Why hasn't the market crashed yet?

148 Replies

Originally posted by @Llewelyn A. :

I think there is no point on trying to predict the Market Crash because you should always put in the protection on the downside because the upside doesn't need protection!

The problem is that most regular investors really don't know how to protect their downside.

For instance, they have heard about Hedges, but they either don't what it means or don't know how to implement it in their Investments.

An example would be buying a PUT to protect your Stock if it should Fall. If you followed that, those who owned GE stock would not have lost very much.

Because this is Real Estate forum, finding out about protecting the downside of your real estate investment should be something you should be doing.

In my case, I buy in Prime neighborhoods. Even during the Financial Crisis, there was barely a blip when it came to finding tenants. The rents were stable. Prime Neighborhoods has an implicit PUT in large Metro areas, especially with a lot of job.

The question for most of you who are NOT buying in these Metro areas, especially those with added protection like NYC, what is your protection against the downside?

It would be interesting to hear from those that went through the Financial Crisis. What affected your properties the most in either positive or negative? AND, would you have bought differently if your Investments took a severe hit?

If you were like me and really did not get affected at all, how do you attribute that kind of stability? What was it? If it was stable rents, why was the rent stable in your area versus other places like Vegas and Miami (moved down more than 50% of property values)?

For those wondering what I am attributing to NYC as a resilience against property value decreases in prime neighborhoods, there are quite a lot of reasons.

One primary one, for instance, is that most of the Apts are NOT CONDOs. They are Cooperatives.

A Coop will not put up with flippers. The Coop Board will do a better job of qualifying you than even a Mortgage Company. So you cannot pull the games that were done in Miami. Those big skyrises with empty apts were being flipped online on Websites like CondoVultures.com No one really lived in them. It was playing musical chairs and ultimately, the music will stop.

The other great thing about NYC is that it's very international. Foreign investments and tourism pick up when ever the dollar gets weak, for example, during a Crisis.

And YET another is that NYC has a large amount of Reputable Universities including New York University and Columbia University. When we are in a crisis that affects employment, one of the first things people do when they are unemployed is to get more education to become more competitive in the job markets.

Anyway, these are several reasons I attributed towards why I did not really feel the kind of pain I know occurred during the financial crisis.

Just curious what happened to others.

Good points! 

I agree.  If you understand and effectively manage risks, you can generate strong returns no matter the market.  When the tides turn, many investors will be swimming naked. I bought at attractive prices, created significant value, and manage effectively, so I’m confident I won’t be.  

Invest so that if **** hits the fan, you will still produce above market returns.

Originally posted by @Edison Reis :

The stock market has a 3 year cycle so it corrects itself  every 4th and that’s how people make millions . (Most sell when it goes down but fastlaners buy)

The real estate only crashed (truly) once in the last 100 years in USA (Canada was immune during the 2007-2009 crisis due to its stronger and more regulatory banking system)  but future tellers from hell keep predicting the next crash.....

Follow market and economic fundamentals and carry on. 

Remember .... “crashes” or actually real estate slump isn’t  always a bad thing for the wicked 

Edison

That may be, but real estate cycles generally last 5-7 years... and, although not a “crash”, many markets entered the recessionary phase in 2016.

http://mediacenter.merrillcorp.com/interface/viewer.asp?LocationID=7963945&ClientID=35&Purpose=HUMAN_VIEW&Caller=RETRIEVE_FILE

Originally posted by @Jon S. :
Originally posted by @Louis Sulek:

Grant Cardone suggests large apartment buildings with median rents were virtually unaffected by the 08-09 crash. I'm not sure how to go about fact checking this, but if they are in fact recession/crash proof, that's a pretty big deal!?! Can anyone clarify? 

Dollar stores and Self-storage perform best during recessions 

 Thanks Jon, I believe you, but that doesn't answer the question about big number of units at median rents - is Uncle G right or not?

No offense to anyone here saying there isn't a problem right now as if that means anything.  I'm also not predicting anything good or bad but to say it's good now and the conditions are different is in many ways not important as to what is going on.

