Why is every one saying the real estate market is at the peak of its cycle and is about to crash? I understand that there will be more interest rate hikes, and in some areas, some housing prices seem over inflated. What other reasons are there though?
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Lots of things, limited supply / new development, leasing up of office spaces that sat vacant for years. Although we do see a lot of prices "peaking" I don't necessarily see it as only going down from here.
Office has seen some of the worst occupancy rates around due to technological shifts. Multifamily developers pooped out a bazillion Class A luxury apartments and continue to build. Supply now outpaces demand. Cap rates are low. However, I think while the market may have peaked, that doesn't mean we should expect some huge drop. I think it will just flatline here.
Also in regards to housing prices, they have been catching back up to where they used to be. I recently purchased my own place, and after reviewing the title report, found that the price I bought it at was still about 20% lower than what it had sold for in 2007.
Sounds to me like you're exaggerating on what you heard, or you were misinformed. No informed RE professional is saying RE is about to crash. There is a consensus that there are certain market segments due for a correction (i.e. class-A MF with oversupply in various CBD's, class-B/C malls, high-street retail in Manhattan, etc.), in addition to potential valuation hits due to cap rate expansions (devaluation over a 4-year, 100 bps cap rate expansion supersedes a 4-years of 3% rent growth CAGR pretty significantly). That being said, sponsors of some deals can very well not make a profit, and MAYBE a few deals will have partial equity write offs.
What I just described is not comparable to 2008 where equity was getting wiped out and lenders were taking 50% write offs. That is what you call a crash.
I've heard people who do not know much about RE calling the crash for a couple years now, I think they're all trying to be chicken little.
DJT
Not a RE guy so I've always wondered this... OP this is not directly in relation to your comment, I've just always wondered this... not saying this is exactly what you asked.
Can you really just make broad statements like "RE is about to crash?" Excluding 2008 style implosions, isn't the RE market so incredibly pocketed that it would be hard to just make broad inferences about it as a whole? Seems like places like NYC could have drastically different cycles than Raleigh, Miami, Denver, etc. Obviously rates are going to affect across the country/world, but is the supply and demand side so easily viewed?
Who is everyone?
My sister's brother's uncle's barber. He knows A LOT of people.
He cuts hair for a fella over a Keller Williams Commercial North Grand Rapids so he knows what he is talking about when it comes to Real Estate and Bubbles.
There are a few things out there that could provide downward pressure on housing prices: -rising interest rates -record levels of leverage in consumption to household net worth -baby boomer transition - when the generation starts to pass away en masse, their children (millennials) will either a) not want to own the house and sell it or b) not be able to afford the taxes and upkeep and sell it.
This. +1 SB
I know a few folks my age who inherited million dollar homes that sold because they could not simply afford it.
I disagree. I think there's going to be a new movement to the suburbs after my generation (millennials) age another 10-15 years.
It is not sustainable to pay $2,000 + $200 in parking & other fees every month, for many years - possibly decades - without building any equity. It is not sustainable to date someone, marry, and then have kids while sharing another 2 bedroom, 650 sf apartment in an urban city. It is not desirable for families to send their kids to many below-par public schools within urban cores (as we all know suburban publics and privates tend to be better).
Everyone is forgetting upcoming tech. With driverless cars, it's going to allow people to live farther away while maintaining an ease of access to urban cores. Instead of being walking distance to the grocery store and bar, people may decide it's better to be within a 10 minute Uber/Tesla ride, where you can surf the web and watch netflix while being driven.
I think this is why none of the public SFR REITs have begun selling their assets. Collectively, they hold over 120,000 or so houses in class A submarkets. Even though they have a low basis because they picked up these assets in foreclosure through 08-12', I believe they will hold onto these cash flowing rentals, and off load some years later when they begin having to replace thousands of houses with new roofs, AC units, etc.
With you on that. I'm an 'older' millennial and do not buy the 'every millennial wants to live in tiny apartments on top of each other model'. I also do not know many other 30 year olds that really want to stay in that type of accommodation long term at all. 80% of friends are married and they all want to be in a house with a yard if not already. When we were in our 20's, sure it was fine. Having a small place also sucks if you have any kind of hobby that isn't just City drinking and brunch. blah. The self driving cars is a game changer. I'll live 2 hours away in a mansion if I can work in a self driving car to be in an office 5 hours a day.
With regard to for sale housing, I just read a bloomberg piece regarding available properties. It's a record low. If I recall, available listings is about 25% of what it was in 2007. This tells me that volume of deals might be really low as well. A precursor in my opinion to a housing correction is rising home prices with low transaction volume.
Yes, of course, it's all regional.
Everyone is saying it? I mostly see it in regards to the prices in SF.
http://sf.curbed.com/2016/9/28/13098360/san-francisco-bubble-ubs
I'm not really qualified to draw my own conclusions, but imo if there's going to be a burst in the US soon, it's going to be in SF. I just wonder whether the repercussions would be felt across the country.
I'd be worried about the Unicorn's too.
