The bubble is bursting and we're still investing

The bubble is bursting and we're still investing

Investor · Decatur, GA · Member since 2015 · 56 posts · 38 votes

In my humble opinion, the bubble has started to burst and many of us including myself are still in denial. 

The national median home value is now $217,300, an increase of 8.3% on the year and 8.4% above the bubble-era peak. In 21 of the nation’s 35 largest markets, the median home value is now at an all-time high.

Currently, interest rates are at a four year high. Mortgage rates have not reached 5% since 2011. Interest rates also have some correlation with the real estate markets. History shows that real estate interest rates tend to hit their highest after land values peak.

Mortgage applications to purchase a newly built home plummeted nearly 9 percent in June compared with June 2017, according to the Mortgage Bankers Association. This suggests lower new home sales going forward, despite higher price.

Lastly, and perhaps most importantly, what happens when all the biggerpockets crowd and likeminded investors start trying to unload their properties at the same time. An article recently outlined that the Chinese investors in US real estate are now trying to sell their properties. For the first time in a decade, Chinese insurers, conglomerates and other investors have become net sellers of U.S. commercial real estate.  

Prices have gone up so high that simply put, the average American renters are barely able to keep up with rent prices. This is the very definition of a real estate bubble. I really hope we are not in a bubble but I worry about the irrational exuberance in this market..

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Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
8y

Groundhog day...been reading these correction posts for four years.  Yes, markets go through cycles.  If you can predict them, forget real estate and short or long the stock market...it's a lot easier.  We don't need to hear that a correction is coming...we all know that markets cycle.  We need to know what you are doing about it.  Years of idle cash is high risk.

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  • Cincinnati, OH · Member since 2016 · 146 posts · 104 votes
    8y

    I agree that the market is hot and perhaps overbought, I am not so sure about a bubble. I my opinion a bubble is derived when only irrational behavior is left to push the market higher.

    Median home value is increasing as the cost to build new has skyrocketed since resources are harder to come by. The also addresses why mortgage applications are down, and you are correct that people see the market as less affordable, but isnt that a boon to landlords? Everyone has to live somewhere and the cost to buy 50 existing units is a fraction of the cost to build 50 new units and although rates are highER, they are still at relative lows compared to the past, making it a great time to finance your preowned 50 unit building.

    When the market floods with inventory, I will be ready to buy then as well, getting even better deals on the same buildings I m cautiously purchasing now.

  • Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
    8y

    @Tareq Salaita I agree. Subprime lending is back in full force under a new name "non-prime", and 0% down mortgages are also back. More than anything else (IMHO) this lending climate is a giant red flashing light at the edge of a cliff.

  • Member since 2018 · 509 posts · 211 votes
    8y

    Bruce Norris famous HML guy uses the word plateauing.

    He called the last crash. I don't know if was lucky or Genius. 

    There's guys who called last stock market crash working  WaL Mart greetings dePt.  today. 

    He always is a good listen.

  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y
    Originally posted by @Eric Adobo:

    Bruce Norris famous HML guy uses the word plateauing.

    He called the last crash. I don't know if was lucky or Genius. 

    There's guys who called last stock market crash working  WaL Mart greetings dePt.  today. 

    He always is a good listen.

     Every year, when things are going well, someone (many actually) "call it".  The only ones we seem to remember are the ones that "called it" right.  We have been at a "bubble" for at least the last 10 years ...just ask all the experts.  When we do hit that bubble, someone will be right, and 9 others will have been wrong.

    My  questions is this:  "Why, when these bubbles actually hit, do we call the ones that predict it, a genius"?

  • Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
    8y

    Median home price in L.A County is now $615,000 . In the city it's closer to $1 million now . In San Franciso $1.6 million but all these areas get multipe offers at these prices. Demand is still high despite the high  prices and the fact these prices are much higher than the U.S median home price. 

    It'll be a downturn when we start seeing days on market increasing significantly and prices actually going down. Right now sales are down because inventory is low...but prices are rising. 

    Regarding biggerpockets crowd and other investors unloading at the same time, not sure why that would happen. As long as investors bought properties that cash flow and had fixed mortgages there isn't a reason to be forced to sell at a certain time. Demand for rentals went up the last housing crash and rents didn't really decline at least in most markets. 

    In regards to Chinese investors I know that a lot of the big investors have pulled out of some deals due to pressure from the Chinese government .  There was a big hotel project in Beverly Hills and Wanda Group backed out of it. This is a lot different though than the types of properties most on BP are buying and investing in. 

    As far as renters not being able to afford rent of course it'll vary a lot by market too. California in general especially SoCal and the SF Bay area is very expensive, which is why many are moving to other places like Texas , Arizona,etc..but they are getting replaced by higher income people. 

    One thing for sure though things don't go up up up forever and appreciation of 10%+ a year isn't sustainable.

  • Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    8y

    Groundhog day...been reading these correction posts for four years.  Yes, markets go through cycles.  If you can predict them, forget real estate and short or long the stock market...it's a lot easier.  We don't need to hear that a correction is coming...we all know that markets cycle.  We need to know what you are doing about it.  Years of idle cash is high risk.

  • Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Mike Dymski:

    Groundhog day...been reading these correction posts for four years.  Yes, markets go through cycles.  If you can predict them, forget real estate and short or long the stock market...it's a lot easier.  We don't need to hear that a correction is coming...we all know that markets cycle.  We need to know what you are doing about it.  Years of idle cash is high risk.

     Short term zero or low risk deals. If people want to gamble that prices will continue going up, why not let them give you money to do it?

  • Investor · Greenville, SC · Member since 2013 · 252 posts · 92 votes
    8y

    i do not think that the real estate market can continue this way forever, as we all can agree.  some of these people have predicted the market crashing for several years.  i guess they will eventually be right?  this is not a slight toward anyone on here.  just a take on some of the so-called ppl that predicted the meltdown 10+ years ago.  

  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    8y

    You should sell me all your properties at a 20% discount then before the bubble bursts.

    Other than after the market crashed a decade ago, home prices are always at an all time high. ( Well, not 1991, they dropped to $120,000 from 1990's $122,900)

  • Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
    8y

    Just waiting for a crash so I can get a sweet deal on this piece of dirt...if it's still on the market.

    ---

    There Is a $1 Billion Property for Sale Atop Beverly Hills

    The highest point in the 90210—a 157-acre, undeveloped lot—has sweeping, 360-degree views from Malibu to downtown Los Angeles and the San Gabriel Mountains.

    So large is the prized piece of real estate that all of Disneyland could fit within its confines and still have 57 acres to spare. Press materials liken a visit to the site, accessed via Benedict Canyon, to a “god-like experience.”

    https://www.bloomberg.com/news/articles/2018-07-30...

  • Rental Property Investor · Tulsa, OK · Member since 2017 · 41 posts · 34 votes
    8y

    Yes it inevitable, but its not a reason to stop investing... its a reason to invest smarter. Myself personally, I am sticking to very short term equity plays and large value add complexes that can store cash easily. Such as mobile home parks. The risk of buying a mobile home and moving it into the park is much less than flipping a house. 

  • Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes
    8y
    @Tareq Salaita So if you think that the bubble is bursting, you think prices are going to drop 30%-40%? Just like post 2008? Or do you think prices are going to come down 10%? If it's the latter, then it's just a correction or part of the market cycle. Just because prices come down 10% does not mean that..."yep the bubble has burst." People need to understand these terminologies and use them right. I don't see a bubble. I do see a correction as there are various fundamentals in play here. I do tons of research and data gathering like most investors here and if there is truely a bubble, then i must be looking at the wrong places and doing a poor job lol! Oh...and i ignore the news and hype. Just look at the data and facts.
  • Member since 2018 · 509 posts · 211 votes
    8y

    Problem with crash thinking is you won't know when  to pull the trigger. 

    Example say $330,000 Vegas rental starts selling  for $250,000.

    Do you buy or wait till $175,000.

    Knowing during the last crash they were selling for $80,000.

    Having Said That I Want A Crash. 🙂😀😁😊

  • Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
    8y

    A 10% drop for Las Vegas would be the second largest drop in it’s history. But then so would a 5% drop. 

    But if it doesn’t drop 15% prices are still higher than last year, you shoulda bought then. If they do drop 30%, wow 2016 prices all over. That sure punishes people that have owned less than 2 years. Unless 2 years later they’re back to 2018 prices. 

    I could see flippers worrying about prices going down 5% or even staying steady  but for buy and hold you’d need to predict such a massive, 2nd time ever correction, as Eric said, on the way out and in, within months of their peaks. Otherwise acquisition and disposal costs will only make others rich.  I can just see a 10% correction and these guys sit out waiting for “the rest of the bubble to pop” prices go back up and they start predicting the next crash. And they still haven’t bought anything. But at least they can tell us how smart they are. 

