Are we in a Bubble??

75 Replies

I have been investing in real estate for over 20 years now. I have seen good times and bad. Lately it seems like everybody wants a piece of the pie. ( things are Great) I keep wondering what will cause this bubble to fail this time. Some thoughts are; 1. Building prices keep going up, maybe tariffs will help this continue and labor is getting higher. 2. Most loans have are stable with money down and good credit 3. HIgher Interest Rates would slow things down I Guess I am look for Opinions on the future of Real Estate

I think it completely depends on what market you're talking about.  There are natural features that drive bubbles in areas like CA and FL.  Think about it.  In CA, you have the ocean on one side and the mountains/desert on the other.  Desirable areas for development are limited to a relatively narrow strip down the coastline.  In FL you're squeezed by oceans and swamps/everglades.  Other areas, like the NE are simply space constrained due to the heavy population.  Now, here in Texas, we don't really suffer from bubbles.  In 2008, when the bottom fell out of RE, DFW didn't crash.  In fact, we didn't even real a real retreat of prices &/or values.  The only impact was a stagnation of appreciation for several years, mostly owing to the fact that lenders locked everything down so much, people couldn't buy properties.  It wouldn't surprise me to see a correction, possibly major, in some of the overheated markets.  CoreLogic is indicating CA could be correcting as we speak.  I've seen a slight weakening in the DFW market, over the last 3 to 6 months, but we are still well below a balanced market, with desirable areas still having an inventory of well under 6 months.  Bottom line, bubbles don't cover the entire country at one time.  Hopefully, a correction in some of the major markets will scare some of the investors out for a while and open things up for the rest of us.

Yes.  They do.  I'm just fairly sure most of them won't still be there in 2-years, with or without a bubble.  Most of these folks have swallowed the marketing whole and believe it's the simplest thing in the world.  They haven't figured out yet that it's hard work and, yeah, you probably do need some of your own money!

@Hattie Dizmond They need a down payment?!! That’s very funny, because I talk to a lot of people that want in the game and they have no money. I recommend to them to find a good paying job and bank as much as possible. I also tell them to sell their house and live in a 4 plex or similar that they would own. They usually look at me like I’m crazy. They want what took me 20 years to create right away with little work. The new generation will make great renters!
Originally posted by @Justin Thiesse :
@Hattie Dizmond They need a down payment?!! That’s very funny, because I talk to a lot of people that want in the game and they have no money. I recommend to them to find a good paying job and bank as much as possible. I also tell them to sell their house and live in a 4 plex or similar that they would own. They usually look at me like I’m crazy. They want what took me 20 years to create right away with little work. The new generation will make great renters!

I'm laughing and yes...they will make great renters!

I would say we are approaching a bubble or sorts, but it may be 5 or more years before we see it crash. Remember, real estate is local, so high growth markets will likely see a crash before others. 

@Hattie Dizmond Texas has seen it's share of real estate cycles. They did miss the last party, but right now, Texas is seeing prices that don't make a lot of sense. I would not be surprised if markets like DFW and Austin are some of the hardest hit during the next cycle. 

@Todd Dexheimer   and whos to say we don't make new highs.. who says that 2007 has to be the peak of the real estate market and values at anytime if they exceed 2007 levels are bubbling  :)

we make new highs every decade or so.... the high in Cupertino were I grew up in the 60s was 30k.. then the 70s saw 60k then 1977 ish 100k..  then in mid 80s  500k   then early 90s  750k  then 2000  750 to 1 mil.. then 2007  900 to 1.2

now 1.2 to 2 million..  and so on an so forth.. 

what was the prices in your market in the 80s compared to today.. what was the high that decade and have they made new highs and gone higher.. 

Not disagreeing with anyone but to me it seems markets make new highs or they get obsolete.. like Detroit or Rochestor or Buffalo where I suspect prices peaked in the 80s and 90s and have been in steady decline every since.. 

?????   just musing..  

Originally posted by @Todd Dexheimer :

I would say we are approaching a bubble or sorts, but it may be 5 or more years before we see it crash. Remember, real estate is local, so high growth markets will likely see a crash before others. 

@Hattie Dizmond Texas has seen it's share of real estate cycles. They did miss the last party, but right now, Texas is seeing prices that don't make a lot of sense. I would not be surprised if markets like DFW and Austin are some of the hardest hit during the next cycle. 

Most of the recent acceleration in DFW can be tied directly back to the missed appreciation, during the period from 2008 to around the middle of 2012 to mid-2013.  We have seen appreciation significantly above the usual steady, but unremarkable, historical rates for DFW.  However, I believe it is mostly driven by a lack of inventory.  Not only did 2008 - 2013's clamp down on lending severely depress home acquisitions, it also killed development.  In fact, here in DFW development almost completely shut down, during that time period.  We have so little inventory and so many people moving into the area or trying to move into home ownership that it is pushing prices.  

