Future problems for investors....................................

49 Replies

Maybe its just me.....  Being in the Real Estate Business for 20 plus years, I am started to see some similarities of the last bubble.  Now I am not saying we are in a bubble.  I don't know.  They are a lot of factors to consider and lots of signs are present, but if I had to go from my gut only, I would say yes.  The logical mind does tend to consider all the data on shortages and low interest rates, and droves moving from Illinois etc...  Whether you go with your instinct, gut or logical thought, It doesn't matter.   What I do know is this.  I have seen a lot of deals coming across my desk of people over paying for investment properties.  I look at the numbers and think, that doesn't even meet the 1% rule or .80 for that matter.  I think its going to be a couple years, but there are going to be some investors in trouble.  And yes they are taking mortgages.  

I was listening to a housing expert on the news the other day and he brought up an interesting point.  He said we don't know if we are in a bubble until it pops.  Until then, it's inflation.

Over the last five recessions, only twice did price reductions happen.  We have to remind ourselves that if the market takes a dip, it is a paper loss and nothing more.  As long as the bills are still getting paid, you stay the course.

A great example are people who bought literally the day before the meltdown in 2008.  Assuming they kept their homes with no changes, many have had their values surpass what they initially paid and if they didn't refinance, then they are two years away from being halfway done with their mortgage.  They are arguably in better shape than those buying today.

I do agree, for the most part the 1% rule is no more unless you get a stellar deal.  Really it seems like .7 seems to be the magic number.

I guess that’s why I haven’t bought anything in awhile. My worst property is like 1.35. I just can’t bring my self to go below 1%. My concern is these investors buying below 1% are barley breaking even. When the homestead comes off and taxes go up it might be a rude awakening. A lot of newbies getting FOMO

I think we are more in 2002/2003 than 2007. Demographics are bullish over the next few years with millennials finally moving out(late) zoomers may start as well and we are in an undersupplied/underbuilt market in many places. 

There's a lot of stock/WSB money out there along with crypto that is held by young people still living at home, this creates a higher bid and cash bid. Add in institutions who are systematizing rentals and you get an even higher bid as they reach some economies of scale and are willing to accept lower yields than small investors. 

In addition places like biggerpockets and other real estate knowledge mediums will also contribute to higher house prices(I don't mean this in a negative way but as everyone figures out things like house hacking it drives prices up) 

People and maybe eventually banks will start to buy/write loans not based on just the person's income, but let's say they buy a 4-bedroom and can rent 2/3 rooms on Airbnb. I think people will start to reach higher for more house knowing this(probably already have but more will do so) and eventually traditional financial institutions or new FinTech firms will capitalize that short-term rent potential into larger loan eligibility.

Things like work from home obviously accelerated the shake-up and gave people an ability to get out of the mega-cities like New York or LA. And move either to a cheaper often smaller city or just have a longer commute since they might only need to commute twice a week instead of five times.

The only way you can stay near the 1% rule is make sure you buy homes that never appreciate. If you bought 5 years ago in vegas with 1% rule. And raised your rent 10% every year (that’s pretty good), because house values have more than doubled you’re at 0.75%. You can’t use the price you paid, you have to use the value today.

My parents bought their silly little suburban mpls home 25 years ago for $25k. Now it's worth more than $250k. If they rent it out for $250/mo is that 1% rule or 0.1%? If my $100k Vegas home is worth $400k 10 years later and I only get $2000/mo rent and I'm getting 2% or 0.5%? It's the same as the ROI vs ROE comparison.

I think most people would be surprised to learn that their house could/should easily quadruple in value by the time they pay off their mortgage. (If they don’t get my 4x in 10 years or my parents 10x in 25)That’s less than 5% appreciation yoy. The good news is if you put down 25% that means you’ve made a 1600% return over 30 years. If you put down 10% as a primary and then move out, you’ve got a 4000% return. And that’s if you never make a dollar in rental income you just break even. Of course since rents will also have quadrupled, that would be a hard trick to pull off. 

@Troy Forney - I feel like you might see some similarities but not being caused by the same issues.  The last bubble was caused by the mortgage industry.  In this case, (in my opinion) real estate is helping keep the economy together.  I know here in Chicago, many investors are moving towards Indiana because of the less expensive inventory and lower taxes.  Which will only continue to drive up prices over in Indiana.

There was so much money pumped into the economy during COVID that inflation is just going to continue to rise and it will be harder and harder for newer investors to get into real estate.

Anyways I am no expert, that's just my opinion based on my understanding of the heavy influx of money.

