Is this a sign that we are in for another crash?

24 Replies

Newbie question for those members that are well engrained into the RE investment space. I am looking to begin leveraging cash I have in REI to increase my wealth and create future financial independence.

The townhome I live (Doral, FL) in I purchased in 2011 when prices were very in favor of the buyer. I purchased for 217k. The previous owner purchased new for 338k in 2006 when values were really booming and the market was approaching a downturn.

Today the townhome is back to that 2006 valuation (worth about 340k) and that makes me a little nervous about beginning to invest in RE due to fear that we are heading for another crash. Is this a sign? 

Can you please share their thoughts and philosophies?

I completely understand your concern, and I'd venture to guess that many people have the same concern. However, when you compare 2006 to present day, it doesn't seem that we are headed for a crash. Much of the price run up at that time was due to fraudulent, or artificial demand. If you could fog a mirror you qualified for a mortgage. Today, the price run up is built on a more solid foundation. Banks are stricter in underwriting loans, and it's no longer commonplace to get a 0% down mortgage. In fact, I believe the share of cash buyers is higher than ever. That means that end users and investors alike have skin in the game and won't be walking away from properties. 

You bought your town home at the perfect time. Real estate was going through a fire sale and it over corrected to the downside. I know some people want to sit on the sidelines and wait for another crash, but that was a once in a generation type event. Historically, real estate goes through cycles with much more modest down legs. 

No.  The crash wasn't caused by RE prices going up.  There were many other factors that contributed...the RE prices going up was just a natural part of rise and fall.

It wa a result of the "perfect storm" of events...not just one

See @Eric G. above

@Justin Cabral There is a metric I rarely see mentioned to get an idea of the frothiness of a a particular housing market.  Check out the Background section of this wiki entry for United States housing bubble:

Land prices contributed much more to the price increases than did structures. This can be seen in the building cost index in Fig. 1. An estimate of land value for a house can be derived by subtracting the replacement value of the structure, adjusted for depreciation, from the home price. Using this methodology, Davis and Palumbo calculated land values for 46 U.S. metro areas, which can be found at the website for the Lincoln Institute for Land Policy.[15]

When I was looking at a lot of property tax records in Southern California in 1990, I noticed the hottest markets started at 50% land value for assessed valuation and ranging up to 80% land value.  I believe the national median is close to 20%.   If both the building value compared to replacement cost and land values are high, you're probably in a heated market. Now in the case of California, there is a true land shortage in the "habitable" areas, so land value will already run a bit high. But in areas where there is plenty of raw land that can be developed, it shouldn't be pushing a high percentage unless the market is over appreciated.

On the flip side, we've been experiencing under appreciation in the Pittsburgh market because the population has not yet returned to pre-1980 levels. When that happens we'll probably see an inflection point upwards in housing prices until more new construction can come into the market.

Unless you are worried about not being able to pay a loan long term, I don't see why a future crash in the market should deter a smart investor from investing in real estate. 

@Justin Cabral

I've bought and sold over 900 properties for my personal inventory.  I buy when the markets are good, and I buy when the markets are bad.  The only difference is I get better prices when the market is bad.

I do Buy and Hold, as well as rehabbing, flipping, land development, tax sales, sheriff sales, REOs, scattered lots, and other investing.  By doing multiple types of real estate, the mix changes with the times.  When there is a large inventory of vacant lots on the market, I'm not creating more vacant lots.  When there are fewer foreclosures to buy, I buy less.

I don't worry about the ups and downs of the market because I'm always a buyer.

And the longer that you own a property the less market fluctuations affect you.  If you own a property for 20 eyars, the market changes in the interim are irrelevant.

@Justin Cabral

The property you mentioned is your primary residence that has appreciated.  What are you seeing in the marketing place?  How many properties have you looked at..... 1? 10? 100? 

I'm getting the feeling your talking yourself out of investing prior to getting into investing. 


