Stock speculators moving into real estate are causing a bubble.

39 Replies

Alright, I apologize if this becomes controversial, or offends anyone.

As an investor and agent, I am seeing a lot of speculation in the market. It seems to me, that stock market speculators, are looking to unload their money into tangible assets across the country, but focusing primarily in large urban areas, where housing prices are reaching insane levels. 

In my opinion, real estate is a commodity and should be treated as such, but it is being speculated on because of the types of investors moving into the markets. Is that good or bad? It's all relative. For me it is fantastic, for those just starting out, it makes it very difficult to break into certain markets. Independent individuals who are looking to build wealth with REI are pushed into marginal markets, while large REIT's and institutional investors are building and building large complexes with inflated rents, and driving up the price of everything. This is a form of the 'syndication' we were seeing in the 80's and 90's, which is now a dirty word.

I've already survived one bubble with flying colors, and have a bomb-proof strategy to survive another. Do you? If your CAPs are low now, you may soon be underwater, just a heads up. What happens in large urban areas will trickle out into the hinterlands, depressing all markets. Some areas will be 1-2 years behind, but it will affect all markets this go around, I promise. In my opinion, I see this market either plateauing or bottoming out in 1-2 years from right now. I like to reference the Case-Schiller Index, but there are so many worrisome indicators out there. The trajectories that we are seeing are by no means sustainable. 

Housing and building is strong now but remember, wealth through real estate doesn't happen overnight, as many new investors are seeing. There is a limit to the rents people can afford. Employment is very strong, but what is more important to look at is the average wage. It will take only a few quarter point rise in the prime rate, or one major Fund collapse, and I can see it all coming down. At that point, I am going to gobble up properties left and right, as oversupply outstrips demand. Watch what you are doing, and do not be blinded by the prices out there. A major worry of mine is these 401k's just dumping money, bi-weekly into ETF's. Can we not remember more than a few years into the past? Are we being blinded by the stock market? 

Anyone else out there thinking along these lines, or I am just crazy over here?

@Michael Rutkowski

Hi Michael!

It's a good thing people and Investors believe it's a bubble. Just the thought of being in a bubble helps deflate the bubble or reduces the effects of it!

In the Crisis of 2008, no one believed that the Housing Market would Crash! But I've been hearing about a Crash ever since!

Either case, I'm in the NYC Market, specifically Brooklyn.

Some Cities have special kinds of inventory. In NYC, we have 1 Million or so Rent Controlled/Stabilized Apts. Additionally, of the Apts can be owned, roughly 75% (as of 2013) are Cooperatives.

The great thing about Cooperatives is that there is a Board that functions as the nemesis of the Flippers and Investors/Home Buyers who really couldn't afford their apartments. 

The Coop Board scrutinizes the applicants entire financial history and you would have to be higher qualified than even the Mortgage Company's qualifications. In some cases, they will deny your application if they suspect any kind of fraud or misrepresentation.

Further more, because of the large amounts of Coops in NYC, we didn't get into the situation that you saw in Miami, where you had huge developments which were bought, but no one lived in it because they were just going to flip it to the next guy using websites like Condo Vulture.

The Coop Boards would not allow Buyers to NOT live in the properties.

However, in Miami, whole skyscrapers were fully owned but if you yelled on any particular floor, you would just hear your echo because no one lived there during that crazy time.

So that really protected Investments in NYC, particularly the ones that were in or close to Prime Neighborhoods which may have had quite a bit of Coops.

That doesn't mean we didn't have large amounts of foreclosures. But if you looked at Manhattan, it was so minimal in the prime areas, your could probably count them on just your fingers and toes in any given month (actually, it may have been so low you could count them on your fingers and toes in any YEAR).

I have been owning Investment properties since 2 decades here. I went through 3 different crisis including 9/11... the fall of the NASDAQ to 66% of it's value in 2001 and the Financial Crisis of 2007/8.

None of that had much of a significant effect on my Investment Properties. What it did do was forced my Lines of Credit to close and increased the standards of qualification for a mortgage so I couldn't buy at exactly the best time.

If we have a dip again..... I'm prepared to buy as much as I can! So I'm looking forward to it if it comes again!

