Is the real estate bubble burst soon?
Rental Property Investor · Boca Raton, FL · Member since 2020 · 25 posts · 17 votes
Is the real estate bubble burst soon?
Most Popular Reply
Property Manager · Member since 2018 · 174 posts · 185 votes
6yHi @Leatha this is a great question. And one that should be answered in a couple parts. Last year many were predicting some level of real estate shift. If you look at history trends we are overdo for a dip. In a buyers market you normally see more than 7 months of real estate inventory. For a Sellers Market you see less than 5 months of inventory. A neutral market is around 5-7 months of inventory. Currently, (at least in Maryland) our inventory is 1.9 months. This is an astounding number. There are more people looking to buy than there are houses for sale. If you look at these numbers alone, we are definitely in a sellers market. Houses are going for higher than list price and selling in record time.
However, to add in the factor of Covid, AND the fact that we are overdo for a housing dip, it will be interesting to see what happens in the next several months. This is the time that the lump payments will be due on mortgages that were paused during Covid. That means people will need to come up with the FULL amount due from the past 3-4 months of payments (unless they worked out a payment plan with their lender). If people haven't properly saved, this could cause a large number of properties to go into delinquency and possibly foreclosure.
The one thing I know for sure, is that when the housing market takes a dip, even during the recession of 2008, our property management/investment company did well. And the reason for that is people still need a place to live. So if properties are foreclosed, and those owners need to find somewhere to live, they will be looking at rentals. In my opinion, if you aren't on the high end or low end of the rental spectrum, you will fare well. On the high end, those tenants may choose to downsize, and on the low end, those tenants may move in with family/friends. In the middle is where you will pull the greatest target market for rental prospects.
If you properly plan for the next dip, you will be ready to invest in additional rental properties, and find amazing deals!
64 Replies
- Investor · Indianapolis, IN · Member since 2015 · 270 posts · 217 votes6y
>I think it is more likely that the dollar, banks and the whole economy will crash rather than the real estate market. Real estate will become even more valuable if that happens.
Who's going to buy all the real estate if everyone is broke? You're making a case for a down real estate market with this post.
- Olathe, KS · Member since 2018 · 148 posts · 207 votes6y
I don't know if a correction is coming or not, but I do wonder longer term about the housing market. For the last 40 years the market has been propelled by lower and lower interest rates...what happens when rates can go no lower like we are now? About the only way to move things higher is through inflation. The market is being juiced right now because rates on houses are at all time lows near 3%, what happens if rates go up 1% to 4%? That's going to be a major drag going forward then. Are they going to move to 40 year amortization or interest only to keep things moving? That seems like the next logical step.
It just seems like there's a lot of dislocation in the market. The fed pumped so much money into the system that price discovery is non-existent currently. I frankly see prices going higher at least for the next 6 to 12 months until that money has distressed assets to go after (like hotels, office, etc...there's too much money available and no deals, so that money is just inflating everything currently). It needs someplace to flow to besides like tech stocks.
- Investor · Indianapolis, IN · Member since 2015 · 270 posts · 217 votes6y
Originally posted by @Aaron Taylor:
I don't know if a correction is coming or not, but I do wonder longer term about the housing market. For the last 40 years the market has been propelled by lower and lower interest rates...what happens when rates can go no lower like we are now? About the only way to move things higher is through inflation. The market is being juiced right now because rates on houses are at all time lows near 3%, what happens if rates go up 1% to 4%? That's going to be a major drag going forward then. Are they going to move to 40 year amortization or interest only to keep things moving? That seems like the next logical step.
It just seems like there's a lot of dislocation in the market. The fed pumped so much money into the system that price discovery is non-existent currently. I frankly see prices going higher at least for the next 6 to 12 months until that money has distressed assets to go after (like hotels, office, etc...there's too much money available and no deals, so that money is just inflating everything currently). It needs someplace to flow to besides like tech stocks.
Good post.
I don't understand why price fixing is generally regarded as bad economics, but it's totally okay when it comes to the price of money. Definitely can't go on forever, but people won't figure it out until it's far too late to fix it. Easier to kick the can down the road.
As far as inflation, the issue there is that the current run-up has been lopsided with asset prices rising separately from the real economy. As such, all of that equity is more likely to go poof than in your typical inflationary scenario where a new baseline is established. I think that will happen before we see the 40 year mortgage, rates aside.
