"It's Different this Time!" - Why we can't lose in RE! :)

43 Replies

This kind of attitude scares the SH*T out of me!!!

“This time is different” are the words scrawled on the wall of every financial bubble - from the South Sea to the DotCom Bust (1.0) to RE Financial Crisis - before it comes crumbling to the ground. The new era of international trade; The new era of a super-productive online world; The new era of RE where prices cannot go down; The human mind is a funny thing!

When have you heard people using this phrase recently? Did it scare the sh*t out of you too?!

This is what another BP'er wrote recently  on a post of mine, where I was questioning whether us first-cycle investors are as smart as we think we are..

“I watched the last disaster unfold. I know lots of people that lost everything. This time is different. Sure, there will be market cycles, but the days of no income and only a pulse required to qualify mortgages are gone.”

DISASTER!

I totally disagree!!! The only thing that is different, is that financial asset bubbles and busts are always a bit different. The money might be coming from a different place. The asset might be in a different form. But common themes are greed, a “can’t lose” attitude, leverage and/or "funny money", and amazingly enough, thinking that we’ll be OK because it’s different this time!

It’s usually coupled with a lot of late-comers piling into the asset after years of sitting on the sidelines missing out, driving it ever higher above its intrinsic value, further increasing the odds and magnitude of a correction when everyone sees how naked the king is..

It doesn't matter if the "funny money" ("hot" money) is coming from loose loans (see Great Recession), an overheated sector (See Tech Bust 1.0), an overheated country (Japan in 90's; see 2-3 lost decades..). Their will always be another bubble filled with risk; it will just look a little different next time. Stay agile ;)

 *I also had a front-row seat to the extreme losses, watching RE borrowers and developers go from 8 & 9-digit net worth to negative in the matter of a couple years*

“An asset bubble is like an orgasm; It feels the best right before it’s over.”


Most recently, here's the questions I've heard answered with "It's different this time."

"Isn't the tech bubble in the San Francisco Bay Area unsustainable? Is it also unsustainably contributing to near-record unaffordability for RE in the Bay Area?" (New York City, Boston, Austin have any similar folks..?)

No stupid! It's different this time! Small tech companies not only have unique visitors, like DotCom 1.0 - but they also have *gasp!* some revenue! (Let's not mention the P(rofit) Word! ;)

"Won't near-record unaffordability levels make it difficult to sustain these prices, or cause a reversion if it continues?"

No stupid! It's different this time! With the hot tech sector, insatiable foreign demand for RE, and the "never-ending" flow of capital into the best place on the world to live, it can go way further! (Never mind the cyclicality of tech & some foreign demand, and the fact that both of these things STILL EXISTED during the last crisis, right?)

"What if interest rates go up?"

No stupid! It's different this time! The era of interest rate cycles is over, and rates won't be above 5% in our lifetime. Just look at the 30yr chart! With a new, smarter Fed that knows how to control inflation, European recession, strong dollar, and cheap oil, how can they go up? (Never mind that they've never been this low before, and historically not anywhere close.)

My question to all of you:

Is it different this time?
What was the last question you heard answered with "It's different this time?"

*The greatest trick the devil ever pulled was to convince the world he didn't exist*

Hey @J. Martin , I have changed from my plans of even just last year to acquire more properties locally.  With low oil prices, the oil field jobs have been shrinking.  We had a horrible bust here in the 1980s, and more than a few of us recall how bad those times were.  For some horrible reason I have decided this next year will be trying to fix up all the big ticket items that have been put off which is mainly roofs.

    If I had a crystal ball back in the 1980s I would have made a killing.  The house I bought to live in was a repo from the credit union.  it has gone up over $100K in the 25 years.  Unfortunately I had no job history and no money then.  I have also done some pretty major upgrades of putting a drain system around the house, replacing decks, new windows, doors, floors and kitchen renovation,  New roof, and landscaping as well.  I still need to redo the bathrooms.

  If prices drop and we lose population again perhaps I can pick up a few of the nicer houses that would previously not have cash flowed.  If no bust comes I will try to upgrade the houses I have.  I already have 3 rentals where I have folks who are going to be late on rent and one of them was $200 short of his full rent.  His hours have been cut.  I am going to batten down the hatches and wait awhile.

