Real Estate history set to repeat itself

Real Estate history set to repeat itself

Irvine, CA · Member since 2016 · 545 posts · 614 votes

First off, I’m a true believer in the saying “If you have a dream in life, you should seek and follow the path to obtain it!”

In late 2006 we saw the real estate bubble come into play and wreak havoc on the housing industry. The main focus of the cause was targeted at the financial industry for its relaxed lending requirements, banking regulations, and “predatory” lending practices. Most people seem to avoid the conversation about all the Real Estate risk takers that played the biggest part in the housing crisis.

A few years before the bubble burst I was encountering real estate investors, house flippers, and buy-and-hold participants everywhere I went, my waitress at The Cheesecake Factory, the two McDonalds employees talking deals on their lunch break, the clerk at the grocery store, everyone everywhere appeared to be a real estate investor in one form or another getting a piece of the housing boom.

The underlining problem I noticed was during the rush to get into the RE industry most of the people capitalizing in the industry never learned the basics of RE investing and were simply doing what their friends, neighbors, coworkers, or online postings told them to do to get a piece of the pie. A majority of all those RE acquisitions were closed without basic RE fundamentals as part of the deal causing them to play a major part in the housing crisis as they were not structured properly and/or in fragile portfolios that quickly crumbled with the first sign of trouble.

Flash forward 10 years to 2016, minus the banking industry’s participation, we are seeing the same industry practices that played a major role in the last bubble. I’m encountering wholesalers, real estate investors, house flippers, and buy-and-hold participants everywhere using the same knowledge base that played a part in the last crisis.

Here’s why I say history will repeat itself. An example can be found in the BP community when there’s not one day that goes by that I don’t see a post along the lines of:

“Help, I have a property under contract, I need help with the next step”

“I have a house under contract, what’s the best way to get financing?

"I got a cash advance on 5 credit cards for the EMD, I need help with financing the deal"

We’ve all seen these post and there are some far scarier than these. While I would never discourage anyone from trying to close a deal, I’m simply pointing out the similarities of 2006 in which the industry was saturated with far more uniformed participants trying to get rich quick than those who know what they’re doing when structuring deals.

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Rental Property Investor · Raleigh, NC · Member since 2016 · 396 posts · 995 votes
10y

So according to you, the primary cause of the crash was relaxed lending requirements by banks, and now even though that primary cause no longer exists, you think there is going to be a crash because a lot of people are interested in real estate?  That doesn't even make sense.

People are naturally attracted to whatever makes money.  If the stock market were to see annual gains of 20%+ for a few years then a large number of people would stop being Saturday afternoon landlords and start being 'stock gurus'. 

The only thing that can cause an actual housing market crash, is for people to start defaulting en masse on their loans, which can happen only if the loan is unstable, or the job market is unstable.  In 2008 this happened because banks were giving anyone and everyone a loan regardless of the credit score, down payment, or income.  They gave loans to people who couldn't possibly repay those loans, especially when their adjustable rate mortgages increased.  Another scenario is if we experience another great depression, or prolonged recession.  People who were previously financially stable can become unstable if the economy sucks and they can no longer find a job. 

Having a large number of people interested in RE will certainly drive the price up, and this increase in price will create more people who want to invest, and this hype will further drive prices up.  This is what happened in 2008.  The difference is banks in 2008 kept giving ridiculous loans that they are no longer giving, which by default creates a realistic limit to how high prices can go.  We have seen prices go up by large amounts following the crash, and this increase will likely start to flatline a little bit at some point, or possibly even recede slightly, but this will not cause a crash.  So long as the underlying loan is solid, and the job market is solid, then real estate as a whole is solid.

We've seen one crash in the last XX years, and suddenly everyone becomes Nostradamus and feels the next one is right around the corner.  Will the market flatline or possibly have a market correction in the next 1-10 years?  -Possibly.  But I am worried about this about as much as I'm worried about what Kim Kardasian just posted on twitter.  A market correction doesn't scare me in the slightest because I invest correctly from day one, with built in equity and cashflow so that I can easily survive during the down years, and thrive during the up years.  I'm nowhere near close to cashing out and retiring, so I am actually hopeful for a market correction because all of my current assets will still produce, and my future purchases will be made at a discount.

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  • Sarasota, FL · Member since 2014 · 151 posts · 80 votes
    10y

    Crash in the future, I don't think so, but there may be small bubbles in some local markets that might pop, or as commonly referred to as market adjustments. Here in Phoenix, we are experiencing a steady pattern of appreciation in the overall market as is the case with many other U.S. real estate markets. The contributing elements do not exist today, that were prevalent '07-'08.

  • Troy GandeeBusiness Member
    Real Estate Broker · Charleston, SC · Member since 2013 · 795 posts · 454 votes
    10y

    I completely agree with @John Semanchuk. I'm a Realtor/investor in Charleston. I was actually just at dinner with the other producers in my company and one of them said that she's heard recently that we're actually netting around 57 new residents per day here now. I've felt the market stagnate a little bit, but I think it's the lack of inventory that's causing people to hesitate because they're either not finding what the want or they're paying more for properties they don't necessarily love. Our struggle here is mostly infrastructure and quality of life due to the influx of new people.

  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    10y
    Originally posted by @Ray Johnson:

    First off, I’m a true believer in the saying “If you have a dream in life, you should seek and follow the path to obtain it!”

    In late 2006 we saw the real estate bubble come into play and wreak havoc on the housing industry. The main focus of the cause was targeted at the financial industry for its relaxed lending requirements, banking regulations, and “predatory” lending practices. Most people seem to avoid the conversation about all the Real Estate risk takers that played the biggest part in the housing crisis.

