This economy feels like 2007. Am I wrong?

Member since 2019 · 5 posts · 5 votes

Hello BP community,

Is it me or do the sky high valuations on homes seem similar to the run-up during 2006-2007? It seems like the market is due for a valuation correction, maybe relatively substantial (10-20%)? Economy looks really good, but wages haven't increased enough to support home prices imo.

In Denver, home prices have flattened over the last 4-5 months and I've seen a lot of Zillow listings reducing prices. Plus there are a ton of new builds in progress. Anybody think staying on the sideline is better in this environment? Would love to hear what you think..

Although I've owned a duplex since 2012, I've very recently returned to the real estate investing community with the goal of buying a single/multi family distressed property to rehab and rent. Am trying to find my bearings. Thanks.

5 Reply

142 views

Most Popular Reply

Mike D'ArrigoPro Member

Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes

@Josh Magnus I totally disagree. High prices alone don't lead to the crash we had in 2008 and the factors that did cause the crash don't exist today.

1. We don't have the absurdly loose lending standards we had in "08". Back then there were all the subprime loans where anyone who could fog a mirror got a loan. There were also the adjustable rate, interest only and negative amortization loans that got a lot of people in trouble.

2. We don't have the growth in the money supply in the economy that we did then. The average annual growth rate in the money supply is 6.5%. Just prior to the crash it was over 10%. Today, the growth rate is just 3-4%. At the time of the crash, the supply of money lead to over development of new construction which leads to the 3rd point.

3. New housing starts are down 40% since their peak in 2005. At that time, their were 2.1M new housing starts. Today, that number is about 1.2M new housing starts.

The reason that so many markets have been seeing so much price appreciation is that there is a real shortage of housing. We've seen that big time in Kansas City and Indianapolis where we operate. Keep in mind that 27% of all markets are still below their 2006 level and many are only at their 2006 peak. You have to look at where prices are today in relation to their 2006 high and not how much they've gone up from their bottom. Some markets lost 50% of their value. That means it takes a 100% increase just to reach their previous peak.

Lastly, you have to consider affordability. In spite of higher prices, all 4 of the regions of the country are still considered affordable to anyone making the median income. That's due to extremely low interest rates. Interest rates were 6.5% at the time of the crash, compared to less than 4% today.

Personally, I think we'll see moderation in prices, and deceleration of the appreciation rate which we're starting to see now, but I don't see a crash.

13 Reply

See this reply in the discussion

41 Replies

Jump to latestLatest

Sort by

Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
7y
going by FEEL is a bad way to judge the economy unfortunately
the market is hot for sure, but there is a lot that's different from 2007 and it's a mistake to think the future will be the same as the past.
Will there be a correction of SOME sort, most likely as markets don't go up forever. Will there be ~40% corrections like 10 years ago? highly unlikely in my opinion, but that's all anyone who responds is going to have: their personal opinion.
That said, staying on the sideline is a mistake for sure. This exact thread has been created on the BP forums since 2016, when I was told not to buy my first rental because the market was too hot and a crash was imminent. Buying high might be risky, but waiting is the riskiest thing of all.
https://www.biggerpockets.com/blog/real-estate-investing-timing-market-bad-idea
I recently wrote a piece on this exact topic and why you should jump in now

[email protected]Podcast Guest on Show #301
11 Reply
Account Closed
Member since 2018 · 214 posts · 175 votes
7y
My feeling is, today market looks like 2005, which is the peak...
2 Reply
Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
7y
When you narrow down to specific neighborhoods I see flips being over priced and sitting on the market longer. That's in the Indianapolis market. Some buyers are realizing everything is over priced but most don't care. My non-investor friends had a different mindset at the closing table.
3 Reply
Josh Magnus
OP
Member since 2019 · 5 posts · 5 votes
7y
Alex, thanks for the response. I bought in 2012 and thought 2014-2015 was the top - ARG. It sounds like your advice is to invest in the market at it's current price and don't worry about timing. I like it - being a financial professional we give clients the same advice about market timing.
Although the analogy is similar, it isn't the same. The vast majority of market investors dollar cost average via a retirement plan - you can't do that with real estate. It's all in (or a lot) and if you miss, that could be the end. There is also liquidity to think about. And the flipside to both of our situations (catching an upswing) is buying an investment in 2007, like a coworker of mine did in FL. He is still $50K underwater 12 years later O.O
Which brings me to my situation - I work full time so am unable to spend hours researching and finding that 'one deal' that all of us are after. I jump on Zillow and look around, talk to others, post on forums, etc. I've seen one deal I've really liked but missed it. Does being a 'part-timer' affect your thinking on timing? If not, do you have any advice on how to maximize limited time when finding a deal?
Thanks again!

