Recession, Market Crash, Bubble ??
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesRecession, Market Crash, Bubble ??
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7yThe over regulation though becomes good for us buy and hold guys. If the builders cant build a competing product, demand remains high for my product.
Market cycles dont matter for a buy and hold guy either. Borrowing at these rates for a couple decades is the easiest path to becoming a multimillionaire. Between debt reduction and appreciation, Im banking about $50k per year per property, and another $12k in free cash flow. Easy as anything, but the BP folk keep telling me I cant make money on the propertys I buy.
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- Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes7y
@Jay Hinrichs Always love your commentary Jay. I think you are right about the hurdles that are artificially preventing some building. Rates are still very low by historic measure, but lending in some areas, like spec is tough.
Unfortunately I think that real estate will perform in a very similar way to how the stock market has...many people are still flinching from 2008-2009 and they have missed most or all of the run up...just when they capitulate to the FOMO and go back into the market is when we will start seeing a crest.
This is a great reason for everyone to consider the time risk elements to their strategy..i.e. are you buying the right property in the right market but are married to a timeline (flip, wholesale etc) that could take a profitable buy and hold deal and turn it into a money loser if the market flattens or drops?
- Lender · Grand Rapids, MI · Member since 2018 · 703 posts · 446 votes7y
We have seen spec homes in new construction slow down, not a crawl but very slow on starts. Some of the big players in our area are sitting on around hundred a piece with tons of room in the sub division.
One of the real big players blew in 5 or 6 roads in a huge sub division poured around 25 basement before winter rates went into play and they are still sitting as open basement to this day.
In my area subs have become super greedy and want a fortune. About 4 years ago we could pay a siding sub $40 a square for siding, now its hard to find a guy to do it for under $140 square. The true trades prices have been very constant but the ext guys, framing contractors and int guys have become greedy. They will be dropping prices soon, because alot of them are now calling for work.
We are lucky in West Michigan, permit problems don't really come into play. We have a ton of developers that don't build, they just buy up land, and blow roads in and then let the builders come in and build in the subs. Some plats you will see 10-15 different builders in them.
I think its going to slow down, but not to a crawl or anything like that. But I do see a huge price adjustment coming for the subs.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Tim Johnson:
We have seen spec homes in new construction slow down, not a crawl but very slow on starts. Some of the big players in our area are sitting on around hundred a piece with tons of room in the sub division.
One of the real big players blew in 5 or 6 roads in a huge sub division poured around 25 basement before winter rates went into play and they are still sitting as open basement to this day.
In my area subs have become super greedy and want a fortune. About 4 years ago we could pay a siding sub $40 a square for siding, now its hard to find a guy to do it for under $140 square. The true trades prices have been very constant but the ext guys, framing contractors and int guys have become greedy. They will be dropping prices soon, because alot of them are now calling for work.
We are lucky in West Michigan, permit problems don't really come into play. We have a ton of developers that don't build, they just buy up land, and blow roads in and then let the builders come in and build in the subs. Some plats you will see 10-15 different builders in them.
I think its going to slow down, but not to a crawl or anything like that. But I do see a huge price adjustment coming for the subs.
Prior to about 98 ish in the Oregon market. it was the exact same you have lot developers and you had builders.. builders would follow lot developers lets say they put in 50 lots 5 to 7 builders would buy them out on take down schedules throughout the course of 12 to 18 months.. I was a lot developer in the late 90s did a few hundred. and a big builder in those days did 20 to 40 homes.. and even to this day I am personally in the Portland market number 24 in size and that is only 34 permits in 18.. :) DR did 450.. then you have a few regionals and lennar those 5 do 80%.. of permits. but prior to that you had litereally hundreds of small builders building 3 to 5 houses a year one reason was the banks in Oregon would not give you more than a few spec loans at a time.
well has things got wild coming into the early 2000 even the smaller builders were getting 20 to 50 spec loans with ZERO out of pocket as long as LTV was 80% or less.. when things changed you should have seen the local builders howl at the fact that they now needed 10% .. and today U need 10 to 20% cash into a deal no matter the LTV .. which is OK by me.. it clear out a lot of competition that was not in the same financial position we are in.. so those builders who would have just did these deals themselves are now building for me on a fee basis. but yes subcontractor price creep is real.. and like you said some are going to price themselves out and the GC wont forget.
