Yield Curve Inversion, Buyers market around the corner?

[Logan Causey]

I'm curious to know how many investors have been waiting and preparing for this time to come, I personally believe what's coming is going to be worse than '08 and would like to know the thoughts of more experienced investors. 

[Mark Fries]

@Logan Causey

I hope it hits soon! Ready to buy some killer cash REO deals from all the BRRRRs on BP....lol

[Logan Causey]

Thanks everyone for chiming in it’s always great to get multiple sets of eyes and opinions on things!

@Spencer Cornelia

I agree with you, the reason 08 was so nasty

Was because all the lenders started giving out 6 figure loans to anyone that can sign a piece of paper knowing the insurance companies would pay in full after it defaulted. I don’t think that will be as bad this time but I believe many other sectors will be impacted that weren’t as much last time. Also the dollar has been losing value since Nixon stopped it from being backed by gold in the 70’s, I personally believe we’re slowly going to inflate more and more until we reach hyperinflation. This being said I’m not waiting on the sidelines because it could be years until anything happens, just wanted the opinions of other more seasoned investors.

[Calvin Lin]

A few things I have been seeing:

1.  Not just that yield curve inverted, look at the broad spectrum of bond maturities and see what message is saying to you.  Right now, 70% of yield curve is inverted.  That is a very strong signal something is not right.

2.  Outside of US, something like 50% of sovereign bonds have a negative yield, which means you pay the government to lend them money, ie I give you $100 now and you give me back $98 1 year from now.  Who makes this type of deal in a normal situation?  Answer: no one. 

3. Gold is screaming higher.  This is a risk off indicator.

4. YEN is screaming higher.  This is a risk off indicator.

5. Overnight swap lending rates (inter-bank lending rates to each other) is now negative for the first time in history.  This is not normal.

6. Check the price action of European banks.  It's in a death spiral.

7. Check the price action of commodity index.  It's screaming deflation.

Fed needs to cut 50 bps in the Sept meeting, they have no choice.  Right now I am not doing anymore RE deal but focus in preservation by keeping my capital in US short-term bonds which will benefit as the Fed cut rates down to 0 in the next 1-2 years.  It is not inconceivable that bonds in both Treasury and US corporate rated AAA have a negative yield in a couple of years just like the rest of the world is heading.  How would that impact RE prices in the US?  I am not sure because this has not been contemplated before as a possibility in the US.  I don't want to be overly negative as Japan saw waves of deflation but RE price in good locations like Tokyo actually have risen the last 5 years.  It's possible RE will become the inevitable choice of investment for those who want to avoid negative yielding securities as they have no other alternative.  Let's see how all these forces play out but buckle up as it is going to get rough.

[George W.]

Next turndown might not even effect real estate much for all we know. unless there's massive job loss. Naturally anyone who's over leveraged can lose there shirt recession or not. Also if you don't have a boat load of cash laying around you'll have a hard time finding money for deals. 

theres definitely alot of talk about it happening soon with world outlooks and yield curves gold rising etc. End of the day I wouldn't wish for a major drop in value or any market crashes. 

What's gonna happen if it's like the last one where you're employer needs a business loan to keep his doors open for equipment and can't get funding? Unfortunately it's the middle class that gets screwed with economic crashes. 

[Artie Wrightson]

@Scott Trench great post - thanks for taking the time to show the trend! Always, always, always...agreed! And waiting is not a strategy...go find some deals...thanks Scott!

[Alexander Ball]

Everyone talks about buying killer deals, but then there's other problems you have to deal with.  If I buy a killer deal today, I know I can rent it out easily or even sell it if need be.  In a dumpster of an economy, it could be harder to find qualified tenants or get out of a property and not lose a lot if need be.  Everyone keeps expecting 08 again, but no one has a good reason... 08 was caused by people being straight stupid.  Same with most if not all big crashes in the last 100 years.  I don't doubt a correction, but I do doubt another 08.  I'm agnostic to it to be honest, if I'm going to succeed it will be in good or bad markets regardless.  

[Alan Grobmeier]

The worst part is that the next recession may not be a ‘quick one’ like 2008.  The first ‘hit’ on the stock market will be quick, but I believe the real bottom will be worse than when many start buying.  Imho it will be a long & slow bleed.

Besides the items that @Calvin Lin stated, we have a serious pension crisis.  Many pensioners are going to get a fraction of what they were promised.  This is after working 40+ with certain expectations.  The millennials can’t afford to buy the assets of the baby boomers.  That means PRICE has to fall.  The govt will respond with helicopter money.  Because the last thing they can ‘control’ is deflation.  So, instead, we will have runaway inflation.

it won’t be pretty.  :-(


Originally posted by @Calvin Lin:

A few things I have been seeing:

1.  Not just that yield curve inverted, look at the broad spectrum of bond maturities and see what message is saying to you.  Right now, 70% of yield curve is inverted.  That is a very strong signal something is not right.

2.  Outside of US, something like 50% of sovereign bonds have a negative yield, which means you pay the government to lend them money, ie I give you $100 now and you give me back $98 1 year from now.  Who makes this type of deal in a normal situation?  Answer: no one. 