Originally posted by @Jerry W. :

Hey @J. Martin, I have changed from my plans of even just last year to acquire more properties locally.  With low oil prices, the oil field jobs have been shrinking.  We had a horrible bust here in the 1980s, and more than a few of us recall how bad those times were.  For some horrible reason I have decided this next year will be trying to fix up all the big ticket items that have been put off which is mainly roofs.

    If I had a crystal ball back in the 1980s I would have made a killing.  The house I bought to live in was a repo from the credit union.  it has gone up over $100K in the 25 years.  Unfortunately I had no job history and no money then.  I have also done some pretty major upgrades of putting a drain system around the house, replacing decks, new windows, doors, floors and kitchen renovation,  New roof, and landscaping as well.  I still need to redo the bathrooms.

  If prices drop and we lose population again perhaps I can pick up a few of the nicer houses that would previously not have cash flowed.  If no bust comes I will try to upgrade the houses I have.  I already have 3 rentals where I have folks who are going to be late on rent and one of them was $200 short of his full rent.  His hours have been cut.  I am going to batten down the hatches and wait awhile.

 Jerry, this is an interesting secular movement in your market. Good that you are staying flexible. Here's a little trick I read about for finding the "staying power" places in wildcat or oil towns...

Buy in local towns/areas that have the lowest marginal cost of production per barrel. This may vary even within a 50 mile radius. But I have heard of some towns that tend to stay afloat, because oil producers retract to their core/cheapest production locations when times are tough, then expand outwards from there when oil prices go back up..

What do you think? Is that crazy? Or was this idea legitimate..?

Way to stay agile. Keep that cash on hand. And your finger to the wind..

Prices always rise--until they don't.

If it's different this time... then, well... GREAT! That means these bidding wars will continue, homes will keep selling for well over listing, and my properties and overall investment portfolio will keep increasing in value. :)

If not, well, then trouble could be brewing if you're ill-prepared...

I'm not smart enough to figure out what will impact what causing what, but I do believe in cycles and what goes up usually comes back down again...

If an investor got in at an opportune time (like you did J. M.), chances are you loaded up and acquired a bunch of assets during the ripe-for-the-picking peak recovery period between 2009-2012... But even in 2013, 2014 it wasn't too late and good deals were still pretty plentiful... The last deal I closed was earlier this year, when I finally went ahead and said, "NO MORE!"

Could this thing keep inflating? Sure, it could... But I look at it from a risk/reward angle -- Trying to leverage more and winning "one last deal" can end up being the straw that breaks the camel's back.

When it comes down to it, it's fueled by greed... In the Bay Area, even if you only won a SINGLE house during the recovery, you're still coming out miles ahead and that SINGLE property has probably appreciated by a minimum $100,000...

Why keep pushing your luck? I'd rather preserve what I've got and stash cash from this point on (I completed two cash out refis recently to pull equity out for the next round!); I'm ok with missing out on whatever deals remain in 2015, 2016, 2017, etc., should this bubble keep expanding.

I'm happy with the progress I made this round (ain't contentment a wonderful thing???); now I just wanna live to fight another day...

At least I'm not the only one worrying about some turbulence ahead.  I actually kind of hate the fact that I'm sitting on a bunch of cash at the moment, because I can't find anything that seems priced prime for the picking at the moment.  I guess maybe I'm waiting for the next sale (recession)?  

Business cycles always happen.  This boom will someday bust, just like they always do.  With real estate that could mean a buyer's market, flat pricing, or a retraction in prices.  But, the cycle will happen eventually.  

My concern is that things have had bullish markets for a long time now, and the real estate market has been climbing at a steeper/quicker rate in the past 6 months (at least in my region).  It leaves a bad taste in my mouth, because it reminds me so much of the build up before each of the last three recessions I've witnessed. 

Too bad we don't have that crystal ball!  

