The massive Real Estate bubble that's happening again (with charts)

101 Replies

http://www.paragon-re.com/3_Recessions_2_Bubbles_a...

Right now and for the next 2-4 years, doesn't look like a very good time to buy. Flipping in most major markets, definitely... But don't get left holding the bag when the music stops. Sometime between 2016-2020 a big crash is coming, for both real estate, and stocks. Stocks will likely be first, in 2016, and then real estate, 2018-2020.

Vicent,

When everyone wants to be a real estate investor, you know we're approaching the top.  The law of "Be greedy when others are fearful; be fearful when others are greedy" still applies.  Human behaviors don't change be it during the Great Depression or the recent Great Recession. It may look and feel different this time, but it's never different this time. 

If you read the whole article, you may have recognized J. M.'s name in the article.  J posted his findings on Biggerpockets several months ago. This is old news to us unfortunately.

This post has been removed.

"This does not mean that these recently recurring time periods necessarily reflect some natural law in housing market cycles, or that they can be relied upon to predict the future. Real estate markets can be affected by a bewildering number of economic, political and even natural-event factors that are exceedingly difficult to predict."

Basing any investment off of technical analysis and not fundamentals is merely a game in speculation and chance. Despite housing prices being higher in areas than they ever have been the market is much healthier than it was back in 2007 when no doc loans, ARM, and CDOs were the norm.

If you place long term debt and buy right then you can hold the asset through a down cycle for the next up cycle if needed.

Where I see a lot of issues is people paying low caps and using short term 3 to 5 year loans from banks to massage the debt to eek out a little cash flow.

The people doing those kinds of things can get into big trouble. The only time I like short term debt is a value add play where you increase the income so much and have such a high cap that you can still sell if the market changes.

For development deals I like small pops that can be done in 6 to 8 months versus large projects that can take 5 years to complete.

Example I would rather develop 10 outparcels at 400k profit each then a shopping center anchored by grocery where you make millions but have to go 4 to 5 years to get there. You want to stay fluid with the market so you can exit on the development side if things start going soft.     

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Originally posted by @Michael Johnson :

Despite housing prices being higher in areas than they ever have been the market is much healthier than it was back in 2007 when no doc loans, ARM, and CDOs were the norm.

This is a good point but what was the reason those products existed in the first place?  It's because people couldn't legitimately afford to buy properties otherwise.  So I think it's a fair question to ask what has changed since 2007 to allow everybody to buy at the same prices or even higher?  Has something replaced toxic mortgage products?  The answer is yes, low interest rates have replaced the need for toxic affordability products.  

Back during the bubble, getting a 3.5% mortgage was considered a "teaser" rate. Nowadays, everybody is getting that teaser rate and in a strange reversal from all of prior history, jumbo rates are actually cheaper than conforming rates right now.  So not only does San Francisco have the highest home prices, but they also have the lowest mortgage rates of anywhere in the country (assuming a higher preponderance of jumbo loans).

The problem as I see it is that someday, nobody knows when, mortgage rates will rise back to 6.5% like they were in 2007.  Where will the future buyers come from without the lowest mortgage rates in history and without toxic affordability products?  Last time I checked the price-to-income ratio in San Francisco was already at 13, higher even than during the housing bubble in 2007.  So incomes would need to rise dramatically from their already lofty levels just to maintain prices.

What then is the exit strategy for an investor buying on the peninsula today?

If you make this post every year for the next 10 years, eventually you will be lauded as a genius.

The bubble is coming!!!  Quick dump all your property to me at a fraction of what to pay to get out while you can!

Well these charts are all about SF and the bananas RE world of the Bay area. So of course the bubble is coming and the market will crash again as RE is totally and always will be a cyclical business, but the big question is when will the bubble pop. 

How is this market different than previous markets? Well for one the biggest driver of the last bubble was everyone with a SSN and a heartbeat could get a loan with no job no income and no assets. However, today I am not sure if you have applied for a loan lately but the lending requirements are insanely difficult compared to the early 2000s. 

This market recover has been mostly cash buyers (foreign and institutional) and SUPER strong borrowers. So currently the market is on a much more solid foundation than a bunch of negative AM option ARM loans with no ability to repay.