The crash didn't start in 08 it started in 06. It got momentum in 07 and by 08 was devastating.  The point is it happened fast.  The economy was great when it happened.   It always is before a crash.  How long are we really talking right ?

What we are seeing now is definitely similar.   Great employment numbers they've been good for 5 years and continue to get better.  Same as before. This leads to private debt going crazy. This is happening. This leads to breaking dereg.   This is also happening again.   Funky loans are starting to appear.  0 down etc. Lowering of credit standards. Im not saying they have hit levels of 06 07 but they are coming out.  

I am saying this not be a pessimist as for many in this business it really doesn't matter it's just how you adapt.  But to say the economy is booming and liar loans aren't happening is not accepting that they aren't before the last crash either.  They started coming out before the crash.

Pardon my grammar and misspellings I'm on my phone :)

Originally posted by @Jon S. :
Originally posted by @Jay Hinrichs:
Originally posted by @Collin Savunen:
@Jay Hinrichs haha that is crazy! Did I understand market supply correctly? If every one stops selling houses then it is (x) months of inventory before it's all bought up.

 over building and no one buying..  you had condo high rises in miami all built out and say 300 units and only 10 sold. that type of thing.

many condo projects where they could were converted to MF.. just to keep them from being vacant.. there was no financing. 

in Portlandia this happened to a few of the new high rises in the south water front area.. all recovered now though

Jay,

I just acquired property in Eugene and was in Portlandia and Bend two weeks ago. Maybe we should meet once I’m back in late November?

what do you mean there is no cash flow in Orygun. :)  I am in Vegas for the winter..

Originally posted by @Kevin Scott :

Pardon my grammar and misspellings I'm on my phone :)

 while i see these no doc products in the wholesale section of the Scottsmans guide i yet to see anyone really get one.

but there is not question the market is awash with private HML companies and at least to you folks on the west coast this has led to competition for the best borrowers and rates are as low as I have ever seen them since the late 70s when i started in this game..

the trick is putting this good priced capital together with real deals.. on the wholesale or fixer end.. hard to find properties that are priced to leave room for debt and profit.. that's another kettle of fish for that section of the market.. but for your BP buy hold i don't care what the market does.. rates are still good enough and the buys good enough to generate that 10% COC return that so many have as their minimum criteria.. at least out east there is enough inventory.

Originally posted by @Jay Hinrichs :
Originally posted by @Kevin Scott:

Pardon my grammar and misspellings I'm on my phone :)

 while i see these no doc products in the wholesale section of the Scottsmans guide i yet to see anyone really get one.

but there is not question the market is awash with private HML companies and at least to you folks on the west coast this has led to competition for the best borrowers and rates are as low as I have ever seen them since the late 70s when i started in this game..

the trick is putting this good priced capital together with real deals.. on the wholesale or fixer end.. hard to find properties that are priced to leave room for debt and profit.. that's another kettle of fish for that section of the market.. but for your BP buy hold i don't care what the market does.. rates are still good enough and the buys good enough to generate that 10% COC return that so many have as their minimum criteria.. at least out east there is enough inventory.

 For sure jay.

My point is simply that non standard loans are creeping in as well as regulations are slowly getting cut.  How far, we will have to see but I remember going to mortgage broker events where it was like a Tony robin's seminar and they were clapping and praising the stuff.   I've started seeing  these again.  From large banks not just hmls. 

The main thing is that it's always quiet before the storm so using that to predict anything is irrelevant.  Either way I'll be ok and you as well.

Norris group is a great reference.   And they do have some concerns.  I have some concerns with the private debt as it is almost reaching the levels in 07.  Etc etc.

But nothing is exact or for sure. 

