Will housing prices crash again in the next 4-7 years?
Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes
Or are we going to see slow and steady 2-4% appreciation for the next 30 years like a "perfect economy"
It's actually a rather foolish question.
No one, of course, can predict with certainty what will happen.
Serious players know that markets take hits every so often. That is a given.
Where I live in CA, we have earthquakes. Cannot predict when they occur but that they WILL occur. So, you plan according to your tolerance for risk.
After 35+ years of real estate I've survived 4 or 5 crashes. If the deal is right and the cash flow is there, you'll gain and lose equity as markets appreciate and retrace. So, you just build that into your plan.
People who are looking for reasons not to take a certain action ask questions based on fear and doubt to reinforce reasons for not taking a certain action. Nuff said.
Will housing prices crash again in the next 4-7 years?
I am someone who believes that the housing market will not return, until real estate taxes and insurance decreases, unless wages rise significantly without either of the two increasing in cost.
I am a flipper, or was a flipper, until I realized from the tax and insurance bills that with the cost of the home, and those, it was not worth doing. Matter of fact, I can understand why home ownership is the lowest in the last 50 years, because of taxes and insurance cost.
A home in most places in the US that is valued at more than $100,000 has real estate/school taxes around 200 dollars a month. Add in the insurance cost, and that is another 100 dollars a mouth, and now in many places, more than that if you include earthquake, flood and other required insurances and taxes. So from the get go, even with a low cost mortgage you owe at least 300 dollars a month on money that will get you a zero return on.
I had a new home specked that was 1300 square feet to be built on a $9000 piece of property. The cost was $130 per Square foot. The cost of the home to be built was $169,000. Taxes on the land and the house would be about $300 a month alone. Even building the house for half the price, the taxes would be about $250 a month. The value of the house and land appraisal would fall in about $125,000 - a loss from the start and that is if I would be able to sell it?
I don't know where you live or what kind of money you make, but in most areas of the country someone is much better off renting than buying a home. Now good news for people that own and rent. You are better off, because you get the tax deductions on your investment properties. If things keep doing like they are today, only multifamily properties will be worth investing in to rent. In small upscale towns today, it is not unusual for a home owner to own more than 30 rental properties. - What is wrong with this picture?
Until things change with the taxes and insurance, or salaries increase dramatically, housing will remain somewhat flat. Housing has not really bottomed out yet, and until it does, house prices will increase a little and decrease a little, It is that simple.
I mostly disagree with what you are saying here. I also live in Virginia and while virginia is a bit different then other states I think you are looking at it the wrong way
I'm in richmond and the Shenandoah valley and during the great housing crash the markets really did not drop down. But, especially in richmond, they were already a pretty decent value. But like most places in virginia I haven't seen the huge amount of foreclosures and tremendous deals either...
Anyway, the tax rates in both of these regions hover around $1 per $100. Your quoted tax rate complaint of $300 a month on a $169k house is around a rate of $2.1 per $100. Now I don't know the tax rate in your region but that seems high
As for insurance, well, we didn't get hit by hurricanes for a while and now lately we sure have, at least your side of the state. So understandably the insurance companies have over compensated.
But really, the reason why taxes and insurance feel high is not because they are high, but realitively speaking money is so cheap because low interest rates. I've owned my own home a few years and yes, I pay more in taxes and insurance then interest already. But that's not the city to blame, that's the cheap money to blame
And yes, salaries are pretty stagnant, which why the recover feels like a non recovery for a lot of people
Anyway to address the original question, I do believe we have equity prices inflated due to long term 0% interest rates which will cause some issues in the future. People highly leveraged up on balloon loans may be in for a surprise when rates rise and causes their real estate values to decline (relative to the interest rate increase).
Because not only will money become more expensive it will also reduce the value of real estate due to returns dropping
Here's my forecast. There's 60% chance of a <5% downturn in the next seven years. 20% of a >5% downturn. 20% chance of no downturn.
Now for an old joke ....
"The only certain thing about a forecast. ... It's wrong."
Will housing prices crash again in the next 4-7 years?
I'm in richmond and the Shenandoah valley and during the great housing crash the markets really did not drop down. But, especially in richmond, they were already a pretty decent value. But like most places in virginia I haven't seen the huge amount of foreclosures and tremendous deals either...