I'm in a similar boat in that I am lying in wait, but I am also a little worried as my properties are commercial in nature, and I am more concerned with consumer spending and what the market is doing. I survived the 2008 crash with multi-family property, and remember the 2000's as I was PMing in NYS at the time.

I guess what I am worried about is the dramatic inflation of the stock market, and an inevitable downturn cascading into the real estate markets. I am seeing a lot of people cashing out right now and investing in multi-family or commercial property, which I believe is very smart of them. I do think that if they plan on owning that property for 10 years, and not utilizing equity to fund other purchases they will be just fine. But that equity will take a huge hit.

My market is tied into the west coast urban markets, and my investments are tourism based. Our most important market is Portland, and from what I am hearing about people moving into my very tight market, is that it is nothing compared to how tight Portland's is. That is very worrisome to me. 

I plan to be credit free in 2020, so not so worried about lines of credit, but the possibility of lower cash flow is a bummer. I don't understand the stock market mentality, and hate to see it being applied to real estate. It's like a feeding frenzy. Sure stocks are soaring, and profits are on the rise, but that mentality is best left in the stock market. I could go on a philosophical debate about this but I will spare you.

@Michael Rutkowski I think you are correct in many respects and there's a lot of investors out there that will get hurt; especially the flippers! However...

I'm still buying workforce multifamily (large managed communities) in the midwest. It simply takes looking at 200 deals to find a good one. From there we stick to longer term (10+ years rate locked) financing so as to hedge rising interest and cap rates.

The smart money is chasing income producing assets (bubble or not) right now because we know that the cash in your pocket and in your bank account is fiat currency; not money! 

being a small time home builder in Portland Market I think you can not worry as much.. prices have stabilized.. market is robust but not over the top.. in migration is still happening.

if anything the prices in this market are held up by wacko environmentalist who tend to run this state.

they limit the land available for new housing.. causing prices to rise.. its a catch 22 no one wants urban sprawl.. and they have curtailed that.. but that leads to a acute shortage of buildable lands which anytime you have a shortage of something the values rise.. and that's whats happened. Once your dirt rises and building costs have gone up about 20% in the last 5 years .. you have end product prices going up...

but for now it seems stable.. WE have houses for sale that 2 years ago would all be sold at framing now they get done and it takes 30 to 60 days to sell them.. I see that as OK.. not exuberance.. also they are ALL going to home owners that are well qualified no speculators.. that's a major difference in todays market and what created 08 to 2011 melt down..

Although When Bruce Norris Spoke at an event in Oakland last Oct.. he felt west coast multi was FROTHY with cap rates crushed.. and when speaking with other owners he would ask them would you buy this building for what you can sell it for today..   and that was a resounding NO... so maybe a good time to sell to the next set of buyers.

If you could predict asset bubbles, you would be richer than Jeff Bezos

How about foreign investments? Anyone seeing a huge increase in REIT's with foreign funding? My market is way too small to be affected by this, but I've been hearing about major cities in Canada thinking about banning foreign investments. While I don't believe there is any chance that would happen in the US, it must be a sign that there is an influx of speculative money pouring into N. America. Cities I am mainly thinking about here in the US are Seattle, DFW, Portland, and San Fran. 

Currently, we are focusing strictly on land, as our RE prices are not worth it IMO. I can say this, because I am an investor, and really have no one to answer to. Meanwhile 'bubble' is a word NO ONE around here in the RE community wants to say (probably because they know that this can't last). This drives me crazy. I watched half of the contractors and agents leave around 2008, for greener pastures, and am surprised at the very un-proactive approach investors and agents/brokers have been taking with clients.

Our single family home prices have reached roughly $525k with average wages for a single family around $45k. I think this inflationary period is due in part to retirees, but there are only so many old folks around to boost local markets like this. On our end, we won't even consider new construction, but it is still being gobbled up. Which is great don't get me wrong. It just flies in the face of everything I was ever taught about REI, since I was in my late teens.

your probably referring to the flipping tax implemented in Vancouver BC...

Asian investment in the west coast especially SF bay area and LA has been a thing for decades.. I don't see that changing.. where I grew up in Cupertino its now 80% ASian population so it already happened :)

Not sure if the bubble is related to paper equity transitions or not, but something to consider, especially related to foreign buying I would think.

