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

    @Eric M. Your reply is hilarious, particularly since it seems that you failed to read it.

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

    @Justin Thorpe reasonable conclusion; I do not see a market crash imminently, but interest rates are the driver in my opinion. If the Fed sees the need to boost interest rates we will necessarily have a market correction.

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

    @Joshua Shockley yup... profitability does not mean much, their margins are razor thin & their debt loads and beyond anything you can imagine (actually you can just look at their numbers in their annual reports). Fannie Mae's current leverage ratio is 185.6, that means that for every dollar they have they owe $185 on it.

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

    @Joshua Shockley lastly, the government is not stealing anything... The government poured trillions of dollars into propping these stupid companies. Sorry, for the poorly worded response but Fannie & Freddie are an example of gross incompetence and greed.

    Both GSEs were under insolvent in 04, the public did not know, the market did not know BUT the accountants that were auditing their books did.

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

    @Roxanne Whitaker I think you have that about right.

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

    @Rich Hanlin I agree.

    0Reply
  • Justin Thorpe
    Member since 2020 · 437 posts · 675 votes
    5y

    I really don’t think anyone can predict a crash. That said markets go through cycles and boom and bust are normal.

    The economy does not have to crash to make a quick buck. For example the last 9 months have given investors many opportunities to buy and sell stocks at a profit or sell short at high valuations, rinse and repeat. Even as the market touches all time highs, there are quality stocks that are selling at a bargain and many others that are inflated.

    The profit lies in identifying these mini bubbles or mini bargains and trade those assets vs wait for the world to crash.

    In RE if you focus and stay patient you can find deals out there. No need for a crash to find deals. More than likely you will one among the millions caught swimming naked when the market crashes. So don’t wait for one.

    All that aside the financial crash of 2008 has pushed Federal Reserve banks all over the world to up their game and put in controls to prevent the next financial crash. Same with banks. If you look at how conservatively banks have reserved for bad loans in

    2020, it shows a level of discipline that we never saw in 2008.

    0Reply
  • Alex J.
    Investor · Tarzana CA and Houston, TX · Member since 2015 · 326 posts · 130 votes
    5y

    This topic has literally come up sever month for 10 years haha.  

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

    @Jim Spatzenfeld interest rate increase in 90, led to market correction in 91/92.

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

    @Rodney Sums https://www.wsj.com/articles/the-shift-to-remote-work-could-be-a-big-swing-and-a-miss-11591452000

    The article argues (1) that new employees need hands on training to develop, (2) that teams collaborate better while being in the same space. Beyond these arguments, I assert that working from home is just not as productive because 'home' is not the 'office'.

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

    @Adam Melon inflation is part of my analysis, I believe the Fed has to raise real interest rates in order to generate investor interest in their bond auctions.

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

    @Crystal Smith that is incorrect; 91/92 RE crashed.

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

    @David A. Hilarious!!! So much to say, but you failed to read.

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

    @Justin Thorpe and yet Fannie still has a leverage ratio of 185 to 1; did the US Fed & Treasury learn their lesson or did they simply 're-roll' all the debt?

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

    @Justin Thorpe and the national debt number is $27T today but in 08 it was $10T; are the players really more discipline? Or have they just shifted the losses to the US taxpayer? GDP is up, productivity is up but yet GSEs are insolvent & we have $17T of additional national debt...

    Again, I do not believe a crash is imminent but it is plain as day that at some point the macro factors will catch up to us; we are clearly incapable of growing our way out of debt.

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

    @Jason Merchey banks have been incentivized to be 'irrationally exuberant', they can write 30 year loans and sell them within 120 and make a 3 to 5 profit with no recourse after a 2 to 5 year period.

    Would lenders lend the same way if they had to hold their mortgage debt for 30 years?

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

    This topic has literally come up sever month for 10 years haha.  

     I agree.  I wonder why (he says laughing)?

    0Reply
  • Matthew M.
    Los Angeles, CA · Member since 2018 · 86 posts · 86 votes
    5y

    @Moises R Cosme I would argue probably not, however the rates we would be getting would be much higher. Part of the reason rates are so low is due to the liquidity in the secondary market largely driven by the role of Freddy Mac and Fannie Mae.

    0Reply
  • Lynnette E.
    Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
    5y

    Me, I am not smart enough to know when or if there will be a crash, a correction, or anything else.  But there is one thing I do know.  Portland won't have a crash.  By the time those fools are done with that city it will all be burned down or just totally trashed.  Nothing left worth buying.  

    And, well, even if the prices crashed (and yes I was wrong), and the property was almost free, who would want to buy property near fools out protesting all the time over something?  They would be your tenants!

    NO thank you!

    1Reply
  • Matthew M.
    Los Angeles, CA · Member since 2018 · 86 posts · 86 votes
    5y

    @Moises R Cosme regarding fed raising rates to garner interest, I don’t believe they do need to do this yet. Much of the interest in us govt debt isn’t just in the US, it is in China, Taiwan, Japan, Canada, and Europe, many of them are pension funds, banks, etc. at this very moment I think that there is plenty of liquidity in the treasury market and in a global marketplace we are still the best of a bad bunch (rates are low everywhere) and the flight to quality always lands in the US treasury market.

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

    @Matthew M. Real interest rate = nominal rate minus rate of inflation. Then subtract expected income tax rate. What are bond investors earning at the end of the day?

    The notion that inflation is zero is false; the cost of education is twice what it was 10 years ago, the cost of milk, cheese, cars etc.

    Would we ever accept a 0 net return on investments we make?

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    5y

    Nobody knows the answer.

    0Reply
  • Patrick Roche
    New to Real Estate · Stroudsburg, PA · Member since 2019 · 4 posts · 0 votes
    5y

    Harry S. Dent Jr (best-selling author and one of the most outspoken financial editors in America)

    says economic downfall started late 2019 and bubble may burst in 2021, projected recovery by 2023.

    0Reply
  • Thomas Greer
    Real Estate Consultant · Member since 2020 · 80 posts · 102 votes
    5y

    Right after we "consider" selling an asset but decide to "wait until next year".

    0Reply
  • Miho Y.
    Investor · Huntington Beach, CA · Member since 2015 · 105 posts · 25 votes
    5y

    @Moises R Cosme thank you for this post. I think the foreclosure will surge in 2 years or so. With the unemployment rate so high and many jobs not coming back, 1 or 2 year after the mortgage forbearance ends, there will be many foreclosures. However, these will be picked up by the buyers/investors swiftly given the housing inventory low and the feds keep printing money decreasing the value of US dollars.

    2Reply
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