The massive Real Estate bubble that's happening again (with charts)
Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes
The massive Real Estate bubble that's happening again (with charts)
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Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
11yIf you make this post every year for the next 10 years, eventually you will be lauded as a genius.
102 Replies
- Investor · Atlanta, GA · Member since 2014 · 389 posts · 250 votes11y
The darn thing about the stock market is that to buy $60,000 in stocks, you have to have $60k! To buy a $60,000 house, you only need $14k. Or I'd be jumping on my Ameritrade account and buying instead of writing this reply :-)
- Real Estate Broker · Johns Creek, GA · Member since 2009 · 870 posts · 664 votes11y
I don't know about the other markets, but here in Atlanta, I don't think we will ever reach that 2012 (1996 levels) again.
In terms of the stock market 2016 is a significant year as 75 million baby boomers will turn 70 and will be forced to pull money out of their pension plans. This why i think 2016 will be a very very important year for the markets. IF and WHEN there is a full blown blood in Wall Street (... and we not there yet), you need to have your powder dry and be ready for this incredible opportunity as an investor when the whole world will be on SALE.
- 11yMindy JensenPro MemberBiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
@Aaron Mikottis, thank you for mentioning Jim Collins's stock market series. This is a MUST READ for anyone in the stock market or considering getting into the stock market.
Jim Collins is brilliant, and has the experience to back up what he says. Here is his stock series starting with part 1. It is worth the hours you will invest to read the entire thing.
- 11yAnthony GaydenPro MemberRental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
Originally posted by @Vincent Crane:
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
I am relocating to Omaha soon, and I found out that the housing there is even cheaper than here in Tucson. The median home sells for $113,000 in Omaha.
I just don't think there is another approaching bubble. The last bubble had real estate prices in almost every market across the country skyrocketing. This time, the only places where prices are going up very high are places where appreciation and home prices were always much higher than the rest of the country.
The last bubble also had a huge construction boom, and this time there doesn't appear to be near the amount of construction activity, especially in single family homes.
- Architect · Joliet, IL · Member since 2015 · 207 posts · 119 votes11y
@Mindy Jensen, I couldn't agree more. Everyone cites Rich Dad, Poor Dad as their eye opening moment, changing the way they thought about money. Jim Collins and his stock series is what changed my mindset.
- Investor · Orange County, CA · Member since 2014 · 137 posts · 96 votes11y
Originally posted by @Aaron Mikottis:
@Mindy Jensen, I couldn't agree more. Everyone cites Rich Dad, Poor Dad as their eye opening moment, changing the way they thought about money. Jim Collins and his stock series is what changed my mindset.
What specifically was the point he made that turned the light bulb on? I read his real estate article on buying vs. renting and it was full of really bad assumptions, which made me question how many other poor assumptions might be buried in his stock articles.
I perused the first article linked by Mindy and he states unequivocally that stocks always go up in the long run. Yet we have an example from our lifetimes where an economic powerhouse, Japan, is still half of where it peaked 25 years ago. How does Jim Collins explain that away?
- Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes11y
Stocks always rebound (as a whole, the S&P for example) but real estate, that's not always the case.
- Architect · Joliet, IL · Member since 2015 · 207 posts · 119 votes11y
@Brent Seehusen - I don't think that there was a single "aha!" moment for me. The further I read, the more I realized that I don't need to sit at a desk for 45 years, make a six figure salary, or win the lottery in order to live the life that I desire. I always knew that the idea of saving was important, but I had no idea what vehicles I could use to achieve financial independence.
What points did you dislike in his rent vs buy article? I read that long before I had a foundation of knowledge in real estate. I think that the early retirement blogs in general are biased against owning primary residences... They primarily seem intent on knocking the notion that buying your own house is an investment and they rely heavily on geographic mobility to chase COL optimization and increase earning potential by hopping jobs.
It may very well be the case that Japan is still down from their peak 25 years ago - Jim Collins is only talking about the US stock market.
- Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes11y
I think people are quick to jump to the B word. I agree that some markets are getting over heated. The part that no one has mentioned is there are still a lot of non performing assets. Drive through most any neighborhood and look for the houses with paper taped to the inside of the front window. You can also look at the Homepath, Homestep site. They have plenty of inventory. They have been slow to release houses to avoid flooding the market and lowering prices.
The second part of the equation is the demand. There are a lot of potential single family home owners that are sitting out ,due to tighter banking regulations. The forces that create and sustain a bubble are not in place. A tight supply and growing demand.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes11y
The issue with cycles and busts is not the deflationary events in and of themselves, but whether those events happen at a bad time for you - the investor...
We live in a fractional reserve banking system. Run-ups and busts in all markets are systematic. All you have to do is be ready - at any time - any place. in paper markets people hedge themselves; we do that in real estate as well. It looks different, but it's all the same :)
The OP is quoting factual research. Why are you arguing? It is what it is. If you buy today, are you going to be ready when the shoe comes down? In other words, we know it will happen, so if you buy today you must have a plan for what happens if and when you get hammered...
- Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes11y
Do you guys think we'll see markets crash at different times the next time around? And what sort of timelines are you guys predicting, and how much of a crash might we see again. Will we ever get 30-50% off again like in 2010-2012?
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes11y
Not in SF BAY. Outbid again!
- Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes11y
Originally posted by @Frankie Baca:
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!
Here's your answer:
You can buy and sell houses in ANY market but HOW you buy and sell will depend on the market.
In this blog post, I will prove the above statement based on experience and actual market data. But first...
Here are the 4 market cycles or phases:
(pardon my crude drawing - drew this on my tablet)
S1 or Seller's Market Phase 1: I refer to this as a NORMAL market. A normal market is when property values go up proportional to inflation. The US government's official inflation number is 1.6% as of 2014 (although I believe the real inflation figure is really closer to 5% by the time we consider the price of gasoline and asset prices like home prices). In an S1, DOM (Days on the Market) is around 90 days (that's the time that it takes for a house to sell on average).
S2 or Seller's Market Phase 2: I call this your HOT market or bubble. A hot market is when property values go up significantly higher than inflation or significantly higher than 5%. DOM is around 30 days or even less.
B1 or Buyer's Market Phase 1: I call this a DECLINING market. Prices of real estate goes down significantly during this market phase (+10% per year). We experienced this in the US in 2008-2010. DOM can be as long as 180 days or even longer.
B2 or Buyer's Market Phase 2: I call this a STABILIZING market. The price of real estate will not decline indefinitely. At one point, the price will be good enough that it makes sense to buy. Also, when enough big money gobbles up enough real estate inventory, prices will stop declining and the market starts going back to normal (back to a Seller's Market Phase 1).
NOTE: The above drawing is an idealized representation of reality. There will be fluctuations based on seasonality for example. Also, a market could change from NORMAL market to a DECLINING market due to extraneous factors like loss of jobs (say a major industry collapses or leaves an area). A HOT market may not suffer a declining market - it could go to a stabilizing market and then back to normal again. Lastly, in a real estate market, single family homes could be in an S1 market while apartment buildings could be in S2 market. Each real estate type has different market dynamics.
Even though the above drawing is an idealized version of reality, it is close to what happens in reality.
Where's the proof?
I can speak for Chicago since I invest in Chicago. Below is the Case Schiller Index of Chicago single family homes and condos:
As one can see from the above, we were in an S1 Market in the 1990s and the BUBBLE (S2 market) started in 2001 (that's when Alan Greenspan started decreasing interest rates). The real estate bubble popped in 2007-2008 (B1 market) facilitated by the sub-prime collapse and the price stopped declining in 2011 (B2 market). In 2013, we were back to an S1 market and on our way once again to an S2 market.
This is Good BUT How Do We Make Money With This? (click HERE to read the rest of my blog post on BP)
- Chicago, IL · Member since 2015 · 469 posts · 81 votes11y
Great post and blog Wendell!!! Thank you!!
- Wholesaler · Ludhiana, Punjab · Member since 2015 · 5 posts · 0 votes11y
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.
Originally posted by @Vincent Crane:
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
It seems like Charlotte is pretty much back where it was as well. You can sort by city on the Case-Schiller indices.
http://us.spindices.com/indices/real-estate/sp-case-shiller-us-national-home-price-index
- Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes11y
It seems to be the lack of inventory in most markets that's really driving prices and bidding wars
- Investor · Rapid City, SD · Member since 2015 · 16 posts · 1 vote11y
A discussion of this topic MUST use a qualfier of locations to have any merit. To compare the bay area to the midwest is like comparing apples and hubcaps. Is it good to discuss it? of course it is. Have you noticed the West coast investors buying in the Mid West as apposed to buying into the bubble? Even in past bubbles some locations remained fairly immune. Now if coastal investors flood into the center of the country and drive prices up we may have a problem. Just my humble opinion
- Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes10y
Anyone else?
Couple of things I'd add:
1) As long as you're not buying for appreciation, I think its always a good time to invest in real estate. But the locations are the key factor in finding deals. If you buy right and they cash flow right, I wouldn't worry one bit about where the pricing of the market actually is.
In my areas, we have seen very little new construction over the past 8 or 9 years. So for similar areas, you can see why the inventory would be so low. Until those areas see construction start to come up, I don't see any way those prices will go down. They should continue to go up.
And when new construction comes in, I think they'll go up even more. A 2,000 sq ft new construction home may cost you 250k but a 2,000 sq ft home built in 1985 may look like an even better bargain at 180k to 190k. Today, the problem is nobody here wants to pay 250k so new construction is still running pretty slow.
2) I would disagree with one of the posts that says when the market is down, the rents/demand are down. When the market is hot, the rents/demand is up.