I have a couple metrics and a very crude leading indicator I follow, ready to sell.  I refuse to look at 200 deals to find one.  I'd rather take a nap as most of you know.

As far as houses, I can sell, easily by owner, my smalls that become vacant anyway and are facing cap ex. Did 3 in the last 9 months. Old roofs and HVAC, for instance.  I discount less than it would cost me and I didn't have to do or schedule or oversee the work. None of those owner-occ buyers cashed out of the stock market though.  It's simply related to population growth and lack of inventory here. Demand vs supply. 

As far as commercial assets, you have to know what your market cap is for that asset class and that neighborhood.  The trend line obviously has had downward pressure for a while about everywhere.  When they compress down an additional 1% (from 6% & 7% in my case) in my 2 markets, I'm out.  I estimate that to be next spring, but will see. Time to exchange into something else.  It is too easy to beat 5 & 6% without the hassles of buildings and tenants. Those cap rates are also an historical floor.

My last leading indicator I call MSA dominoes.  Yours may be different, but learn the markets your area follows.  Like dominoes, you may have time and see clearly what may happen.

For me in the west, I watch the Bay Area.  3-6 months later will be Seattle.  6 months later will be me, 3 hrs east of Seattle.  6 months later will be my other little market to the north.    Crude seat-of-the-pants observation, but it may give me up to 12 months to find a chair when the music stops. Cheers!  

Originally posted by @Steve Vaughan :

Not sure if the bubble is related to paper equity transitions or not, but something to consider, especially related to foreign buying I would think.

I have a couple metrics and a very crude leading indicator I follow, ready to sell.  I refuse to look at 200 deals to find one.  I'd rather take a nap as most of you know.

As far as houses, I can sell, easily by owner, my smalls that become vacant anyway and are facing cap ex. Did 3 in the last 9 months. Old roofs and HVAC, for instance.  I discount less than it would cost me and I didn't have to do or schedule or oversee the work. None of those owner-occ buyers cashed out of the stock market though.  It's simply related to population growth and lack of inventory here. Demand vs supply. 

As far as commercial assets, you have to know what your market cap is for that asset class and that neighborhood.  The trend line obviously has had downward pressure for a while about everywhere.  When they compress down an additional 1% (from 6% & 7% in my case) in my 2 markets, I'm out.  I estimate that to be next spring, but will see. Time to exchange into something else.  It is too easy to beat 5 & 6% without the hassles of buildings and tenants. Those cap rates are also an historical floor.

My last leading indicator I call MSA dominoes.  Yours may be different, but learn the markets your area follows.  Like dominoes, you may have time and see clearly what may happen.

For me in the west, I watch the Bay Area.  3-6 months later will be Seattle.  6 months later will be me, 3 hrs east of Seattle.  6 months later will be my other little market to the north.    Crude seat-of-the-pants observation, but it may give me up to 12 months to find a chair when the music stops. Cheers!  

Steve, this is one of the best posts I have read on BP.  Keep tabs on that NAP Index...100% correlation.

Hi @Michael Rutkowski ,

Your post is a great one because everyone needs a reality check and needs to hear other points of view from smart people.  I am a Ray Dalio fan and he loves to get smart people on the same team that disagree.  This gives the actual decision being made a much higher probability of success.

I am very cautious right now on investing in real estate.  I look at tons of deals every day and rarely find anything that interests me.  I think there is a bubble in the luxury apartment rental market.  It seems no matter where I travel in the US, that is the craze and they are overbuilding for this segment.  More importantly, my friends in the commercial loan market have casually mentioned that the future projections for the projects are not realistic and don't properly bake in property taxes and other items.  BUT, this is only one segment in real estate investing.

I follow the 10 to 2 year spread in treasuries and once that inverts, then I think we can worry a little more.  Typically the S&P 500 peaks at the inversion of this yield curve and a recession follows.  That is true for almost all the recessions in our lifetime.

I think the real bubbles are not necessarily in the real estate market but more in corporate debt and venture capital.  A recession will no doubt impact real estate negatively but I don't see a 2008 type crisis on the horizon.  I also agree with @Llewelyn A. that if a bunch of people saying there is a bubble then that mitigates and deflates it a bit.

