RE Crash prediction for 2020

45 Replies

I read that rents are down at least 3% in the hot markets of SF, NYC and Boston? Any landlord in these areas care to comment? If so, how does that affect the decisions to buy rental properties in these metros as the tents could go Yes down further whilst the prices are skyrocketing out of control!!?? Is a crash in the investment market in these areas inevitable? Looks like right now almost every rental investment in Cambridge MA is going to bleed money on a rental cash flow basis. Sample figures. 2 br 1 bath listing for 550 k selling at 570k. Monthly expense with just mortgage tax and fees are running at 2.7 to 3k and the rents have softened to 2.3k. Now if you add vacancy and maintenance to this equation, it looks like such an "investment" in Cambridge is going to bleed 5 to 6 k a year on a cash flow basis. Of course, the potential for appreciation is 4% easily a year or even 10% in these areas but again the numbers show a market that is not rooted in reality. Crash prediction is as follows: More apartments staying vacant (seattle times article and npr podcast on nyc yesterday) Projects are permitted and planned years in advance so even as commercial multi family of 50+ are crashing, they are still building Ok n next 2 years smaller devlopers and property managers to go under, default, get bought out. Short REITs such as avalon that have large exposure to markets such as SF Seattle and NYC where rents went up so high to drive people to purchase but developers kept permitting Note analysis does not apply to sfh and non top 10 metro.

No one can know ,it is all speculation . Of coarse eventually there will be a “ correction” and The best thing to do is preparation to mitigate loss .dont be too over leveraged and be sure to have reserves . Continue to invest and if and when the market falls then you will be in a good position and have some great opportunities to score discounted real estate at bargain prices from people who didn’t prepare . All great investors have used recession or corrections to their advantage . Warren Buffett became the wealthiest stock holder in the country by following These strategies

Sorry - I did not speculate. I quoted two hard data points about Seattle and NYC vacancy being multi-year highs.

So I did ground some of the thesis in some data. Could the market overcome this blip? sure. But given that this is happening in the hottest of hot markets, I feel there is a trend towards down side on commercial multi family projects ...

And once the banks start losing money on $100 M apartment complex in Seattle or NYC, they will start to jack up RE loan interest to make up

investors make up a small portion of the real estate as a whole in the US.. its the homeowner market that will drive the overall market and new construction..

In addition I suspect many of those homes that are huge negative cash flow are being sold to owner occ.. not for rental purposes. ???

I know in our area even though its 3 to 5% cap rates its still positive cash flow not negative.. price points wont go up above rental income. at this point the market for rent has peaked and unless someone is going to owner occ  the values are pretty steady for small multi family and multi family.

SFR's you cant look at in a cap rate scenario.. there is many times intrinsic owner occ values attached to those.. And they in most of the high value markets have never made sense to buy as rentals..

Boston isn't because of the market, its because every idiot with funding thought they could all put new buildings up in Seaport and Fenway and there would always be plenty of people to fill them. It is going to take some time for that market to get back to where it should be after the over development

Originally posted by @Bryan Devitt :

Boston isn't because of the market, its because every idiot with funding thought they could all put new buildings up in Seaport and Fenway and there would always be plenty of people to fill them. It is going to take some time for that market to get back to where it should be after the over development

this is common in Multi and commercial development.. at least what I have seen over the years  lag time is  so long to get permitted 

what is wild is when you see buildings that stop before they are finished.

I remember a day in Honolulu there were foundations all over the place and see throughs.

Vegas still has some and one huge one on the strip still sitting there 11 years later.

in Portlandia we had half a dozen were the big underground parking structures were built started to go vertical and financing was stopped.. those have in the last 3 to 4 years though finally been finished but they sat there mothballed for half a decade. 

Yes, cyclical markets go through...well, cycles.  The active BP members in these cyclical markets (1) buy well (2) add value (3) use long term debt (4) maintain reasonable LTVs (5) buy in good locations with high demand (6) hold very long term and (7) have reserves.  There is no sense in discussing reckless investment into hot cyclical markets without these safeguards...those investors are not on BP trying to learn how to prudently invest.

These BP market correction posts have been going on for years.

Originally posted by @Mike Dymski :

Yes, cyclical markets go through...well, cycles.  The active BP members in these cyclical markets (1) buy well (2) add value (3) use long term debt (4) maintain reasonable LTVs (5) buy in good locations with high demand (6) hold very long term and (7) have reserves.  There is no sense in discussing reckless investment into hot cyclical markets without these safeguards...those investors are not on BP trying to learn how to prudently invest.

These BP market correction posts have been going on for years.

and the reality is markets are correcting all the time.. in some place in the US.. this is also highly regional. some markets are still in the toilet and maybe will never come back..  

