Malibu2 said:

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Tex117 said:

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evestor1 said:

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Tex is going to be sorely disapointed when values dont drop in Texas as much as California...and rents are 5% higher for ... purpetuity.

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Dude, you can't even spell correctly. You must be a RE investor.

Values will drop. Powell has basically said this. RE cannot fight the FED. This is basic econ man. How RE folks think that their asset class is immune from the FED (and the market at large) when much of their industry is based on monetary policy is beyond me. Its going to happen. Book it.

By how much? Don't know. For effsakes, its already happening in Austin.

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Yes but you've hand waved way basic Econ supply and demand issues. There is still more demand for housing than there is supply. When the debt service becomes too high a burden, prices will of course drop to get to equilibrium. Every increase in interest rate will further drop prices. But you still have to account for quantity demanded and quantity supplied to understand the market fundamentals for pricing.

Most of us in the real estate space have long-term debt in the low threes after an incredible run up. Will I have to tell my investors we are going to hold for an extra two years to refi or exit while we wait out a bad market? Sure. But I have stable cash flow to service debt, and even a crash and prices is not going to wipe out my holdings or make me insolvent.

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Yeah, what you posted on that isn't good enough. I also did some research and couldn't find anything definitively supporting that there is a glut of millennials more so than other generations especially when drawn out over equilibrium.

Further, I am accounting for it by saying that I don't know how far they will drop recognizing that its going to be on a market by market base to some extent. Im not saying this will be a housing crash like 08. Not at all. Nor am I asserting that one can't weather the storm (like you seem to be in a position to). You, like many SOPHISTICATED RE investors, know this.

Its the dumb idiots that maybe own their house and one rental that are like "RE only goes up! VROOM!" Nope, prices will come down....And not a bad rule of thumb will be to assume it will give its Covid gains (just like the market did). (Will probably be a bit less than that).

If the market corrected to near before COVID gains wouldn't that make it worse than 08?

htxag09 said:

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If the market corrected to near before COVID gains wouldn't that make it worse than 08?

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Im just saying it would be something to look for.

If we are placing bets, I would put it 2019 + the average increase in property for the market over 2020, 2021, and 2022.

Here's a better image of what I was talking about earlier:
https://images.populationpyramid.net/capture/?selector=%23pyramid-share-container&url=https%3A%2F%2Fwww.populationpyramid.net%2Funited-states-of-america%2F2022%2F%3Fshare%3Dtrue

The age cohorts I'm talking about are a lot bigger. Those small decimal points may not seem like much, but 0.1% represents about 330,000 more people. So we need to build new units to support that growth. Did that happen?

Malibu2 said:

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Here's a better image of what I was talking about earlier:
https://images.populationpyramid.net/capture/?selector=%23pyramid-share-container&url=https%3A%2F%2Fwww.populationpyramid.net/united-states-of-america/2022/%3Fshare%3Dtrue

The age cohorts I'm talking about are a lot bigger. Those small decimal points may not seem like much, but 0.1% represents about 330,000 more people. So we need to build new units to support that growth. Did that happen?

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Good image and better graph.

We aren't disagreeing. You obviously know a lot about your business. Its a complicated question for sure, but Im going to believe Powell when he says the RE Market will go into a correction. (WE are only debating magnitude here...which, Im 100% guessing....it may be a little, it may be a lot, but it will happen).

https://www.marketwatch.com/story/popular-bond-market-recession-gauge-may-go-further-below-zero-than-any-time-since-paul-volcker-bnp-says-11664295125?.tsrc=daily_mail&uh_test=0_00&siteid=yhoof2&yptr=yahoo

If the debt burden is too high the Fed is absolutely right that price it should fall. However that doesn't mean new home buyers are better off. Let's say we go full Volcker and interest rates go to 15%. Compared to 3% in January. For a $1MM mortgage, to have the exact same debt service payment at 15% vs 3%, that home would have to drop by 67% in value. Could that happen? Maybe but I sincerely doubt it.

Let's take a more probable but still scary 50% drop in value. $500k price. My real estate strategy converts to being 100% cash purchase and just ignore the debt market. If debt markets stabilize to 5% interest rate, let's assume that prices rise as debt service falls, rises to say 33% in value. Or $665,000. The bank will let me refi at 70% loan to value or $465,000. I have now recovered 93% of my original investment simply by putting a mortgage on a property that I bought with cash in a down market.

