It's Feeling a Lot Like 2007

Dylan Mathias · 2018-08-18T09:11:32-07:00

Hi All, Wanted to start a discussion on peoples outlook on the real estate market and the economy in general. I know it is a controversial topic but I have not seen many discussions on BiggerPocket on this topic and I believe they are important conversations to have. Here are my general thoughts on the topic. Economies always go through cycles and we are coming up on the longest bull market era in history. If history is any indication of the future their have always been corrections or crashes every 8-10 years. Data1. Interest rates are rising and the yield curve is flattening a tell tale sign of future growth expectations are declining2. Corporations are turning to stock buybacks because they cannot find internal or M&A returns that can get a high enough return. Once buybacks are done will corporations begin to "restructure" or contract leading to layoffs and the downward spiral of layoff, people not buying as many goods and services leading to more layoffs. 3. Inflation is another worry when prices begin to increase at a higher rate after almost a century of 2% inflation people are going to be inclined to buy less leading to the ugly spiral as well. 4. In the stock market is extremely over prices with PE ratios being the highest they have ever been.5. Housing prices especially in California have increase much more rapidly then wage increases and I do not see this as a sustainable recipe.There are many other factors and coming from an analytical background i know there are ways to spin the numbers to make it look any way you want. I cannot time the market and nor do I think anyone can but I am writing this post to get others perspectives about where we are and what they think of the future outlook of the economy. With the ways things are, my guess is there will be at least a big correction in 2019 or 2020 but I could be way off as well. I would like to get peoples opinions on both sides. I am not someone stuck in my ways and truly believe that debating with someone that has complete opposite views is the best way to learn in life.

Stefan Ross

Real Estate Broker · Southern California · Member since 2018 · 10 posts · 3 votes

8y

Speculation drives cyclical industry cycles. Because of the cyclical nature of industries there is no avoiding recessions at the bottom of a cycle after a dip in perceived values. I agree that the real estate recession won't be as deep as it was in 2008 because of the current state of loan requirements but it is bound it happen. When it does people who have over extended their cash flow will need to make adjustments to their portfolios and people will lose houses. There is no getting around this.

Here in the Southern California I am seeing a continued uppward trend of the value of houses sold, but a reduction to 2016 levels of the number of closings. That means that while the number of transactions are starting to flatten out that the values are starting to exponentially increase, this is a red flag. I would be careful right now about over extending cash flow.

1 Reply

Aaron Taylor

Olathe, KS · Member since 2018 · 148 posts · 207 votes

8y

Originally posted by @John Kunick:

@Kraig Kujawa, totally agree about resting easy via cash flow.

Here are other key things perhaps many on this thread will consider about how different we are now vs. 2007:

1. The real estate bubble in 2007/2008 was primarily based on government-induced loans that were then backed by government via taxpayer. In short, due to government intervention in the market place and the consequent greed, money was too easy to get. There were people getting loans that had no business getting loans and the house of cards fell. This is not currently the issue. While loans are easier now than they were five years ago, they are nothing like it was in the early-to-mid 2000's. No comparison.

2. Those people that were getting loans that shouldn't have, are now renting and that has propped up the rental demand and thus the cash flow for investing.

3. Savings rate - In mid-to-late 2000's, the savings rate was 1-2%. It is now almost 7%

4. Not all markets are like California - Like many have commented on this thread, CA seems to be out of bounds. Perhaps there are other markets like that. But, there are still many markets where real estate has acted normally the last ten years. Even in Tulsa, where I own a significant portfolio of SFH, the prices still have room to run up. Sure, they are not as attractive as they were after the crash, but there are still bargains to be had - and rents have increased as prices have gone up.

5. Equity - In early 2000's there was very little equity in most rental properties (and real estate in general). That is not the case now perhaps due to loan requirements. This will curb panic selling should a recession hit.

So, all in all, I see a lot of differences between now and 2007. That is not to say that a recession or correction might not take place (they are usually psychologically driven), but I do believe the fundamentals are significantly different now

For #5, the equity thing, there are a large number of FHA home buyers who have very little equity. A couple websites mention 25% to 40% of the home purchases are FHA, that would seem to imply that there are a large amount of homes with low equity. I'm not saying that it's like 2007 or anything, but people are buying a large amount of houses with very little down.

1 Reply

John Kunick

Investor · Broken Arrow, OK · Member since 2016 · 210 posts · 314 votes

8y

@Nicole Heasley Beitenman, RE: student loan crisis.

Per my post above, I was one of those shaking my head at the stupidity of those taking loans out for real estate in early-to-mid 2000's. While I understand their motivation, the key is they were like sheep being led to financial slaughter due to government intervention. Therefore, I was setting a lot of money aside to buy up cheap homes once the house of cards fell. I am thankful for the opportunity that was presented.

I know there will be some that will find my comments troubling as they may think I was looking to profit off of someone else's misfortune. Unfortunately, I was telling lots of people back in early 2000's not to invest nor to take the easy money to buy a personal residence unless they could put a large downpayment. To be honest, I think many of them deserve what they got as there were lots of people telling them not to do it.

However, on the student loan crisis - which I see a lot of similarities in terms of government intervention driving up college costs due to easy money - I don't see any ways to either prevent a collapse or how an investor can find opportunities by picking up the pieces.

Anyone see any good ways to avoid the collapse? Any ways to pick up the pieces?

1 Reply

Dylan Mathias

OP

Real Estate Agent · Sebastopol, CA · Member since 2017 · 56 posts · 161 votes

8y

@Omar Khan

I am young and naive. I have so much to learn from people like yourself and others in the industry. I have begun to network in the area but I will dig in more. I know a lot of people in the industry that are always willing to help which is awesome. I have not yet been to a meet up but I have heard from many people that they are salesy.

1 Reply

Nicole Heasley Beitenman

Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes

8y

@John Kunick I think the opportunity will be in the form of the availability of tenants and homes. Those with heavy student loan debt will have more difficulty buying. Therefore, they will become potential tenants. This is already happening. The bulk of the burden is currently being carried by millennials, and even those that can afford to buy a home are more and more frequently choosing not to. And the more difficulty you have selling a home, the lower you price said home. Bad news for flippers, but good news for those looking to pursue the BRRR method or buy and hold turnkeys.

0 Reply

John Kunick

Investor · Broken Arrow, OK · Member since 2016 · 210 posts · 314 votes

8y

Originally posted by @Aaron Taylor: