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..

19Reply
345 views

Most Popular Reply

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.

See this reply in the discussion

66 Replies

Jump to latestLatest
  • Peter TverdovBusiness Member
    Developer · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
    8y

    I don't think there will be a "crash" like we saw for a long long time (talking decades). We are due for a correction. I have seen some stupid high prices on owner occupied property and also ridiculous prices for rental property. I think it's a good thing interest rates are increasing again. 

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

    What I do know is, in 2003-2008 (give or take) people were buy with no money down, interest only payments, 3 year arm, 2 mortgages at close, and buying properties that they couldn't possibly pay for when their arm was due. They simply couldn't afford the principal on their loans. That isn't happening right now. FHA will get you a loan at 3.5% down, but even that small amount is keeping a lot of people from buying. Now, are people house poor? Of course they are. America is also car poor, credit card poor, and student loan poor. I simply don't see the same factors now as I did 10-12 years ago. My area is growing very fast, and it's not like were gaining 20% a year in equity. I was in California when housing was gaining 30-40% a year in "value". Now, not even close.

  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y

    Everyone has their own opinion of when "the buble will pop" or if we are at the top but personally, I think the bubble popping will provide more opportunity.  Some flippers may get in trouble if they are holding too long but I think many of us on here will welcome lower purchase prices. 

  • Lewisville, TX · Member since 2015 · 344 posts · 264 votes
    8y
    The Bubble in real estate is one of 5 major bubbles. This is the everything bubble. That being said invest conservatively in things like mobile home parks & you will have no regrets.
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    8y
    Originally posted by @John Woodrich:

    Everyone has their own opinion of when "the buble will pop" or if we are at the top but personally, I think the bubble popping will provide more opportunity.  Some flippers may get in trouble if they are holding too long but I think many of us on here will welcome lower purchase prices. 

    I think what happens though is if you have a lull or leveling off and a small retreat then the sentiment goes I am going to wait for it to bottom.. so fence sitters get a sore butt either way.. waiting for it to bust or wont pull the trigger until they are darn sure it bottomed out. 

  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Jay Hinrichs:

    I agree but I am not a fence sitter - I will continue to flip properties that make sense and acquire cash flowing rentals while other people sit on the fence and further decrease demand.  Bad flippers made money in the mid 2000s, I was lucky to get started when it all fell apart and now have the experience and equity in all of my rentals to weather a storm.  As long as we manage and turn flips timely we can take some market adjustment.  On the rental side, cheaper prices means a lower down payment and more cash flow.

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

    I agree but I am not a fence sitter - I will continue to flip properties that make sense and acquire cash flowing rentals while other people sit on the fence and further decrease demand.  Bad flippers made money in the mid 2000s, I was lucky to get started when it all fell apart and now have the experience and equity in all of my rentals to weather a storm.  As long as we manage and turn flips timely we can take some market adjustment.  On the rental side, cheaper prices means a lower down payment and more cash flow.

     did not mean you personally just making a general observation of those I see in the business over the last few decades they are very much driven by public sentiment.. and all it takes is one article like this and they get nervous.. and then its see I told you were where going to bubble and pop  LOL

  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y

    @Jay Hinrichs I agree.  You will find many who will take a 100% leveraged investment offering $100 per month and think it is a home run.  Then when rents drop from $1500 to $1400 because of the new apt complex in town who find that leverage is not always the path to success.  My goal is not based on the amount of units I own or the amount of deals I can post about, my goal is based on getting my family an after tax cash flow that helps us live the live we want.  It may take some time by not leveraging up to the max but it helps us sleep at night and with solid financials we have a plan to get there.

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

    @Jay Hinrichs I agree.  You will find many who will take a 100% leveraged investment offering $100 per month and think it is a home run.  Then when rents drop from $1500 to $1400 because of the new apt complex in town who find that leverage is not always the path to success.  My goal is not based on the amount of units I own or the amount of deals I can post about, my goal is based on getting my family an after tax cash flow that helps us live the live we want.  It may take some time by not leveraging up to the max but it helps us sleep at night and with solid financials we have a plan to get there.

     I have moved to almost all cash and have very little contingent liability personally other than short term construction loans of which I have a lot :)… but no way would go out and borrow any large amount of money on the metrics I see here on this site. Ie million in debt making maybe 2k to 3k a month.. can think of many other business that a million in debt would make far more money than the risk of landlording I am totally with you on that one.. and its why I get in arguments all the time with the refi till you die crowd and the equity is stupid and dead money crowd. I will take my equity and sleep very well at night thank you very much !!!  but I understand the younger investors needing to scale .. and this super size attitude you see it on BP all the time.. HEY I got 700 units in 9 months  …. I would rather own 7 free and clear.. 

  • Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by :
    Originally posted by :

     I have moved to almost all cash and have very little contingent liability personally other than short term construction loans of which I have a lot :)… but no way would go out and borrow any large amount of money on the metrics I see here on this site. Ie million in debt making maybe 2k to 3k a month.. can think of many other business that a million in debt would make far more money than the risk of landlording I am totally with you on that one.. and its why I get in arguments all the time with the refi till you die crowd and the equity is stupid and dead money crowd. I will take my equity and sleep very well at night thank you very much !!!  but I understand the younger investors needing to scale .. and this super size attitude you see it on BP all the time.. HEY I got 700 units in 9 months  …. I would rather own 7 free and clear.. 

    100% with you. Makes sense for people to take calculated risks to scale but losing a property in foreclosure is going to stop you quicker then needing to find cash for the next deal. I have had many 100% cash rentals, just put a business LOC on one last week to create some cash flow for a flip we need to complete. After the project is done the LOC will be paid off until we need the cash again.

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

     I have moved to almost all cash and have very little contingent liability personally other than short term construction loans of which I have a lot :)… but no way would go out and borrow any large amount of money on the metrics I see here on this site. Ie million in debt making maybe 2k to 3k a month.. can think of many other business that a million in debt would make far more money than the risk of landlording I am totally with you on that one.. and its why I get in arguments all the time with the refi till you die crowd and the equity is stupid and dead money crowd. I will take my equity and sleep very well at night thank you very much !!!  but I understand the younger investors needing to scale .. and this super size attitude you see it on BP all the time.. HEY I got 700 units in 9 months  …. I would rather own 7 free and clear.. 

    100% with you. Makes sense for people to take calculated risks to scale but losing a property in foreclosure is going to stop you quicker then needing to find cash for the next deal. I have had many 100% cash rentals, just put a business LOC on one last week to create some cash flow for a flip we need to complete. After the project is done the LOC will be paid off until we need the cash again.

    a lot of my clients are moving to debt side  IE be the bank on really good performing first trust deeds... at the end of the day especially when you consider the price points these can out perform the acutal asset.. as depreciation is really not that beneficial on a few smaller value homes vis a vi the risk of cap ex etc..  we  like those for that 8 to 10% mail box money.. with no down side tenant risks. 

  • Dylan VargasPro Member
    Rental Property Investor · Chico, CA · Member since 2016 · 633 posts · 336 votes
    8y

    @Tareq Salaita..........In Layman's terms lets look at this number breakdown. In my market people can find a decent home for 300k to 350k. 

    Mortgage on this home would be approximately 1500 to 1750 per month plus 350/month taxes.

    So 1850 to 2100 per month mortgage plus insurance of say $85 per month.

    Most people have two income earner homes. So at this mortgage how does someone NOT afford this mortgage? I point this out as one of the incomes only needs to make approximate say 38k to make this mortgage payment correct?

    Buyers are prequalified and making this money. Most people are making substantially more. I understand car payments, kids sports, food etc. 

    With that being said I feel we are fine and not a bubble until something gives such as a recession or other issue. Equating 2008 to modern day is apples to oranges for the simple fact people were NOT QUALIFIED for the loans.

    Hope this makes sense and numbers are all approximate.

  • Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    8y

    @Dylan Vargas at say $2k mortgage plus insurance, utilities, CAPEX, and maintenance they need to make approx. $38k AFTER taxes to pay for their home (and nothing else). Not including other expenses. Or taxes on income. So they need to earn something like $120k+ gross.

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

    If you’re paying $1,000/mo in utilities/cap-x and maintenance you bought a lemon. 

    If you need to make $120k+/year to afford that inflated $38k/year you need to change CPAs.

    Most people here would rent to someone earning 3 x $2000/mo rent and feel safe. $72k/year. Thy still gotta pay utilities.  The extra $48k/year is for cap-X and maintenance? That’s steep. 

    Ps. Move to Vegas if you’re paying $350/mo in property taxes for a $300k house. Probably cut that in half, or less. Save any income tax if you’re paying it. Defiantly pay less than $85/mo insurance. I think the original poster was using inflated numbers to prove a point. $2,000/mo is super affordable. That’s the gone in a week house price point. Higher interest could hurt that. Or people might find the extra $50 a month for the house they love. 

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

     Indeed!

    I'm not enough of a financial/investing whiz to say another way is wrong, but "free and clear as soon as possible" is the goal I pursue.

  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    8y

    My theory is that the government's efforts to control inflation by raising interest rates are working. Basically the increased interest rates are slowing down or reversing appreciation in some cases, especially in markets where prices had seen dramatic price increases. That combined with changes to federal tax laws and I could easily see a decline in home values in places like California. 

    It might not make property owners in California happy since they will lose out on appreciation (that they rely too heavily upon), but it will help the people overall who were suffering due to high real estate costs and accelerated inflation. 

