CRASH!!! CRASH!!!! CRASH!!!

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CRASH!!! CRASH!!!! CRASH!!!

Tanveer Ahmed
Briarwood, NY · Member since 2017 · 16 posts · 14 votes

Hi BP, when I open any forum or social media the hot topic is upcoming housing market crash. But I don't understand what does "CRASH" means in real state. Is it like stock that will go down 30-50%? Looking at the historic data I don't see any "real estate" crash. I see sub prime mortgage and insanity in appraisal which caused(foreclosure) the market to go down in 2008. Other than that value of real estate alway treanding up slowly but surely. Now what's going on last few years is abnormal. People bidding a house way over than it's actual worth. People had unnecesaary money from stimulus, the money they didn't have to work for. I think rising interest rate will slow that down and come back to normal. In addition we are short 5 million houses. Is that some folks refering this as crash? does it make sense one day we will wake up and see on zillow our house worth 50% less than prior day?  Or I am spending too much time on social media and news outlets? 

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Scott E.
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
4y

As somebody who was a sub-prime mortgage loan officer in 2007-2008 and remained in the mortgage industry for following 14 years, I can say with confidence that this time it's different (from a quality of loan perspective)

The single biggest threat to the housing market in my opinion is if we enter a recession and these layoffs persist. We're already seeing layoffs in tech and fintech. If we continue to see layoffs across other industries and the unemployment rate starts to rise, then there are going to be a lot of people who are having a hard time affording their home (ESPECIALLY the people who got caught up in the frenzy and paid too much over the past 18 months).

I still don't foresee a crash in the market comparable to what we saw in 2008. But I do think there is risk of price decline in the short term. All that being said, I have no idea what I'm talking about. I'm not an economist, I don't have a crystal ball. I'm just a guy with an opinion.

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  • Jeremy Horton
    Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
    4y

    So a couple of things from my perspective:

    We hear that supply is low - pricing is relative to supply AND demand. What's driving the demand? We have (1) a millenial population buying houses (34% of homes bought last year I believe were first time home buyers) and (2) a demand driven from low interest rates - if interest rates stayed where they were pre-pandemic we would not be having the "supply" crisis we are having today. We didn't have this supply crisis/bidding wars/overpaying/20% appreciation pre-pandemic...this makes me think a lot of the demand was tied to interest rates. I think some of it may be shadow demand. Demand was high for everyone due to the interest rates investors/first time homebuyers/literally everyone. I have to think the demand is going to dry up pretty quickly. Then the 'low supply' won't be as much of an issue and the market will stagnate and contract. It really seems to me the interest rates drove demand in the last 2 years or we would've been seeing this same appreciation well before low interest rates and the pandemic. 

    The other thing is we had A LOT of money printed during the last 2 years. Lots of people at home with extra money. Stocks got over valued. Crypto got over valued. Lots of retail investors getting in - and hey you could've made money in almost any investment in the last 2 years. Now I think the party is going to be over - stocks coming back down, crypto coming down - things have to come back down to a true value. This means companies have to truly turn a profit - they may have to layoff workers to do so. Lots of companies that surged during the pandemic 


    Why would the housing market be any different? These overprices areas, San Fran, Austin, parts of Tennessee, Florida, overpriced STRs, I have to think those are going to come down in price. How much? Not sure. The demand I think is going to dry up. Why? Higher interest rates, less disposable income, less remote jobs and we're seeing the layoff start since companies cannot be as profitable/get cheap loans as they could during the pandemic. 

    The Fed literally tells us what they will do. JPow said we have to control inflation (increase interest rates and essentially force a recession) and that home prices need a "reset". What does "reset" mean - it means they need to come down. How do you get prices down (1) dry up demand (2) increase supply. I have to think he's telling us what they are going to do and we're going to see prices drop in a lot of places. 

