Is the real estate market in a bubble?

Question

My business partner and I decided to start investing (buy and hold) recently in the DFW area, and we noticed that most of the properties end up in a bid war, often selling about asking price. Single family, Multi-units, it doesn't matter.

For single families I can understand a future home owner falling in love with the property and paying above market price for a property, but for investors I honestly don't get it. We have target a 10% ROI (including equity for loan amortization) and properties end up selling at prices that would make returns on the 4-6% range (after all expenses, mortgage and capex). Our reasoning is that you can get an average 7% return on the stock market more passively therefore if we going to get active we need to be compensated for.

Are our targets unreal? or we are in a housing bubble?

Chris Soignier · Answer

I'm not so sure I'd use the word bubble, but DFW's investment market is a bit overheated in my opinion, w/ too much competition (esp. from newbies anxious for a deal) driving up prices IMO. The tailwind of ever rising prices has transformed many bad deals into good deals by the time they sold, but buying on that expectation is speculation, not investing. Given DFW's strong economy and population/job growth, I expect the market will continue to be strong through 2017 (at least), but the marginal rate of growth can't continue at the current pace indefinitely, esp. since we're not at all landlocked and have plenty of room to grow in all directions.

I like wholesaling in DFW, but prefer investing in tertiary markets that are less competitive and cash flow better.

Chris Soignier · Answer

Sherman/Denison, Ennis, Greenville, Weatherford, Gainesville, Granbury, Justin, and I could go on and on.   I'm not endorsing all of those specific markets, but you'll likely find less competition in all of them.

Tyler H. · Answer

I agree with @Chris Soignier, the market is a bit over heated--and should continue through 2017.  Nevertheless, demand exceeds supply, specifically affordable housing under the 200K price point, at or under $100 sq ft (compared to $115-135 sq ft for new construction). When I rehab and list properties under 200K, I have literally 40+ showings in 1 weekend, with multiple offers. Population and job growth @Shital Thakkar mentioned, continue to fuel/drive the demand, which doesn't point to a "bubble."  Perhaps gradual interest rate increases could affect demand on higher price points. There are areas/pockets that are undervalued, but its difficult to make a living investing in or out of state by relying on MLS inventory.

Shital Thakkar · Answer

@Mariano Wahlmann,

I live in Dallas and here is my perspective...

• Dallas is going through Economy Boom, Everyday 1000 people moving to DFW metroplex.
• Companies are declaring their relocation to DFW every week.
• There is new construction going everywhere, still they dont keep up with demand.
• I was here is 2008-2009, Dallas just slow down during that time period, never feel recession.
• Here are recent data from Forbes about Future growth...

Paul Ewing · Answer

I also invest in the Tri County area west of Ft Worth.  I am wondering if we are getting to the top of the market around here at least in the sub $100k realm.  I am seeing a lot of price reductions and it seems that initial listing prices are scaling back down a bit over the last three to four months.  Still lots of heat in the newer A class and McMansion areas but in the working class $800-$1000 rent range it might be getting a bit more profitable.

Trent Honea · Answer

@Chris Soignier I agree.  I'm a DFW native and I focus on West Fort Worth to Weatherford for my buy-and-holds.  Even here in the West-o-plex the market is going pretty crazy.  I submitted an offer down the street from a property I own in October, and offered list / market price.  It was priced just right to cash flow and return a decent ROI for that area (about 10%).  I lost to someone who offered 10K above list CASH.  I don't blame them for taking that offer, but it's hard to compete with that.

I can't decide if it's a bubble or if we're just on the upswing of the the pendulum.  If not a bubble, I think we've got to be nearing the peak for appreciation in B/C areas.  If the market keeps climbing, I might have to think seriously about selling some of mine and taking the profit, but then I will have to hustle for new deals.

Mariano Wahlmann · Answer

@Chris Soignier I'm wondering what you'd consider secondary and tertiary markets.

Mariano Wahlmann · Answer

@Corderos SMith I've bought my first house in 2014 in October for 263k at the time I was able to negotiate down. The same house 2.5 years later could be very easily sold for 310k given market conditions.

Corderos SMith · Answer

@Mariano Wahlmann

How long have you had the properties in the DFW if you dont mind me asking?

Is the real estate market in a bubble?

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