with inflation that we can see new peaks  11 years later..

I mean when median price point in Portlandia was 120k in the late 80s  .. it was not going to stay at 120k forever just like

now with our median over 300k  and in the peak it was right there .. it can make new highs, at least I am thinking so.

also much more equity coming into the market than what was happening in 05 to 07 were every one was so focused on 100% leverage you know OPM refi to you die.. max equity.. what I see now in my new home communities are buyers aschewing max equity.. don't want to pay PMI and are putting 10 to 20% down and in my last 23 homes community we sold 3 for cash.. at 450k each.. that was UNHEARD of last go around.. so in my mind whatever is happening today has stronger foundation for a longer run.

then you take all these folks buying rentals.. and I see it every day on my HUDS that I am signing all over the country.. and its cash sales and 20% down or more.. now BRRR has come back that is 100% financing .. but its limited.. were as in 05 ish that was 95% of how people were buying rentals in the mid west.. so very few had any real skin in the game.. as compared to today..

@Joe Splitrock Jobs do drive growth, but to only look at one factor and derive causality from it misses or ignores lots of other things happening in an enormously complex and interrelated system. 

Simple things like the increase in the participation rate and age of the work force can change unemployment data, but are only tangentially related to the economic cycle. 

This may explain why the current expansion has lasted so long. "It’s as if the booms have been smoothed over a longer period of time but not the busts." 

In other word, booms will last longer, but not have the same crazy growth. The busts still have the sharp down turn compounded by a lack of credit that so many relied upon in the good times. 

Its all economic theory, but interesting to think about; especially since one of the paper's looked at 17 different economic over 150 years.

I haven't been investing in 2005, but I think prospects for long term buy and hold residential properties is good now in 2018. Lot of the properties I have are still appraised below repalcement cost of structure and rents are less than 1200. With inflation taking over, I don't see how they loose value in future. I am also in a population centre growing fast.

Originally posted by @Bill F. :

@Joe Splitrock Jobs do drive growth, but to only look at one factor and derive causality from it misses or ignores lots of other things happening in an enormously complex and interrelated system. 

Simple things like the increase in the participation rate and age of the work force can change unemployment data, but are only tangentially related to the economic cycle. 

This may explain why the current expansion has lasted so long. "It’s as if the booms have been smoothed over a longer period of time but not the busts." 

In other word, booms will last longer, but not have the same crazy growth. The busts still have the sharp down turn compounded by a lack of credit that so many relied upon in the good times. 

Its all economic theory, but interesting to think about; especially since one of the paper's looked at 17 different economic over 150 years.

The biggest factor I see now is the role of automation and artificial intelligence. Productivity per worker is increasing at exponential rates. Inefficiencies are removed by using software that adjusts and manage processes in real time. Look no further than maps with traffic, ride sharing, online booking services, even agriculture adjusting fertilizer in every square foot of the field to match the soil needs. All these tools optimize capacity to deliver it where it is needed. Those are the biggest changes in the last 20 years.

Of course there are many factors and it is complex, but having lived through three recessions where unemployment peaked, I can assure you there is a real effect of people losing jobs. It is emotional as much as it is financial - the emotions make the financial hit harder. When people stop spending, businesses suffer and as a result they let go of more people. It becomes a downward cycle. 

I am not trying to say that job loss is a leading indicator, but rather pointing out that this period in history is very unique. Everyone said it was different last time and maybe it is different this time. 

Everyone has PTSD from what happened a decade ago.  This chart has monthly prices...if it was year over year prices, it actually is even more prominently shows an upward curve, as we have only seen 2 instances of nominal price drops. 1991, and the great recession.  What happened a decade ago, was likely a once in a lifetime experience, much like the great depression was a once in a lifetime experience for those that lived through that.

At some point we will have another housing crash that is as significant or greater, it is just likely to be after I am dead. (This is on a national level.  Of course certain markets are more prone to boom and bust cycles such as phoenix, or the high end in the bay area.)

This time the real estate cycle won’t be different, it will be the same like before - boom stage and burst stage.

This is not a unique market that it won’t burst. It will absolutely burst again in the future, but we are not there (burst) yet. We are still in the middle of the boom stage.

We are still collecting chips rolls after rolls of dice in a red hot casino crap table.

The sky will be falling some day. The falling sky day may be 3 years later, may be 5 years later. We don't know yet.
We will evaluate the market yearly to see how close we are from the falling sky day.

With all the strong market data, as of today, at least, the sky won't be falling the next 12 to 24 months.

Originally posted by @Joe Splitrock :
Originally posted by @Bill F.:

@Joe Splitrock Jobs do drive growth, but to only look at one factor and derive causality from it misses or ignores lots of other things happening in an enormously complex and interrelated system. 

Simple things like the increase in the participation rate and age of the work force can change unemployment data, but are only tangentially related to the economic cycle. 

This may explain why the current expansion has lasted so long. "It’s as if the booms have been smoothed over a longer period of time but not the busts." 

In other word, booms will last longer, but not have the same crazy growth. The busts still have the sharp down turn compounded by a lack of credit that so many relied upon in the good times. 

Its all economic theory, but interesting to think about; especially since one of the paper's looked at 17 different economic over 150 years.

The biggest factor I see now is the role of automation and artificial intelligence. Productivity per worker is increasing at exponential rates. Inefficiencies are removed by using software that adjusts and manage processes in real time. Look no further than maps with traffic, ride sharing, online booking services, even agriculture adjusting fertilizer in every square foot of the field to match the soil needs. All these tools optimize capacity to deliver it where it is needed. Those are the biggest changes in the last 20 years.

Of course there are many factors and it is complex, but having lived through three recessions where unemployment peaked, I can assure you there is a real effect of people losing jobs. It is emotional as much as it is financial - the emotions make the financial hit harder. When people stop spending, businesses suffer and as a result they let go of more people. It becomes a downward cycle. 

I am not trying to say that job loss is a leading indicator, but rather pointing out that this period in history is very unique. Everyone said it was different last time and maybe it is different this time. 

Most every downward cycle is the same and different. The details are mostly different (and this is what most people focus on) but the general theory of what drives them stays the same. Irrational exuberance, heuristics, greed, whatever you want to call it. If everyone was a 100% rational then bubbles would not exist. 

So is this time different than 2008? Yes and no. Was the S&L Crisis different than the Dot Com Boom, Yes and No. Have the systems changed? Yes, the average investor has access to debit and equity like they never did before. The internet and cell network blew open the turnkey space, crowdfunding allows investment that were not possible before 2015, you can get a loan on your cell phone at half or a third of the rates available 20 years ago, the list goes on. Have the people in the systems changed? Probably not that much.

Neither you nor I have a crystal ball to see where the economy is headed and what will cause the next downturn, but I'd be willing to bet that when it does happen, the self reinforcing cycle of job lose you mentioned will happen, because the financial market is made up of humans who make sub optimal decisions with incomplete information.