Anyway, the tax rates in both of these regions hover around $1 per $100. Your quoted tax rate complaint of $300 a month on a $169k house is around a rate of $2.1 per $100. Now I don't know the tax rate in your region but that seems high
As for insurance, well, we didn't get hit by hurricanes for a while and now lately we sure have, at least your side of the state. So understandably the insurance companies have over compensated.
But really, the reason why taxes and insurance feel high is not because they are high, but realitively speaking money is so cheap because low interest rates. I've owned my own home a few years and yes, I pay more in taxes and insurance then interest already. But that's not the city to blame, that's the cheap money to blame
And yes, salaries are pretty stagnant, which why the recover feels like a non recovery for a lot of people
Anyway to address the original question, I do believe we have equity prices inflated due to long term 0% interest rates which will cause some issues in the future. People highly leveraged up on balloon loans may be in for a surprise when rates rise and causes their real estate values to decline (relative to the interest rate increase).
Because not only will money become more expensive it will also reduce the value of real estate due to returns dropping
Hey @Vincent Crane no question is a dumb question. Especially if your new to real estate, I think is a interesting topic. Its true about the 7 year trend, I live in Miami F.L and have seen prices here kind of reach a halt lately its rising steady not to fast. I think that's normal when prices go up to fast its starts getting dangerous. So its been 7 years since the last crash, in my local market doesn't seem like its coming anytime soon. Evaluate your own personal market keep an eye out and you might see it coming when it does. Good luck to all, and remember you make your money when you buy guys. Buy smart, and happy investing!
Will housing prices crash again in the next 4-7 years?
I'm in richmond and the Shenandoah valley and during the great housing crash the markets really did not drop down. But, especially in richmond, they were already a pretty decent value. But like most places in virginia I haven't seen the huge amount of foreclosures and tremendous deals either...
Anyway, the tax rates in both of these regions hover around $1 per $100. Your quoted tax rate complaint of $300 a month on a $169k house is around a rate of $2.1 per $100. Now I don't know the tax rate in your region but that seems high
As for insurance, well, we didn't get hit by hurricanes for a while and now lately we sure have, at least your side of the state. So understandably the insurance companies have over compensated.
But really, the reason why taxes and insurance feel high is not because they are high, but realitively speaking money is so cheap because low interest rates. I've owned my own home a few years and yes, I pay more in taxes and insurance then interest already. But that's not the city to blame, that's the cheap money to blame
And yes, salaries are pretty stagnant, which why the recover feels like a non recovery for a lot of people
Anyway to address the original question, I do believe we have equity prices inflated due to long term 0% interest rates which will cause some issues in the future. People highly leveraged up on balloon loans may be in for a surprise when rates rise and causes their real estate values to decline (relative to the interest rate increase).
Because not only will money become more expensive it will also reduce the value of real estate due to returns dropping
Wow, we truly have some disagreement here. First of all my wife and I sold a home in Richmond that was valued at over $400,000 in 2007. We sold the property for $165,000 in 2009. There were some 40 homes in the area for sale in that area at the time for a little over $200,000, so to afford mothers nursing home, we had to sell it cheaply to pay for her stay.
Now, about interest rates. Let me shed some light on this. In 1985 I bought my first home, I paid a 13.5% interest rate on the loan to get the house. That was the rate. I sold the home on an assumption 3 years later for a profit. Interest rates did not hurt home values. Now, today, I can see an increase helping the real estate market rather than hurting it. The reason is because of assumptions and savings. I believe, that an interest bump of just a half percent will persuade renters to buy now, or suffer later. The higher the interest rates go, the more people will be selling their homes through assumptions as well, to buy bigger and better properties. Just a little more.
In 1985 that first home I bought was a 2 bedroom 1 bath 1500sqft home, I paid $52,000 for. Today it remains the same, and now is valued at more than $220,000. Somehow that home was shielded from the highs and lows of interest rates, a housing bubble, a hurting economy etc... The value continues to increase, and I for one cannot figure out why? Many houses near it have been though foreclosures etc... It is not in the best school district, and within a few blocks from it, is a very high crime area, yet the house continues to rise in value. The longest it ever sat on the market was a little less than 60 days, according to the neighbors I know there. It has had 4 owners since I sold it. The house was built in 1935 and has a slate roof aluminum siding and oil heat - making it nothing really special. Sometime in the late 1990's an owner did put in in-ground pool in the backyard. - Maybe that is why? I am sure if it was placed on the market today, it would sell for more than $250,000.