0 Reply
Bob Okenwa
Real Estate Agent/Investor · Peoria, AZ · Member since 2016 · 2k+ posts · 2k+ votes
7y
@Josh Magnus
As has been stated, this is a topic that is posted with such regularity. People see prices flatten and immediately think the sky is falling. Markets have cycles and prices don't rise rapidly forever.
But what happened last decade was a singular event and was based on greed, speculation, and very poor lending standards. Today, mortgage delinquencies are near all time lows and and the percentage of those delinquencies has dropped every quarter since Q1 of 2010 according to the St. Louis Fed delinquency rate chart.
Do your due diligence and by smart and don't overextend yourself .
3 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
I can see how it feels that way since values peaked in 07 08 and crashed in many areas and now values are back to 07 highs and in some markets higher.. to me that's the only thing that is similar.
the lending rules that created the meltdown don't exist anymore.. millions of homeowners have bought their home with sub 4% interest rates allowing payments far lower than current rent.. why would they default ? if anyone is at risk its investors who are max leverage and under capitalized to sustain a down fall in rents..
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
10 Reply
Mike D'ArrigoPro Member
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
7y
@Josh Magnus I totally disagree. High prices alone don't lead to the crash we had in 2008 and the factors that did cause the crash don't exist today.
1. We don't have the absurdly loose lending standards we had in "08". Back then there were all the subprime loans where anyone who could fog a mirror got a loan. There were also the adjustable rate, interest only and negative amortization loans that got a lot of people in trouble.
2. We don't have the growth in the money supply in the economy that we did then. The average annual growth rate in the money supply is 6.5%. Just prior to the crash it was over 10%. Today, the growth rate is just 3-4%. At the time of the crash, the supply of money lead to over development of new construction which leads to the 3rd point.
3. New housing starts are down 40% since their peak in 2005. At that time, their were 2.1M new housing starts. Today, that number is about 1.2M new housing starts.
The reason that so many markets have been seeing so much price appreciation is that there is a real shortage of housing. We've seen that big time in Kansas City and Indianapolis where we operate. Keep in mind that 27% of all markets are still below their 2006 level and many are only at their 2006 peak. You have to look at where prices are today in relation to their 2006 high and not how much they've gone up from their bottom. Some markets lost 50% of their value. That means it takes a 100% increase just to reach their previous peak.
Lastly, you have to consider affordability. In spite of higher prices, all 4 of the regions of the country are still considered affordable to anyone making the median income. That's due to extremely low interest rates. Interest rates were 6.5% at the time of the crash, compared to less than 4% today.
Personally, I think we'll see moderation in prices, and deceleration of the appreciation rate which we're starting to see now, but I don't see a crash.
13 Reply
Caleb Heimsoth
Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
7y
@Josh Magnus this has been posted very often since I joined BP in 2016. I’ve done a lot of deals since then and I’m a lot better off had I done zero..
8 Reply
Frank Wong
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7y
The only thing that feels like 2007 is that price had appreciated and moved rapidly up. To me, today and 2007 do not resemble anything similar other than price. If I were to compare today's economy to one of the past this one resembles the dot com era of 2001. You guys can discuss which one it is, it really doesn't matter.
1 Reply
Lee Bell
Real Estate Appraiser · Isabella lake, CA · Member since 2018 · 628 posts · 491 votes
7y

