Are We Causing the next Bust?

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Are We Causing the next Bust?

Michael O.
Rental Property Investor · Detroit, MI · Member since 2017 · 55 posts · 53 votes

Earlier today, on the way to work, I was listening to the BP Podcast #285 as per my usual routine (another great podcast by the way). But after hearing some of the guest's comments about building multi-family and renting units for $13/sq-ft in a small town in North Dakota and making a killing from it, which was much higher than what is expected in that market, it got me to thinking: 

Are we contributing to the next economic bust?

By "we" I mean real estate investors, both small and large. While I only have one duplex under my belt, I have used the techniques on this community and through the books I've read (thanks @Brandon Turner) to buy a value-add property, rehab it, and raise the rents by ~$200/mo compared to what it was before. I don't plan on stopping the BRRRR process any time soon.

I started digging in to the statistics and I found some frightening numbers:

  • over 11 million Americans are spending 50% or more of their paycheck on rent
  • over 21 million are spending over 30% of their paycheck on rent
  • over 60% of Americans have less than $1,000 in their savings account
  • over 20% don't even have a savings!
  • student loan debt is not slowing down at all - the average graduate now has $40,000 in debt (up 6% in one year!)

Now granted, most of the time I am an advocate believer in the capitalistic society and that every person is in control of their own situation and they wouldn't find themselves with this much debt if they had planned accordingly, etc etc etc.. 

What concerns me is the rate of debt (rent included) increasing at a faster pace than most Americans' income levels. I live in Detroit and have seen rents literally skyrocket over a short period of time. Units that used to rent for $1,100/mo in the Central Business District just 3-4 years ago are now fetching upwards of $1,750-$1,900/mo. 

When I hear multi-family investors talk about how hard it is to find good deals today I can only imagine they are trying to squeeze every dollar they can out of their refurbished buildings to generate higher cap rates. 

All of this leads me to wonder; will we eventually hit a "cap" and see rents start to relax in price, or will people start defaulting on other debt to afford their living situations thus starting a domino effect similar to the housing crisis (on a smaller scale).

Would love to hear everyone's thoughts!

Thanks,

Mike

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y

those stats are nothing new.. its kind of the way the US rolls and has always rolled.

it does not mention that over 30% of all SFRs are owned free and clear as well.. 

so there Is balance.

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    8y
    No I don’t think investors will cause the next bust. The next bust is likely to be caused by geo political events (like a trade war) or the credit bubble that is forming in the corporate sector (high interest, low grade corporate debt)
    7Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    8y
    Michael O. Real estate investors will not be the cause but those who are either over leveraging or doing high risk investments (such as what you mention on podcast that I did not listen to) will be the ones hit the hardest I do not worry about what others do, I make sound Investments and have a balance so I am not over leveraged nor am I putting my money where as if a tenant were to leave it could destroy my business Be smart and patient and do not fall into the FOMA trap
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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y

    those stats are nothing new.. its kind of the way the US rolls and has always rolled.

    it does not mention that over 30% of all SFRs are owned free and clear as well.. 

    so there Is balance.

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    8Reply
  • Christian Hutchinson
    Investor · Detroit, MI · Member since 2014 · 360 posts · 354 votes
    8y

    my biggest scare right now is when all this shadow inventory returns to market. Average people on the street at own multiple properties, banks and hedge funds are sitting on 1000s of homes each.

    Very little building is happening and cash is very available. What happens to home prices when people release these homes back to market. The asset pricing will fall rapidly.

    1Reply
  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Christian Hutchinson:

    my biggest scare right now is when all this shadow inventory returns to market. Average people on the street at own multiple properties, banks and hedge funds are sitting on 1000s of homes each.

    Very little building is happening and cash is very available. What happens to home prices when people release these homes back to market. The asset pricing will fall rapidly.

     Very little building will be regional.... because there are plenty of places where construction is BOOMING...

    2Reply
  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    8y

    who knows?!

    Everyone contributes to the economy, so in some ways yes.

    Who caused the last bust??......lots of people: from buyers, to bankers, it was no particular group.

    you can't take responsibility for the 25% of the population that live week to week, you can't take responsibility for those who are just unlucky, and real estate investors don't make up such a significant part of total GDP that any specific blame could be placed on them, ESPECIALLY if many are creating value, contracting employees, and providing stability.

    that said: if you go bankrupt after the next economic downturn, then yes, you were part of the problem LOL

    [email protected]Podcast Guest on Show #301
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  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    8y
    Originally posted by @Christian Hutchinson:

    my biggest scare right now is when all this shadow inventory returns to market. Average people on the street at own multiple properties, banks and hedge funds are sitting on 1000s of homes each.