At some point however in the longer term inflation or hyperinflation rather is the more likely scenario, when people wise up to the fact that we are completely insolvent and unwilling to take our medicine.
- Member since 2020 · 17 posts · 13 votes6ySam B. "Who's going to buy all the real estate if everyone is broke? You're making a case for a down real estate market with this post." Not really. If the dollar crashed, real property becomes more valuable. Unless it gets real bad, then water, food, guns and ammo will be the new big commodity, oh and tp. People will always need properties to live and do business from, so buying, selling, and leasing property will continue. It may be that only investors or investment groups would have the assets to buy or sell real estate. But that doesn't necessarily eliminate the possibility of some form of trading real estate property. Unless we go to a new system, and some state or government took possession of all real property to fund US debt, and private property ownership went away.
- Member since 2020 · 17 posts · 13 votes6yhttps://www.americanbanker.com/articles/shadow-bank-weaknesses-forced-feds-market-rescue-quarles-says https://www.forbes.com/sites/walterloeb/2020/07/06/9274-stores-are-closing-in-2020--its-the-pandemic-and-high-debt--more-will-close/#67303d6d729f https://www.theatlantic.com/magazine/archive/2020/07/coronavirus-banks-collapse/612247/ https://www.greenwichtime.com/business/article/A-new-credit-bubble-gets-ready-to-burst-13911193.php https://www.zerohedge.com/economics/real-unemployment-rate-21-and-heading-higher https://www.weforum.org/agenda/2020/06/now-is-the-time-for-a-great-reset/ https://www.zerohedge.com/news/2018-11-22/did-imf-reveal-cryptocurrency-new-world-order-end-game https://www.imf.org/external/pubs/ft/fandd/2018/06/pdf/fd0618.pdf https://www.zerohedge.com/crypto/bank-england-governor-signals-central-bank-digital-currency-coming
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes6y
@Leatha L. Luttrell
Yes and I can’t wait to be in a cash position to buy properties a good value.
- Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes6y
@Leatha L. Luttrell
I forgot to mention, after March when the market crashed, all the stupid people sold their stocks, but the people who bought as I did, just experienced about a 20% increase. 
- Investor · Indianapolis, IN · Member since 2015 · 270 posts · 217 votes6y
Originally posted by @Jake M.:
Sam B. "Who's going to buy all the real estate if everyone is broke? You're making a case for a down real estate market with this post." Not really. If the dollar crashed, real property becomes more valuable. Unless it gets real bad, then water, food, guns and ammo will be the new big commodity, oh and tp. People will always need properties to live and do business from, so buying, selling, and leasing property will continue. It may be that only investors or investment groups would have the assets to buy or sell real estate. But that doesn't necessarily eliminate the possibility of some form of trading real estate property. Unless we go to a new system, and some state or government took possession of all real property to fund US debt, and private property ownership went away.If the dollar crashes, real estate becomes more valuable in terms of less valuable dollars, not more valuable in the absolute sense. Put it this way, your quality of life under a collapsed economy isn't going up no matter how many houses you own.
- Shawnee Mission, KS · Member since 2016 · 716 posts · 313 votes6y
So different areas are more prone for a correction them others. Like the stock market the Real -estate seems complex breaking rules that have been followed in the past.
The area I am in is still a sellers’ market priced right an offer on the first day maybe 2.
SFH for rent are renting in the same fashion that I have never seen!
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes6y
Originally posted by @Cassandra Collins:
@Marcus Auerbach I appreciate your clear cut response. I'm currently searching for my first house hack, and more than a few people have said that a crash is coming soon so wait to buy. So thank you for clearing that up!
The real estate market works very differently than the stock market! Stocks are priced against earnings and when the ratios get high you know stocks are expensive. Existing housing prices are driven by supply and demand and benchmarked against the cost of new construction. With the cost of new construction being high at about $200 per SF plus land and impact fees existing homes are still very cheap in many markets including Milwaukee. Low interest further increase affordability.
- East Stroudsburg, PA · Member since 2016 · 24 posts · 2 votes6y
@Nick C. Good point 🧐
- Investor · Daphne, AL · Member since 2014 · 13 posts · 3 votes6y
"Is the real estate bubble burst soon?"