Does not look or feel the same to me so far. Not that crazy.
But the powers that be seem to be trying to recreate the debacle with their loosening and elimination of regulations and standards.
2 Reply
Dale Byram
New to Real Estate · Grand Junction, Co. · Member since 2019 · 12 posts · 4 votes
7y
@Josh Magnus have you listened to this podcast? www.biggerpockets.com/show311
I thought J made some great suggestions. And had some really practical tips for our current market.
2 Reply
Harvey LevinPro Member
Property Manager · Indianapolis, IN · Member since 2012 · 208 posts · 160 votes
7y
In any market if deal makes sense do it . If a deal doesn't then walk away. There are always deals to find in every market . Some times it is easy and sometimes it is hard. The number one thing to remember is to be an investor not a buyer.
0 Reply
Michael Noto
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
7y
Can’t compare 2007 market to now. Lending environments are completely different now, in a good way.
0 Reply
Max Householder
Rental Property Investor · Saint Louis, MO · Member since 2014 · 313 posts · 326 votes
7y
History doesn't repeat, but it often rhymes. Don't focus too much on fighting the last battle, i.e. asking when "the next 2008" will be. There will be another crisis, but the nature of it will be far different than in 2008. Since the 1980s (really since 1971 going off the gold standard), financial markets (stocks, bonds, and real estate) have been greatly influenced by Central Bank manipulation of interest rates and other extreme monetary policies. This paradigm is coming to an end and there will be massive changes to the world financial system over the next decade. IMO these changes will be first and foremost about the US dollar's role as the world reserve currency, but there is much conjecture in this space. I think a good strategy no matter what, since pretty much everything is "overpriced" by traditional measures, would be to "get real" by owning tangible assets such as gold and real estate rather than financial "paper" assets like stocks, bonds, REITs, etc.
That isn't to say overpay for real estate, but in the next crisis I'd rather be sitting in cash-flowing real estate than stocks or bonds. Especially if Central Banks get their wish and finally create inflation, cash-flowing property with fixed rate debt will be like gold vs. holding cash or almost anything else.
Just my $0.02
3 Reply
Yvonne H.
Rental Property Investor · Atlanta · Member since 2019 · 23 posts · 27 votes
7y
We have an inverted yield so historically we can expect a correction is coming. But timing that is a fools errand. Good smart investors will always find ways to invest. 2007 was a different beast. And the next recession will have its own flavor. Personally I'm remaining flexible and not passing up deals where the numbers are working.
2 Reply
Chris LopezPro Member
Real Estate Agent · Denver, CO · Member since 2015 · 1k+ posts · 858 votes
7y
@Josh Magnus I'm an agent in Denver and follow the trends and data closely. Data is much better than a "feeling." None of the data that I'm seeing is pointing to a correction or a decline.
Denver has a supply and demand issue. We have way more demand for rentals and purchases, then we do supply. That drives prices up. We don't have the bad loan underwriting as in the previous decade.
While the market is slowing down, prices are still increasing. We've hit a few new price highs already this year.
My strategy is to dollar cost average into the market, keep high cash reserves and not trying to time the market. It's near impossible. Time in the market is much more important than timing the market. I'm a buy and hold renter. The earliest I'll sell a property to reposition the equity is 5-7 years. Holding time frames like that makeup for any market issues.
I have a lot of data and podcasts on Denver market stats, if you want any, let me know.
Podcast Guest on Show How to Use Equity in Your Home to Reach Financial Freedom Faster
1 Reply
Robert McEachern
Rental Property Investor · Lake Oswego, OR · Member since 2015 · 22 posts · 2 votes
7y
@Josh Magnus No. 2005 run up was due to 106% financing and negative amortizing loans. At least on the coasts, new construction supply can keep up with demand.
0 Reply
David Song
Real Estate Broker · Redwood City, CA · Member since 2014 · 679 posts · 888 votes
7y
@Josh Magnus
San Francisco Bay Area also shows some weakness. Time on market increased in certain neighborhoods. Some price drops.
However, I do not think this is like 2007. Price to rent ratio is not as high. Underwriting criteria is much stricter.
More important, overall job market is solid.
1 Reply
Terry Lowe
Member since 2019 · 8 posts · 3 votes
7y
This economy is much different than 2007. Especially in the Denver Metro area. 2008 was only the beginning of the foreclosure downturn. Prices decreased until January 2012, and they have continued upward ever since. I have been afraid to buy, but I believe I am wrong. My rental rates continue to climb, sometimes at alarming rates. I would not buy new build, but older units, especially in the west suburbs, even though they seem to be seem to be pricy, are doing so well for me now. Gentrification as well as a shortage of small single family homes, with the option to do some upgrades, is raising my rents more than I have ever imagined. Will it continue? Of course I can’t answer that. New builds are big, fancy, expensive apartment complexes, crowded with small units for high rent. Old small homes offer so much more space, privacy, yards, gardens, lovely trees, and even individuality, since each one is different. Also, rents are less than the new build, which makes older units very desirable. I’m not a numbers person, but I am very happy with my older units. We work hard to keep them safe and updated, and as retirees, it has given us a very nice “raise” in income year after year. If the market turns downward, I don’t think it will be drastic. There is only so much space in old Lakewood, Wheatridge and Golden, and I cant see the mountains moving too far any time soon:). If you are in it for the long run, do your due diligence, don’t stretch yourself further than your comfort level and go for it. RealEstate in Denver has ALWAYS trended upwards in the long term. Be patient and don’t bail out because of something you hear on the news. Use your common sense and your numbers. You will do just fine. Happy house hunting!
0 Reply
Account Closed
Financial Advisor · CA · Member since 2012 · 128 posts · 76 votes
7y
IMHO there is a shortage of housing which will continue. Meanwhile, Trump is enticing businesses to the US and removing regulation: 22 regulations removed for each one implemented.