    1Reply
  • Alex Forest
    Rental Property Investor · Henrico, VA · Member since 2019 · 265 posts · 155 votes
    4y
    Quote from @John Teachout:

    Being an old geezer that has been through multiple economic cycles, I believe we're in for some challenges over the next few years. I don't see a housing crash. Home prices have a correlation to new construction. If you can build a new house for less than what you paid for an existing home you're likely to be upside down. I see home prices flattening but not dropping in any significant way (other than a few crazy markets mostly on the coasts). I think many homeowners have refinanced to lower rates and are not going to want to move unless required. So they won't be purchasing homes but they also won't be selling their home thus the impact on inventory is negligible.

    As always, real estate comes down to the numbers and I've seen lots of discussions where people are discounting investor rules of thumb because they won't work at the present price structure. I feel many "investors" have ignored common sense and purchased properties hoping appreciation will pry them upward and they may be hurting if there's no positive cash flow or their "cash flow" was built on overly optimistic data. So continue to look for the deals out there and carry on. There's money to be made in any market situation but be wise.

     This is what Mr. mcbride, author of the calculated risk seems to see as well.  A stall nationally in home prices year over year (ie flat), but not a noticeable drop, other than specific certain markets which could see that. Ify you look all the way back to1976, there is only one big drop. And he compares now to 78-82, not 07-11.

    https://calculatedrisk.substac...

    inventorY iS up, But 50% below2019

    1Reply
  • Aaron Gordy
    Real Estate Broker · Austin, TX · Member since 2012 · 1k+ posts · 1k+ votes
    4y

    Folks always throw the Fed under the bus. They are responsible for monetary policy which controls interest rates. The Fed can't control the spending of the Government nor control the taxing. Fiscal policy has a huge influence on the economy too. Fiscal policy created huge amounts of surplus cash in folks pockets by PPP and all the Covid relief measures. Fiscal policy makers are just as responsible or perhaps even more responsible for the high inflation as the Fed given their policies over the last 5 years or so. Rumor has it that Federal Government may even forgive student loans. That coupled with the supply chain problems and the Ukraine-Russian war effect upon grain prices and oil prices suggest that we will be in for a bumpy ride for a bit. 

    The midterm races will be interesting but citizens tend to vote with their pocket book on Senate races and Presidential races. There is little correlation between House races and pocket book voting, historically. But the US is in uncharted territory. I think that the remainder of the year will be very interesting! 

    I do know that in the midst of uncertainty there are deals that can be had even among big box stores. For example, the big box store Target screwed up with too much inventory. Two weeks ago they marked down prices significantly and one could get a very good deal there. 

    Locally, in Austin metro, its still a sellers market with a severe lack of inventory and double digit house price appreciation year over year. 

    0Reply
  • Paul Sofia
    Lender · Charlotte, NC · Member since 2016 · 372 posts · 172 votes
    4y
    Quote from @Aaron Gordy:

    Folks always throw the Fed under the bus. They are responsible for monetary policy which controls interest rates. The Fed can't control the spending of the Government nor control the taxing. Fiscal policy has a huge influence on the economy too. Fiscal policy created huge amounts of surplus cash in folks pockets by PPP and all the Covid relief measures. Fiscal policy makers are just as responsible or perhaps even more responsible for the high inflation as the Fed given their policies over the last 5 years or so. Rumor has it that Federal Government may even forgive student loans. That coupled with the supply chain problems and the Ukraine-Russian war effect upon grain prices and oil prices suggest that we will be in for a bumpy ride for a bit. 

    The midterm races will be interesting but citizens tend to vote with their pocket book on Senate races and Presidential races. There is little correlation between House races and pocket book voting, historically. But the US is in uncharted territory. I think that the remainder of the year will be very interesting! 

    I do know that in the midst of uncertainty there are deals that can be had even among big box stores. For example, the big box store Target screwed up with too much inventory. Two weeks ago they marked down prices significantly and one could get a very good deal there. 

    Locally, in Austin metro, its still a sellers market with a severe lack of inventory and double digit house price appreciation year over year. 


     The Fed and the gov work hand in hand.  Wait and see, this next crash will be beyond your wildest nightmares.

