Future of real estate values? Thoughts?

Question

I have been investing for about 15 years, and have done hundreds of deals. The past few years have been crazy, I am picking up properties for less than I was a decade ago. I have my opinions on how this is all going, but I am looking for yours.

Do you think we will see a rebound in the next 5 years?

Do you think we have hit bottom?

Do you think we will see a rebound in the next 5 years?

Do you think we have hit bottom?

Chris Martin · Answer

Each person has their own definition of collapse. My definition would be 20% to 25%. My area is slide #4 of 15 in this Metros with the biggest rent drops at http://realestate.msn.com/slideshow.aspx?cp-documentid=17204969. Our "bump" is hardly a collapse. But when you throw in a free month of rent as a concession, that is an additional 8% hit to your rent. In our local 2002-2003 recession, we experienced rent decreases on a few properties of over 10%, one almost 20%. Lots of landlords went to S-8.

Fair Market Rents (FMRs) http://www.huduser.org/portal/datasets/fmr.html determine, for the most part, the upper limit of section 8 payment contracts. The numbers below include both the property rent plus the cost of all tenant-paid utilities for the Raleigh-Cary, NC MSA (Metropolitan Statistical Area). Rents on the S-8 program are for the most part stable.

FMR Year 	Efficiency 	One-Bedroom 	Two-Bedroom 	Three-Bedroom 	Four-Bedroom
FY 2000   		$456 	$553 	$649 	$871 	$1,027
FY 2001   		$530 	$643 	$755 	$1,013 	$1,195
FY 2002   		$545 	$662 	$777 	$1,042 	$1,230
FY 2003   		$559 	$678 	$796 	$1,069 	$1,260
FY 2004   		$561 	$680 	$799 	$1,073 	$1,264
FY 2005 Revised Final  	$574 	$701 	$779 	$995 	$1,076 
Final FY 2006 FMR 	$655 	$734 	$817 	$1,027 	$1,064
Final FY 2007 FMR 	$682 	$764 	$850 	$1,068 	$1,107
Final FY 2008 FMR 	$639 	$717 	$797 	$1,002 	$1,038
Final FY 2009 FMR 	$638 	$715 	$795 	$999 	$1,035
Final FY 2010 FMR 	$687 	$770 	$856 	$1,076 	$1,115
Final FY 2011 FMR 	$695 	$779 	$867 	$1,090 	$1,129

So in our area the concept that the OP presented that "...I am picking up properties for less than I was a decade ago" means that everything else being equal your rental margins should be a lot better.

J Scott · Answer

Real estate is local, so making generalizations about the direction of the market (and whether we're at a top or bottom) doesn't really mean much.

For example, my market may be improving while yours may have another 20% to drop.  Or, over the next 5 years, my market may increase 50% but yours may not move at all.

Personally, I think my specific market is at bottom, though the metro area I live in (larger than my specific market) probably has a bit more to drop.  But, over the next 5 years, I think my market will improve just a bit while my metro market will probably improve more so...

Chris Martin · Answer

Rob, I think there are 10M people who ask the same question. For some investors, the answer may be largely irrelevant. I know investors with a 15 to 20 year "cycle" and for them, as long as the cash flow equation works, they don't care what resale prices look like. A rent collapse... well, that's something different. In my area, prices may have collapsed in some areas, but the rent hasn't. That allows for great margins and where I focus my effort.

It's generally the no equity appreciation 'gambler' (read that as almost every retail homeowner) that wants this kind of question answered.

The stock market (DJIA) has gone up about 80% in the last two years but in the last five years has gone up about 8%. If you can time the market (stock or RE) then more power to you. RE and stock markets tend to move in cycles and just like the industry groups in the stock market, different regions of the country move in different ways. The fact is that in any market, there are always stocks (or properties) that will perform better than the market. If you really know and understand your market, you should benefit more than average because your insight has led you to better opportunities, regardless of the duration of your investment.

Account Closed · Answer

I happen to agree with Jason.  There may be some market areas that may continue to be more or less stagnant for a few years.  On whole though I think that real estate prices will be recovering well in 5 years.

I think though it is much more prudent to study your local markets or buying markets because they may behave much different than the average.