    Very little building is happening and cash is very available. What happens to home prices when people release these homes back to market. The asset pricing will fall rapidly.

    I've been hearing this for 4 years now and haven't seen any evidence yet.

    How do you know how many homes they have? 1000's isn't very much

    Why do you say building isn't happening? In many cities homes can't get built fast enough

    [email protected]Podcast Guest on Show #301
    2Reply
  • Christian Hutchinson
    Investor · Detroit, MI · Member since 2014 · 360 posts · 354 votes
    8y

    The low end of the market has been completely been eaten up by investors. Here in the MW specifically Metro Detroit, 50% of the properties in B-/C+ neighborhoods are owned by investors.  A typically family in Michigan could get into a starter home in numerous suburbs around Detroit under $100K build some equity and moveup to the next home in 5-10 years. Now, its all owned by investors, banks, and shell companies.  The entry-level house for a family is now $150K, which wouldn't be a big deal, but median hh income is 58K meaning they are stretched.  People are selling these "starter" homes for $80K with multiple cash offers stuff selling for $110K, these cash buyers are investors who are late to the party in many ways, but completely crowding out the run of mill working family.

    Its creating locally it sees an artificial price floor for owner-occupied housing. 

    1Reply
  • Omar Khan
    Rental Property Investor · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    @Michael O. Someone, somewhere is going to be responsible for everything that's going to happen. 

    Is a real estate crash like 2008 going to happen? Hopefully not (again) in my life time. 

    Can it happen? Sure. We could also get hit by an asteroid. 

    What should we do in the mean time? Save aggressively, invest conservatively, rinse and repeat. 

    I'll expect my check in the mail ;)

    3Reply
  • Michael O.
    OP
    Rental Property Investor · Detroit, MI · Member since 2017 · 55 posts · 53 votes
    8y

    Thanks, all, for the replies. I guess my main concern is similar to what @Christian Hutchinson is saying; with the starter type homes being bought up by investors and then rented out at higher prices, it leaves lower-middle class folks with few options to save up enough money to buy their own house since they are now spending more of their paycheck on rent.

    I don't want anyone to get the wrong idea about my stance on real estate investing and long-term wealth generation. I'm a big proponent in each person creating the life they choose to live. I just like playing devil's advocate sometimes ;)  

    0Reply
  • Ali Tayeh
    Detroit, MI · Member since 2017 · 10 posts · 4 votes
    8y

    Hi @Michael O. ,

    What drew my attention is part of the statistics that you referred to:

    • "over 11 million Americans are spending 50% or more of their paycheck on rent" That's less than 3.4% of the US population.
    • "over 21 million are spending over 30% of their paycheck on rent" That's only 2.7% of the US population (after you deduct the 3.4%).

    The last three facts are very scary though. 

    I think the real estate market is still reasonably priced (if you look outside the hottest market in the nation), and with Fed increasing the interest rate that will help to slow down the market even more.

    I think the next bust will come from the big apple, Wall Street particularly. The stock market is at all-time high level, and some companies are traded at unrealistic PE ratio (just to name few Amazon 215.17, Netflix 273.63)

    2Reply
  • Matt Millard
    Lewisville, TX · Member since 2015 · 341 posts · 264 votes
    8y
    I don’t think real estate investors are responsible for the bubble it’s market conditions & clearly the true source is the Federal Reserve manipulating interest rates & printing fiat currency for a very long time. Our next bubble is everything & housing may be part of it but will take a back seat!
    0Reply
  • Bryan Devitt
    Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
    8y

    You forgot about the record credit card debt. The problem isn't investors, it is people that dont have a clue about finances. It isnt taught in schools and it should be one of the main focuses of high school. Stop teaching every kid trig and teach them how to live day to day. I am a dooms day person, but I wouldn't blame someone selling or trying to make a profit. I blame the people who never plan and over extend.

    5Reply
  • Michael O.
    OP
    Rental Property Investor · Detroit, MI · Member since 2017 · 55 posts · 53 votes
    8y
    Originally posted by @Ali Tayeh:

    Hi @Michael O. ,

    What drew my attention is part of the statistics that you referred to:

    • "over 11 million Americans are spending 50% or more of their paycheck on rent" That's less than 3.4% of the US population.
    • "over 21 million are spending over 30% of their paycheck on rent" That's only 2.7% of the US population (after you deduct the 3.4%).