    0Reply
  • Rodney Sums
    Laveen, AZ · Member since 2016 · 584 posts · 528 votes
    4y
    Quote from @Jonathan R McLaughlin:

    @Tanveer Ahmed your comment that interest rates will “slow down and come back to normal” highlights how real estate encourages short term memory: the rates now are still below mid-late 20th century norms. It’s the last bunch of years that have been the exception

    I think you are right about inventory. Still short, and the two are tied together. You aren’t going to have panic selling if people are sitting on an3% mortgage


     "Im your huckleberry" on one of your points regarding panic selling lol


    This discussion about panic selling was going on in another thread. 

    I agree one would be incentivized to stay put with a 3% rate.... But what about if they're sitting on a big fat sum of equity they're tempted to spend on a bigger better home? Someone who bought that starter home a few years ago could be looking at their six figures of equity and be like hmmmmm that house on HGTV looks good... 

    0Reply
  • Chris T.
    Investor · Colorado Springs, CO · Member since 2020 · 15 posts · 13 votes
    4y
    Quote from @Scott E.:

    As somebody who was a sub-prime mortgage loan officer in 2007-2008 and remained in the mortgage industry for following 14 years, I can say with confidence that this time it's different (from a quality of loan perspective)

    The single biggest threat to the housing market in my opinion is if we enter a recession and these layoffs persist. We're already seeing layoffs in tech and fintech. If we continue to see layoffs across other industries and the unemployment rate starts to rise, then there are going to be a lot of people who are having a hard time affording their home (ESPECIALLY the people who got caught up in the frenzy and paid too much over the past 18 months).

    I still don't foresee a crash in the market comparable to what we saw in 2008. But I do think there is risk of price decline in the short term. All that being said, I have no idea what I'm talking about. I'm not an economist, I don't have a crystal ball. I'm just a guy with an opinion.

    Curious to get your source on layoffs in tech and fintech. I've recently seen a lot of misinformation on various social media outlets that mimic the same thing, but looking at the official numbers from BLS paint a different picture. Look at Summary Table B.

    'Information' employment increased in May 2022 by 16,000
    'Financial activities' employment increased in May 2022 by 8,000
    Total non-farm was up over 400,000 jobs in May 2022. 

    Also important is that the overall unemployment is steady below 4%. Obviously news outlets love to pump fear stories, so I'm hoping you can provide some quality data to support your claim!

    The Employment Situation - May 2022 (bls.gov)

    1Reply
  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    4y

    Hi @Tanveer Ahmed you got some great commentary above. It really depends on the investor as it always does. If prices adjust, those who are over leveraged with floating rate, short-term debt could get crushed. It comes down to speculating v. investing as it does in so many areas of life. Investing is when your principle is generally safe, and you got a chance to make a return. Speculating is when your principle is not at all safe and you’ve got a chance to make a return.

    I used to be a speculator and I made a lot of money in good times and lost a lot of money in bad time. As an investor, as @Mike Dymski said, there are always opportunities in any market. That’s not to say I couldn’t lose money or anybody couldn’t’ lose money, but even in a crash…especially in a crash, there are great opportunities to get wealthy.

    Howard Marks has a fantastic book, Mastering the Market Cycle. I highly recommend everybody read this book, especially if you are trying to understand how market cycles will impact your investing. Good luck!

    Podcast Guest on Show #533
    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Chris T.:
    Quote from @Scott E.:

    As somebody who was a sub-prime mortgage loan officer in 2007-2008 and remained in the mortgage industry for following 14 years, I can say with confidence that this time it's different (from a quality of loan perspective)

    The single biggest threat to the housing market in my opinion is if we enter a recession and these layoffs persist. We're already seeing layoffs in tech and fintech. If we continue to see layoffs across other industries and the unemployment rate starts to rise, then there are going to be a lot of people who are having a hard time affording their home (ESPECIALLY the people who got caught up in the frenzy and paid too much over the past 18 months).

    I still don't foresee a crash in the market comparable to what we saw in 2008. But I do think there is risk of price decline in the short term. All that being said, I have no idea what I'm talking about. I'm not an economist, I don't have a crystal ball. I'm just a guy with an opinion.

    Curious to get your source on layoffs in tech and fintech. I've recently seen a lot of misinformation on various social media outlets that mimic the same thing, but looking at the official numbers from BLS paint a different picture. Look at Summary Table B.