Account Closed · Answer

J Scott has a good point. You need to look at statistics of your metro and your local area. What's unemployment doing locally? Growth expectations? New employers coming to your town? How many jobs will be added? Jobs create income, income creates wealth, wealth creates a better chance for a home buyer to get in a home, thus creating more sales. More sales translates to higher demand for housing thus driving the price of real estate up. It would also be a good idea to find some information on how many sub-prime mortages were made in your area. Not many in Texas compared to the nation. This will tell you if there was a local bubble that your town or city experienced. Foreclosures are a key indicator of this. Another way is looking at UBPR's of local community banks. If you have 3 or 4 banks with crappy earnings there's a reason for that. It's more than likely due to Asset Quality problems stemming from loan problems.

Please note also that these factors mean squat in small towns and cities that do not materially change when times are bad or good. To answer your question, do I know if we have hit bottom? The answer to that is no one really knows. Do I think we will rebound in 5 years? Have no clue and don't really care. If you have a positive cash flow what does it really matter? If you have negative, find out why and learn from it.

Jon Holdman · Answer

You mean the good old days of 10-20% minimum down payments?  Or the 80's good old days of 15% interest rates on conventional loans?  Or, the stupid days of anyone getting a loan for anything?

I certainly do not see lending ever being as lose as it was during the bubble.  Why?  Because bubbles don't repeat.  This was a CDO bubble as much as anything.  The bad loans were just the raw material to feed demand for CDO's and related investments.  Like the other bubbles, once the initial round of stupidity dissipates, it never comes back.  Not for tech stocks, not for railroad stocks, not for tulip bulbs.

So, I see a return to more normal lending guidelines, meaning back to what they were in the 80's and 90's.  I see a return to slow, inflation-driven price appreciation.  Are we at a bottom? Don't think so, but I don't think we're far from it.

I see unrelated, unpredictable events, such as unrest in the middle east and a huge earthquake in Japan, as having as much or more effect than lending guidelines.

J Scott · Answer

I doubt that will happen again in our lifetimes.  No doubt lending will loosen up, but the days of stated income, no credit check loans are likely gone for a long, long time.

As for the general trends in the market, I think it's pretty likely things will tick up in the next year or two, if only because the foreclosure inventory will start to dry up, and the market will start to use natural competitive forces again.

Over 5 years, I have a feeling interest rates will rise significantly (back to the 6-8% range), which will hurt transaction velocity (fewer people qualifying for loans), but I don't expect things will be as bad as they have been the past couple years.

Now, if you go out 10 years, if the underlying issues in our economy haven't been fixed, I have a feeling that we'll have another major recession, perhaps bigger than the one we just started to dig out of, and that cycle will likely continue every 5-10 years or so until the underlying problems are solved.

That's my pure opinion (guess)...

Rob Gillespie · Answer

Completely agree that unemployment and Bankruptcy are hurting the current market. Heck, in the good ole days those small details never stopped people form buying, and banks from lending to them! LOL! Which is a good reason everything is how it is now! 
I said 10 years ago, that this was on the way. Anytime you have people getting 125% LTV cash out refinances to pay off debt, there is a problem brewin!

Account Closed · Answer

Rob,  I'm sure the current tight lending practices are holding the housing sector back.  I'm also fairly certain that lending may loosen up, but feel doubtful that we will see the lending practices we had even in 10 or 20 years.

Many factors are hurting the housing sector.  Unemployment certainly is not helping.  The large number of bankruptcy filings are not helping.  In fact I think that the new financial reforms enacted are hampering the housing sector.

I'm not sure of the value of looking at the real estate market as a whole, but I do believe we will see a come back over the coming years as a whole.

Rob Gillespie · Answer

LOL! I guess I should take the time to be more clear. I am just more for talking than typing! Of course I understand that real estate is very local, I was just looking at an overall opinion on the market as a whole. I guess it would be more of a question like, what is everyone's opinion on banks giving loans to anybody that can fog a mirror again! LOL! When that comes back, the housing market will follow. Sorry to be so vague on my first comment. :mrgreen:

Future of real estate values? Thoughts?

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