This is a very difficult question to answer. Bubbles are in every market but nobody knows for certain when a bubble will "burst"or when another begins. Timing a market can be a crucial mistake leaving you on the sidelines for years. Invest smart by calculating your numbers and understanding a market.Be conservative and don't over leverage your assets. Regardless whatever point we are in a market cycle if you do your due diligence then it will turn out in your favor over the long term. Money can be made at any point in a market cycle.
- 6yDan DiFilippoBusiness MemberReal Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votes
There are some good points being made here. There are some major macro events that are almost assuredly happening in the next two/five/ten years that will have some dramatic effects on the real estate market. I'll cover a few of them.
1. Low Returns
2. Low Rates
3. Demographics
4. US Federal Government Balance of Payments Crisis
5. Private Sector Debt & Asset Price Bubble
All of these variables tie to the others in some way or another and it can be abstract. But here is my best breakdown.
1. Low Returns
It's very hard to discern because of the sheer amount of noise in markets (international trade development, explosive technological advancements, changing demographics, change in geopolitical circumstances, change in banking regulations), but the US economy has been fundamentally weakening over the last fifty years. There exists an array of reasons that it wouldn't always appear to be weakening, but it has been. It started when the US went off the gold standard in 1971 (and in reality, the gold standard had really been breaking for a decade or so leading up to the official closure of the gold exchange window by Nixon). This is not to say that the solution is the reimplementation of a gold standard, but it is to say that our perception of strength in markets (which is in dollar terms) was obfuscated as the dollar was no longer a consistent store of value across longer periods of time. Now, throughout the last fifty years, and especially in the end of the 20th century, the US Dollar was the global currency. This meant that everyone needed dollars to facilitate their global trade transactions. This creates a tremendous dollar demand which essentially permits the US to add dollars to the system via the Federal Reserve and the banking system and have those dollars eventually be fully kneaded into the global economy. The net result over time is that billions and even trillions of dollars worth of foreign manufactured goods were sent to the US, and all that the US had to give them in return was green paper that were created just by printing. What this means, however, is that the domestic manufacturing base has to be hollowed out. It puts dollar-rich domestic manufacturers into competition with comparatively dollar-poor foreign manufacturers. This problem is what's referred to as Triffin's dilemma. Which essentially presents the problem that when a nation hold the global reserve currency, its domestic productivity has to constantly fend against the entire world, which is usually in a hungrier position. Over time, this usually means the nation that wants to maintain its living standards has to further draw from the strength of (international demand for) the currency in order to offset their fundamental weakness. We have been doing exactly that. We don't produce enough to keep up our standard of living. The other store of value that we have exported in order to maintain our consumption is US Treasury's. The global settlement asset. As a result of doing this, our net international investment position (how much foreigners owe us minus how much we owe foreigners) has gone from 0 in 1990, to -15% of GDP in 2005, to -30% of GDP in 2011 to almost -50% last year in 2019. What this means is that we've been bolstering our economy using more and more money borrowed from foreigners. And we can get away with this because...