I am a huge Ray Dalio fan also! Basically the only person I read on linkedin. I've been following the short and long term debt cycles, and that's why I'm worried.

>the real bubbles are not necessarily in the real estate market but more in corporate debt and venture capital.

This is exactly my point here. I feel like the smarter stock investors have been unloading into real estate. When I see the trajectories of the stock markets, I'm thinking one thing: inflation. This inflation is due to many things but to me an important factor is the high employment rates we are seeing. The flow of cash into equities goes like this in my mind 401k's > ETF's > diversified portfolios > some into real estate. The main problem I see with ETF's is the net asset value for new public companies, and other funds are easily manipulated. That is just an opinion I have, but based on an instinct I have. In short, I do not believe in the value of some of these companies.

I don't invest in stocks, as I make about 5-10 times as much money in real estate. It wins hands down every time, and to me is like comparing apples to oranges. The real estate market, though, I believe, is tied into equities in the sense that people invested in equities are going to unload some of the profit into the real estate market. It will be a very interesting next few years I think. Meanwhile the equity I am seeing in my own properties is allowing me to expand like never before. I love it, and am grateful for this 'bubble'. But lying to yourself is the worst thing an investor can do, and I am disillusioned after 2008, and I think of the lessons I learned then every single day.

I guess it is always good to be prepared. I've spent about a year now wondering how this will reverberate into the real estate market (and how I can cash in on it). The main thing I see happening is the investors just starting out will immediately get underwater, and any flipping will stop, and loans will default. This will tie up credit for most people. I am stockpiling cash, and paying down debts, to buy land at auctions to get ready for this, as I think those will be the first properties to get unloaded. I've got a set date in mind to get pre-approved for a large loan, and will be there at the courthouse. That's how I'm preparing.

I sincerely wish everyone in RE good luck for the next few years. Hopefully we aren't to hit hard by all the speculation. 

Wow! it appears this post has pulled in some big fish in RE. I've only been in RE for about 5 years and self-manage my 4 properties.  Three are 100% equity and the 4th is about 60% (paid off in 6 mo.) Our only debt is 30K on property #4 and we have 360K equity total. 

My question is:

I'll be looking to add another property by the end of this year. I've noticed the dollar dropping in value about 11% over the past year, and some talk of FED raising .25 to .50 bp over the next year.

Considering the overheated market, weaker dollar and potential rate increase, should I grow and hold my cash, add another SFR or 1031 into MF?

Should I leverage my equity for a bigger piece of property and would this be a good market time to make a move?

I know this is off topic, but I can't resit this great audience.

Thanks,

If lenders are lending, I’ll be buying

@Guy Yoes

I would leverage your properties to the maximum, assuming you can maintain some cash flow, since your ROI now is probably next to nothing. Take the cash and squeeral it away waiting for the bubble to break, soon I hope, and be ready to buy.

Your equity right now is doing nothing, worse than nothing since it has turned your properties into a liability, and you need to find a better and safer place to put it. If the bubble breaks now you are going to lose big time. All it will take is a small catastrophe in your life and you will be forced to sell at a major loss. If they are leveraged you can walk away with a smaller loss.

Let's go back to 2010, when it seemed to most real estate as an investment class was gone forever. And then what happened. A boom in real estate now in its 8th year of solid expansion.

I think we may be at opposite end of that cycle where real estate is now the sexiest thing in town and everyone who is anyone wants to get in on that action. We have more investors than ever, more speculators than ever and worst more gurus than ever.

People are not thinking twice before plonking big bucks on properties which until recently were loser towns or even ghost towns! I won't take names but those get discussed here on BP often.

So stock speculators or not, the market is heated up and the behaviors are not exactly encouraging. The only good thing is people from time to time refer to the "bubble". It's a cycle at the end of the day. No one is smart to predict it or time it.

@Thomas S.

Thanks for your input. I like being debt free and my ROI is averaging 10+. However, I am considering leveraging into a small MF. I'm just not sure if my timing is right to buy at today's higher prices.

@Guy Yoes if you've got equity, use it before it's gone *poof*! That's like free money. Just plan for the worst though, as this is not a 'low time'. I saw roughly 20% loss of equity after 2008, but survived just fine, and came out of it stronger than ever. I can't advise you on your market, but I can tell you I am staying far from SFR, high end RE, new construction, remodels, or anything which deviates too far from market value. I like to start with 'cost' appraisal values, then use comparables to adjust, then FINALLY factor in income methods to get a fair market value for my investments.