    'Information' employment increased in May 2022 by 16,000
    'Financial activities' employment increased in May 2022 by 8,000
    Total non-farm was up over 400,000 jobs in May 2022. 

    Also important is that the overall unemployment is steady below 4%. Obviously news outlets love to pump fear stories, so I'm hoping you can provide some quality data to support your claim!

    The Employment Situation - May 2022 (bls.gov)


     Also, it really depends on which company did the layoff, if Coinbase/Celsius goes bankrupt/layoff 100%  it's expected, even a real estate tech company's layoff is pretty much expected as they have not generated profits.

    But if a sizeable layoff occurs from a company like Microsoft or Apple then not just it's affecting the economy, but something bad occurs as those companies have so much cash in the bank.

    The thing is, when unemployment rose in big number, the Fed has to restart QE again lol

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y
    Quote from @Alex Forest:
    Quote from @John Teachout:

    Being an old geezer that has been through multiple economic cycles, I believe we're in for some challenges over the next few years. I don't see a housing crash. Home prices have a correlation to new construction. If you can build a new house for less than what you paid for an existing home you're likely to be upside down. I see home prices flattening but not dropping in any significant way (other than a few crazy markets mostly on the coasts). I think many homeowners have refinanced to lower rates and are not going to want to move unless required. So they won't be purchasing homes but they also won't be selling their home thus the impact on inventory is negligible.

    As always, real estate comes down to the numbers and I've seen lots of discussions where people are discounting investor rules of thumb because they won't work at the present price structure. I feel many "investors" have ignored common sense and purchased properties hoping appreciation will pry them upward and they may be hurting if there's no positive cash flow or their "cash flow" was built on overly optimistic data. So continue to look for the deals out there and carry on. There's money to be made in any market situation but be wise.

    I agree with his analysis, saying that most likely there will be no crash or price is just flattening or reducing a bit in the nominal terms. The difference between the 1979 situation is.... there was no era of "cheap mortgages" prior to 1979. While 2012-2021 (especially 2020-2021) we have an era of super-low interest rates and record-breaking interest rates which means those who purchase/refi during this period, has the best INFLATION HEDGE ever by *doing nothing*/not selling. This will make real estate activity drop significantly but not necessarily reduce prices a lot as inventory is still low. This is where the situation is very different than 2008 when there were massive distressed sales and foreclosures.

    In other countries, a real mortgage is tied to the actual economy where all mortgage is the variable-rate basis (just like HELOC) so any bad cycle in the economy will affect real estate. In US it is not like that. . Just for this reason alone, real estate with heavy regulation/underwriting can not be compared with stock or crypto(this one was not even an asset).

    However situation can change drastically if the inflation is sustainable so much that companies with large cash-flows like Microsoft is doing massive layoffs. Any layoffs may trigger forced house selling and folks downsizing. But at this instance, if unemployment in the middle class is rising, Fed may restart QE again. 

    I think next month will be quite significant to examine what will happen next.

    0Reply
  • Nonkhane Nonnie Saycosie
    Real Estate Agent · Saginaw, MI · Member since 2022 · 28 posts · 15 votes
    4y

    @Tanveer Ahmed

    Well said...I am also a strong believer (and walking testimony) in finding an opportunity out of a catastrophe!

    0Reply
  • Carlos Ptriawan
    Member since 2019 · 7k+ posts · 4k+ votes
    4y

    Latest anecdotal data is showing disinflation started happening after a peak two months ago, there's more supply of goods and inventory in actual markets. Commodities slowly reducing prices.

    Home price is still rising in the bay area, there's almost no recession felt, only three days in some markets. 500K profit if you buy in 2021 and sell now lol :)

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    4y

    @Tanveer Ahmed

    The big difference (outside the banking loan practices of 2008 and prior) is there is still more demand than inventory. Instead of 15 offers now there are only 2. Some people are still trying to buy knowing rates are still going higher.

    Prices are and will soften as more people are priced out of buying a house right now. Some areas will maintain current pricing levels due to demand, other areas will need to cut prices to offset higher interest rates.

    My area only saw prices dip 3% at most during 2008. So the area and the property will dictate prices more than a broad brushed price adjustment.

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