You have 6 months to liquidate your assets
I’ve been doing a lot of research lately and I wanted to share with you guys what I have found about the correlation between unemployment, delinquencies and housing prices. During the 2008 housing crisis the housing market bottomed about 2 years after the peak in delinquencies. Note that delinquencies are very much so correlated with unemployment rates (see graph on link below). Unemployment is already about twice the peak in 2008 so it is very likely that delinquencies will follow, which will lead to increased supply of housing.
See data here, gathered by stanford researches: https://web.stanford.edu/~pavelkr/jmp_slides.pdf
Conclusion: You have about 6 months to sell off your assets until the market will be flooded with fire sales and forclosures.
@Thor Sveinbjoernsson as my statistics teacher said almost every day
correlation does not equal causation
The last recession was driven by the housing sector, and subprime mortgages. This time around with all the forbearance being offered it seems unlikely things will take a nose dive even equal to that of 2008.
I agree with @Aaron K. This time is different than the 2008 recession.
First the unemployment rate is actually 10 times what it was in 2008. The worst number in history. The Fed has increased the money supply in the market significantly to keep things afloat subsequently. One thing is sure to happen, as a result, is inflation because our dollar is now worth less. Its just a matter of when. Real estate has done well in inflationary environments.
If however consumer demand doesn't come back to pre-covid levels relatively quickly, the jobs won't come back either, even if the virus is at bay. People won't be able to cover payments and there will be delinquency. Its a mess no doubt. Massive transfer of wealth to the top continues.
@Aaron K.
Correlation does not equal causation, you are right. But I would honestly conclude that delinquencies are a direct consequence of unemployment, so that is in fact causation.
@Paul Shannon
I agree with you with the inflation that will most likely occur and could potentially push prices up in the short term, but that is not sustainable. With the fed’s balance sheet up to 27 trillion, there has to come a time where rationality will kick in to prevent us from ending up like Zimbabwe.
Also, unemployment rate was 9% in 2009 and is now at 18% so I don’t see where your 10x number is coming from.
Originally posted by @Thor Sveinbjoernsson:@Paul Shannon
I agree with you with the inflation that will most likely occur and could potentially push prices up in the short term, but that is not sustainable. With the fed’s balance sheet up to 27 trillion, there has to come a time where rationality will kick in to prevent us from ending up like Zimbabwe.
Also, unemployment rate was 9% in 2009 and is now at 18% so I don’t see where your 10x number is coming from.
Yes, correction. Unemployment 2x as bad. We got there about 10x faster this time.
@Thor Sveinbjoernsson how are we going to have a flood of foreclosures in 6 months, when the majority of borrowers were given the option to request two 180-day forbearance periods? The soonest we could actually have this flood would be 360 days from the point that began. Then you have to add the time it takes for all the typical required notices prior to foreclosing. If unemployment is still this high a year from now, then I agree we might see a wave of foreclosures. However, many states are pretty far along with their reopening, so that rate should fall to some degree.
Also, your analysis doesn't take into account homeowners' equity. One of the main issues in 2008 was that people were over leveraged. They didn't have any equity, so they couldn't afford to sell. This time around, borrowers have significantly more equity going into the recession. This means a much higher percent of owners will be able to sell their property to avoid foreclosure.
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@Joseph Cacciapaglia
A lot of the jobs lost are not coming back. Unemployment will most likely not go below 10% for the next 1-2 years. Mortgage forbearance is definitely not as readily available as you imply, and even if that was the case, that would simply shift the problem from housing to banking. Banks would enter extreme liquidation issues which would triggle back down to housing. Either way we will see a pullback in housing prices.
Originally posted by @Thor Sveinbjoernsson:@Joseph Cacciapaglia
A lot of the jobs lost are not coming back. Unemployment will most likely not go below 10% for the next 1-2 years. Mortgage forbearance is definitely not as readily available as you imply, and even if that was the case, that would simply shift the problem from housing to banking. Banks would enter extreme liquidation issues which would triggle back down to housing. Either way we will see a pullback in housing prices.