Originally posted by @Kevin Scott :
Originally posted by @Jay Hinrichs:
Originally posted by @Kevin Scott:

Pardon my grammar and misspellings I'm on my phone :)

 while i see these no doc products in the wholesale section of the Scottsmans guide i yet to see anyone really get one.

but there is not question the market is awash with private HML companies and at least to you folks on the west coast this has led to competition for the best borrowers and rates are as low as I have ever seen them since the late 70s when i started in this game..

the trick is putting this good priced capital together with real deals.. on the wholesale or fixer end.. hard to find properties that are priced to leave room for debt and profit.. that's another kettle of fish for that section of the market.. but for your BP buy hold i don't care what the market does.. rates are still good enough and the buys good enough to generate that 10% COC return that so many have as their minimum criteria.. at least out east there is enough inventory.

 For sure jay.

My point is simply that non standard loans are creeping in as well as regulations are slowly getting cut.  How far, we will have to see but I remember going to mortgage broker events where it was like a Tony robin's seminar and they were clapping and praising the stuff.   I've started seeing  these again.  From large banks not just hmls. 

The main thing is that it's always quiet before the storm so using that to predict anything is irrelevant.  Either way I'll be ok and you as well.

Norris group is a great reference.   And they do have some concerns.  I have some concerns with the private debt as it is almost reaching the levels in 07.  Etc etc.

But nothing is exact or for sure. 

consumer sentiment can affect the market as well .. it becomes a self fulfilling prophecy.. and then again its that time of year sales are always slow .. what will really tell in my mind is what happens to sales in Jan feb Mar apr. last year this time I had 23 homes started in Oct 2017 in Gresham so put 10 pre sales on the market and sold exactly one between nov and jan 15th.. between jan 15th and may 15th I sold the remaining 22 homes.. well sold 20 I have two finishing next week and going on the market but don't expect to sell them till after the first of the year.. and we held our pricing there were no bidding wars and there was minor concessions to get buyers to write them up.. like including air conditioning or some small upgrades.. .. so we will see were this year leads. us. I am between projects so right now I only have one big Charleston spec that's pre sold at 2.2 and one other in Charleston going its a 2 bigger house with a full house behind like a ADU on steroids .. almost done and one more nice 500k one just finished and on the market with a potential buyer.. lastly starting 3 in Portlandia but these are 1 mile from downtown and that stuff there just is not near the stock of new construction. so it will sell I have no doubt. OR I would be shocked if it did not.

My crystal ball is currently in the shop, but I don't think it will "crash" at all...I think we'll see a plateau, a slow down, some dips in value, and another wave of defaults, but I don't think we'll see 2008 again (sure hope not anyway)

@Kevin Scott lastly my other thought is since i am the seller of all these homes i sign the huds and see who is putting what down etc.. and i can tell you one shocker pre 08 i could not remember one house i ever sold for cash.. and very few that were not the first and second loans etc.. this go around other than a few FHA and of course Since we support our veterans with our charity aheroshome.org. we accept VA loans were a lot of flippers or smaller builders wont do that because of the hassle factor. but by and large these are all 10 to 20% or more down and like I said even in the Gresham project 2 sold for cash at 450k each.. the 2.2 i charleston is all cash.. i sold one in charleston last year at 740k all cash..

so the strength of borrower the last 10 years is just light years different from pre 08 as you allude to.. that does not mean buyers may get more picky or slow down.. but at some point people move around.. and or our population keeps growing and they need a place to live.   Lastly with the exception of one project non were sold to investors all homeowner. :)

where pre 08 we sold whole subdivision of new construction in investors. now new construction to investor still goes on in Texas OKC  memphis and other markets.. but not so much on the west coast price to rents dont make sense.

Most crashes are self fulfilling prophecies. Its just the nature of human psychology .

There is never a specific number that hits and causes the damage its what people think. 