Smart money is finding it incredibly difficult to find good risk-adjusted returns.
Interest rate increases are real. So you should be modelling cap rate expansion and moderating your leverage.
In simplistic terms, think about a discount rate as r+g where r is the cap rate and g is your growth rate. If rates are going up, your discount rate is going up. And if growth is decelerating, you got to figure that cap rates are going up.
There are still spots where you can find value, but they are getting harder and harder to find.
Basically agreed here. You don't see many compelling investment opportunities in key markets right now, certainly nothing of scale. Interest rate increases may take time before they take effect, but moderate cap rate expansion is very likely. The weight of cross-border capital flows from the likes of China are also being curtailed by government policies, which means that capital markets are bound to trend towards normalcy sooner rather than later.
I'd be positioning my developed market portfolio for a moderate downturn so as to have financial means necessary to act in the event of a material dip (lengthen debt terms, reduce leverage, raise cash from sales of overprices assets in trendy markets). In the long run I'm more positive and I think 10 years from now prices will be higher than they are now. Short term wise, look at Brazil or India. Maybe cautiously Japanese logistics development.
people think we're at the peak because of ridiculous bullshit like this: http://equityestatestravel.com/about-equity-estates/what-is.html
The market is no where near the peak. Think about it.
We are at a point where we are literally tasked with reinventing every major city ACROSS THE WORLD. Multiple US cities are in housing crises because of the no development period after the economic crisis.
This is just getting started.
For example in LA, there is a need for 3 million units to be developed in the next 10 years to accommodate all of the newcomers.(200k every year)
3 effing million. That is a crazy amount of development in an already built city. There needs to be innovation, re purposing of abandoned buildings, legislation, response to economic trends, spending trends, transit development, redesigning for sustainability, etc.
The only thing that can slow this development is all the geopolitical bs that is affecting the world. Trump, the populist movement, and the threat of another war. The possibility of rates raising is also a threat but....what's risk without the reward?
We had a housing crisis in 2009 and for sale housing was crap.
I'm a broker on the west coast and I know of multifamily buildings that have raised rents 20-30% in the past year and are still full, due to high demand and low supply.
It's crazy how short on housing LA is. People are willing to be duped with high prices because there are not that many vacancy options.
The issue with new apartment development is the sky rocketing cost of construction which makes pro forma rents really high and an extremely risky proposition. You can have all the demand in the world, but if wage growth can't keep up with rent growth it doesn't matter. I've sold some apartment complexes which were historic mills that had been repurposed using historic tax credits to create really nice lofts, but those opportunities for developers are few and far between.
Rates going up and new housing starts steadily rising (albeit still below the historical norm) doesn't exactly scream price increase. That said, I'm pretty clueless about RE.
If rates are higher, that means the cost of borrowing is higher -> your leveraged IRR would be higher
To make higher returns, you need to either increase revenues or cut expenses.
Uh, I'm sorry, what? Please explain the logic that more expensive capital leads to higher returns.
If you're arguing that higher rates indirectly lead to NOI bumps because rents need to rise for investors to meet their returns, I completely disagree. It's a function of the leasing market. If landlords could just charge more rent they already would've.
I'm also confused here - surely the inverse (higher cost of borrowing = lower leveraged IRR) is true assuming all else constant?
Have several thoughts. I'd be curious to see what everyone's input is, but overall I think these are hinting at a market slowdown. (bear in mind I'm in MF, so that's what all the below points are geared towards)
Real wage growth is at zero, yet rent growth, as well as most other living expenses, are still increasing at a rate >CPI. Not sure how long this can continue.
In most areas, caps are extremely low and are continuing to drop, even with the recent decrease in transaction volume. There's a lot of speculative interest in RE, but people aren't pulling the trigger.
Cost of borrowing is greater.
In all those high profile areas a massive amount of deliveries are about to come online.
In my opinion, all of the above signal a downturn in the RE MF market. However, the beauty of RE is there's always opportunity, you just have to cater your investment thesis to the current environment and adjust your expectations.
In San Diego I'm seeing deals across my desk that are 5% cheaper today than just 6mo ago. Yes, MF appears to be showing chinks in the armor as the first asset class (barring regional malls) to show weakness.
First American Commercial Escrow has a national office here. They are slowwww.
Rates are coming back down though. Freddie Mac just lowered their rates 10bps. Not a huge decrease, but the 10yr is at 2.20...down from 2.55 or so. If Wall St. continues to slide it may counter any increases by the Fed.
I think this is all relative to what market you're in. The major markets like LA, San Diego, Chicago, NYC, etc... have definitely topped off. Rising concessions and a fall in YOY rental growth definitely points to the fact renters can't bare higher rental rates any longer there. Especially when you have a housing expense to income ratio exceeding 50% which is pretty ridiculous. Other markets like those in the Southeast such as the Carolinas and Georgia still have very strong market fundamentals with a lot of job growth, corporate relocations, friendly tax environments and a housing expense to income ratio still in the 20-30% range which is continuously fostering rental growth. So, there is still a lot of runway there.
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