But for now in my markets sales are still consistent but still I wont do more than 10 to 12 specs at anyone time.. if I get a pre sale I start another. but in our market as well Lots are still very tight development is still very tough.. so its not like markets that can get over built because you can create a lot and make a profit selling it at 40k or so. We spend about 50 to 60k per lot before we have even bought the dirt. if you can create a lot for under 100k all in your doing good.. those lots retail at 120 to 150k each..
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Richard Sherman:
@Jay Hinrichs Always love your commentary Jay. I think you are right about the hurdles that are artificially preventing some building. Rates are still very low by historic measure, but lending in some areas, like spec is tough.
Unfortunately I think that real estate will perform in a very similar way to how the stock market has...many people are still flinching from 2008-2009 and they have missed most or all of the run up...just when they capitulate to the FOMO and go back into the market is when we will start seeing a crest.
This is a great reason for everyone to consider the time risk elements to their strategy..i.e. are you buying the right property in the right market but are married to a timeline (flip, wholesale etc) that could take a profitable buy and hold deal and turn it into a money loser if the market flattens or drops?
In my mind we saw mainstream media play up bubble.. then U have folks posting almost daily on BP when is the bubble coming are we in a bubble? were is it going to bubble.. then you get people on this site.. saying I am going to wait for the bubble to burst and or crash I am not buying anything. now..
So now U have the media starting to come out with articles that say.. WELL wait a minute we are in a housing slow down NO question , I mean there is no question sales are down 5 to 10% in most markets.. but its not like last time the media is staying real estate is not going to be the big driver of a recession.. there for logic indicates no major melt down on prices and those that are waiting could be waiting and they missed out on the best interest rates ever.. I mean if your a buy and hold to not take advantage of rates like this that you can lock in for decades .. just because you think the market is going to go down a little bit.. I don't quite see that.. especially in the low value asset areas of the mid west that are so prone to cash flow investing. I mean if you have a 80k rental and it goes down 10% big deal that's 16k its nothing.. Now if its SF or San Jose and that 2.5 mil house in Cupertino that's 2k sq ft drops 500k I get that and it could easily do that.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
The over regulation though becomes good for us buy and hold guys. If the builders cant build a competing product, demand remains high for my product.
Market cycles dont matter for a buy and hold guy either. Borrowing at these rates for a couple decades is the easiest path to becoming a multimillionaire. Between debt reduction and appreciation, Im banking about $50k per year per property, and another $12k in free cash flow. Easy as anything, but the BP folk keep telling me I cant make money on the propertys I buy.
District Invest Group545 Reviews - Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes7y
@Jay Hinrichs 100% agree...these rates have pushed us to buy a bit more than I was comfortable with, but there cost of acquisition and cost of ownership (which includes the drag from financing) and though the deal was OK on the buy, the financing makes it a winner.
- Investor · Paradise Valley, AZ · Member since 2012 · 366 posts · 214 votes7y
I don’t think the media is to blame. There is a palpable sense that the economy is slowing down and the media is picking up on that.
Look at the Atlanta Fed prediction for fourth-quarter GPA, it is down to 1.4%. The four week moving average of weekly jobless claims is at a one-year high. There is now a threat of tariffs on imports of automobiles from Europe which would be economically devastating to our country.
There is plenty of uncertainty out there and this is leading to a slowdown in housing.
- Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes7y
Originally posted by @Russell Brazil:
The over regulation though becomes good for us buy and hold guys. If the builders cant build a competing product, demand remains high for my product.