The automatic forbearance program applies to 3 out of 4 mortgages in the country, according to bankrate.com. That feels like the vast majority to me. If you don't like the use of "vast", I guess can see that. Of the remaining 1 our of 4, most will be lower leverage products. Banks aren't typically holding those mortgages either. They are packaged up and sold in the bond market. There have been some issues with servicers, but it seems there are already some new protections in place for them as well.
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@Thor Sveinbjoernsson
We are definitely heading into a correction. It was coming anyway at some time. I think the timeline is difficult to predict. With my limited knowledge I predict foreclosures will rise significantly within 6 months but the assistance programs will likely cause
Those to come in more like 18 months
From now. I say this since it takes time and the institutions will Have their hands full and will most likely be Working with people as long as they are making consistent effort. But yes..... definitely want to have cash and/or ready credit on hand. Should
Be interesting to see how it plays out and sad at the same time.
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@Thor Sveinbjoernsson
You may be right, or, you may be wrong!
Predicting economic future is dicey at best; just when you see the same correlation as the last ten times, it either changes, or there was no correlation, just coincidence, or something bigger had a bigger effect.
Everybody and his brother knew that the U.S. would enter a recession when WW II ended. Except the U.S. didn’t enter a recession, it entered a boom. Everyone knew prices would decline radically after WW II, except they didn’t, they rose so significantly price controls were introduced.
Everyone knew Reagan tax cuts would lead to bigger and bigger deficits for the next 50 years, except that they led to budget surpluses within 15 years.
In hindsight everything looks obvious.
It’s not that correlations don’t exist; it’s that whether they are really correlations, and whether the circumstances are similar enough to have the same effect this time as it did last time are just educated guesses.
I think Mark Twain said it best. “There are three kinds of lies. Direct lies, indirect lies, and statistics”.
One of my favorite things to do lately is peruse these forums where people argue about all the things that could happen, even though nobody knows. It's really like watching a reality tv show, which is why I get my popcorn ready each night to browse the ridiculousness. Whatever you all do, please don't stop this back and forth, because someone is going to be right, inevitably, and he or she will be able to sell seminar on 'Predicting Real Estate Markets in the 21st Century', and I want the first copy.
https://youtu.be/-OzBI2r0Xb8
Dr Burry!
Originally posted by @Patrick Snyder:One of my favorite things to do lately is peruse these forums where people argue about all the things that could happen, even though nobody knows. It's really like watching a reality tv show, which is why I get my popcorn ready each night to browse the ridiculousness. Whatever you all do, please don't stop this back and forth, because someone is going to be right, inevitably, and he or she will be able to sell seminar on 'Predicting Real Estate Markets in the 21st Century', and I want the first copy.
Up to the minute facts right there, thanks Patrick!
Something I am seeing real time locally (I'm just a guy wanting my next deal), is there is limited inventory with the same hungry investors circling, and prices seem to be up a little.
Originally posted by @Joseph Cacciapaglia:@Thor Sveinbjoernsson how are we going to have a flood of foreclosures in 6 months, when the majority of borrowers were given the option to request two 180-day forbearance periods? The soonest we could actually have this flood would be 360 days from the point that began. Then you have to add the time it takes for all the typical required notices prior to foreclosing. If unemployment is still this high a year from now, then I agree we might see a wave of foreclosures. However, many states are pretty far along with their reopening, so that rate should fall to some degree.
Also, your analysis doesn't take into account homeowners' equity. One of the main issues in 2008 was that people were over leveraged. They didn't have any equity, so they couldn't afford to sell. This time around, borrowers have significantly more equity going into the recession. This means a much higher percent of owners will be able to sell their property to avoid foreclosure.
I see a problem with assuming that equity will still be there. This assumes that values will stay the same. Equity is only there if the value doesn't tank. Not everyone was over-leveraged. This had a lot to do with how it started melting down, but there were a lot of victims after the fact where people had equity, but lost it when the prices tanked. They faced waiting to sell while being underwater, for the day when value would go back up - hopefully - and/or renting at a loss for years.