I wouldn't mind another correction. All the new people are getting into the market are paying to much for stuff again, making deals harder to come buy.
I bought some great stuff from 2008-13 when no one was interested in RE.
@Lumi Ispas What info graphic from J Scott are you reffering to? I'd love to see that.
Great discussion here guys, love hearing what you think about where the real estate market is headed and why
You probably don't realize it, but an increase in value from $58,000 to $220,000 over 30 years represents an IRR of about 4.5%. Given that real estate (on a large scale) tends to track inflation, all your telling us is that this house has done a little better than average.
As for your statement that the home was "shielded from the highs and lows of interest rates, a housing bubble, a hurting economy etc.," you have provided no data to support that statement. You've merely provided a starting value and an ending value, so there's no reason to believe that the house has been shielded from anything -- only that it's value has increased 4.5% on an annualized basis over 30 years.
Again, I think you don't quite understand the context through which you're making your assumptions, and are filling in the blanks in the data with pure speculation. You certainly have a right to your opinions, but your facts are completely wrong...
You probably don't realize it, but an increase in value from $58,000 to $220,000 over 30 years represents an IRR of about 4.5%. Given that real estate (on a large scale) tends to track inflation, all your telling us is that this house has done a little better than average.
As for your statement that the home was "shielded from the highs and lows of interest rates, a housing bubble, a hurting economy etc.," you have provided no data to support that statement. You've merely provided a starting value and an ending value, so there's no reason to believe that the house has been shielded from anything -- only that it's value has increased 4.5% on an annualized basis over 30 years.
Again, I think you don't quite understand the context through which you're making your assumptions, and are filling in the blanks in the data with pure speculation. You certainly have a right to your opinions, but your facts are completely wrong...
Well seeing how I have been deemed wrong by a moderator at "Bigger Pockets" I have decided to leave Bigger Pockets. I am someone that is very opinionated I know, however, I like discussion rather than being bashed at every turn. I am an investor in real estate among other things. I have made money in real estate and I guess it is time I no longer declare myself is in investor in real estate. (At least in Bigger Pockets terms). I am going peacefully, and I appreciate the discussions and the information I have gained from here in the past. I hope I have provided some information and advice they can use in the future.
Your facts have been deemed wrong (or at least unsubstantiated)...I'm sorry if that hurts your feelings...
Imagine if I said, "You're wrong about housing being flat because, in my opinion, real estate prices across the country have quadrupled over the past two weeks and all data suggests that it will continue to double every month for the next 20 years."
Just because I threw in the words, "in my opinion," doesn't make what I said an opinion. What I said is just a bunch of incorrect facts, plain and simple. Just because I don't want to (or can't) support those facts doesn't make them opinions.
That's one of the problems with our country today -- people seem to believe that if they say, "it's my opinion," they shouldn't be questioned. Yet many of those "opinions" are disproved by actual data. If people want to cling to factually incorrect opinions (for lack of a better term), that is certainly their prerogative...but if you're going to spout those factually incorrect opinions, you're going to be called on it and asked for some proof.
Again, I'm sorry if asking you to support your statements upset you...
I would love to see the perfect, "slow but steady" 2-4% appreciation per year, but it never tends to work out that way. I don't see the market crashing again shortly, but I think it is a bit overheated and will level off. Maybe we're in a "mini-bubble" but I would be very surprised with another collapse. Although if the Fed keeps rates this low for much longer...
Maybe this topic should be renamed as "what's going on in your local market"?
Inventory in my target market has increased by 50% over the last few months, but prices have remained stable. During the crash, inventory was about 2.5 times what it is today, or about 4 times a few months ago.
I don't anticipate seeing another crash like 2007 unless the banks start issuing liar loans again, followed by a sharp increase in interest rates. I do believe that we could see lower prices if rates increase. The biggest factor is how much they will increase. But with the Fed keeping interest rates this low and the possibility of QE 4, I can't say when that will happen. The monetary policy we are seeing now is unprecedented. Who knows what they are planning to do, other than the owners and executive of the biggest banks..
