3 Important Points to Remember When Considering a Potential Real Estate Crash

by | BiggerPockets.com

There is a lot of chatter out there about a potential real estate market “crash,” what it will look like when it will happen, and what we should do to prepare. No one has a crystal ball, so it’s all speculation of course. We really don’t know what’s going to happen, as much as we’d like to. It’s a good conversation, mostly for entertainment but partly so that we can take action to prepare for the future. I have done research on the topic and talked to many other investors and even an economist on the matter. Be sure to watch the video accompanied with this article for a full discussion, but let’s have a brief one here.

3 Important Points to Remember When Considering a Potential Real Estate Crash

Some people think or hope the market is going to crash, but for the wrong reasons.

I have heard several conversations about a pending crash, and most who think we are due for a big dip will tell you it’s because we are “due” for one. The market took a huge hit in 2007, but the real estate market historically doesn’t crash every 10 years. The stock market, on the other hand—that’s a different story, and investors should think about how a pending stock market crash would affect their real estate business. Your local area may not be affected by Wall Street, but it would pay to think about what would happen in your area if the Dow Jones went from 21,000 to 12,000.



Related: 4 Actionable Ways to Find Real Estate Deals, Even in a Red Hot Market

Each real estate is market specific.

Just because the market in San Francisco is booming doesn’t mean that the market in Atlanta is doing the same. They are not related, for the most part. And what dragged the whole house of cards down in 2007 was the finance market, which backs real estate loans. I do not believe that we are looking at the same conditions that created 2007 in the financial sector, so we shouldn’t look for a nationwide real estate crash. Plus, the commercial market, including retail and multifamily, are completely different animals than single-family homes purchased by homeowners. The multifamily market seems to be really overheated right now, and some would say that single family is the same way.

Luxury housing is overbuilt, but middle-market real estate has room to grow.

I have seen this trend specifically in high-end redeveloping urban areas. There are new apartment buildings and condos going up everywhere, all with stainless steel appliances, granite, and lots of amenities. It seems to me that there is a glut of these developments in my markets. I’m in Philadelphia, New Jersey, and NYC, so your areas may be different. (I’m curious to hear what you are seeing in your areas in the comments section below!) That being said, I also see that middle-priced homes that are affordable to most people in any given area are not overbuilt. If anything, there is not enough of them because too many rehabbers and developers are going for the high-priced, top-of-the-market builds. That goes for home sales and rentals also.

I get into a much longer conversation in the video and hope for an even longer one with you in the comments section on this! Remember, it’s all opinions at this point; no one is right or wrong.

But if we can get a conversation going backed by real data, we can help prepare each other for what’s around the corner!

I hope to hear from you. Have a great and profitable week!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area. One of DeRosa’s mantras is “to make money while making a difference.”

51 Comments

  1. Josh Garner

    My market in Oregon is becoming overloaded with the high-priced, top of the market offerings as well. Part of that is due to high development and permit fees being charged by the cities here. It seems some cities need to get “caught up” on infrastructure fees and taxes that they missed out on during the crash. For developers and builders, its easier to “hide” $30k or $40k in fees into a $500k home, whereas a $100k home would see a 30-40% price increase due to those same fees.

    • Matt Faircloth

      Interesting. But I heard in Oregon, developers have to include an affordable portion of their projects priced at or below a level that the median income can afford. Is that still the case?
      Either way, municipalities over charging on fees, real estate taxes, etc… is common across the board. Not sure how that goes away, if at all.

      I am curious if anyone out there sees away for investors to capitalize on the overbuilding of luxury housing. Can we short that market? Thoughts?

  2. Greg E.

    The stock market is coming down hard for sure. We are indeed over due for a correction,but it’s more than that. Companies are priced so far over book value they could do everything perfectly for the next 3 years and still be overpriced.

    Tesla is a great example of a company that has yet to turn a profit,but continues to sky rocket. I’m looking forward to shorting the correction.

    • Matt Faircloth

      I am a Tesla buyer if the bottom falls out. Electric cars are the future, along with Tesla’s other products. There is a ton of hype in their pricing, and other stocks too. I got out a few years ago but would gladly jump back in if good companies go on “sale”.