If we want to have a true correction in the housing market, we have to build new housing now. The reality is that there will be an interest rate correction, but it doesn't mean good things for your average American looking to get into a home because the monthly cash flow is still a lot worse. A really scary correction doesn't mean more affordability for people, it means that investors like me will gobble up even more properties on the cheap, further exasperating the problem.

Malibu2 said:

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If the debt burden is too high the Fed is absolutely right that price it should fall. However that doesn't mean new home buyers are better off. Let's say we go full Volcker and interest rates go to 15%. Compared to 3% in January. For a $1MM mortgage, to have the exact same debt service payment at 15% vs 3%, that home would have to drop by 67% in value. Could that happen? Maybe but I sincerely doubt it.

Let's take a more probable but still scary 50% drop in value. $500k price. My real estate strategy converts to being 100% cash purchase and just ignore the debt market. If debt markets stabilize to 5% interest rate, let's assume that prices rise as debt service falls, rises to say 33% in value. Or $665,000. The bank will let me refi at 70% loan to value or $465,000. I have now recovered 93% of my original investment simply by putting a mortgage on a property that I bought with cash in a down market.

If we want to have a true correction in the housing market, we have to build new housing now. The reality is that there will be an interest rate correction, but it doesn't mean good things for your average American looking to get into a home because the monthly cash flow is still a lot worse. A really scary correction doesn't mean more affordability for people, it means that investors like me will gobble up even more properties on the cheap, further exasperating the problem.

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I never said it would be better for average home buyers either. I agree with all of this.

Sorry if this came across as too adversarial. You are correct that anyone that assumes up and to the right is the only way that a market can go are going to be disappointed. I'm still fairly bullish about long-term holding of residential real estate, but when I buy I always do a CYA analysis and protect my downside by never having debt mature within one year so that I can ride out the bad times. There are a lot of folks that bought in March and expected cap rates to fall in their analysis and they're going to be in a world of hurt.

Ag92NGranbury said:

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https://www.marketwatch.com/story/popular-bond-market-recession-gauge-may-go-further-below-zero-than-any-time-since-paul-volcker-bnp-says-11664295125?.tsrc=daily_mail&uh_test=0_00&siteid=yhoof2&yptr=yahoo

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Doesn't that just reflect that buyers of the 10yr are expecting rates to come back down in the future (between yrs 2-10)

Malibu2 said:

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Sorry if this came across as too adversarial. You are correct that anyone that assumes up and to the right is the only way that a market can go are going to be disappointed. I'm still fairly bullish about long-term holding of residential real estate, but when I buy I always do a CYA analysis and protect my downside by never having debt mature within one year so that I can ride out the bad times. There are a lot of folks that bought in March and expected cap rates to fall in their analysis and they're going to be in a world of hurt.

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Its these people I'm talking about. Not you. (or even folks who bought within the last year and a half...or even those who think the value of their home will remain elevated due to the recent run up outpacing the average).

Bullish over long term? Sure! If the market as a whole has anything to say about it regarding past performance. (Same with Equities).

In the long long terms, looking at the current demographics in about 20 years supply will start to exceed demand and you should expect prices to drop. If you plan to be a truly long-term or generational holder rather than someone that trades assets, the question is which markets will probably be insulated from demographic decline, or plan to buy now and cash out in ~15 years and move on to the next asset class.

Malibu2 said:

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In the long long terms, looking at the current demographics in about 20 years supply will start to exceed demand and you should expect prices to drop. If you plan to be a truly long-term or generational holder rather than someone that trades assets, the question is which markets will probably be insulated from demographic decline, or plan to buy now and cash out in ~15 years and move on to the next asset class.

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Now this is an interesting comment.

You think real estate (lets say by 2042) will be on a real decline? (not just a dip).

The circle of life is getting smaller but the housing still be there. More houses for fewer people should mean that prices go down. Immigration may throw a wrench in my analysis, but the fundamentals aren't for continuous price growth.

Malibu2 said:

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The circle of life is getting smaller but the housing still be there. More houses for fewer people should mean that prices go down. Immigration may throw a wrench in my analysis, but the fundamentals aren't for continuous price growth.

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So you are predicting a population decline ultimately?

Just look at some of zeihans charts.

Ag CPA said:

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If you trust Zillow mine is already down 20% the past couple of months, still up over 50% from the start of COVID though.