The problem is, your entire premise is flawed... The single family housing market isn't being killed, by any definition of the word...
Here are the existing home sale numbers for the past 40+ years:
If you ignore the 2007-2012 collapse, trends essentially mimic what was seen between the 1980s and 2006 -- steady rise with some brief corrections...
Again, I'm not trying to forecast where things are going (I'm not smart enough to do that), but if you're going to claim that home sales are flat, I'm going to need to see some data to support that -- I'm not seeing it...
Do the percentage of home sales, not the numbers. The population has increased since the 1970's as well. Of course the number of homes is going to be higher, just because of the number of people. If you wanted to use this is proof, automobile sales have increased by 10 times in the same period of time. You are also showing all homes, not just single family, owner occupied homes.
Here is the info I was referring to! :)
If the fed increases rates, will it trigger a slight drop in prices?
I doubt it were talking about a quarter point rate increase. Most of the effect will be sociological.
@Edward Briley @J Scott @BPNation... you probably already know this, but
Here is a list of documents containing some of the most comprehensive data about the American housing industry in recent history, from the leading lender who knows a little about the US housing market. Macro Economic data.
Not directed to individuals in particular, but if you read the section(s) on RESIDENTIAL MORTGAGE MARKET (or sometimg similar in the Management overview sections) across different time frames, you'll see a pretty reasonable description of the macro-economic reality of realty in the US.
Now I can tell you a lot of BP Nation won't do that... unfortunately many people don't want to do primary research and comprehend the 'big picture' for some reason. THose of us who do, IMO, have a leg up.. and sometimes predictions are not that hard. Even locally... I can tell you the foreclosure rate in Wake county will go up in about 6 months based on a spike (e.g. doubling Y/Y) in S-T (Substitute Trustee) filings. That's simple cause-effect. Primary research... leading indicator. Nationally, the current indicators are summarized by FNMA and NAR. I contend it isn't that hard to put some of the pieces together. Example: FNMA stated "At the end of 2014, the number of months
Not arguing that there's LOTS of good data out there...I'm just not smart enough (or rich enough) to use the macro-economic data to drive tactical decisions. If I had access to enough money (billions of dollars) where a small edge would have significant value, that's one thing...but I don't...
The best analogy I can think of is a casino. At a blackjack table, the house generally has a couple percent advantage over the player who is using a reasonable fixed strategy. If the house dealt 100 hands of blackjack per night, that edge far from guarantees the house a profit at the end of the night. Perhaps the house would win 60 nights out of 100, but any given night would be a toss up. But, given that the house can deal tens of thousands of hands per day, that small edge amounts to nearly guaranteed large gains in very short periods of time (it exceptionally rare for a casino to lose money over a 24 hour period).
Likewise with this macro-economic data. If you truly understand it and can apply it, you'll be giving yourself a couple percentage point edge over the market. When you're making small and few bets (investments), that small edge is meaningless. If you can make many/large bets (this is where the billions come in), that edge becomes meaningful.
The benefit of focusing on local markets is that you can gain relatively large edges by having superior local knowledge. With a large edge, even small bets can be parlayed with relatively low risk.
That's why I always tell people to focus locally...at least until you have your first billion... :-)
I guess that's my point. I would be the card counter, using your casino analogy.
Likewise, in the stock market casino, I read IBD. A rising tide in an industry group will lift all boats. I combine micro and macro, similar to technical and fundamentals in the stock market. Swim with the current, not against. That's why I'm on the sidelines for REI acquisitions in the central NC market.
In 2010, people were scared. Opening bids were substantially below loan payoffs. It didn't make sense. So today, in 2015 I can bid against a guy at the courthouse who has $4B in cash. This doesn't make sense either. Will I last long if I compete? I think I'll wait. I think you nailed it a few pages ago. "Gut" feel... with some macro and regional data as background confidence. I'm not smart enough to say which way things are going. But card counters do better than the casino averages. Gotta have an edge.