However, that doesn't mean those loans and loose lending requirements aren't coming back. We are already starting to see the reduction of PMI, more low down loans, and as rates creep up and less super strong borrowers look to buy houses you will see banks need to lend capital. As the story goes the banks will start drinking the kool-aid again that the market has recovered. And there is limited or no risk to less qualified buyers, then add in those buyers that went through foreclosure in 2007-2012 as they start to re enter the market. This is when we will start to see a real bubble forming, when it is based on unrealistic and inflated demand.

Of course my crystal ball is hazy as hell and there are a million things that could happen between now and then that might stymie a RE market or push prices down. If the stock market crashes which I think it will, then people hoard cash but then soon get tired of holding cash so they try and get into solid assets. My take is that if the stock market tanks it could rally RE especially in key top tier markets.

So of course focus on your market, be cognizant of your debt, good cash flow is king, and/or being fast or short in your hold times in any market can help take advantage of the upward movement. Also if you can lock in long term debt at these super low rates that might be the best strategy for long term protection. 

Cheers,

Jake

Originally posted by @Brent Seehusen :
 

The problem as I see it is that someday, nobody knows when, mortgage rates will rise back to 6.5% like they were in 2007.  Where will the future buyers come from without the lowest mortgage rates in history and without toxic affordability products?  Last time I checked the price-to-income ratio in San Francisco was already at 13, higher even than during the housing bubble in 2007.  So incomes would need to rise dramatically from their already lofty levels just to maintain prices.

What then is the exit strategy for an investor buying on the peninsula today?

I like that you mention San Francisco. It's been quite interesting reading about housing and rents in that city and I think you pose a good question. It will interesting to see how it unfolds with higher interest rates and a $15/hour minimum wage.

Dang, all you had to do was AAOG.  (Ask An Old Guy/Gal).   Whippersnappers with their fancy power points.


Surprisingly consistent: Over the past 30+ years, the period between a recovery beginning and a bubble popping has run 5 to 7 years. We are currently about 3.5 years into the current recovery, which started in early 2012. Periods of market recession/doldrums following the popping of a bubble have typically lasted about 4 years.

I think it's pretty obvious that several markets are already overpriced. Denver and Oklahoma city are already higher than their peaks before the crash, as well as some parts of Texas. California isn't quite back to where it was, while Las Vegas actually is right back there. The bubble this time around is happening in some markets faster than others, but it's definitely heading that direction. It looks like between 2017-2020 we'll likely see record highs and another dip.

So what I'm taking from this is that if (don't yell at me and say NOT IF BUT WHEN lol) the bubble does pop in the next few years. I'm going to start picking up buy and holds?!

Kendal James | [email protected] | 580‑749‑0045

The real question is not whether there will be another dip -- but:

1) will it look like 2008, when suddenly no one could get a mortgage and prices tanked?

2) what will the impact on rents be?

There is only way out of this hole and I think the Federal Reserve knows it: a rise interest rates and massive wage inflation. But making that happen smoothly will not be easy.

It looks like the stocks didn't wait until 2016 to pop ....

Stocks are so volatile right now it's crazy

The up side to investing (not speculating) in areas with low volatility and anemic appreciation is the lack of drama concerning "bubbles".  Someone once told my that real estate investing was a get rich very slowly scheme.

319‑213‑7458 | Podcast Guest on Show #110

We were actually talking about this at the Las Vegas / Henderson investor meet up last night.  The nation is not all on the same trend this time around. This recovery has affected local markets throughout country differently and there are local factors in each market that make some markets much closer to a bubble than others.  

As mentioned above there are several markets where prices have reached the same levels as the bubble peak or even surpassed those values while you still have other markets like Las Vegas that are still on average 30% below the peak.

I believe the market as a whole is still much healthier than it was in the bubble due to more cash owners and the financed buyers have had to provide proof they can repay the loan as well as put some skin in the game in regard to down payments etc. Also properties are still creating positive cash flow in most markets. If the market dips it is much easier to wait out the down turn if your property is making you money every month vs playing the negative cash flow / for long term appreciation game that so many were playing back in the original bubble. 

So in my opinion are we close to a bubble? Yes but only in certain markets and Vegas is not one of them. Watch the local factors that affect your market closely. Make sure you have good CAP rates on your buy and hold properties. Don't get stuck playing the appreciation game and don't over leverage if your market shows signs of a bubble.