Vinay,

My family's first rental is in Cambridge.

Although it is a different play for us (duplex that's been in the family for 50+ years, you can look at other post of mine), my understanding is the market hasn't pulled backed. We put our 1st floor unit on the market 06/02 & rented it by 06/05 . This 2B 1B went for $2.8K.

We will be listing the 2nd floor unit after my grandparents move out, 7/10. Market rents for 3B 2B are around $4.2K, but I will update when we have a signed lease.

From my knowledge of the Cambridge market, it all depends on your location in the submarket to determine rents (Ex. North Cambridge, East Cambridge, Cambridgeport)

Looking forward to hearing more!

so true @Jay Hinrichs , in pockets of higher end homes in Dallas, its actually transitioned to a sellers market with over 7-8 months of inventory, vs other areas selling like hot cakes... 

I learned in GRI class that you can go into your MLS, pick a sub division, change sold to 0-365, select all, print, and you can print a Fannie Mae 1004MC statistics pdf report to give to your client, or for your own education.

In the attached report of the subdivision called Prestonwood, in the last year, sales have been cut in half, and listings have tripled. Supply has gone from less than a month to 3 month, trending toward that buyers market.

Originally posted by @Christopher Winkler :

so true @Jay Hinrichs, in pockets of higher end homes in Dallas, its actually transitioned to a sellers market with over 7-8 months of inventory, vs other areas selling like hot cakes... 

I learned in GRI class that you can go into your MLS, pick a sub division, change sold to 0-365, select all, print, and you can print a Fannie Mae 1004MC statistics pdf report to give to your client, or for your own education.

In the attached report of the subdivision called Prestonwood, in the last year, sales have been cut in half, and listings have tripled. Supply has gone from less than a month to 3 month, trending toward that buyers market.

not sure if this loads up  

https://altos.re/r/85542a0     but we get these reports weekly from our title company per zip code..  they are pretty handy.. 

Higher end is usually the first to get over built and weaken I find .. in many markets... 

Perhaps, but I just don't think we can accurately predict things that well. Nassim Taleb has taught me better than that.

Originally posted by @Patrick Britton :

@Jay Hinrichs "https://altos.re/r/85542a0 but we get these reports weekly from our title company per zip code.. they are pretty handy."

any idea where those folks get their info? Looking at their numbers vs. MLS i see some data points spot on, and others that are quite a bit off.

 I don't know.. I don't drill into this stuff to much as we sold 21 new construction homes in Gresham in 4 months  so I am happy. !!

Interest rates, and unemployement rates. Higher than ~6% mortgage rate, 7-10% unemployment companies will step on the brake to stop burning money. 

Companies in technology not profitable may not able to borrow money easier. One example is Tesla. 


Originally posted by @Vinay H. :
I read that rents are down at least 3% in the hot markets of SF, NYC and Boston? Any landlord in these areas care to comment? If so, how does that affect the decisions to buy rental properties in these metros as the tents could go Yes down further whilst the prices are skyrocketing out of control!!??

Is a crash in the investment market in these areas inevitable? Looks like right now almost every rental investment in Cambridge MA is going to bleed money on a rental cash flow basis. Sample figures. 2 br 1 bath listing for 550 k selling at 570k. Monthly expense with just mortgage tax and fees are running at 2.7 to 3k and the rents have softened to 2.3k. Now if you add vacancy and maintenance to this equation, it looks like such an "investment" in Cambridge is going to bleed 5 to 6 k a year on a cash flow basis.

Of course, the potential for appreciation is 4% easily a year or even 10% in these areas but again the numbers show a market that is not rooted in reality.

Crash prediction is as follows: More apartments staying vacant (seattle times article and npr podcast on nyc yesterday) Projects are permitted and planned years in advance so even as commercial multi family of 50+ are crashing, they are still building Ok n next 2 years smaller devlopers and property managers to go under, default, get bought out.

Short REITs such as avalon that have large exposure to markets such as SF Seattle and NYC where rents went up so high to drive people to purchase but developers kept permitting

Note analysis does not apply to sfh and non top 10 metro.

There has been a tremendous amount of development in 'A' rental units here in Los Angeles. Neighborhood looks beautiful with all these magnificent, modern-looking apartment structures here in Koreatown, Los Angeles. But with this type of saturation in high-end units, which I hear is happening in other metropolitan cities, a cool-down is all but inevitable. Through multiple layers of hearsay, I have learned that the major player here in my neighborhood has stated that he will no longer develop rental units and instead focus on commercial. 

Originally posted by @Andrew Syrios :

Perhaps, but I just don't think we can accurately predict things that well. Nassim Taleb has taught me better than that.