  • Bloomfield, NJ · Member since 2017 · 23 posts · 1 vote
    8y
    @Eric Adobo I always say the 2 people that really know what's happening is the people at the top (calling the shots) and the people at the bottom (Walmart worker)
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    8y

    Maybe it has and maybe it has not.  Hindsight will say.  There are deals to be had at the top of the market but you really have to work to find them.  Cash is also a position .

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

    Maybe it has and maybe it has not.  Hindsight will say.  There are deals to be had at the top of the market but you really have to work to find them.  Cash is also a position .

     what we saw with the real bubble burst in 08 to 2011 was capital markets freeze over like  Antarctica  as long as capital flows rates will slow things but no bubble burst because there are always deals.. I mean I worked for a decade in real estate when the best rate you could get was 9% on owner occ..  and we know Hard money has always been 12% to 20% apr  that has not changed in the 30 plus years of my lending career..  things can slow appreciation can settle down prices can pull back a little.. but unless credit stops bubbles don't burst.. things just slow. 

  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    8y
    Sure.  We would likely need a catalyst to cause a burst.  I prefer the burst to a slowing or sideways move.  A slow lingering market is more painful imo.  We really don't know if this cycles top is in yet and we won't until it hits and we look back.  We can just adapt.  I am closely watching the financial markets charts that signal against the 1st quarters close.  I am not placing a bet on it, but I won't be shocked to see if the top was in during the 1st quarter and now we are just waiting to confirm it.  Regardless, there are deals to be had, but playing it tight and conservative is more my speed in this environment.  

    Originally posted by @Jay Hinrichs:
    Originally posted by @Ian Walsh:

    Maybe it has and maybe it has not.  Hindsight will say.  There are deals to be had at the top of the market but you really have to work to find them.  Cash is also a position .

     what we saw with the real bubble burst in 08 to 2011 was capital markets freeze over like  Antarctica  as long as capital flows rates will slow things but no bubble burst because there are always deals.. I mean I worked for a decade in real estate when the best rate you could get was 9% on owner occ..  and we know Hard money has always been 12% to 20% apr  that has not changed in the 30 plus years of my lending career..  things can slow appreciation can settle down prices can pull back a little.. but unless credit stops bubbles don't burst.. things just slow. 

  • Dylan VargasPro Member
    Rental Property Investor · Chico, CA · Member since 2016 · 633 posts · 336 votes
    8y

    @Bill B. @John D. "I think the original poster was using inflated numbers to prove a point. $2,000/mo is super affordable". This was my point. 2 person income homes will have no issue affording this home. There are cheaper homes and more expensive homes but this was my argument against the 2008 crisis.

  • Stamford, CT · Member since 2018 · 91 posts · 34 votes
    8y

    Remember great deals are made not from fear, but from the terms you make them out to be.  

  • Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes
    8y

    Ill say it again

    at say $2k mortgage plus insurance, utilities, CAPEX, and maintenance they need to make approx. $38k AFTER taxes to pay for their home (and nothing else). Not including other expenses. Or taxes on income. So they need to earn something like $120k+ gross.  Based on national income to debt ratios and household expense.

     insurance, utilities, CAPEX, and maintenance is around a grand a month over time.  love it leave it or deny it, its reality.

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

    It must only be a reality on your block John that they “need” to earn $120k to qualify for a $2,000/month payment. 

    Most loan people I talk to let you spend 36% of your pre-tax income on your mortgage. That means you would “NEED” to earn $67k pre-tax to qualify for a $2k/mo mortgage. I don’t understand why you think people “need” to earn 6 x their mortgage payment. They most certainly don’t. 

    Maybe others can chime in with their income to mortgage payment ratio. We can see how many make less than $120k and have a mortgage of $2k/mo or more. 

    We have a $2,700/mo payment that my wife qualified for without me while making only $92k/pre tax. That’s the reality. Somehow we’re able to squeeze by on $60k/year after housing expenses.(Her name isn’t on any of the rental properties which show a tax loss and we don’t use any of that income to live on.)

    Her best friend has almost the identical loan as a single mother of a college student. She makes closer to $110k but lives in San Diego. So subtract all the taxes and her situation is only slightly better.  Still, not making $120k, and paying $2700/mo not $2,000. 

  • Chandler, AZ · Member since 2017 · 174 posts · 269 votes
    8y

    As an buy-and-hold cash-flow income investor I don't worry too much about bubbles popping.  

    Here in Phoenix the RE market didn't pop, it exploded in 2008.  With homes getting down to around 50% of their high value.  But rents actually went up during that crash.  To this day, homes have not gotten back up to their pre-crash value.  But if you go back to 2000, you'll see that Phoenix home prices have averaged 3% growth over those 18 years.  A long enough time-frame evens out the bubbles and the crashes.

    If you're buying and holding for the long term, and your financing and markets (ability of renters to pay) are solid, crashes shouldn't be that big of a problem.

Join the conversationCreate a free account to reply, vote on answers and follow this thread.