2. Low Rates
The US is not the only economy that is fundamentally weak. Because the US is not a closed economy. The US economy is really better regarded as the global economy, but where the Americans have an outsized ability to decide how it is organized. The reality is though that buying power flows to assets that will produce the best return. This is reflected in interest rates. The Federal Reserve facilitates the introduction of credit into the economy at an interest rate known as the Federal Funds Rate. Interest rates roughly reflect the return an economy can produce. If the market is borrowing money at a rate of around 5%, it means that market participants are have uses for that money that they expect will return 5% or higher. That is good, that's respectable growth. Now, if you watch the FFR over the last half century, you see that the Federal Reserve has constantly targeted and worked to achieve a lower and lower FFR in order to make it easier for banks and by extension businesses to borrow. When the US got a handle on interest rates in the early 1980's, market rates were up as high as 20%. To us this would seem incomprehensibly high. Well, tracking the decline in fundamental growth, these rates slowly fell and then they crashed into the floor in 2008 and the system has been trying to find release valves since. We no longer have real growth opportunities. Interest rates would even like to be lower than they already are, but the economy has been subconsciously rearranging itself, borrowing more and more against the future in order to stimulate more growth in the present. The Federal Reserve has tried three main times since 2008 to try and raise rates in the hopes that the economy would perk up and agree that it is a 5% returning economy, but every single time we start raising rates even above 2%, a wheel pops off somewhere and the Federal Reserve has had to capitulate and lower them again. Low rates (usually) enable more lending. And lending is how most money is created. Most people think that Federal Reserve money printing is inflationary, but that's not exactly correct. Mostly, money is created when it is loaned into existence by a financial institution. It's a little difficult to wrap ones head around, but the main point is that most money is based off of a debt that someone else owes. And this directly involves real estate, of course. Because we apply some 80% leverage to most of our investments. Low rates have been needed in order to keep things moving. And even despite low rates, Americans are still struggling to make ends meet. We've had auto-delinquencies up at high levels despite banks lending at 6, 7, and 8 years just to try and make it more affordable. Essentially, rates have been kept low in a bid to keep the loans coming out. But they are still not workable. The banks still need to be able to make money on those rates. They can't really make money if they can't make at least around 2% interest. And in many cases, there might just not be enough 2% or better returning projects around. As a result, the loans won't be made. And if the loans aren't made, then the money creation doesn't continue. As a result the rocket will run out of fuel and sellers will have to start pricing their homes to accommodate what the buyers can actually afford in terms of monthly payments. This is hugely bearish for home values.
3. Demographics
We have 10,000 baby boomers turning 65 every day. And this will continue for some 15 years. As they retire, they will begin to sell their assets to finance their lifestyles. Starting with their houses. They have been huddled around places like New York City and Chicago in these beautiful suburbs with $1.3MM homes. They live in these places and have used the tremendous fifty year long credit expansion I cited to buy/build-up massive communities worth of houses in these places. Because it was close to where they worked. That's it. Once they no longer have to work and instead they have to have their 20+ year retirement fully planned out, you bet they will be selling their overpriced homes in places like the northeast and relocating to where it's warmer and cheaper and lower tax. Think of Texas, Florida, Nevada, Arizona. These states all have at least some cheap real estate. All of them but Arizona have no income tax. And this is why real estate isn't a monolithic asset class. It needs to be evaluated meticulously and with a multitude of variables in mind. The boomers really thought that life would be 9-5 in an office, pretty wife, pretty house, 401k, buy a timeshare, 2.3 kids going to good schools, and then having a comfortable golf retirement in Florida at 65. They thought that this is what American life was going to look like pretty much forever. In fact, so assured in it were they, that they ruined our economy and saddled us with government debt and student debt, as well as ruined our housing market in order to finance it.
4. US Federal Government Balance of Payments Crisis
Our public debt is altogether too much. Even disregarding the states and municipals, the US government will finish this year some apocalyptic $30T in debt. As explained regarding interest rates before, the government has been borrowing at what can only be described as a de minimis rate of interest, with most Treasury debt financed in under twelve month terms and at a rate of 1.5% (and in the last few months, these rates have gone down under 0.25%). With public debt over 120% GDP, the government is essentially beholden to this low interest rate environment. And mind you this is not as times are good. We are not economically strong. That would be one thing. It's a whole different story being that we have tensions at an all-time high. Middle Americans are in more pain than ever on one side of the argument, and rioters in the inner cities are demanding healthcare, minimum wage increases, affordable housing, and other dispensations on the other side. And in the meantime, those boomers are going to be going on Medicare and social security and consuming those resources. Healthcare is about 17% of the economy, so this has serious implications for what the government provides to people. This bill essentially can't be paid. This is where the inflationistas are actually correct. While the undercurrent is deflationary (lower rates, lower returns, more pain), the US government will eventually force its way out of its debt problem by requiring the Federal Reserve to print the difference. The people are demanding what they've been told they could have. And they're going to refuse to elect anyone who won't give it to them. This is what people don't understand about politics. The milquetoast neo-cons and neo-libs are going to be squeezed to death. It's already underway, in fact. As we've seen with Trump, the Republicans have already replaced their stuffy Washington insiders with a bombastic populist who will say what he feels needs to be said and who will tackle the issues that his constituency are vocal about. "Opposite" (and that isn't really the correct term) Trump is Bernie Sanders and even the more out-there side of the Democract Party. The AOC's, the Andrew Yang's and the Ilhan Omar's. These people are requiring that the government directly and explicitly address the issues facing their constituencies. These politicians are not going away. They are what the future of politics will look like. And in their efforts to deliver on their promises to keep Americans fed, in homes, in work, etc., they will ultimately hijack monetary policy and make it such that the government can print all of the money it needs in order to give it directly to the people. This is what will ultimately cause inflation. And this will have an explosive effect on real estate. Because real assets become more valuable in inflationary episodes while debt instruments become cheaper. Imagine taking out a 30 year mortgage on a rental property and then over the course of five years, enough money is introduced into the system to double consumer prices. You're charging double the rent, many of your costs will increase as well, except your mortgage payment will remain the same. Meaning you get to keep the difference. Hugely beneficial for real estate.