@J Scott,
I know you are a smart guy and I am also a big fan of your flipping book. I just wanted to get your opinion on something. I know that majority of the investors in Bigger Pockets believe that appreciation cannot be predicted, and that you are only speculating on your investment if you believe in this... but can't an investor somewhat predict what will happen in your housing market in the next 2-3 years simply by just understanding inventory levels, population and job growth, household income moving into the area, and unemployment levels by county? Some of the course work I took while in college and even in grad school that I really enjoyed was economics, especially macro economics. I think that is one of the reasons, I have always been drawn to the commodities and the forex sector since my early 20s as the investing knowledge you need to succeed in these sectors is just simply understanding and forecasting supply and demand. If you know that that there will be a shortage of a certain commodity down the road, you concentrate your resources on buying this specific sector and you know that a sharp bounce is coming when demand outstrips the supply. I think this type of knowledge has also served me well in my buy and hold real estate investment decisions. I knew back in 2012, prices in the Atlanta market, homes were trading at the 1996 price levels. I also knew that the inventory levels in metro Atlanta below 40k, was extremely low and would not be able to sustain at these levels compared to the population moving into the Atlanta metro area. The reason I don't think that the Atlanta market is at the bubble stage yet is because at the last 2007 bubble right before the crash, inventory levels reached 138k, but today we are sitting at 45k and the population moving into the Atlanta metro market is much greater today than it was 8 years ago. What is see in the next couple of years in the atlanta metro housing market is appreciating at a faster rate than normal. My thoughts will change on this when i see the population growth slowing down and inventory levels reaching back up to the 120k plus levels. At this point i would expect prices starting to level off, and a correction taking place. As for the macroeconomics cycle for where the stock market is today is a whole different story. Do you have any reason otherwise why my theory may be flawed and why we may be at the housing bubble stage today?
Thanks J.
@James Park Of course you can predict the trends some of the time. You can even be right more often than wrong. You can be right over a long period of time -- e.g decades.
Not sure anyone can accurately predict the short term movement in prices. Predicting a sharp down turn seems very difficult and I think predictors are wrong more often than right.
Here's my crystal ball:
The bubble will burst (more than 5% price drop) in Atlanta shortly after the apartment buildings (new ones) are converted to condos and quickly sell out for $250k each AND 5 new condo towers are underway in Buckhead and Midtown.
I predict prices will move sideways while investors slow their house buying and new homebuyers slowly replace them. When credit is available to nearly everyone, then we'll see a real bubble.
Today's prices are the baseline or close to it.
"Peaks" in the Real Estate market over the last century have occurred in the following years:
'18 '29 '73 '80 '90 '08
With such a wide range of time between crashes, it is so hard to call. That being said, another crash will happen. My guess is somewhere around 2030 plus or minus 20 years ;-)
Instead of trying to predict a year, how many years from now, etc, it is better to simply watch the stock market and what sector of companies are crashing. If the sector of stocks correlates to jobs in your area, expect a local slow down in the stock market. Stock market sector crashes always proceed real estate slowdowns.
Also, look at inventory and supply trends. If their is under supply, it is likely that the slowdown will be local and that the real estate market will pick up steam. Super bubbles tend to pop when construction activity is going crazy, oversupply, speculation that work their way out to the war zone areas.
I believe we'll hit a big slow down after the next market crash and it will slowdown for 1 to 2 years if the stock market sector hit correlates to jobs in your local area. For example, if the tech sector of stocks crash, that will hugely effect real estate in Seattle as high tech jobs drive the north Seattle and Eastside markets here. We're probably not seeing a 2008 crash unless there is a 1973 like currency crisis.
The next big real estate crash will likely be worse than the 2008 crash when Europe, Japan and China come tumbling down.
I like to use tax lien certificates and whole life insurance (if you know what you are doing and highly educated on it) as hedges against 2008 crashes. Both of these categories did extremely well in 2008 in my portfolio (the whole life was returning 15% returns). After the crash, it is the best time to buy 50% of replacement cost where you can buy for both cash flow and appreciation.
"Also, look at inventory and supply trends. If their is under supply, it is likely that the slowdown will be local and that the real estate market will pick up steam. Super bubbles tend to pop when construction activity is going crazy, oversupply, speculation that work their way out to the war zone areas."