I actually think its the exact opposite. To me, when the market is down, then nobody is buying so they have to be renting. Rents should go up and rental demand should be up. But when the market is "hot", then that would mean to me that more people are buying and there would be less people looking to rent.
3) At the end of the day, I think once you get out of some of the extreme markets (i.e. NY, California, Arizona, etc), then investing in buy and hold real estate is still going to offer you an excellent way to invest your money. Far better than anything else out there.
But thats assuming that you are buying at a traditional discount that most investors look for (i.e. 70 to 75% LTV), and that the house cash flows from Day 1 $200 a month or more.
And I would guess that environment exists in about 70% of the areas out there. Even in the big cities, if you are willing to go further out to the suburbs, I think many areas would support that middle class model to where the need to figure out whether you're at the top of the market or not really doesn't matter.
Ultimately, its about running your numbers and making sure they work today. No matter how you cut it, if you're paying 250k for a house that rents for 1000/mo, then you're losing money and you're betting on appreciation to save you. Thats a risky investment in any market.
If you're paying 100k for a house that rents for 1400/mo though, then your risk is far less that a bust will hurt you. For SFH's, I don't think rents go down that often historically......
@Vincent Crane I did not read the article. UCLA forcasters don't think LA is in a bubble.
Now what @Brent Seehusen surmises is interesting and I get the concept. If we take that full circle would the 13%-17% interest rate of the early 80s be a more attractive time to invest? IDK but I think he has the experience to answer that.
sidebar;
What I don't get is some BPers in Cali who have been anti Cali for the past few years did not recognize the best opportunity in generations to invest here. That was very weak advice and any future market analysis from those folks should be suspect to say the least.
- 10yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@Matt R. especially those CALI investor that sold out a few years ago and went to the rust belt or mid west thinking all RE revolves around cash flow..
Just Ask Bruce Norris about his venture into Texas.. He makes some pretty poignet points about it in some of his presentations.
- Lender · California and Florida · Member since 2008 · 319 posts · 194 votes10y
If you have time, look up "I Survived Real Estate." These are some of the folks making industry decisions in different real estate sectors. It's a really great listen over the break. Perspectives from the mortgage, builder, and investor perspectives.
Real estate is so local. Even in California, you can have some areas soften while others continue to do well because of different circumstances. We don't see a big crash coming, yet. And has anyone else been watching the really cool projects sprouting up in California. Shoot, Palm Springs alone! Downtown is going crazy. 5 new hotels I think? Riverside has lots of new construction on the horizon as well.
Want to get really nervous?! Check out Point.com. Pretty interesting concept, I'm just concerned they are rolling out in the wrong areas at the wrong time. And how do equity investments like that show on a credit report?
- Investor · Orange County, CA · Member since 2014 · 137 posts · 96 votes10y
Originally posted by @Matt R.:
@Vincent Crane I did not read the article. UCLA forcasters don't think LA is in a bubble.
Now what @Brent Seehusen surmises is interesting and I get the concept. If we take that full circle would the 13%-17% interest rate of the early 80s be a more attractive time to invest? IDK but I think he has the experience to answer that.
sidebar;
What I don't get is some BPers in Cali who have been anti Cali for the past few years did not recognize the best opportunity in generations to invest here. That was very weak advice and any future market analysis from those folks should be suspect to say the least.
I know somebody that borrowed at 13% to buy an apartment building in Orange County in 1981 or so. He had asked my dad to partner on the deal, but it was fortunate that he didn't because it was a loser for several years, compounded by a tenant falling asleep with a lit cigarette and burning part of the building down. LOL..
The early 80's was coming off a strong late 70's market for appreciation, and so there was a bear market from 1980-1985. Prices didn't really drop, but on an inflation adjusted basis, owners were losing double digits per year. Keeping your money in CD's would have been a much better option at the time.
The reason the early 80's were a poor time to buy was due to low affordability. The reason 2016 San Francisco is a poor time to buy is also due to low affordability. The interest rate environment is secondary to that, but can compound what is already happening with prices. If rates suddenly lurch up while prices are already unaffordable, it's bad news.
And hopefully your comment about being anti-Cali wasn't in reference to me. Everything I own is in Southern California, which is why I'm a strong advocate for monitoring the cycle and buying when there's blood in the streets, and avoiding buying near the top of the cycle. Many in the San Francisco crowd talk like prices only go up, which is disturbing when you actually look at historical data. Their market has detached from historical fundamentals of price/income and their exuberance is irrational, which means, yes, they are in a bubble. I'm not anti-Cali. I'm anti-losing money by buying at the wrong time.
@Jay Hinrichs I will have to look that up. The trading gold for silver/bronze is probably challenging longterm. The constant marketing vibe for CA locals to go for that alternative is generally absurd to put it lightly IMO. If management is equal your buy and hold results are fundamentally location driven. That part is for others readers Jay:)
But I like where Trump buy and holds CA....Palos Verdes, San Francisco etc....
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