The good news is that new development has begun to catch up with demand.  As far as cycles, Texas is a really big state.  Houston saw several significant cycles, usually tied to severe downturns in the energy sectors.  However, after the last big bust in the 1980's, Houston began taking significant steps to diversify their economy.  DFW has always maintained a very diversified economy and has proven to be resistant to major economic swings.  I do expect to see a softening - hopeful a significant softening - of the DFW market, but that should only bring the market back into balance.  Bottom line is that normal ebbs and flows may prove to be cyclical, but they hardly represent bubbles. 

I think our biggest issues right now stem from a combination of lack of inventory and migrations from states like CA.  Properties in highly desirable areas are selling above what I would consider market to people moving in from states like CA, because the prices still seem low to those folks.  It's making it really difficult for investors to uncover deals in those areas.  Again, I expect a minor correction, but I don't see a bubble bursting here.

@Justin Thiesse You will do fine as long as you're buying on solid fundamentals with manageable leverage. Most folks run into issues because they try to be cute and cut corners. 

@Hattie Dizmond I would have to agree with @Todd Dexheimer . Texas was lucky (and prudent) in avoiding the 2008 crisis but has had its fair share of massive real estate based recessions. Most notably in the 1980s followed by the S&L crisis which meant most of the 90s were not a booming time. 

@Jay Hinrichs 100% agree! Nobody knows when the next big recession is coming BUT I have to chuckle at how everyone has become a macro-economist these days. 

I do not think picking a random year (2007) as the high point without adding local research is helpful/useful analysis. Your point about prices going ahead of 2007 and not being in bubble territory is well-taken. 

Originally posted by @Hattie Dizmond :
Originally posted by @Todd Dexheimer:

I would say we are approaching a bubble or sorts, but it may be 5 or more years before we see it crash. Remember, real estate is local, so high growth markets will likely see a crash before others. 

@Hattie Dizmond Texas has seen it's share of real estate cycles. They did miss the last party, but right now, Texas is seeing prices that don't make a lot of sense. I would not be surprised if markets like DFW and Austin are some of the hardest hit during the next cycle. 

Most of the recent acceleration in DFW can be tied directly back to the missed appreciation, during the period from 2008 to around the middle of 2012 to mid-2013.  We have seen appreciation significantly above the usual steady, but unremarkable, historical rates for DFW.  However, I believe it is mostly driven by a lack of inventory.  Not only did 2008 - 2013's clamp down on lending severely depress home acquisitions, it also killed development.  In fact, here in DFW development almost completely shut down, during that time period.  We have so little inventory and so many people moving into the area or trying to move into home ownership that it is pushing prices.  

The good news is that new development has begun to catch up with demand.  As far as cycles, Texas is a really big state.  Houston saw several significant cycles, usually tied to severe downturns in the energy sectors.  However, after the last big bust in the 1980's, Houston began taking significant steps to diversify their economy.  DFW has always maintained a very diversified economy and has proven to be resistant to major economic swings.  I do expect to see a softening - hopeful a significant softening - of the DFW market, but that should only bring the market back into balance.  Bottom line is that normal ebbs and flows may prove to be cyclical, but they hardly represent bubbles. 

I think our biggest issues right now stem from a combination of lack of inventory and migrations from states like CA.  Properties in highly desirable areas are selling above what I would consider market to people moving in from states like CA, because the prices still seem low to those folks.  It's making it really difficult for investors to uncover deals in those areas.  Again, I expect a minor correction, but I don't see a bubble bursting here.

for rental investors on SFRs prices will bracket based on returns.. and what investors will accept for a return on their investment.. prices can go very high like BAy Area if investors with 20% down accept negative cash flow ( common) but in states where negative cash flow is a none starter values for investors will top out as rents top out.. where some get stuck in Texas is they buy one year then their tax's jump and the next thing they know they are negative .. I think tax rates help moderate those values.. but SFR rentals for investment purposes are valued by rent.. if rent does not move and values go up returns go down.. pretty simple math.

good to see you back on line Hattie been a while !!! 

Hello @Jay Hinrichs .  It's good to be back.  And, you are exactly correct about taxes and rental values.  We still haven't moved back into buy & hold, because - in the areas we are focused - property values have far outpaced rental rates.  It will balance out, but it hasn't yet.  And, property taxes are exactly why I don't believe the 1% rule works A/B areas in DFW.  Dallas County has been incredibly aggressive in revaluation.  10-years ago they were revaluing most properties every 3 to 5 years.  Class A areas now appear to being revalued every year.  Pretty much everything is being revalued every 2 years, and the valuation model is resting at or very near 100%, unless you have exemptions.  I will never advocate for a state income tax.  However, I would like to see a move toward slightly higher sales taxes, which would force EVERYONE to participate more in funding services, rather than placing so much of the burden on property owners.