J. M. Some very random thoughts. 

I would be more concerned over natural disasters. We can adjust to economics. I never hear the you can't lose stuff like I did before. That last round left many holding the bag. Now everyone knows you can lose. It is almost certain interest rates will rise soon. There are 7 million boomerangers coming back 2016 - 2020. I think the millennials numbers were adjusted up to 87 million from 76mil. Millennials overtake baby boomers this year. Housing permits have not kept up with jobs in California. There could be a shortage of housing of the likes we have never seen. Your results may vary. Batteries not included.

The history of bank failures since the establishment of the FDIC below:

Year - Number of Bank Failures

2015 - 4

2014 - 18

2013 - 23

2012 - 50

2011 - 92

2010 - 157

2009 - 140

2008 - 30

2007 - 3

2006 - 0

2005 - 0

2004 - 4

2003 - 3

2002 - 11

2001 - 4

2000 - 7

1999 - 8

1998 - 3

1997 - 1

1996 - 6

1995 - 8

1994 - 15

1993 - 50

1992 - 181

1991 - 271

1990 - 382

1989 - 534

1988 - 470

1987 - 262

1986 - 204

1985 - 180

1984 - 106

1983 - 99

1982 - 119

1981 - 40

1980 - 22

1979 - 10

1978 - 7

1977 - 6

1976 - 17

1975 - 13

1974 - 4

1973 - 6

1972 - 2

1971 - 7

1970 - 7

1969 - 9

1968 - 3

1967 - 4

1966 - 7

1965 - 5

1964 - 7

1963 - 2

1962 - 1

1961 - 5

1960 - 1

1959 - 3

1958 - 4

1957 - 1

1956 - 2

1955 - 5

1954 - 2

1953 - 2

1952 - 3

1951 - 2

1950 - 4

1949 - 4

1948 - 3

1947 - 5

1946 - 1

1945 - 1

1944 - 2

1943 - 5

1942 - 20

1941 - 15

1940 - 43

1939 - 60

1938 - 74

1937 - 75

1936 - 69

1935 - 25

1934 - 9

I don't have the hard data, but if you look at number of new residential constructions in the bay area now vs 2006.  We have a lot less new homes inventory vs the last peak cycle.   We have some cushion from the supply side if we have a downturn.   What really concerns me is the price people are willing to pay for new homes in class C areas.  700 to 800K homes with tiny lots in Hayward neighborhood surrounded by industrial buildings.  IMO, they are already overpriced and the owners will find out the hard way when we have a economic downturn.

Thanks Matt, looks like San Mateo & SF have the biggest supply and demand gap.  I would think counties like LA vary quit a bit from city to city.

@David C.

Yes. It is interesting when you unpack LA county. Nearly all that building was 30 to 60 miles out. So the inner core from 0 to 20 miles out is probably more like the Bay area in reality. So those LA numbers are deceiving. The actual LA city is much more tight than the entire county as a whole. When you look at the official inland counties, it is easy to see why they are always the last to go up and first to go down. 

It is always different this time.  A different way for the bubble to burst that is.  Ask people saying that if super low interest rates (ZIRP) are a good thing why didn't the FED do this long ago?  Speaking of the Fed when was that last time they got the inflation thing right?  It is almost always too much tightening which leads to a recession or overstimulation which leads to a bubble of some sort.  

What worries me the most is the fact that the fed has been acting under emergency conditions for so long (7 years) that it is considered normal when it is anything but... 

@David C. - no kidding...This market crazyness reminds me of 2004-2006 when everyone "have to get in and ride the appreciation train"....including myself. I learned my lesson for sure. Even in the far east side of the Bay Area where we live, I see the same pattern: emotional crazyness which is a deadly combo. People say that this time it's different because the loan guidelines are stricter and people can't get into negam loans etc. I think it is no different at all....it will be coming down crashing again. Stock market is crazy, housing market is crazy....people will learn for sure. I am actually considering selling all my rentals in the Central Valley and just wait...what are you guys' thoughts?