Jonathan-I agree, if there is a bubble, definitely not the same reasons.   It would be hard to believe that this could last forever. I mean I have properties that have doubled and quadrupled in value over the past 6 years. Of course forced appreciation was involved also. Still I never imagined. If I cared more about appreciation and less about cash flow, I might be inclined to sell. 

Originally posted by @Troy Forney :

Maybe its just me.....  Being in the Real Estate Business for 20 plus years, I am started to see some similarities of the last bubble.  Now I am not saying we are in a bubble.  I don't know.  They are a lot of factors to consider and lots of signs are present, but if I had to go from my gut only, I would say yes.  The logical mind does tend to consider all the data on shortages and low interest rates, and droves moving from Illinois etc...  Whether you go with your instinct, gut or logical thought, It doesn't matter.   What I do know is this.  I have seen a lot of deals coming across my desk of people over paying for investment properties.  I look at the numbers and think, that doesn't even meet the 1% rule or .80 for that matter.  I think its going to be a couple years, but there are going to be some investors in trouble.  And yes they are taking mortgages.  

 Troy  just because a property does not meet the 1% rule or .08 does not mean your over paying. in many markets top shelf real estate only hits the .03 rule or .05  1% rule is in markets that are generally flat on appreciation or historic appreciation and or risky vis a vi the tenant base..  Heck break even no return on 25% down real estate in the right market is still a great deal over a 10 year hold at todays interest rates in many markets.. money is made on appreciation and debt paydown over time.. Cash flow positive is just the icing on the cake but not the metric in investment grade property purchases.    So thats another way to look at it..  :)

@Troy Forney good question. I highly recommend you read Howard Marks’s classic Mastering the Market Cycle.  Howard reminds us that there is always a market cycle. Trees never grow to the sky. The goal is to act appropriately right now, based on your observation of the place we are at this moment. We are with Cinderella at the ball and we don’t know when it will strike midnight. As Warren Buffett says, the clocks have no hands.  Happy Investing! 

I do believe in the 18 year cycle. I know some don’t just different schools of thought. So that leads us to 2026. Of course it’s not dead on all the time, but the big question is how much has covid and the long term debt cycle affected it. 

I am far more concerned with rent control and ridiculous pro-tenant rights laws (I believe in a slight tilt towards tenants) than in investors overpaying. What return you are happy with is up to you, so why should I "worry" about it? If you get crushed, more opportunities for me and others. If you don't, then I probably will benefit from that same appreciation as well.

Rent control, eliminating no-cause evictions, inconvenience payments, those crush values much more readily and to a greater extent (usually) than a bubble burst -- there's no way to work around them and there's no opportunity to take advantage of.

@John Clark we have all sorts of "silly" pro tenant laws here in the Portland Metro area....  and yet - the market is booming and new builds are all over - so many cute little neighborhoods have 4 story Multi Fams going up....  sooooooo  its all how you look at it.  Do I think some of the laws are silly and benefit no one? yep - but it isnt hurting my bottom line and we just adjust and continue on.....

Mourning times gone by (1% rule) is just backward looking and isnt going to help you reach your financial goals....  adapt and move on :) 

Originally posted by @Troy Forney :

Maybe its just me.....  Being in the Real Estate Business for 20 plus years, I am started to see some similarities of the last bubble.  Now I am not saying we are in a bubble.  I don't know.  They are a lot of factors to consider and lots of signs are present, but if I had to go from my gut only, I would say yes.  The logical mind does tend to consider all the data on shortages and low interest rates, and droves moving from Illinois etc...  Whether you go with your instinct, gut or logical thought, It doesn't matter.   What I do know is this.  I have seen a lot of deals coming across my desk of people over paying for investment properties.  I look at the numbers and think, that doesn't even meet the 1% rule or .80 for that matter.  I think its going to be a couple years, but there are going to be some investors in trouble.  And yes they are taking mortgages.  

Strictly my opinion ...

No, we're not in or approaching a "bubble".

We ARE, however, in a housing shortage.

This was predicted just after the crash of '07 / '08 when some 80% of builders and developers went under. New housing all but stopped, while the future demand for housing continued to develop unabated: folks didn't stop growing up, completing their education, getting married and starting their families simply because of what had happened with the economy.

Economists of the day predicted a shortfall of housing supply amounting to 5+ years of housing starts / building new homes and apartments by the time "starts" began to recover, and a 10 year shortfall by the time the "ramp back up" restored some of the momentum in housing prior to the crash - basically, where we are now.

Needless to say, no one anticipated COVID and the related impacts on the population and the economy.

In my view. we're seeing a multi-faceted issue because of all that's happened since the crash, not to mention the impact of the crash itself.

My $0.02 ...