Sellers markets do not equal bubbles. Buyers markets do not equal crashes.  Everyone needs to get over the PTSD of what was likely a once in a lifetime bubble and crash from a decade ago.

I lived through the crash in Cali. I don't see anything like that happening. People all around me were buying with zero down and interest only loans (and variable rate interest) on a 3 year ARM. Now, the best deal anybody can get is 3.5% live in FHA loan. Investors around here? 20% down, 5.2% interest. That tends to ward off those that cannot afford it. However, I am also seeing people bid too high for rental properties. I was outbid twice this month on duplexes in which I gave my best offer to still have the property cash flow. So, I guess I wouldn't mind a little dipping of the housing market as my properties are on fixed rate loans.

I agree with @Hattie Dizmond I see a correction but not a crash that some people are predicting. People see rapidly rising prices and automatically assume we are heading into trouble like we did in 2007-8. The underlying fundamentals are different. For example, no one can get a loan in a SFH for 125% of the value of a house. Underwriting is much stricter than before the last crash, which is a good thing. Some random thoughts:

Arguments for continued appreciation:

 - lack in inventory in many markets.  Net absorption rates are low in some major cities, pushing up rental rates. Developers are building to catch up but new inventory always lags demand as it takes years for new product to be built and come online.  

 - Politics of liberal states.  NIMBY-ism, anti-development, building restrictions, etc will always put a vice on inventory growth, thus raising prices of existing stock.

- low interest rates.  We have historically low interest rates.  decades ago, people bought houses with 10%+ interest rate mortgages.  The Fed cannot raise rates to those levels anymore.  The US government has so much debt, payment on high interest alone will cripple spending.

- For rental property investors - the generational shifts occurring will increase demand for MF and some SFH rentals. Millennials burdened with various debt cannot and will not buy SFH at the rate past generations have. Baby boomers are retiring and scaling down. Saving what they have in retirement and taking their equity in their home and moving into apartments

Arguments for correction

 - Debt levels are highs - student loan and consumer debt are at scary levels. People who have equity may leverage further to pay off their kid's debt, etc.

 - Decrease in investment money from international investors.  This is usually concentrated in hot markets, such as SF, LA, LV, etc.  ie, Chinese government is cracking down on cash outflow from wealthy investors...but then again, investors will find a way to funnel the money out to safe havens.

 - Lack of wage growth.  this is a huge deal.  everyone knows wages have flat lined over many decades. even decreased in some areas adjusted for inflation.  If people don't make money, people can't buy houses...simple economics.  Good for MF landlords since they are perpetual renters.

CANARY IN THE COAL MINE - Money velocity (M2) is ridiculously low, I mean historically low. Lower than post recession.  Money is being printed (QE), which should increase inflation but it's not.  People/corporations/international gov/whoever are hoarding money, not spending it. If the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.   The fed is trying to fight this by increasing interest rates.  They don't care if the housing market gets hit with higher rates.  They absolutely do not want deflation.  Inflation can be controlled.  Deflation cannot.  Look at Japan over the past decades.  Their economy is at the same level where it used to be in the 80's/90's.

https://fred.stlouisfed.org/series/M2V

I'm with @Jay Hinrichs in thinking "so what?" when people point out that prices are above where they were at their last high. It is trivia at best.

That data point doesn't take into account inflation. Here is the Case Shiller for as close as I could get to Cupertino (SF MSA) compared to everyone's favorite city, Detroit, and Dallas. 

Dallas is above it's 2007 highs, but SF isn't. Does that mean Dallas is more at risk for a correction than SF? No, of course not. 

If we all want to play amateur economist, we should at least be clear on real vs nominal values.

Any somewhat efficient market trends up over time. The GFC seems to have clouded some folk's memories when it comes to bubbles; they can form outside of RE and RE related markets. In fact most bubbles in the past 50 years have started outside of RE. Dot.com, Russian Ruble, S&L. That trip down memory lane only brings us to 1985. 

The future of RE is not going to be drastically different than its past if you focus on buying fundamentally sound properties that match YOUR goals in quality locations at a price below intrinsic value and run them with sound management practices.

Originally posted by @Justin Thiesse :
@Hattie Dizmond Thanks for the reply. You have some very valid points. I may be paranoid, but everyone seems to want to be in Real Estate these days.

 Hahaha this is a funny comment. While it's true that it's amateur hour in a lot of ways, on the other hand - what's a better option for people? Is it better to put money in paper markets, still as an amateur? Yours is a flowed argument that just because there are a lot of amateurs in the space that the space is in a bubble...:)

Well, from an economic look at the issue it is macro economics....then I would say we are in a bubble. It will pop how bad I don't know.  I blame it on people who buy a house that is asking way too much for it. If it is a hole in the wall in a city it is just that not worth 250k.  On the other hand microeconomics we are not all in a bubble.  Housing market in some places are not as bad as the bigger cities.  