I agree with this statement 100%
-James
Instead of trying to predict a year, how many years from now, etc, it is better to simply watch the stock market and what sector of companies are crashing. If the sector of stocks correlates to jobs in your area, expect a local slow down in the stock market. Stock market sector crashes always proceed real estate slowdowns.
Also, look at inventory and supply trends. If their is under supply, it is likely that the slowdown will be local and that the real estate market will pick up steam. Super bubbles tend to pop when construction activity is going crazy, oversupply, speculation that work their way out to the war zone areas.
I believe we'll hit a big slow down after the next market crash and it will slowdown for 1 to 2 years if the stock market sector hit correlates to jobs in your local area. For example, if the tech sector of stocks crash, that will hugely effect real estate in Seattle as high tech jobs drive the north Seattle and Eastside markets here. We're probably not seeing a 2008 crash unless there is a 1973 like currency crisis.
The next big real estate crash will likely be worse than the 2008 crash when Europe, Japan and China come tumbling down.
I like to use tax lien certificates and whole life insurance (if you know what you are doing and highly educated on it) as hedges against 2008 crashes. Both of these categories did extremely well in 2008 in my portfolio (the whole life was returning 15% returns). After the crash, it is the best time to buy 50% of replacement cost where you can buy for both cash flow and appreciation.
Instead of trying to predict a year, how many years from now, etc, it is better to simply watch the stock market and what sector of companies are crashing. If the sector of stocks correlates to jobs in your area, expect a local slow down in the stock market. Stock market sector crashes always proceed real estate slowdowns.
Also, look at inventory and supply trends. If their is under supply, it is likely that the slowdown will be local and that the real estate market will pick up steam. Super bubbles tend to pop when construction activity is going crazy, oversupply, speculation that work their way out to the war zone areas.
I believe we'll hit a big slow down after the next market crash and it will slowdown for 1 to 2 years if the stock market sector hit correlates to jobs in your local area. For example, if the tech sector of stocks crash, that will hugely effect real estate in Seattle as high tech jobs drive the north Seattle and Eastside markets here. We're probably not seeing a 2008 crash unless there is a 1973 like currency crisis.
The next big real estate crash will likely be worse than the 2008 crash when Europe, Japan and China come tumbling down.
I like to use tax lien certificates and whole life insurance (if you know what you are doing and highly educated on it) as hedges against 2008 crashes. Real estate investors don't like life insurance because they don't understand it. I like IULs as a stock market replacement and whole life as a 2008 crash hedge. The problem with life insurance is that the life insurance agent (like real estate agents) don't know how to find you the good investments. It is pretty complicated and even though I recommend the idea of life insurance I don't recommend that most people do this. For example, you want to buy in a mutual insurance and not a stock insurance company, buy in a non-direct recognition in a company with 12%+ historical returns, and buy the least amount of death benefit. If you have no idea what I am talking about, stay away from this strategy. The problem I ran into with whole life has been that the loan out rates have been extremely high (5% to 10%) and variable. This totally sucks! And by the way, DISCLOSURE I don't sell life insurance and am strictly talking about what I did and not giving financial advise.
What I learned in 2008 is that you need cash liquidity when the housing market crashes. Both of tax liens and whole life insurance did extremely well in 2008 in my portfolio (the whole life was returning 15% returns). After the crash, it is the best time to buy 50% of replacement cost where you can buy for both cash flow and appreciation.
The idea is simply. Hedge your real estate risk by creating liquidity for yourself by building essentially your own private bank (from life insurance and self-directed Roth iras). If you have your own bank, you can take advantage of housing market crashes when bank finances disappears for everyone. Buy when banks don't loan money.
Because of the tax disadvantages of self-direct IRAs (not Roth) such as RMD rules at 70.5 and lack of write-offs at distribution time, be careful using too much self-directed IRAs to buy real estate.
This is why I like buying real estate taking loans out of different life insurance policies and out of self-directed Roth IRAs. I'd prefer to buy cash flow rentals around 2010 to 2013 and pick up a few along the way and sell around 2020 to 2022, and upon selling push some of the capital back into the insurance policy to get the returns on the policy and back into the self-directed Roth IRAs to buy tax lien certificates. 1031 exchange the rest into the best commercial option available at the time.
PS - I expect to have at least one poster freaking out for mentioning life insurance and most likely they don't actually have any experience with it.