When Will The RE Market Crash?

General Real Estate Investing
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When Will The RE Market Crash?

Moises R Cosme
Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes

The history of markets tells us that we will always have a crash.  



This graph shows total consumer debt in the US since 2003

Housing crashes come from over indebtedness, this graph shows that US consumers have more debt today than they did during the housing crisis in 2008

Total US consumer debt in 2008 $13T

Total US consumer debt in 2019 $13.9T

Total debt per US consumer according to US Census Bureau data: $41.77, this exceeds the record established in 2008 of $41.68 (this is total consumer debt divided by the entire population)



So, are we in for a crash?? UNLIKELY

There are two key financial indicators that tell us that US consumers are in better shape today than they were in 2008 (even taking the pandemic into account):

  1. Median household income 2019: $68,703
  2. Median household income 2008: $57,010

Consumers make more money; the median household income is up 20% from 2008, while total debt is only up 6.9%.

The second indicator is the consumer debt delinquency rate

2005: 4%                                   2016: 4%

2006: 4.25%                              2017: 4.125%

2007: 6%                                   2018: 4.25%

2008: 8%                                   2019: 4.125%

Delinquency rates for 2020 are not yet available, but there is no evidence that delinquencies have spiked anywhere close to 2008 levels. 

Anecdotally it seems unlikely that there will be a real estate market crash at any point in the next 3 to 5 years. The federal reserve has dropped interest rates to 3% or less, which is being reflected in current mortgage rates (a recent Buyer of ours put less than 5% down and obtained a 30 year mortgage with a 2.37 interest rate). The federal reserve is now committed to a low interest rate environment for the foreseeable future, IF they were to raise interest rates back to 4% ALL homebuyers and many consumers that refinanced their properties would be under water as purchasing power would decrease and there would be a subsequent impact on sale prices (historically there is an inverse relationship between interest rates and property prices; drop interest rates, property prices go up and the reverse applies).

What do you think?  Many pundits disagree with me and believe that market is long overdue for a correction.  Reply and let me know what you think. 

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
5y

All those "pundits" that agree with you have agreed with you for the last 20-25 years.  Trouble is, they all went to the the University of Chicken Little.  What's really going to be funny, is when the market does crash, they will all claim the saw it coming,...the year before.  What they will conveniently forget, is they also predicted it coming the next year...for the previous 2 and a half decades.

Point?

Setup your RE so you can adjust the the crash.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Bill P.:

    @Joe Villeneuve I'm going to go on the record and say watch out for 2024 - 2026. I say this because there are so many macro issues with economy that the piper will have to be paid.

    But if you're flexible with your investment plans you can still prosper. Cash will always be king. Access to credit, if available, will always be queen.

     You could very well be right.  Then again, economists have been saying the same thing for so many years I lost track of when these dire predictions started.

    On another note, what the heck are you doing up at 3:30 am...wait, what the heck am I doing up at 3:30am?

    1Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    5y

    I don’t see a housing market crash. Banks are much healthier now and people have more skin in the game with larger down payments the last 10 years.. unlike last time. The US is growing by 7-10 million. People need a place to buy or rent. Most people have plenty of equity in their homes now with this major real estate boom market the last 7 years. So I don’t see them getting foreclosed on due to tenants not paying. They’ll sell them if needed even if they have to break even on them. Nobody wants a foreclosure on their record.

    0Reply
  • Steve Faucette
    Rental Property Investor · Baldwin, NY · Member since 2015 · 69 posts · 21 votes
    5y

    if, you really want updated information on what's going in the Real Estate world listen to, very informative information, a must listen to podcast.

    "Kathy Fettke" podcast 
    2Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y
    Originally posted by @Joe Villeneuve:


     You could very well be right.  Then again, economists have been saying the same thing for so many years I lost track of when these dire predictions started.

    Screw the economists.  I say the collapse will happen once every post on here is of people making a bazillion in real estate on every deal even with no experience.

    0Reply
  • Javier Rosales
    Rental Property Investor · Los Angeles, CA · Member since 2019 · 160 posts · 58 votes
    5y

    @Victor S. The price of food and gas going up is due to a shortage of consuming and usage. Less consumers is what’s driving the inflation up. I think it’s a temporary inflation. But from these mark ups, it will set the future demographics. But you are right and it’s good intel their.

    0Reply
  • Mike Wall
    Real Estate Broker · Fuquay Varina, NC · Member since 2015 · 28 posts · 10 votes
    5y

    Worth studying the 18 year real estate cycle: https://www.cato.org/publicati...

    1Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @Moises R Cosme:

    The history of markets tells us that we will always have a crash.  