I think this post calls for economical prognosticator James Park. I'm fairly sure given the inversion of the partial differentials between the CPI and Libor rates over odd years we see what the discrepancies between that which the inflationary Markov chain indicates compared to normal stochastic methods used to define the tangential M3 money supply divided across Ricardian land scarcity. Well the conclusion is obvious, but this is just a laymans opinion

In 2016 the vanguard of the baby boomers (those born from 1945 to 1964) will reach 70 1/2 years old.  For the first class of baby boomers that means at least 4% mandatory withdraw from their retirement accounts as required by law.  Most retirement accounts hold equities (stocks, ETFs, mutual funds, etc. )  If savings interest rates remains dismally low, then they may plow that money back into equities.  But if savings rates are 2% or higher, they may decide the money is better kept out of the stock market for their twilight years.  Year after year another class of baby boomers will join in the mandatory withdraw from retirement accounts.  In a mere five years the first class will have withdrawn 20%, second class 16%, third class 12%, etc.  This will mark the first time in financial history that such a large group of investors are systematically forced to SELL equities.  This is stark contrast to the year 1974 when 401Ks first started. That was the first time in financial history that large groups of workers (lots of baby boomers) were forced to BUY equities because companies replaced pension plans with those 401Ks.  Some point in this change of supply and demand for equities there will be a tipping point. A lot more sellers of equities, a lot less buyers of equities.  Sure Millenials will be forced to buy equities if they contribute to their 401Ks, but that generation has record student debt, less average wages, less job security... not nearly the force of buy equities that the baby boomers had.

Watch those interest rates.  (I read this on www.optionsforcash.com)

Also, I think the next financial bubble will be the defaults on the over 1 Trillion dollars (and rapidly growing) in student debt.  Such students will have their credit scores downgraded so they cannot get loans. That means less overall consumption, etc... down we go.  Or a significant stock market slide will also hit boomers and spenders.

I am not buying rental property now unless it fits precisely the numbers I need.  I have cash ready to invest, but I'd rather have it sit safely on the side lines (although I admit I am doing a bit of short term stock trading; doing very well, thank you) rather than buy with the wrong numbers and suffer the consequences.  (I made an offer on a triplex for my personal investment and the reply was the seller was insulted at the offer price...  well, I was insulted at the selling price so I'm simply moving on...)

It may be too early to brace for a down turn.  But do your own stress test of decreasing rental revenue, decreasing ARVs, etc.  Have a sustainability or exit plan.

@J. Martin Wyoming is an odd market, we often go opposite of the nation as a whole.  As to cost of producing in a 50 mile radius, probably 90% of the oil field workers drive more than that per day.  We have seen nearly all the big oil companies sell their fields and move on.  This means lower wages and less workers but more efficiency.  The lack of drilling hurts us pretty bad because so many of the service jobs we have are tied to drilling.  Trucking, construction of drilling pads, pipe, testing, drilling mud, chemicals, casing, etc.  I have had 2 people who own rentals and have oilfield jobs try to sell their rentals to me.  When I made an offer they said they owed more than that, I told them they paid too much.  The claim they make money, well getting $150 over the mortgage is not making money.  That is the reason I have not added many houses locally in the last few years.  I actually hope I am wrong I hate seeing folks lose everything they have.  Most have new 4 wheelers, new boats, new camping trailers, houses, new trucks, new cars, etc.  Most will cash in their retirement first, then start losing things.  I know of a few doing that right now.  Anyway I have no crystal ball just paranoia from past experience.  I just hope it doesn't get so bad I cannot rent.  Folks often move away from oil bust towns.

Guys, I got a weird question.

I noticed the nationwide bubble is really centered on Class C properties -- exactly the "middle class" properties that were hammered so hard by the last financial collapse, which are also the greatest in demand (due to "affordability"). 

On the other hand, if you look around, you can get some really good deals on class A-B properties -- especially ones that need a little bit of work. It has gotten to the point that many class B properties are now cheaper than class C properties. 

I am considering buying a higher-end class B property in Salt Lake City (currently rented out), holding it for a few years, then occupying it and selling it. If we're all doomed in the next 1--2 years, is this a bad idea? Should I just stockpile cash?

@Aaron Knoll

Class C (versus say Class A) will get hit harder because :

1) such owners usually don't have as much savings to bail themselves out, and 

2) Class A properties turned out to be able to recover (in terms of value and demand) much faster post-crisis.