Frank

@Justin Cabral  Many varying opinions, but I agree that the ones which rely on metrics, as opposed to personal anecdotes and opinions, are probably the more reliable ones.  That being said, I'll offer my own opinion.  I have lived in Brickell for the past 4 years, and the amount of development going on is scary.  The theory is all the foreign money will flood the condo market and buy up everything with cash.  However, is there really enough demand for that?  Perhaps, there's a metric, an article that can distinguish between what is fact vs. fiction.  Also, what's going to happen to the value in a seemingly new building built in 2008 (one that I live in), when nearly 20 brand-new construction high rises open in the next three years.  I guess we'll find out...

Originally posted by @Gregory Emmer :

@Justin Cabral  Many varying opinions, but I agree that the ones which rely on metrics, as opposed to personal anecdotes and opinions, are probably the more reliable ones.  That being said, I'll offer my own opinion.  I have lived in Brickell for the past 4 years, and the amount of development going on is scary.  The theory is all the foreign money will flood the condo market and buy up everything with cash.  However, is there really enough demand for that?  Perhaps, there's a metric, an article that can distinguish between what is fact vs. fiction.  Also, what's going to happen to the value in a seemingly new building built in 2008 (one that I live in), when nearly 20 brand-new construction high rises open in the next three years.  I guess we'll find out...

Its funny that you bring up that theory. I live about a block away from all the new high end development going on in Doral and just recently was looking at the Lennar estates project. That is where I found out that pretty much all the townhomes in that project were sold and 90% of those sales were purchased by south americans with foreign money. Maybe the influx of cash purchases made in south florida with money that was not earned in our local economic market is causing a false inflation and overevaluation of properties. How else can a 2600 square foot  home on a 4000 sq ft lot  with basic interior finishing be going for almost 600k and pay 12k per year in taxes? The local job market doesn't support that cost of living IMO.

I think this is a good post and I will play devils advocate to the responses just for the heck of it.

The main replies have been 

a) the economy is fine don't worry about it and 

b) were in this for the long haul don't worry about it

But remember, we live in a world where the economy is so weak that investors, businesses and even banks and governments are watching to see what financial engineering will be needed to keep the train on the tracks. And not for the next 20 years but for the next six months. I think the international debt markets are the clearest indication that their are major structural issues. I also think that when these issues come to pass they will affect housing prices to some degree. Yellen couldn't even squeeze out a tolken .25 basis points and people are saying the economy is fine? Doubt it. HoweverI do believe prices will keep moving higher but not in a straight line.

This leads to my second point, if you are a newbie investor the last thing you can afford is to take the money your saving and end up upside down on an investment. I'm seeing some narrow spreads because these people are desperate to get out of their 9-5 and think this is the only way. How many real estate investors are itching to write a check but will end up waiting years to break even? It happens all too often. 

If a newbie investor has an existing business or trust fund and can afford to loose some money then go ahead. But if your a newbie investor scrimping and saving and your only going to get a single shot then you had better hit the target!

Originally posted by @Frank R.:

@Justin Cabral

The property you mentioned is your primary residence that has appreciated.  What are you seeing in the marketing place?  How many properties have you looked at..... 1? 10? 100? 

I'm getting the feeling your talking yourself out of investing prior to getting into investing. 


Frank

 I don't think I am talking myself out of investing. On the contrary. I am really excited about pursuing increased wealth through real estate investing however I want to make sure I understand what I am getting into first.

In the high stress, high turnover, cut throat medical sales career I have chosen to earn my living in so far, I sleep very well at night knowing that I have a good amount of liquid cash in the bank as backup. 

I want to increase my wealth by making that cash work for me thru real estate, however when I see RE market pricing at the same levels that they were when everyone and their mother was saying that "housing was becoming unaffordable and that there is no way that appreciation is going to continue going uplike it has been (hence the bubble is going to pop)" right before the RE market crashed, it does make me think twice and do my homework before making a move that is going to put me on anxiety meds if I make an impulsive play that puts me in a bad position.