    The last three facts are very scary though. 

    I think the real estate market is still reasonably priced (if you look outside the hottest market in the nation), and with Fed increasing the interest rate that will help to slow down the market even more.

    I think the next bust will come from the big apple, Wall Street particularly. The stock market is at all-time high level, and some companies are traded at unrealistic PE ratio (just to name few Amazon 215.17, Netflix 273.63)

     I've been thinking about the stock market issues, as well. Amazon, Tesla, Apple, etc.. do seem unrealistic and artificially inflated. 

    I love hearing everyone's thoughts on this topic!

    0Reply
  • Damon Pendleton
    Rental Property Investor · Richmond, VA · Member since 2018 · 46 posts · 90 votes
    8y
    Michael, in my neck of the woods I see RE investors rebuilding neighborhoods, creating jobs, reopening storefronts that have been closed for years, etc. I’m very proud of the work we do. People are certainly being priced out in some areas but the underlying factors for that are many. I certainly wouldn’t blame the average RE investor for the need for better public education, inflation, rising cost of college education, or even creating the need for low income housing. And we collectively don’t make any economic policy. If we added all the deals on BP I doubt an economist would have them moving the needle much on the US economy. That doesn’t mean we won’t see a cycle in the RE/stock/capital markets but most of us are just trying to insulate ourselves from how that cycle will impact us and some are trying to be prepared to take advantage of the next down cycle.
    2Reply
  • John Patterson
    Contractor · Canton, GA · Member since 2015 · 107 posts · 81 votes
    8y

    Look at new home construction compared to 1st time homeowner demand. There is not the boom we had in 80s and 90s. Prices and rates are on the slow rise but new development hasn’t peaked yet. 

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    There is no connection between a possible crash and investors. The stats on Americans housing expenses, savings etc. is due entirely to the mismanagement of money by indivulaes. Their situation is self imposed. Renting is the least expensive form of housing and it will not result in indivulaes defaulting on other debts. They will default on their rent first. What needs to happen is they must realise it is their responsibility to curtail their extravagant spending habits. If you can not afford your rent you can not afford a cell phone, cable TV, eating out etc. Individual financial management woes are in many respects unique to the U.S.

    The next economic crash in America will be the result of the newest international trade wars.

    0Reply
  • Michael O.
    OP
    Rental Property Investor · Detroit, MI · Member since 2017 · 55 posts · 53 votes
    8y

    @Thomas S. i've been reading more into the trade wars brewing and I can definitely see that. It has people especially worried in my market (metro Detroit) where auto manufacturers will feel the hit extremely hard compared to other markets. 

    0Reply
  • Gordon Starr
    Rental Property Investor · Dayton, OH · Member since 2015 · 312 posts · 273 votes
    8y

    The government gets in the housing market by heavily influencing the supply of money and the interest rate. They calculate a cost of living index and try to keep it inflating at 2-3% per year. The housing component of their index is based on what people perceive they could rent their house for. Pretty damn obscure in my view, but they are trying to control rents in aggregate.

    Their policy has really very little to do with the cost of homes. It is, in my view, lame because they also influence the cost of buying a home. In recent years they made money both highly available and low interest just to keep rents inflating. They definitely don't want rents skyrocketing like they have been, so look for a lot of tightening until the rents stabilize.

    This may control rent, but it really messes up real estate values which get hurt badly by fiscal tightening. Unless wages and employment go up, its a bust in home values, especially in areas and asset classes that are highly leveraged and low yield. My advice - don't buy that McMansion regardless of what the wife wants!

    1Reply
  • Anthony Wick
    Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes
    8y

    I'm actually counting on those 60% that can't save up even $1,000. Those are the people that will never own and will keep renting my units. However, I am seeing more and more people overpaying for multi family around here. At least in my opinion. I'm running the numbers on how much recent sales have been, and I can't for the life of me figure out how those places are cash flowing. Maybe more people paying cash and anticipating appreciation. But I'm not going to do either of those things. 

    2Reply
  • Marc Winter
    Real Estate Broker · Northeast PA · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    The way I see it, not investors, not spendthrifts, not credit card or student loan debt, high rents--none of that will break the backs; it's government policy and interference.  Remember, the last real estate 'bust' 2007 on, was in fact, not a real estate bust, it was a financing crisis.  It was caused by political philosophy gone way bad;  EVERYONE  should own their own home.