Originally posted by @Jay Hinrichs :
Originally posted by @Kevin Scott:
Originally posted by @Jay Hinrichs:
Originally posted by @Kevin Scott:

Pardon my grammar and misspellings I'm on my phone :)

 while i see these no doc products in the wholesale section of the Scottsmans guide i yet to see anyone really get one.

but there is not question the market is awash with private HML companies and at least to you folks on the west coast this has led to competition for the best borrowers and rates are as low as I have ever seen them since the late 70s when i started in this game..

the trick is putting this good priced capital together with real deals.. on the wholesale or fixer end.. hard to find properties that are priced to leave room for debt and profit.. that's another kettle of fish for that section of the market.. but for your BP buy hold i don't care what the market does.. rates are still good enough and the buys good enough to generate that 10% COC return that so many have as their minimum criteria.. at least out east there is enough inventory.

 For sure jay.

My point is simply that non standard loans are creeping in as well as regulations are slowly getting cut.  How far, we will have to see but I remember going to mortgage broker events where it was like a Tony robin's seminar and they were clapping and praising the stuff.   I've started seeing  these again.  From large banks not just hmls. 

The main thing is that it's always quiet before the storm so using that to predict anything is irrelevant.  Either way I'll be ok and you as well.

Norris group is a great reference.   And they do have some concerns.  I have some concerns with the private debt as it is almost reaching the levels in 07.  Etc etc.

But nothing is exact or for sure. 

consumer sentiment can affect the market as well .. it becomes a self fulfilling prophecy.. and then again its that time of year sales are always slow .. what will really tell in my mind is what happens to sales in Jan feb Mar apr. last year this time I had 23 homes started in Oct 2017 in Gresham so put 10 pre sales on the market and sold exactly one between nov and jan 15th.. between jan 15th and may 15th I sold the remaining 22 homes.. well sold 20 I have two finishing next week and going on the market but don't expect to sell them till after the first of the year.. and we held our pricing there were no bidding wars and there was minor concessions to get buyers to write them up.. like including air conditioning or some small upgrades.. .. so we will see were this year leads. us. I am between projects so right now I only have one big Charleston spec that's pre sold at 2.2 and one other in Charleston going its a 2 bigger house with a full house behind like a ADU on steroids .. almost done and one more nice 500k one just finished and on the market with a potential buyer.. lastly starting 3 in Portlandia but these are 1 mile from downtown and that stuff there just is not near the stock of new construction. so it will sell I have no doubt. OR I would be shocked if it did not.

We allow va often. I'm now seeing 0 down. I've yet to get a va to pay more than 3 percent in years.   That's pretty good if u are but here it's getting worse. 0 down everywhere.  Upping purchase price to cover closing costs and they are still closing .  Again im not predicting just saying the similarities.   They are similarities to what happened prior to the crash not the day of. Which is obviously not a real day. Plus I keep hearing 08 when it happened before 08 started in 05 according to Norris group which is congruent to what we saw. But we started feeling it in 07 hard.  So maybe our market is just a little ahead which would make sense.  .

Jay were you in multiple markets back then?  We are now but then I was basically western washington 

Originally posted by @Jay Hinrichs :

@Kevin Scott lastly my other thought is since i am the seller of all these homes i sign the huds and see who is putting what down etc.. and i can tell you one shocker pre 08 i could not remember one house i ever sold for cash.. and very few that were not the first and second loans etc.. this go around other than a few FHA and of course Since we support our veterans with our charity aheroshome.org. we accept VA loans were a lot of flippers or smaller builders wont do that because of the hassle factor. but by and large these are all 10 to 20% or more down and like I said even in the Gresham project 2 sold for cash at 450k each.. the 2.2 i charleston is all cash.. i sold one in charleston last year at 740k all cash..

so the strength of borrower the last 10 years is just light years different from pre 08 as you allude to.. that does not mean buyers may get more picky or slow down.. but at some point people move around.. and or our population keeps growing and they need a place to live.   Lastly with the exception of one project non were sold to investors all homeowner. :)

where pre 08 we sold whole subdivision of new construction in investors. now new construction to investor still goes on in Texas OKC  memphis and other markets.. but not so much on the west coast price to rents dont make sense.