Justin,

If you invest for cash flow then you generally don't need to worry about short term cycles. Don't even factor appreciation into your return calculator. I know that might be tough in Miami but you don't necessarily have to invest in your own market, as evidenced by the many folks here who invest outside of their markets. 

Bennet 

If your investment strategy depends on the market going up the day after you bought it, find a new strategy. If your investment strategy breaks if the market goes down the day after you bought it, find a new strategy. If your investment strategy works either way, pull the trigger. Else, keep looking.

@Justin Cabral  For what it's worth, I was recently at an investor meeting and they had a panel discussion on the state of the economy. The consensus was that we were heading into a correction with varying degrees of severity (some panelists felt the correction would be significant while others were milder on their forecast. That said, I plan on keeping an eye on the market while continuing to search for deals. 

So I found an article that talks to the topic of my post. It shares some interesting statistical data that I think is relative to my concern. Remember that what flagged my attention and caused me to create the post was the fact that my property today is back to the same value that it was in mid 2006 when prices were at their peaks.

Here are some clips from the article that caught my eye...

"Thirty-three states are now at or within 10 percent of their price peaks, going back to January 1976, when CoreLogic began tracking. Ten states — Alaska, Colorado, Iowa, Nebraska, New York, North Carolina, Oklahoma, Tennessee, Texas and Vermont — reached new price peaks"

"Despite the growth, overall home prices still are 8.4 percent below their highest point, which was nine years ago, in April 2006."

"...In real estate, the key word is local. Although some cities’ markets are booming because of job growth and shortages of homes for sale, across the country, sales aren’t as hot. They’re not stagnant, but after home prices rose quickly in 2013 and 2014 they did not sustain the pace."

The 50 fastest-growing U.S. metros

Here is a look at yearly home-price growth in the 50 fastest-growing U.S. metro areas. The numbers are from the Federal Housing Finance Agency, which uses different data than Core Logic:

You can look at the article (pasted below) but bottom line 7 of the top 9 were all metro areas in the south half of the state of Florida.

Not sure exactly how I should digest this data so I would love to hear your opinions. As a new investor located in south florida that is looking to begin investing in RE, how do you think I should determine whether the better timing to invest in my local market is now or down the road given these price spikes???

Article link: http://www.moneytalksnews.com/are-headed-into-another-real-estate-bubble/

IMHO, for me, the bottom line is can you make money without an appreciation play?  That is something that Brandon and Josh talk about all the time.  As investors, appreciation is icing on the cake.  That holds true for a flip OR buy & hold strategies.  You make your money when you buy.  

The point is that if you can cash flow positive on a buy & hold purchase, it makes sense. If you can make money on a flip with current ARV * .7 - repairs, then buy it. We aren't wildly swinging in our market right now. If you aren't finding those numbers, then do not buy. Or if you are only finding them in the ghetto....again, do not buy...at least that is my opinion :-)

Bond trader opinion here(it's going to be different). I'm not the Wall Street cheerleader type. I could write a 10-page paper on why this is the biggest bubble we've seen yet.  98% of what is shown in the media is BS.  The issues are very complex and unfortunately many in  Main Street who drank the recovery Kool-Aid are going to get faded. I'm worried what follows afterwards personally.   In a few words we are seeing the byproducts of grossly desperate Fed policy (ZIRP,QE, etc.) from massive asset deflation, currency wars and foreign capital circumventing capital controls into the new Swiss Bank Account (western RE with a shell company).   Quick recap - we remediated the equity bubble in 2001 by inflating the RE bubble(Greenspan 'Maestro' lowering rates) and remediated the RE bubble by inflating a bond/dollar bubble (QE/ZIRP). Rates have been 0%(supposedly temporary life support) for nearly 8 years. RE financing is heavily dependent on secondary market liquidity and the 10-YR Treasury. Ok, opinions are opinions - right?  The Bond Market tells all and is my objective source. - monitor HY/IG credit spreads, corporate bond liquidity,  swaps, and the Treasury auctions (especially the 10-yr).  The offshore yuan FX reserves and China's selling of Treasuries to float Yan something to watch too as selling pressure will drive up the 10-yr  If people watched and understand those vs. CNBC/HGTV/DIY channels Armando's house flipping seminars would be vacant.  Not being alarmist - just providing a perspective from the credit markets. Net-net from me is the bond market is materially 'broken' due to Fed with no price discovery and this in my opinion is driving atypically high demand and will eventually lead to a crash. Good luck and be careful!