    A few years before the bubble burst I was encountering real estate investors, house flippers, and buy-and-hold participants everywhere I went, my waitress at The Cheesecake Factory, the two McDonalds employees talking deals on their lunch break, the clerk at the grocery store, everyone everywhere appeared to be a real estate investor in one form or another getting a piece of the housing boom.

    The underlining problem I noticed was during the rush to get into the RE industry most of the people capitalizing in the industry never learned the basics of RE investing and were simply doing what their friends, neighbors, coworkers, or online postings told them to do to get a piece of the pie. A majority of all those RE acquisitions were closed without basic RE fundamentals as part of the deal causing them to play a major part in the housing crisis as they were not structured properly and/or in fragile portfolios that quickly crumbled with the first sign of trouble.

    Flash forward 10 years to 2016, minus the banking industry’s participation, we are seeing the same industry practices that played a major role in the last bubble. I’m encountering wholesalers, real estate investors, house flippers, and buy-and-hold participants everywhere using the same knowledge base that played a part in the last crisis.

    Here’s why I say history will repeat itself. An example can be found in the BP community when there’s not one day that goes by that I don’t see a post along the lines of:

    “Help, I have a property under contract, I need help with the next step”

    “I have a house under contract, what’s the best way to get financing?

    "I got a cash advance on 5 credit cards for the EMD, I need help with financing the deal"

    We’ve all seen these post and there are some far scarier than these. While I would never discourage anyone from trying to close a deal, I’m simply pointing out the similarities of 2006 in which the industry was saturated with far more uniformed participants trying to get rich quick than those who know what they’re doing when structuring deals.

    The market in 2003 was really when we started to see the bubble kick in with pricing suddenly moving up quicker than normal. It was not till after 2007 timeframe (give or take a year) that people got over hyper, but by that time it was already over... in 2008 the shoe dropped, and in 2009 the economy could feel it.

    It's very unlikely we will see another one in our lifetime, why you ask? Because everyone is looking for one, and if everyone is always looking over their should for the next real estate crash, you can bet there won't be one. Bubbles don't exist where people look for them, they come up and get you when you lease expect it...

    Markets go up and down.. that's all we are doing now. The demand is up because everyone just about stopped building for years, so now we have a housing shortages as the number of people entering the market due to age and income continue to grow even tho we stopped adding houses for a few years while we recovered from the housing crash.

    The real concern is slow or no growth in the economy or global economy right now, stagnation. This will result in little or no growth in business, which will result in little or no growth in people's incomes. This already has resulted in a huge population of renters that are stuck till something kickstarts business growth again.

    We can't look at interest rate, it's already as low as it really should go, and frankly it needs to go up a lot, but for that to happen we need to trade something off, taxes is the answer. IMO Trump wins, taxes get cut, rates go up, import tariffs go up, thus forcing business to move back to the states with the added bonus of cheaper cooperate taxes, means lots of jobs, it's basically free money, and cheaper to do business in America vs somewhere else.

    Any good business person knows, it's not your product that makes your company successful, it's your people, so hire a lot of them. The two punch combo of tax cuts and interest rates is likely going to lead us into a 8 year bull cycle for the economy. 

  • San Francisco, CA · Member since 2015 · 786 posts · 717 votes
    10y
    Originally posted by @Wade Sikkink:

    I don't see a crash coming either.

    There are a lot of misconceptions about what caused the financial and housing crash in 2007-08.  It wasn't low interest rates as some on this thread have suggested.  It was pretty simple.  Banks developed the ability to sell mortgages by creating Collateralized Debt Obligations.  One type of collateral used in creating these securities was mortgages.  Thus the Mortgage Backed Security.  Now that a bank didn't have to hold a mortgage it originated, it could take more risk in that mortgage, then sell that risk to an investor in the form of a security.  This, in and of itself, didn't create a real problem.  If a MBS full of junk sub-prime mortgages was given a C- rating from the ratings agencies, then they would have to be priced at a sufficient discount to attract buyers and there wouldn't be as much demand for them in the secondary market.  However, junior analysts at ratings agencies didn't look very deeply into these instruments and reasoned away the risk by saying that a large enough pool would mean that even if 1 or 2 borrowers defaulted, the overall security would still be fine.  Therefore they could confidently give it an investment grade rating.  A deep and wide market for sub-prime MBS's was created and that meant banks could lend to anyone with no approval criteria and unload the risk quickly and easily.  Rinse and repeat.  When these loans got so bad that people actually started defaulting in mass, anyone holding the bag got hurt.  Investment banks with MBS's in their portfolios and insurance companies.

    The uptick in the market today is not caused by the same forces.  What I'm seeing is many asset classes have lousy yields because the Fed has kept rates artificially low for way too long.  I mean, really, how can the Fed honestly say they are not political and leave rates unchanged in Sept?  Anyway, because investors can't find a decent yield anywhere else, they are turning to real estate.  At some point when interest rates become more normal, those investors will potentially unwind those investments in real estate and put them to work elsewhere.  When they do, that will take some of the pressure off real estate prices, but it won't be a crash.

    As long as you bought right and have a solid investment, that kind of shift should have virtually no effect on you

    What do you think drives the MBS and CDO markets? The arbitrage opportunities caused by low interest rates. And MBS and CDOs are back just under different names now and again it is being driven by as you pointed out artificially low interest rates. 

    To think that low interest rates from 2000 to 2007 did not have anything to do with the 2008 crash is perhaps a little short sighted.

  • Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
    10y

    Well, 10 year rates in early 2007 were nearly 5%, so that doesn't strike me as artificially low.  Rates were on a steady march up from 2002 to 2007, so we were actually in a rising rate environment, not a falling or exceptionally low rate environment.

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