  3. Robert Whitelaw

    I believe that we ARE tending to see some of the same mistakes being made in the financial sector that we saw in the last big downturn. Slightly different tactics this time, but the end result is the same. Here are some tidbits:

    Artificially creating more buyers – then and now. In the lead up to 2007, this was done by allowing 110% loans, no or low doc loans and regulations that specifically pushed for lending to subprime borrowers. Also, ridiculously downs meant that owners were underwater the second escrow closed. In 2017, credit scores are being manipulated to make subprime borrowers look better. Medical and civil judgements are being removed from credit scores, normal monthly expenses that never used to count toward your credit score are now being calculated in to improve your score. You can now get a 120% loan when you merge your student loan into a mortgage. There are numerous 0%-3% down loan options available that again, leave buyers owing more than the home is worth immediately. So again, we are creating a larger pool of buyers. Since the inventory is not going up (you can make a good argument that regulations are at the heart of this problem – just google how much the cost of complying with regulations in home building has skyrocketed just since 2005), we end up with home prices being bid up under the stress of no growth in inventory but growth in the pool of buyers – many who would not have qualified for the exact same loan just a year ago.

    When the stock market finally corrects (and I cannot find any sane person that does not believe that they will), this will be a huge hit on pensions – since there money is invested there. The pressure to solve the problem will push the government to do what they always do, print money. However, this time it will be much worse because the money printed will have velocity. Velocity in money means that the money will go directly into the hands of folks (pension holders) who will then spend it in the economy. Last time, all the money that was printed lacked velocity because it was digital and just sat with banks who then passed it from one bank to another in the form of mortgages being underwritten. The reason this is a concern is because it causes inflation – the more money that gets out into the wild, the less that money is worth. As real costs rise, folks have to decide where they trim their spending. Once they are in that situation, they start making the same choices they made in 2007, which tends to push the rest of the debt world into trouble.

    There is lots more we could talk about, but frankly, as I see it, we are in MORE trouble this time since the overall economic picture today is not as good as it was back in 2007.

    • Matt Faircloth

      Great points Robert! I am still unclear on how what you are describing will cause the real estate market to drop out. Someone else asked me about pensions, but I don’t see the two as related. Curious for your thoughts. Also any thoughts on potential shifts in the luxury housing market versus workforce housing?
      Matt

    • Darin Anderson

      How will printing money put it in the hands of pension holders? Are you suggesting the fed is going to have a program to write checks to people who had pensions that are under funded? There is almost zero chance of that. If the govt were to prop up pensions that would only put money back that was already presumed to be there, but had gone away with a crash. Would not create new velocity only replace lost velocity and I see no precedence for the govt bailing out all failed pensions. Any govt action would likely be hard pressed to replace 50 cents on the dollar.

      No a stock market crash would not create and inflation environment. It would be just like 2008 only worse because we are starting from a much lower inflation environment. It would create deflation that was worse than what we witnessed in 2008.

      Can the stock market have a significant correction from here. Absolutely. Is a crash like 2008 a certainty sometime in the not too distant future. No, it is not. Who knows what will happen, but hyper inflation from a stock market crash is one of the least likely outcomes. See US 2001,2008 and Japan 1989.

  4. tim boehm

    Many home buyers don’t realize the the developer has to build the roads the sidewalks the sewer and water lines and the power lines, and they all have to be built to city county and state spec. When he’s finished with these things they get turned over to the city county or state, he doesn’t get to charge a yearly fee, but the buyer does get charged it’s called taxes. Many buyers think these things are paid for by the city, county or state but they are not! Add to that the low income housing that has to be put in at a loss, you’ll know this when you find the guy across the street paid half of what you paid because he’s low income, thus you end up paying for his house. This is the main reason houses cost so much.

    • A little bit off topic. Question to Philadelphia investors. How hard is it to obtain a permit to use a house as two family building. My husband and I are new to investing and when we bought a duplex in 19152, never bothered to check the zoning on it. Turned out city doesn’t have any
      zoning atterney? All suggestions are welcome.

    • Turned out city doesn’t have any record of the use of that property. It is build as multyfalimy and zoned as RSA-3. So city refused to give us two rental licenses on it. Is it possible to fix it without a
      zoning atterney? All suggestions are welcome.

  5. As the saying goes, “don’t fight the fed”. When the Fed starts these tightening cycles they will not stop until they get their intended result which is to bring housing under control this time. So you can count on a slow down. This will take years to play out. So if someone needs a place to live for the long term and can’t do it without today’s low rates, I would say go ahead, just don’t plan on double digit appreciation for the next 5-8 years.