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Mine has steadily risen. Hasn't been a decrease in more than 9 months. Here's what I got today.:

Last 30-day change

+ $700 (+0.1 %)

Malibu2 said:

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The circle of life is getting smaller but the housing still be there. More houses for fewer people should mean that prices go down. Immigration may throw a wrench in my analysis, but the fundamentals aren't for continuous price growth.

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NYT had an interesting article about this and unless cities start to regulate housing more, I don't think the population slowing will make much of a difference. People love their ****



https://www.nytimes.com/2022/09/25/upshot/starter-home-prices.html

In my estimation, people are going to be stuck in the homes they've purchased in the last 1.5 years when the market corrects itself.

If you paid $600,000 for a home that typically would sell for $450,000 you're stuck. Those people will have to stay in that house and it'll be off the market for 10+years.

how did that house go from $600K to $450K if these folks aren't "able" to sell? Are we to assume that all the people that bought houses prior to the last couple years will be happy to unload their homes at this new price point? I would have to think many of them pulled cash out as well. Not sure why they would be in a big rush to sell and take on more expensive debt.

You will always have people that are forced to sell because of work or life changes, but if the high rate environment discourages "move up" buyers, that will effect supply.

This all ignores the issues with land/entitlements/costs related to new construction, which are another supply constraint.

I'm certainly not one of those "real estate people" that think homes will never lose value. I have been beating the drum that recent appreciation is unsustainable for a long time now. I do think it's more complicated than "rates go up, prices go down" because you need a willing buyer and seller. For that reason, I think the "correction" that many people are predicting to mirror 2008 will not come to fruition.

With all the Californians moving to Austin and big tech jobs in Austin I bet the average salary is pretty freaking high. Our friend group of 10-15 dual income millennials, all TAMU or UT grads and all homeowners are all substantially north of that 160 mark in household income but we have much lower incomes than our neighbors

Tex117 said:

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evestor1 said:

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Tex is going to be sorely disapointed when values dont drop in Texas as much as California...and rents are 5% higher for ... Perpetuity.

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Dude, you can't even spell correctly. You must be a RE investor.

Values will drop. Powell has basically said this. RE cannot fight the FED. This is basic econ man. How RE folks think that their asset class is immune from the FED (and the market at large) when much of their industry is based on monetary policy is beyond me. Its going to happen. Book it.

By how much? Don't know. For effsakes, its already happening in Austin. https://www.redfin.com/city/30818/TX/Austin/housing-market

Just look at it.

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fixed spelling for Tex. Also not really an investor as much as developer that holds as a slumlord. Values up and down dont do much to me, but rents going up ... that helps my life!


Please post again when my comment about values dropping in TX vs. CA is wrong.

Keeper of The Spirits said:

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With all the Californians moving to Austin and big tech jobs in Austin I bet the average salary is pretty freaking high. Our friend group of 10-15 dual income millennials, all TAMU or UT grads and all homeowners are all substantially north of that 160 mark in household income but we have much lower incomes than our neighbors

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https://www.redfin.com/city/30818/TX/Austin/housing-market

But yeah, it is. For now.

evestor1 said:

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Tex117 said:

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evestor1 said:

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Tex is going to be sorely disapointed when values dont drop in Texas as much as California...and rents are 5% higher for ... Perpetuity.

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Dude, you can't even spell correctly. You must be a RE investor.

Values will drop. Powell has basically said this. RE cannot fight the FED. This is basic econ man. How RE folks think that their asset class is immune from the FED (and the market at large) when much of their industry is based on monetary policy is beyond me. Its going to happen. Book it.

By how much? Don't know. For effsakes, its already happening in Austin. https://www.redfin.com/city/30818/TX/Austin/housing-market

Just look at it.

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fixed spelling for Tex. Also not really an investor as much as developer that holds as a slumlord. Values up and down dont do much to me, but rents going up ... that helps my life!


Please post again when my comment about values dropping in TX vs. CA is wrong.

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The values have dropped in CA and TX (Austin anyway...Dallas and Houston are following).

Rents, well we shall see, but there are already signs of it tapering in Texas.

To be fair….

Values are dropping pretty much everywhere.

Number of houses on the market in our comparable range just keep increasing. I'm not sure why people are continuing to put their house on the market unless they are hoping to catch someone before it all goes to complete *****

None of the group we are tracking have sold. Everyone continues to drop price. We aren't even getting showings anymore at this point.