5. Private Sector Debt & Asset Price Bubble
Presently, the debt held in the private sector is over 200% GDP. It's found that over 180% tends to be a point of no return for financial disaster. We are dealing with extremely high levels of debt. Now, given those low rates cited before, larger companies have been making use of these low financing opportunities and using the money to turn around and buy back their stock - thereby increasing their share prices. Unfortunately, a lot of this is due to the moral hazard of executives seeking to just increase company share price because that is one of the chief metrics of their performance (and thereby, their bonuses). But a part of it is simply that the American consumer is mortgaged to the hilt; the foreign private sector is strapped for cash too. There isn't enough positive economic activity for these large companies to make money on. So buying back their shares would appear to make the most sense as something to do with cheap financing while they hope some more economic opportunity pops up down the road. More than that, there are a number of private pension programs and insurance programs that need to shoot a ~6.5% annual return in order to meet their obligations. In a super low interest rate environment, they can't meet this target as the rates on the bonds they hold keep declining. So they have actually increased their equities exposures in a sort of Hail Mary attempt to grab some more yield. What this results in are extremely high price to earnings ratios. That is to say that the markets are overpaying for the productivity of the companies in which they are buying stock. This often means that they are buying to try to participate in asset price appreciation rather than fundamental growth. This means that the stock market being at these astonishing highs is really just part of a bubble.
The main point that I think should be taken from this is that we are in an "everything bubble". And this absolutely includes houses. Probably in a pretty big way, considering the amount of leverage that is involved. I think all of American life will change. If you can buy houses in the sweetspot bottom, you'll be in a great position. Because rates will be low when you buy and so will prices. And then we'll probably be facing a strong and sustained inflationary impulse as well as asset price appreciation following that. Things are definitely going to get rough, so keep all of this in mind. And learn/follow macroeconomics if you can. - Member since 2020 · 17 posts · 13 votes6ySam B. I guess it depends in what way the economy crashes, and how bad it gets. But I agree. Marcus Auerbach. How stock prices effect real estate prices is another worthwhile aspect to consider. Doesn't hurt to look at this report from th Pentagon’s Joint Special Operations University with their prediction for the lawless future of US cities. https://theintercept.com/2016/10/13/pentagon-video-warns-of-unavoidable-dystopian-future-for-worlds-biggest-cities/
- Rental Property Investor · Atlanta, GA · Member since 2019 · 16 posts · 2 votes6y
@Jenni Utz great analysis thanks
- Rental Property Investor · Atlanta, GA · Member since 2019 · 16 posts · 2 votes6y
@Marcus Auerbach good points
- Lender · Southwest Georgia · Member since 2017 · 312 posts · 278 votes6y
So I can’t say I know that there is a bubble and when it will burst. But let me tell you some things I am seeing as a lender right now.
1) Appraisals that used to take a week are now 3-4 weeks. They are just that busy.
2) When we are getting appraisals back for new construction, the cost approach value is 10-20% more than the sales comparable. So when you build a house, it costs more to build than its worth based off sales. Never seen that be this high till now.
3) Housing in markets where average days on market was between 45-60 are now going under contract in less than 30 days. This is happening even in rural America.
So is there a bubble, I don’t know. But, I tell everyone an old saying if they are thinking about selling “Get out while the getting is good”
- Member since 2019 · 12 posts · 11 votes6y
Originally posted by @Dan DiFilippo:
There are some good points being made here. There are some major macro events that are almost assuredly happening in the next two/five/ten years that will have some dramatic effects on the real estate market. I'll cover a few of them.
