Is this all a blind spot?
So I am an economics teacher but the true intricacies of real estate are relatively new to me. I have a friend who has been borrowing money, investing in real estate multi families and apartments etc, and seemingly making a killing. I repeatedly see people who are using similar tactics, including thousands on this site specifically, but I have a problem. I am a cynic. I am in the process of taking out a HELOC against my primary residence. I own a (valued at) $550,000 house. It has appreciated $100,000 in the past 5 years in Massachusetts. I owe $199,750 on my mortgage. I am looking to take out the max amount against my house or about $280,000 as a HELOC at around 4.5%. This will give me the liquidity to hopefully find a property, run the numbers, and make a profit after all of my expenses. It took my 14 days to learn and understand this entire process after lurking on these forums and reading a few books. So then I would rehab the property, gain some equity, and then refinance the property taking out the entire amount owed, pay off my HELOC, pay off my nice small 30 year fixed mortgage, take out another nice slightly larger but still cheap 30 year mortgage, and collect rent from peasants until the day I die. Then I will do the entire thing, all over again, and over again, and over again, offsetting my new debt with my new rental income until I am a millionaire. No offense, but this is not an overly complicated process, although there are certainly difficulties achieving it optimally.
So this all sounds wonderful. But then I realized something. I am a teacher. My salary is $77,000. After taxes, retirement, etc. I bring home $49,400. I am planning on buying a $400,000 home without actually using any of my own money, because obviously I don't have nearly enough money to do any of this. Therefore I am using credit, to purchase an investment. Are we allowed to use credit to invest in the stock market? Of course not, because no one guarantees that the stock market will appreciate. Why are we once again assuming that the real estate market will always appreciate? Is 10 years enough to wipe everyone's memories? I understand here, that leverage comes into play, and how profitable the deal is at the beginning is important, but how profitable do the numbers have to be if say, your property needs a new roof and a tenant loses their job and squats for a year?
Therefore I am using imagined money, or the perceived value of my home, to purchase a property or properties that have a number of perceived values themselves. Then I realized something terrifying. I don't think we are any better off than we were in 2007. The appreciation in home values we have seen since 2009 is a classic example of a self-full filling prophecy. People assume that housing values should appreciate. Therefore our behaviors collectively lead to their very appreciation. By utilizing mechanisms like HELOC's and refinancing, we justify the appreciation of our houses by having literally artificially created capital available to afford them, which in turn lead to 'demand' which inflates prices.
The reason home valuations became so high during that '08 crisis was because literally anyone could get a mortgage. These NINJA loans were given to anyone, whether or not they could actually afford to buy the home. Can someone explain to me how my situation is any different? I can't afford to buy a $400,000 house. Let alone a number of them. But I have lenders literally falling all over themselves to give me a quarter of a million dollars in credit when I already owe $200,000. You guys have figured out ways to borrow 'other people's money' in order to buy property. Since this has become so common place, and it has become so easy to borrow money, can someone explain to me how the prices of houses are not artificially inflated once again? And if they are, what happens to the small real estate empires so many of you have built when the valuations of your properties plummet and your tenants stop paying your highly leveraged loans?
My contention is that its the same thing. We 'think' that the housing market and valuations are justified because the perception is that people are putting 20% down of their own money and can thus 'afford' the houses they are buying. But if people are using the very methods this website lays out in books, we are not buying houses we can afford, and we are putting the same inflationary pressures on the values of houses.
Without diverging lets not forget that this low interest rate environment is also why the stock market is so grossly over valued. Investors, with their trillions of dollars in assets, need to find a return somewhere. Bonds and savings are paltry. Watch how grossly P/E values are rising and understand they aren't rising for any logical reason except excessive influx of funds into the market because of a lack of alternatives. In many European countries their efforts at stimulus resulted in negative interest rates. Billions have flowed from European and Japanese markets into US equities, or 'the stock market' thus driving up the prices of stocks even further. With stock market valuations so high investors like us are looking to property as a way to diversify, or even primarily generate returns. Since those interest rates, which are generating massive inflows into the stock market, also carry over to the mortgage industry, the same inflationary pressure is happening in housing.
So can someone smarter than me, convince me that endlessly borrowing other people's money to buy things you can't actually afford somehow has a happy ending? Or is what we are all actively contributing to and trading 'tips' on going to culminate in a crash that makes 2008 look like a blip on the radar. Oh, and when everyone gets wiped out, don't forget who swoops in and gathers cheap assets at an astonishing rate. Then repeats the whole process. hint* (They are the same ones encouraging, facilitating, and in some cases (negative interest rates) forcing this behavior in the first place.)
Anyways nice to be a member!