These are just my personal thoughts. 

If it cost 50k to build a house in materials, 50k for labor, and then the view/location costs 2 million you have a house worth 2,100,000.  Is the house worth anything?  That is what is causing issues.  So, someone builds it, then they mark it up to make a profit.....it is now 3 million....someone wants to live exactly there and is willing to pay three million but then so is someone else and they are willing to pay 3.2 million....  What is that house worth?  100,000.  This is where I see the bubble.  It is popular to live there at this exact moment in time but next year or in 5 years it will not be "THE PLACE TO BE" and then the bubble pops and it is only worth 100,000. 

I know these numbers are outlandish I am trying to make a point. 

Investors usually do not go for those kinds of houses but, realtors are more than happy to sell them all day long everyday.  Until the bubble pops and then what?  The american people bail out the banks/lenders?  Seriously???

Maybe I am wrong, just my opinion.

There are 5 major bubbles. Student Loans, Subprime Auto loans, government debt, stock market, housing market. Housing is at the back of the list as it was propped up by fIat money printing by the FED & caused asset values to increase across the board. Many of the other 4 bubbles are much worse than housing. Housing just got a residual effect as it’s where people try to store wealth in times good or bad. Student loans have negatively affected millennials in ways most older generations will never understand! Millennials have negative net worth & shouldn’t be buying overpriced homes but it continues. The next crash will reveal all 5 bubbles but it’s hard to say what will trigger it but it’s likely not to be housing this time around like last time but it does play a role.
Originally posted by @Paul Choi :

- low interest rates.  We have historically low interest rates.  decades ago, people bought houses with 10%+ interest rate mortgages.  The Fed cannot raise rates to those levels anymore.  The US government has so much debt, payment on high interest alone will cripple spending.


CANARY IN THE COAL MINE - Money velocity (M2) is ridiculously low, I mean historically low. Lower than post recession.  Money is being printed (QE), which should increase inflation but it's not.  People/corporations/international gov/whoever are hoarding money, not spending it. If the money velocity declines rapidly during an expansionary monetary policy period, it can offset the increase in money supply and even lead to deflation instead of inflation.   The fed is trying to fight this by increasing interest rates.  They don't care if the housing market gets hit with higher rates.  They absolutely do not want deflation.  Inflation can be controlled.  Deflation cannot.  Look at Japan over the past decades.  Their economy is at the same level where it used to be in the 80's/90's.

https://fred.stlouisfed.org/series/M2V

When interest rates were that high, banks were actually paying pretty good % on their deposits, so there was some offset for those that saved. Not today. 

As far as corps hoarding cash, I don't necessarily agree, as stock buybacks have been quite high lately. You do have the likes of AAPL, FB, and other tech cos that do have massive stockpiles of cash, but I bet they're just waiting for good deals and not necessarily hoarding just to hoard, imho.

I've heard two theories on this in my college economics classes. One is, that we had to catch up to where we were before the '08 crash, so the recent gains were simply just a market correction and that we are just now starting to have truly climbing price to value ratios. The second theory is the continuous rise theory, where it's not based off of a previous value but simply on how long the market keeps increasing. Right now we would be in year ten of a seven year cycle, so by this method the market is extremely over valued. Either way, it would be prudent to buy cautiously! 

My take:  The salary of "EVERYMAN" is not keeping pace with the appreciation and escalation of values and rents.  I see it in my own rental business.  So, what happens?  People start to overreach.  They rent or buy something that stretches them out to the max.  Now, add job loss or economic slowdown and what do you have?  

As @Matt Millard stated, there are 5 major bubbles.  

They are all connected.  IMHO when one blows, they will ALL blow to different severities.  There has to be another 'reset' button hit.  We didn't learn from the last recession.  :-(

Originally posted by @Hattie Dizmond :

Hello @Jay Hinrichs .  It's good to be back.  And, you are exactly correct about taxes and rental values.  We still haven't moved back into buy & hold, because - in the areas we are focused - property values have far outpaced rental rates.  It will balance out, but it hasn't yet.  And, property taxes are exactly why I don't believe the 1% rule works A/B areas in DFW.  Dallas County has been incredibly aggressive in revaluation.  10-years ago they were revaluing most properties every 3 to 5 years.  Class A areas now appear to being revalued every year.  Pretty much everything is being revalued every 2 years, and the valuation model is resting at or very near 100%, unless you have exemptions.  I will never advocate for a state income tax.  However, I would like to see a move toward slightly higher sales taxes, which would force EVERYONE to participate more in funding services, rather than placing so much of the burden on property owners.

 I've been looking into investing in Texas from OOS and this is the one variable that really worries me.  How do you determine the likelihood of a tax rate hike?  I'm interested in San Antonio.