Real wages will start rising again. First the excess labor has to be absorbed. When we remove the "FED" the US will get even more prosperous. This is my long-term view.
0 Reply
Bobby Stener
Rental Property Investor · SF Bay Area · Member since 2018 · 49 posts · 54 votes
7y
I’ve acquired at least 1 new property every year since 09 and 2018 was the first year I did not buy ANYTHING. I don’t see an acquisition in 19 either. Keep your powder dry!
2 Reply
David London
Rental Property Investor · Queen, NYC · Member since 2018 · 63 posts · 22 votes
7y
@Josh Magnus I would suggest to proceed with caution...but proceed nonetheless...In the area where I focus most of my attention, 80% of the houses for sale are places that were sold last time in 2006-2007...Most of them investors who finally manage to match the price they paid for...As most commentators said condition now are very different then 2008...but that doesn't mean crisis have to come from the same direction/cause to get the whole economy crashing along...Brexit...trade wars...student/consumer/corporate debt...there can be many reason for the next fall...and in 2008 nine out of ten economists didn't see it coming...that will probably be the only constant.
As someone who also work full time my suggestion is to narrow your focus on a specific area like 1 zip code and follow it to exhaustion...know every house that get to market...walk the street with google view over lunch break...analyze city/county records for every property that hit the market...check all rentals you can find...establish working relationship with one or two buyer agents...this way when something arrive to market you'll be in a position to act fast enough...I got one house that way and now in contract for another...both were sold last in 2007 and on both I offered asking price (=2007) the day after they got to market...if the numbers work for cash flow then the state of the economy is much less important...and be picky (don't feel bad passing on houses)...personally my goal is to be able to become at least part-time when the crash will come so I have more time for RE then...good luck!

0 Reply
Michael Corso
Member since 2019 · 1 post · 0 votes
7y
@Josh Magnus maybe you're right I'm still trying to figure this out myself. But last year this time was much busier in the mortgage industry at least for us although thank God we are very steady I did notice a slight decline from last year this time. I guess we just have to wait it out and see what the market has in store for us
0 Reply
James Carlson
Real Estate Agent · Colorado | stan.store/JamesCarlson · Member since 2014 · 2k+ posts · 2k+ votes
7y
@Josh Magnus
We get this question all the time from Denver buyers we work with. I'm bullish about Denver as a whole, so take what I say with a grain of salt. That said ....
As someone said above, the data doesn't point to some huge crash. Yes, there has been a slowing in price increases. That seems to come as the inventory of homes has increased. (Roughly 9,000 homes on market right now. That's well up from the historic low of 4,000 homes we had for a few years, but is well below the 24,000 homes on market before the real estate crash.)
I would echo an above sentiment as well. Trying to time the market is tough. We had people telling us we were crazy when we bought a small condo in 2015. (Prices are sky high!) We've since gained $100k equity.
A lot of this depends on goals and timeline. For instance, if there's a chance you might have to sell in two years, then you never know. But if you know you can hold on to it for five to seven years (either living in it for that time or moving out and then renting it), then you're likely fine. For example, if you bought at the height of the bubble in Denver in 2007,the average residential price was $288k. Average prices dropped in the crash and didn't get back up until 2013. Yes, that's seven years before you got your equity back, but it's also only seven years after the worst financial crisis in more than a century.
As my wife -- also a Denver real estate agent -- likes to say, don't wait to buy real estate; buy real estate and wait.
0 Reply
George Gammon
Flipper/Rehabber · Las Vegas, NV · Member since 2016 · 174 posts · 251 votes
7y

0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.