    I bought a 200k house in 1998 that “bubbled” to $400k by 2007, dropped back to $200k and now is back to $450k. Rent went up every year, it was occupied above 98% over those 20 years, bringing in $21,000/yr. Time heals almost all real estate errors. If all you knew was a $200k house brought in $420k in rent and was now worth $450k 20 years later. I’d call that “ok”. It’s not a home run but it wasn’t a disaster. When it was in the low $300’s I refinanced it and took my $200k out. So whatever it made or is worth is being made with virtually none of my money. That money bought other houses. And so on...

    These perma-bears may be right, probably have to be right someday, but maybe they will have missed out on so much money then that they should have no right to talk. Certainly they should be talking now about how many years in a row they’ve been wrong. 

  • Member since 2018 · 509 posts · 211 votes
    8y

    Pure genius.  Collecting rent over long period of time lowers BASIS. 

    I apply this thinking to my stocks and their dividends. Not once did I apply it to 🏡 investing. 

    From now I will apply it to RE too. 

  • Specialist · San Francisco Bay Area · Member since 2018 · 221 posts · 160 votes
    8y

    @Eric Adobo how does rental revenue lower basis?  What tax code are you referring to....(because that’s not how it works).

  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @Eric Adobo:

    Bruce Norris famous HML guy uses the word plateauing.

    He called the last crash. I don't know if was lucky or Genius. 

    There's guys who called last stock market crash working  WaL Mart greetings dePt.  today. 

    He always is a good listen.

     Well I listened to Bruce last OCT at an event  he thought Multi at 3 and 4 caps was frothy  that's his words.

    and I was pleased to know that I do exactly what he does in business world.. so just keep emulating him.. and I hope he is right.

  • Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Tareq Salaita:

    ...the average American renters are barely able to keep up with rent prices. This is the very definition of a real estate bubble. I really hope we are not in a bubble but I worry about the irrational exuberance in this market..

     Tareq,

    Keep this in mind:

    Housing And The Great Recession end of page 3 and beginning of page 4 "Although housing prices have fallen and prices in general declined during the recession, figure 6 shows that rents held steady and continued to increase, as more house-holds turned to renting. This trend, together with declining incomes, has increased the proportion of renters who are “severely rent burdened,” or pay more than 50 percent of their incomes for rent, as shown in figure 7. This is particularly true among low-income renters, more than 60 percent of whom pay over half of their pre-tax income on housing."

    Other reports/studies support the idea that rents did not decline as home prices did.  Renters suffered as their incomes shrank and the portion of their income that went to housing increased, but in general, landlords continued to collect the same or higher rent.

    If you truly believe we are living in a bursting bubble, you can possibly protect yourself by focusing on buying rentals.  New home developers and flippers may suffer, but landlords who are not overleveraged should be ok.

    Disclaimer: I am not an economist, accountant, financier, or anything else in that vein.  I'm just sayin'

  • Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
    8y

    Bruce Norris was on a episode of the Real Wealth Show with Kathy Fettke earlier this month. He has a lot of great insights on the market and market cycles.

    Link here:

    https://www.realwealthnetwork.com/learn/interest-r...

  • Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
    8y

    9/10 people cant predict the market. The 1/10 that can are just lucky with their timing on their guess. Its nearly impossible to predict when exact a crash it going to happen. All you can do is make sure you're prepared and secured for it. And also making sure you can take advantage of it when it does happen.

  • Rental Property Investor · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Tareq Salaita:

    In my humble opinion, the bubble has started to burst and many of us including myself are still in denial. 

    The national median home value is now $217,300, an increase of 8.3% on the year and 8.4% above the bubble-era peak. In 21 of the nation’s 35 largest markets, the median home value is now at an all-time high.

    Currently, interest rates are at a four year high. Mortgage rates have not reached 5% since 2011. Interest rates also have some correlation with the real estate markets. History shows that real estate interest rates tend to hit their highest after land values peak.

    Mortgage applications to purchase a newly built home plummeted nearly 9 percent in June compared with June 2017, according to the Mortgage Bankers Association. This suggests lower new home sales going forward, despite higher price.