Medium rgc adams team logoRobert Adams, The Adams Team at Rothwell Gornt Co. | [email protected] | 702‑349‑9175 | http://www.LVrealestateHELP.com | NV Agent # 62827, MA Agent # 9530304 , RI Agent # 18138

I know there are different strategies you use when the market is up vs. when it's down, though I haven't been an investor in a down or a crashing market.  Here's what I'm thinking:

In a hot market:

  • Shorter hold times
  • Harder to find deals
  • Higher rents/lower vacancies
  • Need lower margins to get deals
  • Rehab doesn't need to be as nice 

In a down market:

  • Longer hold times
  • Easier to find deals
  • Lower rents/higher vacancies
  • Can get higher margins
  • Rehab needs to be nice to attract buyers

So I think while the market is going down (or after it has been going down for a while), I would want to start buying more so that you're not late in the game for the uptick.  More people get afraid to invest so it becomes more of a buyer's market.  Also I think it would be good to sell some of your rentals to prepare for the low rents and vacancies.

When it's going up your appreciation kicks in and you can reap the gains on your houses.  Refinancing should be easier to since the values are higher, so you can get some cash out to reinvest.

But I think that in both markets I would still be buying, but have different requirements.

Anyone agree or disagree?

Paul

Originally posted by @Vincent Crane : California isn't quite back to where it was, while Las Vegas actually is right back there. 

Vegas is not close to the previous peak. Values are on average still 30% below the peak. Properties are still creating positive cash flow w CAP rates of 6% to 8%. That is much different than the bubble of 2008 when anything you bought was for negative cash flow and banked on appreciation for their ROI.

Also there are thousands of properties that were all bought w cash by investors as well as the hedge funds.  This is the polar opposite of the maxed out leveraging Vegas saw in the original bubble. 

Medium rgc adams team logoRobert Adams, The Adams Team at Rothwell Gornt Co. | [email protected] | 702‑349‑9175 | http://www.LVrealestateHELP.com | NV Agent # 62827, MA Agent # 9530304 , RI Agent # 18138

The bubble is definitely different in each market this time around which is really strange to watch. Prices in Atlanta are right back to where they were before the crash, while Denver and Oklahoma City are now even higher than they've ever been. But then some cities like KC, Indy, Charlotte, still pretty affordable

@Vincent Crane,

I see that you are from Atlanta. Back in 2012, only 3 years ago, homes in Atlanta were trading at 1996 levels. It was a no brainer for me back then that I must buy as many new homes I can afford in the best schools zones in the wealthiest county in Georgia. I will hold onto these investments forever into retirement.

IF and WHEN the DOW Jones or S&P crashes down to 1996 -1997 levels, that would be approximately 6800 on the DOW and 750 on the S&P.

I know that many of you will think this is silly, ridiculous, and impossible, but I hope that you and I are smart enough to inject some serious capital into the S&P IF and WHEN this happens. You will then be able to close your eyes and enjoy capital appreciation for the next 18 years.

  

Medium jcrp logoJames Park MBA, Johns Creek Realty Partners LLC | [email protected] | 678‑865‑6250 | http://www.johnscreekrealtypartners.com | GA Agent # Broker 344981, CA Agent # Broker 01894781, GA Lender # NMLS 157229

Originally posted by @Paul Ballew :

I know there are different strategies you use when the market is up vs. when it's down, though I haven't been an investor in a down or a crashing market.  Here's what I'm thinking:

In a hot market:

  • Shorter hold times
  • Harder to find deals
  • Higher rents/lower vacancies
  • Need lower margins to get deals
  • Rehab doesn't need to be as nice 

In a down market:

  • Longer hold times
  • Easier to find deals
  • Lower rents/higher vacancies
  • Can get higher margins
  • Rehab needs to be nice to attract buyers

So I think while the market is going down (or after it has been going down for a while), I would want to start buying more so that you're not late in the game for the uptick.  More people get afraid to invest so it becomes more of a buyer's market.  Also I think it would be good to sell some of your rentals to prepare for the low rents and vacancies.

When it's going up your appreciation kicks in and you can reap the gains on your houses.  Refinancing should be easier to since the values are higher, so you can get some cash out to reinvest.

But I think that in both markets I would still be buying, but have different requirements.

Anyone agree or disagree?

Paul

 I am new as well and believe this to be true but am still eager to see what the more experienced fellas have to say. I'm ready to get into the game and don't want to start off all bad!

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