3. Gold is screaming higher.  This is a risk off indicator.

4. YEN is screaming higher.  This is a risk off indicator.

5. Overnight swap lending rates (inter-bank lending rates to each other) is now negative for the first time in history.  This is not normal.

6. Check the price action of European banks.  It's in a death spiral.

7. Check the price action of commodity index.  It's screaming deflation.

Fed needs to cut 50 bps in the Sept meeting, they have no choice.  Right now I am not doing anymore RE deal but focus in preservation by keeping my capital in US short-term bonds which will benefit as the Fed cut rates down to 0 in the next 1-2 years.  It is not inconceivable that bonds in both Treasury and US corporate rated AAA have a negative yield in a couple of years just like the rest of the world is heading.  How would that impact RE prices in the US?  I am not sure because this has not been contemplated before as a possibility in the US.  I don't want to be overly negative as Japan saw waves of deflation but RE price in good locations like Tokyo actually have risen the last 5 years.  It's possible RE will become the inevitable choice of investment for those who want to avoid negative yielding securities as they have no other alternative.  Let's see how all these forces play out but buckle up as it is going to get rough.

[Jay Hinrichs]

Originally posted by @Mark Fries:

@Logan Causey

I hope it hits soon! Ready to buy some killer cash REO deals from all the BRRRRs on BP....lol

Mark I think the issue most don't realize is that to get to massive reo takes years even if you started TODAY especially in a state like FLA.

other states like GA  MS TX you can get through the foreclosure system in a matter of months..  So even if you started to magically have more defaults than a normal market condition that will not = inventory for a few years..    Kind of like a Ocean liner coming to a stop takes 5 miles :)   Might be a play though to buy paper early on were banks figure out Hey we don't want to go through the foreclosure process so lets just sell our late payers paper at a discount to Wall st hedge funds who then let it filter down to us little guys/gals

[Mark Fries]

@Jay Hinrichs

Just being hopeful!

[Jay Hinrichs]

Originally posted by @Mark Fries:

@Jay Hinrichs

Just being hopeful! 

My point is it takes years to get to over abundance of distressed cash only real estate at deep discounts.. unless your talking about c - D  F areas then those areas its always available. 

[Ola Dantis]

@Logan Causey Remember many Real Estate millionaires were created in the 08' Recession. 

So, if whatever is coming is going to be worse than the great recession, then we are about to see many more Real Estate millionaires made! 

[Joe Splitrock]

@Victor Vella actually if you invest $100 in the bank at 1% you will have $101 dollars. If you spend $100 at Costco, you get 4% back and you will have $4. 

@Logan Causey it is impossible to predict the future. Of course using historical patterns is where people normally look first. The problem is the economy is way too complex and has way too many variables. Inverted yield curves are the buzz right now, but that is old news. It has been repeated a million times and people start believing it will predict a recession. That is a gross oversimplification. 

There is a generation that grew up with the 2008 recession as their only experience. So they believe every recession is a real estate crash. It just doesn't work that way. Recessions take different forms every time. There are different catalyst every time. 

Those who believe that 10 years of expansion is abnormal, don't understand that is exactly what happened in the 1980s and 1990's. Both decades had 10 year growth periods that didn't end catastrophically. In fact after the short 2001 recession, the economy went gang busters until 2008. So really from 1991 to 2008, we had a 17 year run before the housing crash. 

Could we have a minor pull back? Maybe, but I doubt it. I think we have several more years in this run. My reasoning is because the depths of the last recession was abnormally low. On top of that some important things have changed.

- Beneficial tax laws that are pro businesses. Profits are good for investors and the stock market, which we know the stock market can be a catalyst for a recession.

- Energy Independence like we have never had in modern history (fuel crisis caused the 1970's and 1991 recessions)

- Tighter lending standards (reckless lending caused the 2008 crash)

- Low interest rates for consumers (some may think they are high but prior to 1999, over 8% was the norm)

- Low unemployment and businesses do not have excess people. Aging baby boomers are retiring which keeps opening opportunity. 

Of course some wild card event could throw us in a tail spin. Or more likely some series of events, which is what normally happens. It will be fun to see what happens.

[Sam Shueh]

Just a sign that long term bond yield interest of 1.58%, pays less than short term interest rate. In Great Britain, it was the same. If being persistent it may mean global economy is slowing down.  

It can mean several things to re investors. 1. Bond holders may now get into income properties. 2. The momentum in RE growth is almost depleted. For that reason, many economists do not now believe housing prices will appreciate in the immediate term. 3. Flippers will have a tougher time to make a profit since homes will not appreciate as before.

In west coast home prices peaked about 15 months ago. We see a slow down already (-5 to -10% YTY) with historical low mortgage interest and full employment. If the unemployment and companies start cutting back in hiring one will see more inventory. This time the lenders are more selective screening borrowers and the likelihood for massive default will not happen. Home prices may remain to stay constant to a mild decline. If you study all recessions from last 30 years, some lasted just 1 year, the Great Recession was the worst which carried on from 2008-2012. The fear one may not notice it is gone. It can mean home prices is constant. One can buy but won't make money out it. The Trade War will also have some ripping effect on economy.