Market cycles dont matter for a buy and hold guy either. Borrowing at these rates for a couple decades is the easiest path to becoming a multimillionaire. Between debt reduction and appreciation, Im banking about $50k per year per property, and another $12k in free cash flow. Easy as anything, but the BP folk keep telling me I cant make money on the propertys I buy.
Absolutely agree. I was explaining this to a couple of local investors regarding some of the regulations they are passing in Oregon. Regulation will put downward pressure on supply which will exacerbate the housing "crisis" in Portland Metro which will mean less competition and higher long term rents. Some (current tenants who are lucky enough to get some of the benefits) will be paid for by higher costs long term for renters. Bring it on, I am much more worried about a 200 unit apartment building coming in down the street than only being able to raise rents 7% + CPI per year.
- Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes7y
The one thing I really agree that is hurting construction, and will only get worse, is that available land is disappearing at an extreme rate. Obviously this will push prices higher faster and will making todays "normal" development very hard to do. I would even dare to state that I think it will start to out pace the increase in home prices. Reason being that, though the media says new construction is down, every true REI knows the truth that it isn't. They will either be the buy and hold investor stock piling "inventory" (so to say) and then those selling it off at a premium.
Another, compounding problem (which has been mentioned), is city regulations. More and more cities that where once considered too far to be suburbs of a large city are now seeing that edge creeping up to their door step. Many don't like that at all and will do anything to keep their "small town" feel and "cheap housing" and reality as long as possible. I saw this happening in the west suburbs of D.C. and I see it here in Wenatchee (which doesnt even count as a large city). In Virginia I saw several small towns in act laws requiring all new sub divisions to be no less than 5 ac lots. Basically eliminating all but the priciest gated communities from going in and, really, making the housing crisis worse.Here in Wenatchee I see several of the small farm towns going out of their way to make any type of development near impossible to put in. They want to stay farmland as much as possible. I saw a mini storage facility get so many "required" studies and test and red tape and fees thrown at it by the city that they back out of their plans. Even though the orchard they were planning to remove to do was 40+ years old and at the end of its like. The farmer didn't want to replant and wasn't starting over at 80 years old. He had to end up selling it much cheaper to another farm so they could get it at a price to replant. Farmers dont make much so its not like he could sell it at a premium to a farmer like he could to a developer.
I'm personally seeing and hearing of more and more of this. Where every city will acknowledge they have a housing crisis but then turn around and make laws that make it harder to do. I understand not letting developers running wild but there has to be a give and take here. In fill projects hardly pencil out in average size towns. - Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
@Nik Moushon in our area here in the north west you have two major issues.
You have commercial timber lands ( huge HUGE areas designated as such as big as many states on the east coast) these lands are protected for timber production. in Oregon you need 160 acres minimum lot size for a single home in many of these timber reserve loans.
then you have prime low land farm land.. and those are even tougher to try to develop.. no matter that they are not near as valuable as farm land.. but its the farm bureaus protecting their turf.
Then you get to CA and you need to do full blown EIR's ( environmental impact reports) these can cost 200k to 1 mil up front with no assurance your project will be approved..
its a tough game out here in the west.
- Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes7y
@Jay Hinrichs, I wasnt even thinking of the timberlands. At least near me, which is my limited experience with them, most of those land areas are too inaccessible to be developed more than a 20 ac lot thats completely off grid. Not to mention the terrain is so steep that 90% of those lots you cant even walk up. I'm not familiar with the east side of the mountains but I think its much easier to have the potential for some actual sub-division development but thats just a guess.
Ya the farm bureaus are protective for sure over here. I expected it from them. I just didnt expect to local politicians to play that dirty as to prevent development. Don't know why I thought that, it is politicians we are dealing with after all.