@Justin Cabral

Your gain on your residence should allow you comfort in cushioning in case your area slips.  Will there be a down turn, probably in some areas, why do I say that...

Several sources are showing an increase in inventory, many institutionals bought a bunch of houses and turned into rentals, they didnt pan out, so that pumped up the market and if/when they sell, it will hurt the market, I travel a bit and am seing more empty houses again, the US govt is spending more than it can sustain, instability overseas on several fronts, and on

So, you can put money under your mattress or put it somewhere, I choose real estate and will continue to, if I can buy foreclosures at 50% still, then the market can drop 50% and Im still in a good position and thats not even counting my rents that have climbed 37.5% and Im going up again next Summer.  My second investment is in liens, as the market slips, they pay slower and more dont pay, so I get more interest or more properties, win-win!  

So @Justin Cabral, if you feel this is for you, buy smart and you should do just fine!

Darron  |=>~~~

This is for your personal residence? who cares if it goes up or down. it's a home that you live in.  in terms of South Florida, if there's a lot of foreign cash investors, then that's dangerous if the local economy does not support it.  Real estate will always be about jobs.

Denver and Silicon Valley has such good appreciation due to the the healthy job market.  Midwest is flat or barely at 1-3% so not as subject to a crash.

And the Feds IMO have manipulated the market with too much money produced. Inflation will be coming someday.

Originally posted by @Cagney Moreau :

I think this is a good post and I will play devils advocate to the responses just for the heck of it.

The main replies have been 

a) the economy is fine don't worry about it and 

b) were in this for the long haul don't worry about it

But remember, we live in a world where the economy is so weak that investors, businesses and even banks and governments are watching to see what financial engineering will be needed to keep the train on the tracks. And not for the next 20 years but for the next six months. I think the international debt markets are the clearest indication that their are major structural issues. I also think that when these issues come to pass they will affect housing prices to some degree. Yellen couldn't even squeeze out a tolken .25 basis points and people are saying the economy is fine? Doubt it. HoweverI do believe prices will keep moving higher but not in a straight line.

This leads to my second point, if you are a newbie investor the last thing you can afford is to take the money your saving and end up upside down on an investment. I'm seeing some narrow spreads because these people are desperate to get out of their 9-5 and think this is the only way. How many real estate investors are itching to write a check but will end up waiting years to break even? It happens all too often. 

If a newbie investor has an existing business or trust fund and can afford to loose some money then go ahead. But if your a newbie investor scrimping and saving and your only going to get a single shot then you had better hit the target!

 I am in line with this mode of thinking.

Our financial markets, which are tied to everything, have, for the first time in history, been artificially infused with capital for the so called "recovery". It's fake, no other way to say it.

Bernanke's college thesis, which he used in real life was based on the premise of, "If you make the herd believe things are OK, they will act like it's OK".

I am getting back into the game after being pummeled by the last economy, an injury and a very expensive divorce.

I have a full time thing, of which I will be using to "inch" my way back in.

I scrutinize everything a lot more now.

I do agree the banks, (with government arm twisting) have been more prudent in loans making for a more solid RE structure.

The only caveat I see is:

Foreign money is heavily involved in my local market and others, so I am looking elsewhere with a bigger down payment to ensure cash flow right away, (200+ per door, net) and ride any modest value depreciation which I believe IS coming.

I am also fortunate to have a construction background and RE properties are, well, constructed. So I can save a lot there.

It's called the rubber band effect, or if you prefer, DOW theory:

1: Accumulation

2: Realization

3: Distribution - (don't be a huge buyer of anything, stocks, investments, RE, etc. at this stage)

my .02

Originally posted by @Darron Stewart :

@Justin Cabral

Your gain on your residence should allow you comfort in cushioning in case your area slips.  Will there be a down turn, probably in some areas, why do I say that...