I am always investing in property which is I believe to be more liquid. In my market that's MF, or land. People can never get enough of that stuff. I am almost out of residential real estate altogether, but can always convert back into res. if I need to. That's the key I think. Just be flexible.

Small investors such as me can still win even in the current market cycle. I am in a lower cost Midwest market. There is still a lot of low cost housing that meets the cash flow rules that i set.

I am focusing on single family because a lot of investors are so focused on multifamily and are ignoring good deals.

Hi @Guy Yoes ,

I may have this backwards but I would stay away from MFs and go with SFR as long as you buy them right. I feel the SFRs are more liquid then MFs. But that could be in my market. I agree with others that are focusing on replacement costs when targeting properties to buy. With the real estate boom centered around 5+ years of building apartments I feel that is where I don't want to be. So if you can find SFR that are close in to urban centers I feel that is a safer investment. I might be the only person that thinks that way though. I also like SFRs because I can sell one whereas it is hard to sell 25% of a MF property. BUT, I am a small fish and learning to get scale.

Your question regarding what to do with the dollar dropping and the fed raising rates. If you buy things that are real and at or near replacement cost, inflation will be your friend. If you can buy some cash flowing assets and allow for liquidity when needed that would be ideal. Examples would be another property leveraged properly and possible room for a HELOC. Another idea if you have the expertise is to buy cash flowing stocks (i.e. dividend) and open up a security based lending account against the portfolio for liquidity. Just make sure that in all cases the assets are cash flowing (cap rate) at a higher rate then the borrowing costs. If the rates are floating then target a 3% spread. Also, it requires a lot of research because of the risks relative to the returns.

I am not a big fish at all but hope to be so in 20 to 30 years.  I do all of the above strategies.

I agree with @Michael Rutkowski on being flexible.  Also, go with what you know, feel comfortable with, and understand.  Sounds basic but I remind myself all the time to do that because there will always be good deals to come.

Some of this just boils down to: "What else would I do with my money?"  Real estate is "too high" so I invest in stocks?  Those are pretty frothy as well.  Do I invest in crypto?  Talk about frothy...  Bonds?  Those don't pay squat.  Buy gold bars and hide them under your bed?  Not for me, but I'm sure it works for some.  Put it all in savings accounts where inflation outpaces interest?  There just aren't too many benefits there.  

And if you're in it for the long-haul there are material benefits to locking in either a 5% rate for 5-10 years on commercial or 4.5%ish for 30 years on non-commercial.  A lot of people look at the past for values but I rarely see people talking about the past in reference to interest rates.  As though values will drop by access to capital will still be as easy, as thought interest rates will still be the same as the are today, as though (if the economy is negatively impacted) Mr. Investor will still be able to easily qualify for the loan if they get fired from their job.

The biggest challenge is that nobody knows what's going to happen.  The market could be frothy for another two years and then "plummet" back to the 2018 levels.  There have been people saying the stock market, real estate, etc. and other assets will all correct/crash/etc. for 2+ years now.  They've missed all the appreciation, capital gains, cash-flow, mortgage principal payments, etc.  

Almost by definition, a bunch of people are going to be right and a bunch of people are going to be wrong.  But I never trust anything that says "We're only 1-2 years away from a massive crash!!!!!!"  And yet isn't selling their entire portfolio...  

I would not try to predict when the markets will correct but definatly believe they will. Everything has climbed unrealistically high with no foundation to justify the climb. It can not continue for ever. When markets reach a peek and what ever the trigger it is that starts the fall happens it is going to have a long way to fall.

Sorry but I don't think stock speculators are moving in droves into RE.

The stock market is doing very well, no reason to leave.

TBH I think that flippers and RE investors are driving the RE market to insane levels.

>The stock market is doing very well, no reason to leave.

Main reason to put some money elsewhere is because dividends are taxed, heavily, in some cases. Real estate has amazing deductions to take advantage of. Pretty big reason right there.

The stock market has only gone up a piddly EIGHT TRILLION dollars since THE MAN took office! Why get out now? Double down!

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