    • A little bit off topic. Question to Philadelphia investors. How hard is it to obtain a permit to use a house as two family building. My husband and I are new to investing and when we bought a duplex in 19152, never bothered to check the zoning on it. Turned out city doesn’t have any record of the use of that property. It is build as multyfalimy and zoned as RSA-3. So city refused to give us two rental licenses on it. Is it possible to fix it without a
      zoning atterney? All suggestions are welcome.

  6. brian ploszay

    The real estate market does not look to be “crashing,” or at least at the level of the 2009-2012 crash. This crash was a collapse of the securitized mortgage banking system.

    The best sign of an upcoming real estate crash is too look for upticks in the default rates. Today’s mortgage paper seems to be fairly high quality. Defaults are normal to low.

    Also, the real estate crash of 2009 certainly wasn’t just a local thing. It was national. Because mortgage securitization is national.

    I see a few frothy elements in the market. Upscale housing and multi-family. Some may disagree with me on multi-family. The reaction to this is a slowdown in transactions for both segments. Today, developers are certainly planning less luxury housing for the future market. It is beginning to correct itself.

  7. Erik Whiting

    “Everything I needed to know about stock markets and real estate I learned online from people with on a semi-public forum.” – A phrase I have never heard a rich person whom I know personally to have said –

    I want to find someone who honestly admits that they have NO CLUE what will happen tomorrow, much less a year from now. I think if anyone did know what was coming, they’d already be millionaires and wouldn’t have time to waste posting on a public forum. 😉

    • Matt Faircloth

      Hey Erik,
      I actually know some millionaires, many of which comment on these forums, and others I know write articles for them too (wink).
      This topic is one with lots of opinions, and no one is right because as I say in the video “Everyone’s crystal ball is broken!” All joking aside, I’ve been in this business for a while and I find that open forums like BP are a good space to share ideas and opinions. From the perspective of other investors, I can make my own decisions on actions to take to protect myself and take my business to the next level.
      Matt

  8. Downtown Chicago same issues as you described with high end condos going up everywhere but it seems the more they build the more the prices keep going up anyway…….

  9. Jim Davis

    Matt,

    I agree with you as far as not much inventory for affordable middle-class housing in the Philly market. My wife and I just sold our 1500 sq.ft. 3BR/2BA primarily residence last month for $275k asking within 48 hours of hitting the MLS, which is $35k more than we paid in November 2014. We did remodel the tiny galley kitchen (ourselves, no contractor), quartz and all, but that only would have forced $10-$15k in appreciation since it’s so small. The other $20-$25k was market scarcity driven.

    On the other hand, our new 3250 sq.ft. 4BR/2.5BA purchased for $365k sat on fhe market for a month before it got its first offer, $30k below asking — ours.

    I see Toll Brothers all over Montgomery county building “affordable, entry level” homes starting at $400k. Entry level for who? Lawyers?

  10. Steven NA

    Colorado Springs where I’m currently searching seems to be in a sort of bubble. There is no end in sight to all the new construction I see on a daily basis. Every property I’ve considered bidding on has went under contract before I’ve even been able to schedule a showing (typically within a day or two of being listed). I think there are other factors besides scarcity of supply at play. My theory is it’s a combination of the market reacting to the news of additional Air Force components being stood up as well as the summer PCS season for service-members. Worse, from an investment standpoint, there is a SFH down the street from me that has had a For Rent sign out front for several weeks now.