Several sources are showing an increase in inventory, many institutionals bought a bunch of houses and turned into rentals, they didnt pan out, so that pumped up the market and if/when they sell, it will hurt the market, I travel a bit and am seing more empty houses again, the US govt is spending more than it can sustain, instability overseas on several fronts, and on

So, you can put money under your mattress or put it somewhere, I choose real estate and will continue to, if I can buy foreclosures at 50% still, then the market can drop 50% and Im still in a good position and thats not even counting my rents that have climbed 37.5% and Im going up again next Summer.  My second investment is in liens, as the market slips, they pay slower and more dont pay, so I get more interest or more properties, win-win!  

So @Justin Cabral, if you feel this is for you, buy smart and you should do just fine!

Darron  |=>~~~

 I have a similar investment strategy to Darron... I researched the entire country looking for markets to invest in and after spending over 3 months, I decided on New England... more specifically Vermont and New Hampshire. My rough criteria is very strict and I think it pretty much guarantees a profitable criteria. 

1) Pay 20-35% of the 2006 peak price of the property. A typical deal for me is to buy a bank REO where the buyer paid $150k-$190k and I will buy it for about $30k or less but of course it has been abused or neglected and requires a cash purchase as it is non-financeable.

2) Low $/s.f. I've bought properties as low a $3-5/s.f. small commercial (10k s.f.) and former mansions. No zeros are missing... $20k for a 9,300s.f. building... $5k for a 4,000s.f. house.

3) Where my risk/gamble is, is that I like changing use of properties... converting bootlegged 2 units back into SFR. The gross rent is less, but it is less headaches with Vt state inspections and rental codes. Or sfr's that have commercial zoning market to business owner live in usage.

4) Buy at historical lows. A recent deal is I paid $17k for a house that previously sold for $130k. Have it rented for $1,200/mo. I have about $33k into it after renovation costs. I expect to sell it next year for $90k. It's worth $85k today. These smaller deals I find very lucrative. I cannot find any risk it this type of investment... But they are not easy to find... I'll look at hundreds of properties to find one like this...

5) Get property taxes lowered. I try to lower my fixed costs as much as possible. Little changes can make a BIG difference. The $5k house I bought was assessed at $190k and I got it reassessed down to $75k. I'll save about $3k/year on taxes, so lower taxes means higher cash flow, which means higher resale value because of lower expenses. By the time I finish the renovations, I will likely have $65-75k into it and project a ARV of $150k-175k. With a little luck and appreciation over the next 10 months, ARV could easily go up another $10-30k. That 7br/4ba house should rent for $1500-1800/mo. So I should see a 10% ROI from rent, plus the added value from the renovations of an additional 100-125% profit. And that is cash investment, if I used leverage, the profit numbers would soar off the charts.

6) Hold for at least 1 year so that I can 1031 Exchange the properties to defer paying most income taxes. This is where flippers lose so much value... paying taxes on their profits.

7) I try to only rent to tenants who will qualify  for new loans so I can cash out for my exchange and I find my own tenants without brokers (I used to be one for 30 years) and so I avoid paying commissions when I sell to the tenants. Fees saved is profits made.

8-20) I have many more criteria for my investment (but I'm stopping here) and I also have to like the properties I buy. I turned down a 4 unit building for $10k (would need to spend 70k reno) because I didn't like the building and thought it was too unsafe... I was on the deck of the top floor when my foot when through the floor board and for a few nanoseconds, I thought I was gonna fall through the deck... lol... scary... lol It would have been a huge cash cow as all units were 2-3 bedrooms and could go Section 8 at an average of about $1k rent each unit. My competitor has an even more profitable rental plan... he rents to convicts just released and gets ridiculous rents as he loads up properties like this renting rooms and gets paid by the government for housing the ex-cons...  So I'm guessing he gets double or triple the normal rents... Not my cup of tea...

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