The 1% has been dead for a very long time in certain markets. It doesn't mean that good deals don't exist though. You just need to adapt to this new market

Also, looking at real estate investing in a vacuum doesn't mean anything really, you have to compare it to available alternatives at any point in time.

Originally posted by @David Dachtera :

We ARE, however, in a housing shortage

When you say 'housing shortage', are you referring to certain areas, or the country as a whole? In other words, is there enough housing in the USA to house all the people in the USA legally?

I'd bet there is and therefore there is no 'housing shortage'. Makes me laugh when people complain about housing shortages just because everyone wants to live in the cool cities, but can't afford to.....

Bubble? I don't think so. Slow down? Yes.

i think the real problem facing most investors is that we've had a growing rental market for 10+ years. Most Landlords have only seen rent increases and high demand. When the market turns, I expect we'll see a lot of landlords selling off their inventory.

Originally posted by @Bruce Woodruff :
Originally posted by @David Dachtera:

We ARE, however, in a housing shortage

When you say 'housing shortage', are you referring to certain areas, or the country as a whole? In other words, is there enough housing in the USA to house all the people in the USA legally?

I'd bet there is and therefore there is no 'housing shortage'. Makes me laugh when people complain about housing shortages just because everyone wants to live in the cool cities, but can't afford to.....

EXACTLY  there is no shortage.. many of the rust belt mid west cities will have between 5 to 20k vacant homes thats a fact.

but they are not in areas were most owner occs want to live.. its the domain of cash flow investors.

there is a shortage of NEW nice affordable housing.. no question about that.. 

Originally posted by @Bruce Woodruff :
Originally posted by @David Dachtera:

We ARE, however, in a housing shortage

When you say 'housing shortage', are you referring to certain areas, or the country as a whole? In other words, is there enough housing in the USA to house all the people in the USA legally?

I'd bet there is and therefore there is no 'housing shortage'. Makes me laugh when people complain about housing shortages just because everyone wants to live in the cool cities, but can't afford to.....

I'd like to discuss that.

Can you explain how housing starts can all but cease for 5 or more years while increase in future housing demand grows unabated without creating a housing shortage? ... and how increase in demand remains relatively constant even while borrower eligibility factors fluctuate, often wildly? ... and while the ramp up in new housing availability is just now - 13 years after the crash - approaching levels not seen since the ramp up to the crash?

Again, we're not talking about affordability or other economic concerns. we're talking about the availability of housing to satisfy demand without regard to affordability, borrower eligibility, or other factors. Those were so badly skewed by the pandemic that the studies are still in progress and available data is preliminary, at best.

@Troy Forney Here is an interesting perspective I heard from a co-worker who is a lender who has much more experience than me and has seen a few cycles. It is related to interest rates, the biggest factor I see for any decline in RE valuations nationwide would be a huge spike in interest rates. So that is why I address this. I have a fear that rates may increase significantly in the coming years but he reasoned to me that the fed at this point in time will never let that happen again because it would price the population out of housing very quickly monthly payment wise and basically RE prices would have to tank to compensate for a high increase in interest rates which would create additional problems that he explained more in depth the fed would not allow. Basically the fed is in a rock and a hard place interest rate wise. What I would be more concerned with is the value of the dollar rather than the “costliness” of the real estate.

That addresses the only factor that I think will even cause prices to fall which I think the rate of the increases will just significantly slow down, even with increased rates. Which will probably top out at 6% at the very very max which I would be surprised if they went that high. Every other factor like population growth, current development, and rent increases suggests to me price increases.

Look at it this way. Real Estate is not even more expensive a dollar just buys less. If the buying power of the dollar didn’t significantly decline these higher prices would be a concern but to me it is just logical now to buy a real property that provides shelter in exchange for more of my worthless paper, not a problem at all. Now everything else including wages just needs to increase (I am not suggesting a higher minimum wage but it is a problem).

Also speaking to individuals as a lender the “starter home” now seems to be around 300k. Which is ridiculous to me, most people won’t even accept a home worth less than this, another concern I have is that starter homes seem to be a thing of the past and a home is no longer even worth being bought from anyone besides landlords for under 300k.

TLDR - Basically rates increasing is the only factor that I see causing a decline in prices and the fed would be foolish to let these rise too much with how much debt they are in, the dollar was useless paper and now just more useless so it takes more of it to buy a useful house, and starter homes seem to be out of mind for most of the population.

@Thomas Don also I agree that banks will start lending on this more freely in the future it is very difficult to use this income right now for a conventional loan product and it is a problem

Originally posted by @Jacob Trogan :

@Thomas Don also I agree that banks will start lending on this more freely in the future it is very difficult to use this income right now for a conventional loan product and it is a problem

 Yes, they'll figure it out eventually, and when they do it will create another bump in house prices.