Ya the EIRS up here are bad too. Not so bad on the east side as the are on the west but you get in the wrong area and you can screw yourself over. Wetlands is a VERY dangerous word up here lol.And you can have CA. I'm not going to touch that state. Too many other easier places to deal with than to put up with all that crap.
- 7yKevin PolitePro MemberInvestor · Decatur Atlanta, GA · Member since 2011 · 611 posts · 232 votes
Good post. Here are some points I read in an article last month and the link below. housing supply for sale remains tight. Low supply and high demand means higher prices.
For a recession to impact the housing market, it would need to fundamentally alter this dynamic between supply and demand. A spike in unemployment could negatively impact demand, particularly if an intensifying trade war leads to export tariffs, which could put jobs at risk. But with unemployment already unusually low, it would take a pretty dramatic rise to cause home prices to drop.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
@Russell Brazil@Richard Sherman@Nik Moushon Hey you guys may or may not be familiar with Bruce Norris.
He runs a large HML shop in LA basin ( inland empire) and is a renowned speaker on the markets mainly in CA but it translates to the whole US with some of his bigger theories. Any time he speaks at a REIA its over flowing.
Any way he was the key note last year at the J Martin event in Oakland.
and here are some of his pearls I sat through his entire presentation.
1. For us to be experiencing a bubble pop and a market crash. 30% or more of MLS listings need to be short sales or foreclosure bank owned.. ( not sure about Russ market but that ship sailed long ago on the West coast)
2. Mortgage defaults have to sky rocket.. and his position was ( and I think its pretty common knowledge) is that with the changes in mortgage lending rules IE no sub prime No liar loans etc. that the bad paper has pretty much flushed through the system.. there will always be defaults as we know ( Bruce participates at the auctions I believe). But there is no huge mortgage defaults coming on new originations of the last 10 years.
3. And of course job market and unemployment and of course this is regional.
4. Lastly he commented on MF and felt that its frothy so I took from that meaning lots of new players entering into the space for the first time and tend to over pay and drive caps down. His other comment was the 5 year calls and were would those deals be when if they went into them looking to refi or sell at a certain interest rate and now its a point or more higher the values have dropped and he thought there could be stress there..
- Rental Property Investor · Salem, OR · Member since 2017 · 696 posts · 660 votes7y
@Jay Hinrichs awesome commentary. Of all the things that I have some concern for, it is the inability to refinance a loan on a good property due to issues in the lending area...like we saw when WaMu vanished in OR and no one wanted to loan into a market that was "falling apart"... last thing you want to be doing is selling into a market where you and your potential buyers can not get financed.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes7y
@Russell Brazil. I agree with a lot of the stuff you say on BP. I think it’s really useful advice, just one question I had was can you give me an example of something you’ve bought in the last 1-2 years? Purchase price, rents when you bought it, rents now. What it was worth when you bought it and what it’s worth now, would all be helpful.
I agree with you though between appreciation, debt pay down and cash flow my Net worth has exploded since I started in RE (about 2 years ago).
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Richard Sherman:
@Jay Hinrichs awesome commentary. Of all the things that I have some concern for, it is the inability to refinance a loan on a good property due to issues in the lending area...like we saw when WaMu vanished in OR and no one wanted to loan into a market that was "falling apart"... last thing you want to be doing is selling into a market where you and your potential buyers can not get financed.
I was working a short sale for me personally in Lake O with Silver falls bank. I was dealing with the president ( pretty common for a little bank like that) on a Friday.. on Monday when I called .. they answered Silver falls bank now taken over by the FDIC.
that led to me not getting the deal as the bank Assests were sold to Rialto hedge fund ( Lennar hedge fund arm) they got 5B of Tarp money.. But then I had a Salem business owner with his loan due and no one would entertain a refi in 09 2010 and his note was due..
So he had to scramble to pay it off. Rialto on the other hand was very unemotional you had loans due they foreclosed .. you could not do work outs with them.. they bought a few loans from Vendors of mine in GA.. and one when they foreclosed he had to file BK it was a weird time.. I am not saying at all that refi markets are going to freeze like that.