@Jay Hinrichs thank you! Portland area is insane. Last time I had been involved in the Portland market they were/ were talking about putting a restriction on how fast they could increase rent. I don't know what is going on there recently.
I think it's instructive to realize that there really is a cycle and it's almost always an 18 years cycle going back 150 years it's been 18 years peak to peak in all but two occasions ( both of which were the result of ww2). The nation wide peak was around 2006 which means in all likelihood the next peak won't be until around 2024. We are seeing signs on the coasts that we are moving from expansion to the hyper supply phase of the cycle but we are still very likely a ways away from a crash. For more info see this excellent summary market cycles. https://www.extension.harvard.edu/inside-extension/how-use-real-estate-trends-predict-next-housing-bubble
Originally posted by @Jay Hinrichs :
Originally posted by @Jon S.:
Originally posted by @Jay Hinrichs:
Originally posted by @Collin Savunen:
@Jay Hinrichs haha that is crazy! Did I understand market supply correctly? If every one stops selling houses then it is (x) months of inventory before it's all bought up.

 over building and no one buying..  you had condo high rises in miami all built out and say 300 units and only 10 sold. that type of thing.

many condo projects where they could were converted to MF.. just to keep them from being vacant.. there was no financing. 

in Portlandia this happened to a few of the new high rises in the south water front area.. all recovered now though

Jay,

I just acquired property in Eugene and was in Portlandia and Bend two weeks ago. Maybe we should meet once I’m back in late November?

what do you mean there is no cash flow in Orygun. :)  I am in Vegas for the winter..

Yeah, investors can find cash flow and lots of raw milk! 😂

https://view.yahoo.com/show/portlandia/clip/60507349/raw-milk-is-the-future

Originally posted by @Louis Sulek :
Originally posted by @Jon S.:
Originally posted by @Louis Sulek:

Grant Cardone suggests large apartment buildings with median rents were virtually unaffected by the 08-09 crash. I'm not sure how to go about fact checking this, but if they are in fact recession/crash proof, that's a pretty big deal!?! Can anyone clarify? 

Dollar stores and Self-storage perform best during recessions 

 Thanks Jon, I believe you, but that doesn't answer the question about big number of units at median rents - is Uncle G right or not?

 No, he is not. It depends on the apartment building, it’s quality, location, HVAC condition, and many other variables.  I know people owning apartment buildings that did well through these times and done that went bankrupt.  Don’t generalize.  Because if you do, I’ll show you how your generalization is incorrect.  Returns in real estate are asset specific.

It will crash when it crashes. I started following the market closely when I graduated college and needed to figure out how my 403 (b) worked at my first real job. At the time the Dow was headed for 16,000 and there were near-daily headlines via Marketwatch and CNBC all calling for a correction when the down hit 16,000. Many headlines also stated that it was impossible for the S&P to cross 2,000 without a crash. Yet here we are many years and points later. Some writers and fund managers have called falsely for crashes hundreds or even thousands of times, and when they get even remotely close they start yelling "See! I was right all along".

I try not to speculate.

To quote Tracy Letts in 'The Big Short', "No one can see a bubble. That's what makes it bubble".

@Jon S.  curious what you got in eugene ? (Feel free to PM). I will be heading back up to Eugene in early December and would love to meet other investors - esp those that are From the Bay Area! 

@Mary Mitchell @Collin Savunen On the topic of a College Bubble, I think it's a matter of planning around something that your gut tells you may become a problem in the future. The way this would relate to REI (specifically Buy and Hold) is to avoid properties reliant on college tenants and buy elsewhere for the time being. If the college bubble does burst, then at least you'll be on the outside of it, ready to invest in those previously college reliant areas. This is assuming of course the market finds a way to convert those areas into something sustainable and they just don't turn into "war zones".

Originally posted by @Louis Sulek :

Grant Cardone suggests large apartment buildings with median rents were virtually unaffected by the 08-09 crash. I'm not sure how to go about fact checking this, but if they are in fact recession/crash proof, that's a pretty big deal!?! Can anyone clarify? 

 It's a blanket statement. Many apartment complexes did indeed do well during that recession. Some even saw their rents go up. People who lost their home to foreclosure had to move into an apartment, thus increasing demand.