1. Low Returns
2. Low Rates
3. Demographics
4. US Federal Government Balance of Payments Crisis
5. Private Sector Debt & Asset Price Bubble
All of these variables tie to the others in some way or another and it can be abstract. But here is my best breakdown.
1. Low Returns
It's very hard to discern because of the sheer amount of noise in markets (international trade development, explosive technological advancements, changing demographics, change in geopolitical circumstances, change in banking regulations), but the US economy has been fundamentally weakening over the last fifty years. There exists an array of reasons that it wouldn't always appear to be weakening, but it has been. It started when the US went off the gold standard in 1971 (and in reality, the gold standard had really been breaking for a decade or so leading up to the official closure of the gold exchange window by Nixon). This is not to say that the solution is the reimplementation of a gold standard, but it is to say that our perception of strength in markets (which is in dollar terms) was obfuscated as the dollar was no longer a consistent store of value across longer periods of time. Now, throughout the last fifty years, and especially in the end of the 20th century, the US Dollar was the global currency. This meant that everyone needed dollars to facilitate their global trade transactions. This creates a tremendous dollar demand which essentially permits the US to add dollars to the system via the Federal Reserve and the banking system and have those dollars eventually be fully kneaded into the global economy. The net result over time is that billions and even trillions of dollars worth of foreign manufactured goods were sent to the US, and all that the US had to give them in return was green paper that were created just by printing. What this means, however, is that the domestic manufacturing base has to be hollowed out. It puts dollar-rich domestic manufacturers into competition with comparatively dollar-poor foreign manufacturers. This problem is what's referred to as Triffin's dilemma. Which essentially presents the problem that when a nation hold the global reserve currency, its domestic productivity has to constantly fend against the entire world, which is usually in a hungrier position. Over time, this usually means the nation that wants to maintain its living standards has to further draw from the strength of (international demand for) the currency in order to offset their fundamental weakness. We have been doing exactly that. We don't produce enough to keep up our standard of living. The other store of value that we have exported in order to maintain our consumption is US Treasury's. The global settlement asset. As a result of doing this, our net international investment position (how much foreigners owe us minus how much we owe foreigners) has gone from 0 in 1990, to -15% of GDP in 2005, to -30% of GDP in 2011 to almost -50% last year in 2019. What this means is that we've been bolstering our economy using more and more money borrowed from foreigners. And we can get away with this because...
2. Low Rates
The US is not the only economy that is fundamentally weak. Because the US is not a closed economy. The US economy is really better regarded as the global economy, but where the Americans have an outsized ability to decide how it is organized. The reality is though that buying power flows to assets that will produce the best return. This is reflected in interest rates. The Federal Reserve facilitates the introduction of credit into the economy at an interest rate known as the Federal Funds Rate. Interest rates roughly reflect the return an economy can produce. If the market is borrowing money at a rate of around 5%, it means that market participants are have uses for that money that they expect will return 5% or higher. That is good, that's respectable growth. Now, if you watch the FFR over the last half century, you see that the Federal Reserve has constantly targeted and worked to achieve a lower and lower FFR in order to make it easier for banks and by extension businesses to borrow. When the US got a handle on interest rates in the early 1980's, market rates were up as high as 20%. To us this would seem incomprehensibly high. Well, tracking the decline in fundamental growth, these rates slowly fell and then they crashed into the floor in 2008 and the system has been trying to find release valves since. We no longer have real growth opportunities. Interest rates would even like to be lower than they already are, but the economy has been subconsciously rearranging itself, borrowing more and more against the future in order to stimulate more growth in the present. The Federal Reserve has tried three main times since 2008 to try and raise rates in the hopes that the economy would perk up and agree that it is a 5% returning economy, but every single time we start raising rates even above 2%, a wheel pops off somewhere and the Federal Reserve has had to capitulate and lower them again. Low rates (usually) enable more lending. And lending is how most money is created. Most people think that Federal Reserve money printing is inflationary, but that's not exactly correct. Mostly, money is created when it is loaned into existence by a financial institution. It's a little difficult to wrap ones head around, but the main point is that most money is based off of a debt that someone else owes. And this directly involves real estate, of course. Because we apply some 80% leverage to most of our investments. Low rates have been needed in order to keep things moving. And even despite low rates, Americans are still struggling to make ends meet. We've had auto-delinquencies up at high levels despite banks lending at 6, 7, and 8 years just to try and make it more affordable. Essentially, rates have been kept low in a bid to keep the loans coming out. But they are still not workable. The banks still need to be able to make money on those rates. They can't really make money if they can't make at least around 2% interest. And in many cases, there might just not be enough 2% or better returning projects around. As a result, the loans won't be made. And if the loans aren't made, then the money creation doesn't continue. As a result the rocket will run out of fuel and sellers will have to start pricing their homes to accommodate what the buyers can actually afford in terms of monthly payments. This is hugely bearish for home values.