    Lastly, and perhaps most importantly, what happens when all the biggerpockets crowd and likeminded investors start trying to unload their properties at the same time. An article recently outlined that the Chinese investors in US real estate are now trying to sell their properties. For the first time in a decade, Chinese insurers, conglomerates and other investors have become net sellers of U.S. commercial real estate.  

    Prices have gone up so high that simply put, the average American renters are barely able to keep up with rent prices. This is the very definition of a real estate bubble. I really hope we are not in a bubble but I worry about the irrational exuberance in this market..

    Just wanted to add my two cents: Inflation-adjusted prices lags 2008 levels in most major markets. 

    Secondly, why should 2008 be considered the high water-mark for the real estate industry? Why don't we compare current prices to the S&L crisis (we'd be in a bigger bubble territory!) or some other real estate crisis.

    We keep hearing bubble, bubble, bubble from multiple sources but no one offers specific, actionable advice. It's not much of a prediction if you can't put a timeline on it. 

    E.g. With 100% confidence I can tell you that we will have a recession/economic collapse bigger than 2008 in the next 1,000 years. But that isn't helpful for investment decision-making, is it?

    Simple solution: Put your money where your mouth is. Sell your properties and move to cash or massively short the real estate index. 

  • Attorney · Northbrook, IL · Member since 2017 · 719 posts · 549 votes
    8y

    Every time someone talks about a bubble bursting I honestly wonder how much time they've spent reading about what really happened in 2008. We don't have a tenth of the economic factors today that brought the crash in 2008.  That being said, he we are over due for a correction in real estate. 

    Home prices have been consistently rising across the board, with some areas rising faster than others. The problem is wages are not rising at the same rate and expenses are going up. Far too many homeowners are asking too much money for their houses as the market dictates pushing value. We need a price correction, meaning an event that will trigger homeowners to become more realistic about their home prices to allow more buyers the opportunity to buy. 

    What will be that trigger? The Washington Post did a very interesting article last month (link below) that states most of the stocks and bonds we invest in have been over leveraging the companies in order to improve their bottom line and keep their dividends to investors up and stock price up. They are approaching a critical level that could trigger a massive sell off in stocks and bonds and result in huge losses for ETFs. This type of event could massively reduce retirement accounts and portfolios.

    https://www.washingtonpost.com/business/economy/be...

    Someone posted above, you can minimize your risk by investing smart in real estate. I've recently revised my investing strategy. If you can find cheap multi unit properties, jump on it. In Chicago, the prices on investment properties have risen dramatically and I'm waiting on the sidelines for prices to pull back. In the meantime, I'm doing residential fix and flips, but only if I know I can put the property on the market for a price that an average family with a decent job can afford. Whatever that price is depends on your area. I'm avoiding any projects that dictate pushing value and playing it safe until the market corrects. At the end of the day, a working family still needs a home for their kids.

  • Scott TrenchPro Member
    Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
    8y

    The bubble is always 18 months away :)

    Here are similar pundits who predicted crashes, with excellent numbers and reasoning behind them, over the past five years. 

    2013:

    2014:

    2015:

    2016:

    2017:

    2018:

    I think that if you are afraid of a bubble, you'll never invest, and will surely lose. At the same time, you need to have a strong financial position, great cash flow, and a cash cushion. I intend to win if the market continues to climb, to win if the market falls, and to win if it flattens out. Can your strategy handle all three conditions? 

  • Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
    8y

    @Tareq Salaita always buying good deals with a cash flow cushion. Less of them around, but they still exist in my market. Also a reason to invest in C and B class areas. There will always be somewhat of a demand because when the economy is good people trade up in their housing. When it's bad renters trade down.

  • Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    All ive seen around me is a younger generation buying single family homes, that can afford it. There is a huge demand for starter homes driving all prices up, except for the million dollar homes that have sat on the market for the last 6 years.

    The ones who bought prior to 2016 have even more money now to invest. And most of them are looking towards rental investment property, but very few of them can afford to get into one with the down payment requirements. 

    I said it a few months back, and a RE agent mentioned it wasn't true, is that ive "noticed" prices starting to level out across the board. Because I am constantly looking at property and noticing prices and what I would pay yada yada. Everyone is trying to sell, but no one wants to buy over 300k. Any home under 300k is gone quickly.

    Take what I say with a grain of salt, I only have experience in what Ive been looking at (which im pretty obsessed with). Im not an experienced investor yet.

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