I think Bruce's point is you buy at a low cap because of low rates .. now rates are higher cap rate is higher you have max leverage as all the MF guru's preach and now your going to have capital calls as there wont be enough equity to refi. So there could be scenarios were investors get stressed.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
@Caleb Heimsoth
Yeah 2 properties Im working on now pop to mind. Im under contract to purchase a new construction townhouse at $440k. Should rent for $2800. This location I like in particular as its located right at a train station. I own 2 other rentals near by so I like this location, including the one below.
I also have a property listed that I just bought in 2015. I purchased at $415k w $5k back. I had a tenant turnover so I listed for both sale and for rent and will take whichever happens first (I think its going to rent in the next few days). When I first rented it it was $2500. Most recent tenant was $2750 and I have it listed for rent at $2800. Also for sale at $490k. I was hoping to sell this as it needs a new roof which Ive been putting off getting, but it looks like I was pushing the limits a little too high on proce...$10k less and I would have sold it.
Im looking to pick up 1 more property this year in addition to the townhouse above. In 2018 I didnt purchase anything other than a new primary residence which sucked away all my cash last year.
District Invest Group545 Reviews - Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes7y
Originally posted by @Russell Brazil:
The over regulation though becomes good for us buy and hold guys. If the builders cant build a competing product, demand remains high for my product.
Market cycles dont matter for a buy and hold guy either. Borrowing at these rates for a couple decades is the easiest path to becoming a multimillionaire. Between debt reduction and appreciation, Im banking about $50k per year per property, and another $12k in free cash flow. Easy as anything, but the BP folk keep telling me I cant make money on the propertys I buy.
I agree with you Russell. As a landlord myself, I am not as affected by market cycles. I say NOT AS AFFECTED because we landlords are still affected by market cycles. I built my portfolio during the last recession because it was so easy to buy and I sold some of my portfolio during the uptick in the cycle because it's always good to cash in specially if I can trade up to better properties.
So, yes - landlords should not be concerned with market cycles as much as flippers or developers and builders. However, we still need to watch the market and take advantage of the opportunities that come up as a result.
I think J Scott shoud weigh in on this discussion.
- Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes7y
Originally posted by @Russell Brazil:
@Caleb Heimsoth
Yeah 2 properties Im working on now pop to mind. Im under contract to purchase a new construction townhouse at $440k. Should rent for $2800. This location I like in particular as its located right at a train station. I own 2 other rentals near by so I like this location, including the one below.
I also have a property listed that I just bought in 2015. I purchased at $415k w $5k back. I had a tenant turnover so I listed for both sale and for rent and will take whichever happens first (I think its going to rent in the next few days). When I first rented it it was $2500. Most recent tenant was $2750 and I have it listed for rent at $2800. Also for sale at $490k. I was hoping to sell this as it needs a new roof which Ive been putting off getting, but it looks like I was pushing the limits a little too high on proce...$10k less and I would have sold it.
Im looking to pick up 1 more property this year in addition to the townhouse above. In 2018 I didnt purchase anything other than a new primary residence which sucked away all my cash last year.
Thanks that’s really helpful. Couple more quick questions. Do you list your own properties? (I’m guessing you do). Do you ever 1031 exchange any of these sales or do you just pay the tax and move on?
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
@Caleb Heimsoth
I do typically list my own properties for my buy and holds. If it is a flip Ive done, or funded....I do not. Thats a liability thing.
Ive both used a 1031, and have forgone and paid my taxes. The time I skipped doing the 1031 was a multi I had plowed all the cash flow back into making a ton of improvements...so my cost basis had been raised quite a bit, so my paper gain wasnt as big as my actual gain. So I decided to just pay my taxes instead of being forced i to buying a property on the 1031 timeline. Some of that money then became the funds for my new primary residence. Thats the kind of downside to the 1031, not being able to use the money for other things.