But does it mean large apartments are always recession-proof? No, what if the next recession is totally different from the last one? Also, real estate is always local. Just because apartments do well in one market, it doesn't mean they are a good investment in yours. If people leave an area because jobs are scarce, then you might not have any tenants.

A main factor of the real estate crash, actually starting in late 2007, was high default rates in mortgage back securities.  A deep crash in real estate usually occurs when the financing sector no longer can write loans for a period of time.  When no loans are made, the market spirals downwards.

Today, there are some submarkets and product types that probably are in "correction" right now.  For residential real estate, some call it a "buyer's market".  But there has to be something much deeper for a crash to happen.

Looking at today's mortgage delinquencies, it doesn't look too risky out there.  Matter of fact, credit is expanding.  

For investment real estate, like multi-family, the market is not crashing, but there are some negative headwinds.  Mainly topped out pricing and especially rising interest rates.  What seems to be happening is that less transactions are occurring.   But there is no sign that properties are being handed back to banks.  

None of us can predict the future, and I remember in 2007, I saw a correction coming, but I greatly underestimated it.  That deep of a crash may be the worst market I'll ever have to live through.  And the best buying opportunities of my lifetime as well.

@Collin Savunen Simply put.. the governments and society will just print more money. Do a increase in M3 and inflate their way out before a deep correction takes hold. I’m not only speaking about the USA. Look at the IMF and what they are doing to prop up economies that should fail and then rebuild. The next big collapse will not be due to past mistakes. Since there is massive regulation to prevent mass consumers from speculating in RE. I’m not saying it doesn’t occur with more relaxed bank rules lately due to cheap money. Just not the crazy days of people who have no jobs acquiring a home. At least you have to produce a W2 with 80% LTV. I think the next collapse will be due to the Fiat currency devaluation. At some point the dollar will be worth less than what it’s printed on. We just keep printing and racking up debt, at this point every US citizen owes about $70k. This is not sustainable.

I am paying attention to what is happening today.. .US economy is roaring, with GDP at around 4% and jobs levels at historical lows. 

I never pay too much attention to economists.... why? they always seem to get it wrong.

I like this one..... why economists always get it wrong...…

https://danerwin.typepad.com/my_weblog/2011/02/ten...

extract

1. They never stood a chance. Forecasting doesn't work and never did. Like weather forecasts, which are based on physical parameters (not psychological--like economics), it's always a hit or miss affair. [Obviously, neither Schiller nor Avniel are aware that weather forecasting is the most accurately predictive vocation of all professions. That's a scary fact!]

2. You can't predict a turning point. It's the old issue of will this turn into a horrible recession, or merely a blip on the radar for the next 15 months?

3. Economic models assume that economies are stable. Data, such as bond ratings and debt structures, are never stable.

4. Economists tend to focus on specific, accepted parameters and ratios. As a result they fail to see warning signs unless they hit them over the head.

5. Economists are afraid to break rank with the consensus. If they're wrong, it's career suicide. Since no one dares to say otherwise, the consensus grows stronger and becomes even harder to buck. In other words, economists are human, and they err.

6. Forecasts, of themselves, affect the economy. The forecast becomes part of the "given," and influences human behavior--for good or ill.

7. Forecasts influence politicians. A politican approaching an election will treat a forecast differently than after he/she's elected. The most relevant example is Germany and Angela Merkel. All forecasts depend on how Germany and Merkel behave, but nobody really knows how they will behave.

8. People look for shortcuts, but there aren't any. Robert Shiller said the market failures of the recession were foretold in the economic literature, but nobody looked at the data. Just the bottom line. The devil is in the details but if you don't read the details, you'll get caught up.

9. Economists believe their own stories. "This time it's different, or our case is different." It never is. They thought, for example, that securitizing debt would change the world and that economics would start acting differently. But it didn't, and the world exploded.

10. When the economy is roaring and soaring, control mechanisms collapse. We make our biggest mistakes when the future looks very, very sunny.

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