    This graph shows total consumer debt in the US since 2003

    Housing crashes come from over indebtedness, this graph shows that US consumers have more debt today than they did during the housing crisis in 2008

    Total US consumer debt in 2008 $13T

    Total US consumer debt in 2019 $13.9T

    Total debt per US consumer according to US Census Bureau data: $41.77, this exceeds the record established in 2008 of $41.68 (this is total consumer debt divided by the entire population)



    So, are we in for a crash?? UNLIKELY

    There are two key financial indicators that tell us that US consumers are in better shape today than they were in 2008 (even taking the pandemic into account):

    1. Median household income 2019: $68,703
    2. Median household income 2008: $57,010

    Consumers make more money; the median household income is up 20% from 2008, while total debt is only up 6.9%.

    The second indicator is the consumer debt delinquency rate

    2005: 4%                                   2016: 4%

    2006: 4.25%                              2017: 4.125%

    2007: 6%                                   2018: 4.25%

    2008: 8%                                   2019: 4.125%

    Delinquency rates for 2020 are not yet available, but there is no evidence that delinquencies have spiked anywhere close to 2008 levels. 

    Anecdotally it seems unlikely that there will be a real estate market crash at any point in the next 3 to 5 years. The federal reserve has dropped interest rates to 3% or less, which is being reflected in current mortgage rates (a recent Buyer of ours put less than 5% down and obtained a 30 year mortgage with a 2.37 interest rate). The federal reserve is now committed to a low interest rate environment for the foreseeable future, IF they were to raise interest rates back to 4% ALL homebuyers and many consumers that refinanced their properties would be under water as purchasing power would decrease and there would be a subsequent impact on sale prices (historically there is an inverse relationship between interest rates and property prices; drop interest rates, property prices go up and the reverse applies).

    What do you think?  Many pundits disagree with me and believe that market is long overdue for a correction.  Reply and let me know what you think. 

    At the beginning of the Pandemic when everything was shut down there were multiple posts & articles about the market crashing. When I say market I referring to the Real Estate Market. But looking at the last 4 or 5 major recessions, the Real Estate market only crashed in one. The one crash was because of the junk bonds specifically tied to real estate. If I had more time I'd put the link to the articles I posted at the beginning of the Pandemic so you'll just have to take my word. 

    To that end- there may be a correction in some parts of the country but at a Macro level, using the past as a prologue, I don't see a RE market crash anytime soon.

    312-681-7487
    0Reply
  • Alexandre Marques dos Santos
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Javier Rosales

    “ less consumers is what is driving inflation up..”. Can you explain the relation of lower demand and higher inflation? I missed that in my economics class...

    Someone also posted strictly standards in loans... well having heard of 5% DP does not sounds strict.

    Finally rates will probably be low ( 0-2%) for the next 10+ years. But my concern is with income, rather than interest rates...

    0Reply
  • Trung Nguyen
    Rental Property Investor · Milwaukee · Member since 2020 · 2 posts · 2 votes
    5y

    Interesting data, thanks for presenting it Moises! Your data comparison of now vs '08 definitely shows a crash similar to '08 won't be happening imminently. Also remember that the crash in '08 was caused by systematic failure due to neglect from the government on the bank's greed, so a crash in the future shouldn't be caused by the same or similar thing in '08 (meaning the '08 indicators may not warn us in the next "crash" and we'd have to look for other indicators). 

    I do think a correction will happen in the next few years however. I think SFH prices will stay steady while MF prices will correct itself due to the pandemic consequences. SFH will stay steady because of the DTI ratio you've presented in your data. I think MF prices will correct itself when the pandemic rolls over (after the vaccine distributions) because many renters (and even landlords like me) are laid off from the pandemic, so many landlords are missing rent from this, or renters can be taking advantage of landlords (if they're aware of the situation) due to the eviction halt until the end of this year. Those reasons in combination with the forbearance agreements between the lenders and the landlords will delay the increased delinquency data that we haven't seen yet. Once it rises and more foreclosures pop up, let's get ready to pounce on it :). This is just my theory though... I'm continually looking for good deals and won't be waiting for this correction since timing the market is extremely difficult.

    2Reply
  • Jonathan Tavarez
    Flipper/Rehabber · Laurel, MD · Member since 2016 · 139 posts · 109 votes
    5y

    For those interested in the actual data go search for “Black Knight forbearance tracker”, but long story short as of right now forbearance is declining so don’t expect a massive correction any time soon.

    1Reply
  • Adam Melon
    Rental Property Investor · NY · Member since 2019 · 30 posts · 19 votes
    5y

    @Bill P. Agreed. When those interest rates start creeping up, there will be a day of reckoning.