    Sorry, not everyone should own their own home, imho.  Responsible, working individuals that have enough income and savings to purchase and have a reasonable chance of actually repaying the loan--THOSE people should own, if they want.

    The government FORCED banks/lenders to give out mortgages to people that actually had NO CHANCE of repaying.  You all remember--package up those doo-doo loans, call them grade A, and sell them as securities.  Banks and Wall Street  did the dirty work, but they were following their own philosophy--government mandates we make these garbage loans.  OK, we'll figure out a way to profit from it.  They did, at all our expense!

    As the business cycle progresses, eventually you can expect another downturn or even a crash--that is the normal cycle of things.  Don't be afraid of it; embrace it.  Trust and follow your gut, only buy bargain, make-sense investments, keep some of your powder dry (don't overleverage), and take time to rest, recover and take a view from 30,000 feet to get a feel of what's the major, over-arching trend.

    Simple, but not easy.

    Good luck, keep investing.

    2Reply
  • Mark Nickoson
    Rental Property Investor · Dayton, OH · Member since 2015 · 79 posts · 85 votes
    8y

    Michael,

         It is an interesting question, but can I ask you to look at it from a different angle?  Whether tens of thousands of investors invest or fewer investors invest in BIG amounts, I don't think the number of people is the issue.  The question is whether it is profitable to invest.  It is, that is why we are here.  Now look at the benefit of what we are doing.  When properties are run down to the point that investors find it profitable to buy, rehab and either rent or sell, we have raised the level of the neighborhood up a few notches and we have employed some construction folks along the way.  And if we are grabbing the worst of the properties I.e., the eyesores, we have made a dozen or more neighbors happy.  What we do is breath new life in old properties.

         There are economic cycles.  At some time, there is always a downturn.  If we use good business principles and don't STAY highly leveraged, which is really gambling, we don't have to be burned when the upswing of a cycle turns into a downturn.  If investors own an abnormally high amount of properties and the price goes up because of demand, many will sell, because it will reduce their risk.  In the mean time, if demand is high, builders will be building to satisfy the demand.  For those incurring high debt, when the downturn occurs, they will not be able to maintain their inventory, and they will loose some or all of what they have.

    Mark Nickoson

    0Reply
  • Spencer Hilligoss
    Investor · Alameda, CA · Member since 2016 · 132 posts · 170 votes
    8y

    the severity of the great recession was exacerbated by lax lending standards. it was not the only driver, but an important one. many lenders have tightened their LTVs, particularly for less experienced borrowers. 

    now, we're starting to see trends that are inching back toward generous leverage and flexible underwriting standards.

    that said, I agree with some of the comments made here about the larger (current) risks of a 'bust' being related to trade wars and the resulting market uncertainty

    0Reply
  • Josane Cumandala
    Appraiser · Brooklyn, NY · Member since 2018 · 106 posts · 118 votes
    8y

    Causing? Not at all. Will we be impacted by it? Yes.

    Federal reserve policy causes asset bubbles. Lowering interest rates distorts the decision-making process between debt and thrift. When money is cheap it's more expedient to borrow money for things rather than save it up yourself and buy it. The problem with this is that it leads to malinvestment and business practices that rely too heavily upon low interest rates to be sustainable in a higher rate environment. Cough cough Leman Brothers cough cough sub-prime mortgages.

    It's easy to blame investors or even Wall Street and the financial sector but asset bubbles like that would not be possible without the Federal Reserve empowered to artificially suppress interest rates whenever they feel like it. The malinvestment portion of it is easy to succumb to and some people on this forum will get burned if rates go up too much. I blame the system itself more than the individual actors because if mortgages were based on the rationale of say the private or hard money lenders that we investors often deal with, then realistically they would be much higher in order to protect the lender unless the borrower was extremely qualified and/or brings a lot of business. It's only when the lender knows they are covered and there's so much helicopter money from the Fed to go around that they lend to people with no proven income or credit history. 

    1Reply
  • Account Closed
    Tax CPA · Charlotte, NC · Member since 2014 · 215 posts · 186 votes
    8y

    I agree with @Caleb Heimsoth. Toys R Us was the start of the big box retailer debt bubble. Many other big box retailers have debt maturing over the next 4 years. Combined with fewer people going into stores...

    2Reply
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