In terms of your strategy, ask yourself if the market never recovers, what will be your alternate plan?  If your bad case scenario is still good, then it may be a sound investment.

Stockpile cash if, and only if, you have no other venues of investments and/or you already have other riskier investments elsewhere (to hold the cash as reserves)

I'm not too worried about the market. I expect it to go up and down. It's the postal carrier I worry about. Who will deliver my message?

What I wonder, is what all the hedge fund guys plan to do with all their inventory.  They have a lot. Maybe they're using RE to hedge their other investments? 


@Che Chiu Wong Thanks for this. Right now we have 100% equity in our house, which is very safe but horrible ROI. We would turn that into two low-rate mortgages (with roughly 50% equity in each property) and rent out at least one property. The worst-case scenario is that rent goes down, or we have to deal with vacancy for several months. The main disadvantage of this plan is I might have to get at least one 30-year fixed mortgage to cover PITI+25% -- I hate 30-year mortgages. The new property (probably a B+/ A- by Salt Lake standards, 5800 sq ft with views in a great neighborhood) needs a bit of work and I'd be getting it for about $180k under current value -- but it is already rented out and we'd have no intention of selling anytime soon.

I think my challenge will be ensuring a constant stream of rental income from at least one property; but if that works out then this seems both a sound investment and a good way to "buy into" a neighborhood. This seems plausible -- if anything, there is higher demand for rental in Salt Lake than ever. 

The only thing holding me back is: perhaps I should wait 2 years and maybe there will be a huge crash, with REITs unloading tons of properties onto the MLS for cheap? Or, is that unlikely?

I highly recommend metal roofing. <g>

stephen
-------------



Originally posted by @Jerry W. : . . .   For some horrible reason I have decided this next year will be trying to fix up all the big ticket items that have been put off which is mainly roofs . . . . 

@Jerry W. Jerry, some recent UCLA oil forecasting here you might be interested in.

But some real estate agent told me circa 2006 that real estate always goes up.

No, I know what you mean. I would be surprised if we're in for another crash like 2007, but the way things are going right now, I'm starting to believe we're in a mini-bubble and going to see it deflate pretty soon.

@Aaron Knoll  and @Che Chiu Wong

I noticed the nationwide bubble is really centered on Class C properties -- exactly the "middle class" properties that were hammered so hard by the last financial collapse, which are also the greatest in demand (due to "affordability").

In the later part of the cycle, especially with artificially compressed yields from the FOMC, you will see convergence between higher-end and lower-end properties/areas/classes. Similar to spread compression from the risk asset rates over “risk free” rates. Investors “reach” for yield, credit loosens, and confidence and low rates make retails buyers stretch. Then it reverts as the market turns, investors and retail buyers differentiate b/t classes more, foreclosures, inventory, etc..

I highlighted this in a recent presentation I gave to my meetup group and shared on BP. It usually reverts eventually! (Surprise surprise!) Especially relative to affordability..

@David Cheung,

That's why I just turned down about a 7 GRM 4plex in Richmond. Even though the cash flow would have been good, there would have been no built-in equity, because a lot of people are paying full-blown retail market prices for sub-standard areas w/ properties that need work. If I needed to sell or the market softened, I would quickly have negative equity. If that starts getting super crazy, I will consider trading up. Think of that ratio between prices of superior & inferior properties like an exchange rate. If I can buy .7 of a nice property today with my low-end property, when I could only buy .3 or .4 of a nice property with mine a few years ago, it starts to get tempting.. Especially when the exchange rate tends to revert!!!

@Andrew Syrios ,

"No, I know what you mean. I would be surprised if we're in for another crash like 2007, but the way things are going right now, I'm starting to believe we're in a mini-bubble and going to see it deflate pretty soon."

I’m done trying to play the exact future timing game, and am more focused on how much risk is built up in the system. (aka, probability of reversion, and potential magnitude of reversion.) I won’t pretend to be able to exactly predict the timing of greed, fear, and eventual logic. But to your point, I agree that risk is not built up like it was in 2007, although we’re getting much closer in the Bay Area..

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