3. Demographics
We have 10,000 baby boomers turning 65 every day. And this will continue for some 15 years. As they retire, they will begin to sell their assets to finance their lifestyles. Starting with their houses. They have been huddled around places like New York City and Chicago in these beautiful suburbs with $1.3MM homes. They live in these places and have used the tremendous fifty year long credit expansion I cited to buy/build-up massive communities worth of houses in these places. Because it was close to where they worked. That's it. Once they no longer have to work and instead they have to have their 20+ year retirement fully planned out, you bet they will be selling their overpriced homes in places like the northeast and relocating to where it's warmer and cheaper and lower tax. Think of Texas, Florida, Nevada, Arizona. These states all have at least some cheap real estate. All of them but Arizona have no income tax. And this is why real estate isn't a monolithic asset class. It needs to be evaluated meticulously and with a multitude of variables in mind. The boomers really thought that life would be 9-5 in an office, pretty wife, pretty house, 401k, buy a timeshare, 2.3 kids going to good schools, and then having a comfortable golf retirement in Florida at 65. They thought that this is what American life was going to look like pretty much forever. In fact, so assured in it were they, that they ruined our economy and saddled us with government debt and student debt, as well as ruined our housing market in order to finance it.
4. US Federal Government Balance of Payments Crisis
Our public debt is altogether too much. Even disregarding the states and municipals, the US government will finish this year some apocalyptic $30T in debt. As explained regarding interest rates before, the government has been borrowing at what can only be described as a de minimis rate of interest, with most Treasury debt financed in under twelve month terms and at a rate of 1.5% (and in the last few months, these rates have gone down under 0.25%). With public debt over 120% GDP, the government is essentially beholden to this low interest rate environment. And mind you this is not as times are good. We are not economically strong. That would be one thing. It's a whole different story being that we have tensions at an all-time high. Middle Americans are in more pain than ever on one side of the argument, and rioters in the inner cities are demanding healthcare, minimum wage increases, affordable housing, and other dispensations on the other side. And in the meantime, those boomers are going to be going on Medicare and social security and consuming those resources. Healthcare is about 17% of the economy, so this has serious implications for what the government provides to people. This bill essentially can't be paid. This is where the inflationistas are actually correct. While the undercurrent is deflationary (lower rates, lower returns, more pain), the US government will eventually force its way out of its debt problem by requiring the Federal Reserve to print the difference. The people are demanding what they've been told they could have. And they're going to refuse to elect anyone who won't give it to them. This is what people don't understand about politics. The milquetoast neo-cons and neo-libs are going to be squeezed to death. It's already underway, in fact. As we've seen with Trump, the Republicans have already replaced their stuffy Washington insiders with a bombastic populist who will say what he feels needs to be said and who will tackle the issues that his constituency are vocal about. "Opposite" (and that isn't really the correct term) Trump is Bernie Sanders and even the more out-there side of the Democract Party. The AOC's, the Andrew Yang's and the Ilhan Omar's. These people are requiring that the government directly and explicitly address the issues facing their constituencies. These politicians are not going away. They are what the future of politics will look like. And in their efforts to deliver on their promises to keep Americans fed, in homes, in work, etc., they will ultimately hijack monetary policy and make it such that the government can print all of the money it needs in order to give it directly to the people. This is what will ultimately cause inflation. And this will have an explosive effect on real estate. Because real assets become more valuable in inflationary episodes while debt instruments become cheaper. Imagine taking out a 30 year mortgage on a rental property and then over the course of five years, enough money is introduced into the system to double consumer prices. You're charging double the rent, many of your costs will increase as well, except your mortgage payment will remain the same. Meaning you get to keep the difference. Hugely beneficial for real estate.