  11. Jay Adivaraha

    Interesting viewpoints. With time, I am sure these will turn out to be true. Having said that, I dont know if the stock market is over-valued, fairly priced, etc. Valuation to me is a matter of perspective and frame of reference. We have growth stocks and value stocks for a reason. Growth stocks are always valued at a premium and so they always keep going higher. Case in point is NVDA or TSLA. One is established while the other is relatively new. Having said that, is the stock market poised for a correction? Yes. Big question is ‘When’.
    I dont think anyone can say this accurately and it is far easier to let the market give us signals and act accordingly. What would make it difficult to act is our own ego and false hope once we see that small loss in our portfolio. This is true of stocks or real estate. success or failure is based on our perspective and ability to act after assessing the situation. 2000 and 2008 crashes did not happen overnight. Crashes are preceeded by corrections. By the time a crash is realized, we are deep into it. 2008 crash was preceeded by a correction that started in the latter half of 2007. It took almost a year for the crash to materialize. I am relatively new to real estate and I sometimes get a sense that the stock market is easier because there is so much data available, while real estate is still dependent on macro and micro environment. Further, real estate is not as easy to liquidate as stocks and also involves much higher transaction cost on buy and sell. I am not saying one is better than the other. There are pros and cons to both. It is a matter of perspective and what one is comfortable with. I am still trying to figure this for myself. A key question that I am now trying to ponder is how will the real estate get affected if the market crashes next? Depends on what fundamental issue will get rocked. Again the crash may take time to materialize, but by the time one realizes it l, the losses could be significant causing a paralysis (inaction and deciding to become a buy and hold investor).

  12. eric c.

    Matt, Very good article to help ground the concept of whether, if, when a potential crash in the real estate market could hit us. In regards to building high end apartments and condo’s, it is definitely happening in the Denver market. New builds appear to be only focused on the high end and until reading your article didn’t realize this was the case elsewhere as well. Taking this to the next step, could the potential for a hit on prices on the high end occur over the next year or so? This is a part time area for me so will leave it to professionals like yourself to use their crystal balls and experience.

    The point you bring out that I see as a positive in regards to where to invest is in the middle market. Again I’m not a pro in this arena by any means, however if inventory is going to outstrip demand on the high end, in Denver inventory does not appear close to hitting demand in the middle. If that is the case the next question is how to find those properties?

    Thanks,
    Eric

    • Matt Faircloth

      Hey Eric,
      I would stay away from buying or building high end A level deals. Focus on the B and C level stuff. Those would be existing properties that need a face lift – either rental or fix and flips. The best place to look is the foreclosure market – auctions especially.
      Matt

  13. Bubble indicators are everywhere, prices are way up again across the board, like they were in 2007.
    While RE agents are happy, lets remember, the economy is till not on track for 70% of the US. Prices are too
    high for the middle incomers. Properties are selling for way more than they are worth, a person with an ounce of brain would be foolish to buy now. Even investor deals are becoming harder to negotiate.
    If the stock market drops there has to be some effect on the housing market, just depends how big of a drop, and how fast. I am more concerned with the National consumer debt bubble of almost 60 Trillion. When those markers are called in by the banksters, and that bubble bursts, it will take everything with it, including the dollar.
    If the dollar value is dropped internationally in favor of the Yen, or perhaps a Bitcoin, that would change house values for sure, but of course if all these scary scenarios happened, real estate would be virtually worthless anyway, definitely a good time to buy.

    • Matt Faircloth

      Hey M Haney,
      You raise some good points. A few thoughts…
      – Yes, prices are back to 2007 levels but it took us 10 years to get back to that point. Isn’t that just the market catching back up? What are your thoughts on my point in the video that much of this price increase is due to pent up demand?
      – I see many middle-income earners buying in today’s market, but they are priced out of the “overheated” areas like downtown urban environments. Have you seen other data?
      – You painted some “worst case” scenarios such as our currency devaluing which would create a crash beyond anyone’s imagination. Although something like that is possible, I feel it’s unlikely and also impossible to prepare for as a real estate investor. I could be wrong, so do you have any thoughts on how to prepare for such a scenario?
      Matt

  14. I’m up in Seattle and we are seeing some interesting outcomes. Very good economic growth and with that we are seeing strong population growth. Additionally, many of these jobs are good paying jobs. The result of this is large scale commercial and multi family growth. Last I heard, Seattle currently has more high rise cranes with buildings under construction than any other city in the country, regardless of size. Most of the multi family are at high price points, with corresponding low income units due to government mandates, with almost nothing in the middle.

    On the single family home side, we are seeing meaningful reductions in inventory due to conversion to multi family and heavy gentrification of the remaining stock. Due to geographic constraints, new housing is limited and mostly in the far outlying suburban communities. As a result, housing prices are inflating rapidly and most homes stay of market for less than a week or two if they are priced correctly. My personal residence has appreciated by 60-65% in last three years.

    I am expecting a significant pricing correction in multi family and maybe commercial (particularly in older stock) in the reasonable future. I am not expecting a correction in single family without a fairly significant national triggering event.