I believe Thor is right.
I was a building contractor/developer in 2008 when the bottom fell out of the market. We had several million dollars in spec residential construction underway. Not a pretty picture. The current "crisis" has the same look and feel. I have now rebuilt my portfolio as well as I could and am facing foreclosure on a short-term mortgage if I can't find a refi. I am only leveraged at about 25% on the portfolio which I will eventually lose if I can't find a refi. These properties cash flow very well and if and when we lose them, my wife and I will have lost our main source of income and could potentially become homeless. That is just the reality. Can anyone provide a link on the extended forbearance programs? And, by all means, if anyone can refer me to a lender who can help, I will be forever grateful. Thanks.
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Thanks, Thor. I am so looking forward to buying up some of this churning wave of foreclosures and fire sales for peanuts and turning them into more affordable family housing. This is going to do wonders for my portfolio.
@Thor Sveinbjoernsson I agree that the next 6 months do not look good. But there is/was a housing shortage, not a surplus. And most homeowners have equity at today’s prices so will try to hold on one way or another vs 2008 when so many were 100k+ upside down. Moreover, the hardest hit sector is likely not going to be homeowners but the 40% of America that rents. So there will be rental vacancies, lowered rents and pressure on the owners of those properties. I can see sales, possibly short sales and some foreclosures (but having put 20-25% down it would seem many investors would also have reserves). With 3% interest rates, now might be a good time to sell if you are thinking of selling already. 6 months down the road it will either look even worse or better, possibly much better.
Originally posted by @Aaron K.:@Thor Sveinbjoernsson as my statistics teacher said almost every day
correlation does not equal causation
The last recession was driven by the housing sector, and subprime mortgages. This time around with all the forbearance being offered it seems unlikely things will take a nose dive even equal to that of 2008.
I would argue all of the forbearance being offered will cause a lot of foreclosures in the next 12 to 18 months. People that lost their job and put their home in forbearance, say monthly payment is $2000 and you do it for 6 months. When that's over you owe $12,000. Am I correct in this? Who in this economy is going to have $12,000? I'm expecting a lot of foreclosures in 12 months.
@Trevor Imlay
Great point. Forbearance is a temporary fix that might cause more severe problems later on. Let the market reward those that were approprietaly prepared with reserves and lower debt to asset ratios.
A Silicon Valley VC once mentioned to me how in 2003 - 2006 he rejected investments in several new tech companies because he thought they were dot bombs. He said he was suffering from the recency bias of the dot com crash and failed to realize it was actually a different era in tech.
Fast forward to now, and apply the same thought on Real Estate there is sentiment that this recession will be an action replay of the last one!!!
I wonder how?? Banks are well capitalized. Loan discipline especially for residential properties has been rock solid. Regulators have their eye on the ball. People own a lot of equity in their homes just to drop it all and walk the hell away.
How does this foreclosure scenario then play out? It can play out if the unemployment rate persists at 15% in 6 months but then isn’t the country and the world doomed? I think the economy opens up gradually, people get back to work, unemployment falls and in 6 months life is normalizing vs regressing!
@Thor Sveinbjoernsson multifamily is not for sale
@Thor Sveinbjoernsson At least in Phoenix, so much inventory, especially the around $250k stock that independent investors drool over has already been acquired by institutions and converted to rental housing. These homes will likely never be available for sale again - and those portfolios are also waiting to add more doors! Are deals still able to be found, yes! Will there be a huge surplus of vacant homes with no interested or capable buyers again? Unlikely, in my opinion.
A major difference in 2008, at least in our market, was the level of false demand. Too many people financing 100% on interest only ARMs with no plan to occupy or rent the properties.
While unemployment numbers may look indicative, there are many other factors that tell a totally different story.
@Trevor Imlay if that were the case I'd agree, but it seems more likely that they will just tack the extra payments onto the end of the loan instead of the traditional forbearance. Many mortgage companies are already offering to do that and it has been a common clause in many of the stimulus bills being proposed.