    1Reply
  • Rich Hanlin
    Real Estate Broker · Suwanee GA · Member since 2019 · 16 posts · 6 votes
    5y

    @Moises R Cosme. I’m going to go with a pull back. Maybe not a crash but it’s all propped up by nothing right now. Stock market new highs in the middle of COVID shut down. It does not add up. More and more people not making their house payments, rent payments and or commercial loan payments. I think the pull back has already started. The stock market is up due to a few run away companies. I guess I’m pessimistic. But 2021 is about to see the hammer.

    0Reply
  • Walt B Philip
    Member since 2020 · 22 posts · 20 votes
    5y
    Originally posted by @Moises R Cosme:

    @Walt B Philip I do not see inflation as a driver, particularly if employment trends hold.

    ETF price inflation (aka “bubble”) is different than core inflation


    https://www.bloomberg.com/news...

    0Reply
  • Nick D.
    Rental Property Investor · Springfield, MA · Member since 2019 · 19 posts · 21 votes
    5y

    @Moises R Cosme

    Ray Dalio who I believe is the best guy to understand the Economy, period basically described the below.

    The stock market and the economy have no connection to each other but is very overlooked.

    We are in a bubble simply on the fact of how inflation is going to be at zero (and has been at zero for years) for the next upcoming years. The longer the country keeps interest rates dirt cheap, the more pain comes on the banks who are going to face a lot of problems when foreclosures continue to come in.

    What happens if the the big banks fail? No wonder hedge fund elite have all dropped US banks. We are going to print money and things will stay inflated for some time but we are so over due.

    That will lead to more monitory easing which will simply destroy the dollar.

    (Hence why do you think Bitcoin is getting so much popularity )

    Bottom line is there’s a draw back every 8-10 years so we have been overdue for a correction for a long time.. The March draw back to recovery timeline was almost impossible to speculate. Every Tech IPO that comes out this year seems like it’s up 75-150% in 3-6 months. The real estate market is strong but the stock market is so inflated when that goes, of course that’s going to impact the real estate market.

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Steve Montgomery if 08 proves that stocks & RE affect one another, how do explain the dot com crash and the beginning of the housing boom in 2000?

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Joe Villeneuve Seems like you have seen all of this before. How many cycles have you been through as a market participant?

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Joe Villeneuve I do not think getting the timing right is that important; I think it is more important to understand where we are in the cycle generally. I think that as market participants we are likely to misjudge patterns, arrive at incorrect conclusions and place too much or too little weight on the most significant factors. Lastly, markets are the most complex systems we have due to the number of inputs, participants and outputs.

    I have read a lot of what you post and in general it seems like: 'pay attention to what's going on, treat investing like a job & try to avoid big mistakes'.

    1Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Michael Ablan excellent!!! I think hit the nail right on the head, the minute mortgage payments start flexing upwards we will start to see a correction. How did you arrive at this conclusion? Most other responses to the post are missing the key point.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y
    Originally posted by @Moises R Cosme:

    @Joe Villeneuve Seems like you have seen all of this before. How many cycles have you been through as a market participant?

    Lost count.  Figured out that learning how to buy was more important 

    1Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Michael Noto excellent!!! How long have you been in the industry?

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Steve Morris seems about right, but those are micro issues... a market correction or crash will be driven by a macro factor & I don't think tax policy is it. What tax policy are you referring to? Is it local to Portland or are you referring to changes you anticipate from the Biden administration?

    0Reply
  • Edmond J Daugherty
    New to Real Estate · Mine Hill, NJ · Member since 2017 · 12 posts · 1 vote
    5y
    Originally posted by @Moises R Cosme:

    @Lamont Chen lending standards will not be a significant factor in a market crash, interest rates will. Ask yourself, what would happen to the market if rates went to 4.25? What would happen to housing prices? What would happen to inventoru levels? What would happen to mortgage shops relying on refinance revenue?

    Those are all valid questions I'm asking. Does anyone know why inventory has been so low for so long? Or is this a regional phenomenon?

    0Reply
  • Karl B.
    Rental Property Investor · Erie, PA · Member since 2015 · 1k+ posts · 2k+ votes
    5y

    Ken McElroy says late-2021. 

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Victor S. The Fed's interest rate benchmark runs with bonds the treasury sells, at the current rate investors are break even on US bonds. At some point (I do not know when) investors will stop buying bonds at break even. If investors stop buying bonds then the US will have a funding problem at the federal level.

    0Reply
  • Moises R Cosme
    OP
    Flipper/Rehabber · Leominster, MA · Member since 2020 · 667 posts · 384 votes
    5y

    @Alexander Szikla you are exactly right!!!

    0Reply
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