5. Private Sector Debt & Asset Price Bubble
Presently, the debt held in the private sector is over 200% GDP. It's found that over 180% tends to be a point of no return for financial disaster. We are dealing with extremely high levels of debt. Now, given those low rates cited before, larger companies have been making use of these low financing opportunities and using the money to turn around and buy back their stock - thereby increasing their share prices. Unfortunately, a lot of this is due to the moral hazard of executives seeking to just increase company share price because that is one of the chief metrics of their performance (and thereby, their bonuses). But a part of it is simply that the American consumer is mortgaged to the hilt; the foreign private sector is strapped for cash too. There isn't enough positive economic activity for these large companies to make money on. So buying back their shares would appear to make the most sense as something to do with cheap financing while they hope some more economic opportunity pops up down the road. More than that, there are a number of private pension programs and insurance programs that need to shoot a ~6.5% annual return in order to meet their obligations. In a super low interest rate environment, they can't meet this target as the rates on the bonds they hold keep declining. So they have actually increased their equities exposures in a sort of Hail Mary attempt to grab some more yield. What this results in are extremely high price to earnings ratios. That is to say that the markets are overpaying for the productivity of the companies in which they are buying stock. This often means that they are buying to try to participate in asset price appreciation rather than fundamental growth. This means that the stock market being at these astonishing highs is really just part of a bubble.
The main point that I think should be taken from this is that we are in an "everything bubble". And this absolutely includes houses. Probably in a pretty big way, considering the amount of leverage that is involved. I think all of American life will change. If you can buy houses in the sweetspot bottom, you'll be in a great position. Because rates will be low when you buy and so will prices. And then we'll probably be facing a strong and sustained inflationary impulse as well as asset price appreciation following that. Things are definitely going to get rough, so keep all of this in mind. And learn/follow macroeconomics if you can.Ummm... I read all of that and I'm gonna have to read it 5 more times. Dang, man. Thanks for taking the time.
- 6yNic S.Pro MemberDanville. CA · Member since 2017 · 313 posts · 221 votes
@Leatha L. Luttrell buy for cash flow now and let it ride. If you pay a little more now and it still cash flows that’s a win imo. Whatever you pay now, I’m 10 years it will be a good deal with rising housing costs. Stay in a diversified market and keep buying for cash flow.
- Investor · NorCal · Member since 2015 · 281 posts · 240 votes6y
Important numbers to consider:
New home built per year. Since the 1950’s we have always built between 1-2 million new homes per year, non stop year after year, even during recessions. Only during 2008-2018 that number dropped by about 50%. Now we have a serious shortage on living spaces, hence (among other reasons) home prices almost reached the sky. Major unemployment and major foreclosure might put some downward pressure on prices but the underlying problem (not enough homes) will stay the same, or get even worse if new home construction slows down again.
Google ”United States Housing Starts 1950-2020”
And in the 50s and 60s our population was much lower than now.
Never ever sell a house. If you need/want the money, just ca$h-out refinance and let the tenant pay off the mortgage. Instead of paying capitals gains tax you’ll get interest and depreciation deductions, as well as future appreciation.
- Rental Property Investor · Member since 2019 · 304 posts · 462 votes6y
Juan Pardo, the big reason for the large price hikes in Europe is the combination of low interest rates and the tax treatment of rental properties. People with large amounts of cash in their bank accounts are either earning nothing or they have to pay the bank! On the flip side, if you own rental property here in the Netherlands, you only pay a 1.4% wealth tax on the equity in the property. The net income you earn is not taxed. The expenses are also not tax deductible. Even if you pay cash, you can get an after tax return of 8% or higher which is pretty good compared to 0% in the bank. As such, many people with large cash savings have been flocking into the real estate market, increasing demand, pushing up prices, and forcing first time buyers out of the market.
- Flipper/Rehabber · Memphis, TN · Member since 2020 · 758 posts · 285 votes6y
You can use american standard champion 4, niagara, kohler and aquasource.
- Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes6y
@Jake M. you are overthinking and much to much negative, I see the exact opposite. Everything was fine until the Chinese virus , all will be great again even better. If there is a correction great buy more. Up or down 10 15% who cares rent still comes in,
Good luck
PS stop reading books and analyzing things to dealt . also change the channel from the main stream :)
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