Those who borrowed heavily will get burned and default. Leverage is good up to a point. Those count on great appreciation to resell their flipped home quickly will not be able to carry out their ambitious goal as many BP members hoped.

Wall Street advisers have cautioned that equity is overvalued and suggest people put money in cash or Treasury bills.

[Victor Vella]

Originally posted by :

actually if you invest $100 in the bank at 1% you will have $101 dollars. If you spend $100 at Costco, you get 4% back and you will have $4

——-

Correct @Joe Splitrock

I was not implying you’d have $100 you just spent at Costco. But you effectively get roughly $100 of value for spending $96.

Why keep your $100 in the bank when your earning $1 a year on $100 and it depreciates in value (historically)

That being said obviously those well prepared for a market change will grow there portfolio immensely...... but how does the market change with the fed leading the charge to keep rates low and everyone keeps calling to extend the business cycle. 

[Russell Brazil]

Everyone likes to think they are Nostradamus.  Guess what, not a single one of us here are. 

"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves."

-Peter Lynch

[Omar Khan]

Originally posted by @Russell Brazil:

Everyone likes to think they are Nostradamus.  Guess what, not a single one of us here are. 

"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves."

-Peter Lynch

lol - 100% agreed. 

Love how everyone is an armchair economist now expounding on the yield curve when 2 month ago people couldn't spell the term out. 

[Rob Drum]

We may see a slowdown, and some people will blow up . It won’t look like 08 though. The speculative money just isn’t in real estate. Lending standards are still too high. Although they’re deteriorating every year.

Look at other sectors where speculative money is piled in. Crypto, VC backed startups, etc. those could see some major pain.

[Scott Johnson]

@Kenneth Mooney, that’s what I’m looking at as well. Sure the lending for homes is reigned in, but students are getting slammed with thousands of dollars of student loan debt that’s been handed out like mortgage loans were back in ‘08.

I’m excited to see what’s coming down the line.

[Michael Ealy]

Originally posted by @Russell Brazil:

Everyone likes to think they are Nostradamus.  Guess what, not a single one of us here are. 

"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves."

-Peter Lynch

 100% agreed Russel!

And I like what @Scott Trench posted also. There has been prediction of a recession as far back as 2013 and had you stopped investing then, you would have lost out - BIG TIME.

I made money before, during and after the 2008-2009 recession.

I am still making money now when the market is hot (and in my market Cincinnati - the market is getting even hotter).

How? I create my own economy by finding great deals and adding value to them so their value goes up regardless of the economy. And even if the economy does crash, my focus has been on income producing properties so I still make money as these properties will still be rented and will still cashflow. I am buying only in areas where I can create substantial rent increases by doing value-adds.

This month, I already closed on $28.5 MILLION worth of transactions. Those properties are producing massive cashflow NOW...and if the recession happens soon, they will still produce massive cashflow. If the recession does not happen soon (say in 2-5 years), I can sell them at huge profit. Either way the economy goes, I am OK.

Bottomline: stop trying to predict the economy and instead, focus your attention on making good deals that will make you money regardless of what happens to the economy.

Oh and here's a quote I saw from a TV show that succinctly summarizes the folly of trying to predict the economy and investing based on it: "Economists are on earth to make fortune tellers look good."

[Phil Kessel]

Deleted my previous post... off topic. 

Lots of smart posts on here so far! I've enjoyed reading through.

[Will Barnard]

Originally posted by @Russell Brazil:

Everyone likes to think they are Nostradamus.  Guess what, not a single one of us here are. 

"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves."

-Peter Lynch

Spot on!

I think it is hilarious that some feel that any next recession will be worse than 08’ That was likely a once in a lifetime event. Just keep checking your crystal balls after reading the news, I will keep pushing forward doing deals and adjusting to the changing market conditions as I have done for 15 years now. 

[Ed Gray]

@Robert C.

Just this past year I saw the first HELOC as a first position mortgage marketed to rental property owners. It has a variable rate and interest only payments for 30 years. I thought wow this sounds too good to be true, but it is real and anyone doing this type of loan had better have substantial cash flow if interest rates go up quickly.

[Joshua Cruz]

@Scott Trench haha so great!

[Brent Crosby]

Originally posted by @Logan Causey:

I'm curious to know how many investors have been waiting and preparing for this time to come, I personally believe what's coming is going to be worse than '08 and would like to know the thoughts of more experienced investors. 

I agree that another recession is coming, but you can't let that stop you. The best deals come to those know what they are doing and that only comes from doing deals. The yield curve did invert, but it needs to stay inverted for another few months before that's to be considered an indicator. Also, historically that means that a recession is a year or more away. You could do a deal or two and learn something in that time and if the housing market implodes you're learning trajectory will increase significantly. Focus on learning and the earning will come. 

[Jennifer Perich]

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