This is a really fun thread and I had to dive in: we haven’t had many BATTLE ROYALS recently
Even if you make a series of good choices as an investor, life isn’t a bed of roses, there are still many questions to deal with (forecasting the future). In some ways, the stakes are higher as you realize how the circumstances which got you to this point are not likely to be repeated.
As many on this forum note, the 2000-2006 run up was quite phenomenal. Any reasonable person would look at that (some as soon as 2003, others later) and realize it was not sustainable. A drop off should have been expected and a mild throttling would have been healthy and in-line with normal trends.
The fall-out of the 2007-2008 crash was much greater than anyone was predicting. Yes, there may have been the occasional prediction of 33% drop in prices, but I don’t recall anyone saying it would cause a global financial crisis, trillion dollar stimulus, discussion of nationalization of banks, a 38% drop in equities, 2.6 million lost jobs in the US, 10 million lost homes. (500 California families per day in 2007/2008) which continued well into 2012/2013.
A friend of mine’s home was foreclosed in January 2018 even though he had stopped making payments at least 6 years prior.
For some of us, the aftermath was the greatest buying opportunity of a lifetime. Just being factual, I did 3 short sales, 1 post short sale, average down-payment was 25% or about 130K per property. There were articles being written at the time about the pending housing shortage in San Diego due to lack of construction which supported this decision.
One common element of all these short sales SIX FIGURE (HELOCS!). A large portion of the equity was borrowed out. As far as I can tell, these funds were not used to make house payments but to finance (cars/vacations/motorcycles/lifestyle/Maserati’s). These owners/borrowers knew they were one of 6 million nationwide and had given up hope!
They spoke of this to me directly. Some mentioning this may be a “false bottom in 2013”. They were scared and resigned as the short-sale process often took years to get to.
I never see the housing bubble naysayers mention the HELOC issue. I would go so far as to say that ALL of these would have kept their homes if they had not borrowed equity.
So what does this mean for today? We are back at this point where absent detailed specific market data, a high level analysis would lead one to conclude that prices are going up to quickly. At least the pace should not be sustainable. But as soon as we break down the micro level details, we start to see a number of phenomena which may have a more lasting impact.
The lack of construction is by far the largest. This closes off many options to (upsize/downsize/right-size/modernize/etc). With the permanent effect of Prop 13, many will just stay in place. Yes lower interest rates help, but keep in mind, I could get a 30 yr fixed at 3.5% in 2013 as well.
But the factor which I think is most important is the RATIO of BUYERS to SELLERS. I have seen references of 4 buyers for each seller. So if 2500 have sold in a recent month county wide, that implies 10,000 want to buy.
The specific data by zip code confirm this:
I was considering listing a home a few weeks ago, spoke with a realtor. He mentioned they have 900 leads in the 92078 zip code who have expressed interest which may convert to 40 viewings and 5-6 offers. This is a zip code with about 30 listings with (3BR 1500 sf under 1.5M)
So the lead to house ratio of roughly 30. I don’t see this bottleneck clearing anytime soon.
Other zip codes like 92127 have a worse ratio of 70-80 potential buyers per listed home.
It is not uncommon for an open house to have 50-70 viewings.
Ten offers on day one is also not uncommon. I don’t want to go into everything I do to win bids but it involves a lot of data/analysis/patience and letting some go.
I bought one more in 92127 in Sept 2020 and one out of Bankruptcy recently (took 8 months) and the seller tried to change the contracted price at the last minute.
When I go through underwriting for a purchase or refi, this can take weeks (I’m a CPA and always do full docs). So I have skin in the game even at today’s prices and won’t walk away. But the process is soul crushing even if you know what you are doing and have everything lined up. Maybe the underwriter doesn’t like your foreign property/bitcoin/wants all lease agreements/additional bank statements etc. But these are not the loans of 2006.
So in a nutshell, I can see how it is frustrating for anyone who didn’t dive in to look at the market and think something is terribly wrong or that it must correct.
A mistake is ignoring the actual data being given to you. In late 2019, one of my tenants who is sponsored by a NATO partner told me of his colleagues coming over, they were offering a much higher budget for rentals, about 30% more than I was getting on average. This is a government sponsored entity with real resources, I spent weeks trying to find a new home for the new-comers but they choose other options. But the point was I used the information and bought anyway as I realized I was being given a form of insider information on where the rental market is going.
So yes it can be unnerving to buy a home in Sept 2020 for 877K and rent it for $4200 a month but that’s where the market is. Today that home is worth 1.1M and rents for $4500 or more.
I recognize the market may soften and it may be healthy if it does. But I don’t think we will have another 2008 style crisis. If anything, the odd situation we are getting into looks more like a moderate to midterm surge of inflation with low interest rates. I.e. stay in equities and real estate and stay light on cash.
Yes collecting rent is easy, but one still has to pay attention, plan for property transition to heirs, capital gains taxes, upkeep.
But also, monitoring the market takes time and one should never mentally bank anything.