Dr. Tharp taught me I don't invest in the market. Instead, I invest in my belief about the market.

I agree the evidence is compelling we might be near a peak. But since I don't really know, I keep my positions small and diversified. I also keep plenty of cash in the bank. If we end up  with Weimer-style hyperinflation, however, I'm hosed, but it's a risk I'm willing to take right now.

Two things to watch for are corporate debt defaults. When this indicator peaked, it’s a 3 year indicator of recession. Peaked last summer, so would mean middle of 2020.

Other thing to look out for is the inverse of the yield curve which is a 6-9 month indicator of recession which I don’t think has happened yet.

So got some time left

I agree my prognostication had nothing to do with SFH SFR and owner occupied 1-4 unit MFR.

Talking about the big apartment blocks in those super heated cities of NYC and Seattle. They seem to be in peril.

@Andrew C. I agree - if you bought a duplex in Cambridge even 5 years ago, you are cash flowing and renting it all day. I am talking about Avalon type rentals....

However once the large players start cutting rent and offering concessions, (free 1st month, sometimes 2 months free), it is likely to bleed into other and the landlords who just bought may not be cash flowing - in fact I am pretty sure you buy a duplex in Cambridge at market price now, you won't be cash flowing. Plus some of the apartments offer amenities such as underground parking, swimming pool, etc, so while a tightly managed owner/family occupied duplex will always be cheaper than Avalon, I think the glut will bleed into all rental properties eventually. But for now, we are focusing on large apartment developments in large metros which seem to be taking a hit.

Originally posted by @Caleb Heimsoth :

Two things to watch for are corporate debt defaults. When this indicator peaked, it’s a 3 year indicator of recession. Peaked last summer, so would mean middle of 2020.

Other thing to look out for is the inverse of the yield curve which is a 6-9 month indicator of recession which I don’t think has happened yet.

So got some time left

Seems right - on track for 2020 to 2022 recession, depending on macro (jobs, tariffs, trade wars, wars, winning etc) and local conditions (RE is local - so oversupply, quality of housing stock, employment type and  opportunities in high tech etc)

Originally posted by @Jay Hinrichs :
Originally posted by @Christopher Winkler:

so true @Jay Hinrichs, in pockets of higher end homes in Dallas, its actually transitioned to a sellers market with over 7-8 months of inventory, vs other areas selling like hot cakes... 

I learned in GRI class that you can go into your MLS, pick a sub division, change sold to 0-365, select all, print, and you can print a Fannie Mae 1004MC statistics pdf report to give to your client, or for your own education.

In the attached report of the subdivision called Prestonwood, in the last year, sales have been cut in half, and listings have tripled. Supply has gone from less than a month to 3 month, trending toward that buyers market.

not sure if this loads up  

https://altos.re/r/85542a0     but we get these reports weekly from our title company per zip code..  they are pretty handy.. 

Higher end is usually the first to get over built and weaken I find .. in many markets... 

Thanks @jay hinrichs for posting. The reports are great snapshot. Yes top end of market is where the higher leverage and higher concentration of discretionary income (Wall Street bonuses, high tech stock options), so it takes a hit first....

Originally posted by @Christopher Winkler :

so true @Jay Hinrichs , in pockets of higher end homes in Dallas, its actually transitioned to a sellers market with over 7-8 months of inventory, vs other areas selling like hot cakes... 

In the attached report of the subdivision called Prestonwood, in the last year, sales have been cut in half, and listings have tripled. Supply has gone from less than a month to 3 month, trending toward that buyers market.

@christopherwinkler - I think you want to say that high end Dallas has transitioned to buyer's market if there is 7-8 months inventory 

As for the above report, your argument seem compelling when you say #of listing has tripled and median price down but

sample size is only 7 to 21 listings, so not so sure. Median listing price is slightly down, but DOM is actually down, so it means the market is in flux. 

To confirm , you want to see rise in DOM, rise in inventory but fall in median price

Originally posted by @Mike Dymski :

Yes, cyclical markets go through...well, cycles.  The active BP members in these cyclical markets (1) buy well (2) add value (3) use long term debt (4) maintain reasonable LTVs (5) buy in good locations with high demand (6) hold very long term and (7) have reserves.  There is no sense in discussing reckless investment into hot cyclical markets without these safeguards...those investors are not on BP trying to learn how to prudently invest.

These BP market correction posts have been going on for years.

I agree. I am just trying to spot the cycle and ensure we buy well ! if there is downward pressure on rents due to oversupply, then it means the opportunity to buy at better price point must definitely be down the corner (the corollary would be to avoid buying in these markets for now)