      • Amazon, economic health and growing population all play a role, but we are seeing similar effects across the west coast. Probably more significant, Seattle is land locked with no place to grow, we have political pressures forcing single family homes to be torn down to provide multi family rental units (no condos allowed) which is reducing single family housing stock, resulting in massive gentrification. Back to Amazon, the jobs coming in are coming with large amounts of cash money and simply buying anything that goes on the market, regardless of condition.

  15. angela yan

    Reporting from downtown SOMA district in SF in which I own 2 homes. Many condos came into my neighborhood and are now ready to rent. I recently was just able to see and be in a brand new one because my friends just moved in. They are paying $3500 for their beautiful one bedroom but this doesn’t mean this is not a teaser rate. It will go up next year when they renew but with this said the high rent in SF is starting to even out and if I was to rent out my place I will have to get few hundred dollars less than last year.

  16. Zachary Robtoy

    There is a boom and bust cycle every 8-12 years. Big Banks are wall st., big banks loan to construction companies that build houses/condos, and other banks that loan to individuals to buy houses. It is all related in part of the speculative financial industry that is growing bigger and bigger.

    One Key indicator that has been mentioned by Ben Bernanke is the GDP growth rate at 1% or less. Last two quarterly GDP growth by FOMC is 2.1 last quarter of 2016 and first quarter of 2017 was 1.4%. However, this could be put off by Congress loosening the regulations on the Dod-Frank Act allowing business to grow more but at a higher cost when a recession does come.

  17. Tracey Geary

    Hi Matt.
    Funny that you posted this as I was just relistening to your BP podcast today.

    We are waiting for our first flip (in Union County) to go under contract. Planning to do next one near home in eastern Monmouth County where I really know ‘ the farm’. I see that ask prices are getting back to pre crash levels but they aren’t turning too fast yet. Particularly the outdated ones. So I don’t think we are in heady territory yet. Since you are also in suburban central NJ market, I was wondering if you feel the same way.
    Thanks for any input.
    Tracey

  18. James Maradits

    I enjoyed this point, and this is a topic I have been researching a lot lately.

    I fully agree that all the statistics point towards there being another recession in the very near future, however I do not think that it will impact the housing market in the same way that the ‘great recession’ did. Lending standards have tightened up tremendously from the notoriously loose (think NINJA…) standards in place before the recession, which I have to believe would greatly decrease the amount of defaults that will occur in the next recession. I don’t think we’ll see another “housing market crash,” I think what we may see is a shift from the current low inventory/high demand market we’re in to either more balanced market or a lower demand market. I’m not expecting discounted properties to be as plentiful as they were following the last recession, but it will still likely be a better time to buy.

  19. John Murray

    Investors can speculate in many different ways. I’m a bit more pragmatic and empirical personal data seem to make more sense. I started BRRR in Portland Oregon a little over 2 years ago. I started with about $500K and $1.4M in my IRA and still had to put down 30% on my first BRRR project. As each project progressed the down payment went down to now 20%. Each project required more money to complete as the prices begin to increase. In a nutshell the first projects cost me $60-$70K to complete and the latest were $85-90K to complete. I have 8 SFH and leverage $3M with about $$650K of my own skin with $150K coming from refinance. Now if the numbers keep the same I will refinance 2 of my homes and extract about $170K and purchase 2 more in 2018. In 2018 Each project will cost me with 20% down and cost me about $95-110K to complete. Real estate in Portland is increasing about 8-10% per year with the median value of $420K for a SFH. Rent income will be about $70 (profit) this year and last year it was $60K. Here’s the beauty of the BRRR biz, I took a $8K loss on paper in 2016 and will take a huge loss in 2017. America is a great place to become a millionaire, we don’t pay taxes, we leverage and take paper loss just like Pres trump does. That’s not speculation that is fact of America.

  20. Ryan McDaniel

    Watching that video was like watching my future-self talk to me. (I thought it) and then you said it!
    (He should really use the word ‘correction’ instead of ‘crash’) “…a correction, let’s call it…”
    (Yeah, there’s a glut of luxury/high-end construction) “because there’s just a glut of overdeveloping these things”
    “I do think the stock market is going to take a hit in the next, say, six months…” (Yeah, probably in October) “tends to always crash in October…”

    I like the way you think! Practical and down-to-earth. Keep the good videos coming.

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