District Invest Group545 Reviews - Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes7y
@Jay Hinrichs I have not heard of Bruse Norris before. I will be looking into him.
Since we are talking about media is posting their torches and pitch fork articles everywhere I came across this one this morning.https://www.marketwatch.com/story/why-bubble-era-h...
I don't know enough about mortgages to argue either way for this article but I thought it brought up some interest facts. The residential market might not cause the next crash, but if this article is right, it could effect the SFH market. And of course, like everyone one else, he throws out his timeline for the apocalypse.
- Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
Originally posted by @Nik Moushon:
@Jay Hinrichs, I wasnt even thinking of the timberlands. At least near me, which is my limited experience with them, most of those land areas are too inaccessible to be developed more than a 20 ac lot thats completely off grid. Not to mention the terrain is so steep that 90% of those lots you cant even walk up. I'm not familiar with the east side of the mountains but I think its much easier to have the potential for some actual sub-division development but thats just a guess.
Ya the farm bureaus are protective for sure over here. I expected it from them. I just didnt expect to local politicians to play that dirty as to prevent development. Don't know why I thought that, it is politicians we are dealing with after all.
Ya the EIRS up here are bad too. Not so bad on the east side as the are on the west but you get in the wrong area and you can screw yourself over. Wetlands is a VERY dangerous word up here lol.And you can have CA. I'm not going to touch that state. Too many other easier places to deal with than to put up with all that crap.
I did some poking around at the trustee sales for your area.. there is literally nothing.. maybe one or two.. so if you have no forclosures in Chelan county and you have no short sales you have no bubble.. you may have sales slow.. thats happening and you may have prices not rise and or fall a tad when a motivated seller wants to move something quick.. but nary a bubble at this point in your market.
- Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes7y
Originally posted by @Jay Hinrichs:
Originally posted by @Nik Moushon:
@Jay Hinrichs, I wasnt even thinking of the timberlands. At least near me, which is my limited experience with them, most of those land areas are too inaccessible to be developed more than a 20 ac lot thats completely off grid. Not to mention the terrain is so steep that 90% of those lots you cant even walk up. I'm not familiar with the east side of the mountains but I think its much easier to have the potential for some actual sub-division development but thats just a guess.
Ya the farm bureaus are protective for sure over here. I expected it from them. I just didnt expect to local politicians to play that dirty as to prevent development. Don't know why I thought that, it is politicians we are dealing with after all.
Ya the EIRS up here are bad too. Not so bad on the east side as the are on the west but you get in the wrong area and you can screw yourself over. Wetlands is a VERY dangerous word up here lol.And you can have CA. I'm not going to touch that state. Too many other easier places to deal with than to put up with all that crap.
I did some poking around at the trustee sales for your area.. there is literally nothing.. maybe one or two.. so if you have no forclosures in Chelan county and you have no short sales you have no bubble.. you may have sales slow.. thats happening and you may have prices not rise and or fall a tad when a motivated seller wants to move something quick.. but nary a bubble at this point in your market.
That was my thinking as well. I wasn't trying to say that my area is having this problem. On the contrary my area has a huge housing shortage. So if anyone wants to come up and do some developments with me I'm game!
I just linked to it since it was an interesting article and was on the topic of the media preaching doom and gloom. - Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes7y
@Nik Moushon I am game in the BIG W 10 lots minimum.. to maybe 40 lots.. show me the money and I will be there
- Member since 2018 · 1k+ posts · 1k+ votes7y
@Richard Sherman "I am much more worried about a 200 unit apartment building coming in down the street than only being able to raise rents 7% + CPI per year."
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Here in Chicago the politicians want to limit landlords to CPI increases only and force LLs to set aside ten percent of gross revenue for repairs and maintenance." Good news is that means we won't have 200 unit apartment buildings coming in down the street!
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