Leasing looks more and more likely at this point.

I know the Austin Market well and just from what I see, there will be a sizeable correction soon. The major catalyst to support prices remains demand is high, people still moving to Austin, rent is high. If this was not a catalyst, price would have a large correction and I believe many cities without such support will see this large correction.

Investors are getting out of buying. I have seen Large apt complexes fall through due to higher interest rates. A 600K loan I took out at 3.5% would be the same payment if I took out a 400K loan at 7%. Numbers just do not make much sense at 7% interests and you can increase rent just so much. Along with higher property tax, insurance, carrying costs the numbers for investors are almost impossible. I bought my last property at 5.25% and is essentially my limit. Any property I buy going forward at a 7+% interest rate will be all cash offer. There are alot of people like me which lowers demand.

I had an investor willing to buy my duplex as is for 400K 4 months ago when rate was in the 5% but now I would be lucky to get 300K.

Families who are buying their 1st home or upgrade will have to put it off. The average Austin home is 555K would need about a 450K loan putting their monthly P&I at 3k vs 2k when rate was 3.5%. Add on increased property tax in Austin about 30% last year adds another 5k, Insurance up 1k/yr and you are looking at an increased in monthly payments of about $1500/month. With all the other inflationary living expenses, this is just not possible for most families.

I feel interest rate will hover around 7-9% by years end and will create a real good buying opportunity for cash buyers or those willing to buy low then refi when rate go down.

Malibu - I know you're in multifamily investments (based on previous threads). Me too. I'm seeing valuations cool off (Cap rates), but rent is still increasing in most regions. Deal flow is still coming through, but at a slower pace. CoC/IRR have been reduced due to rate increases, but in general I still see profit to be made if the asset is managed properly. Onwards and Upwards.

HoustonAg_2009 said:

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Malibu - I know you're in multifamily investments (based on previous threads). Me too. I'm seeing valuations cool off (Cap rates), but rent is still increasing in most regions. Deal flow is still coming through, but at a slower pace. CoC/IRR have been reduced due to rate increases, but in general I still see profit to be made if the asset is managed properly. Onwards and Upwards.

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I know of a 2016 Built large MF complex that is under purchase contract right now at a 4.25% cap rate. When looking at the GPR and NOI, it has a 56% expense ratio mostly due to RE taxes and some other unavoidable expenses tied to the deal (think ground leases). Even at the best rates, it's still going to get a 5.25% interest rate at best. So these investors/buyers are pretty much underwater day 1 even at 40%+ of hard equity ahead of the loan. I asked the internal question of what these guys are planning to do to increase the value and it was just rent growth projections. Not sure about that and definitely didn't get any warm and fuzzy feelings. That deal probably needs a purchase price haircut to make it pencil better but hey. Not my money.

I don't know how this will ultimately shake out. But building costs remain very high and price increases are still happening. In a year, concrete in BCS has gone from $80-90 per yard to over $150 per yard with more price increases coming.

I don't know how long it will take pricing to adjust but commodity pricing for lumber, copper, and aluminum are now back to longer term normal pricing prior to the inflation bubble. I am not sure what inputs are driving concrete pricing for construction. I would imagine some of it is higher labor and transportation costs. You would think transportation costs would also start moderating with the drop in fuel pricing over the last few months.

A builder in the neighborhood we just bought in has dropped the model home price about ~$100k in the last few weeks

HoustonAg_2009 said:

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Malibu - I know you're in multifamily investments (based on previous threads). Me too. I'm seeing valuations cool off (Cap rates), but rent is still increasing in most regions. Deal flow is still coming through, but at a slower pace. CoC/IRR have been reduced due to rate increases, but in general I still see profit to be made if the asset is managed properly. Onwards and Upwards.

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Seeing the same thing. We are actually getting more deals now because every Johnny Jackass with a little bit of money doesn't want to be in the multifamily space anymore, so the competition is more professional operations and less retail. I am seeing unlevered yields on cost going up on what's being sold, so if we can wait out a bad market there is going to be a large pot of gold at the end of the rainbow.

Your point about operational excellence is absolutely spot on. There's plenty of money to be made, but it has to be earned instead of treating multi family like it's bitcoin.

Red Pear BCS Luke said:

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HoustonAg_2009 said:

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Malibu - I know you're in multifamily investments (based on previous threads). Me too. I'm seeing valuations cool off (Cap rates), but rent is still increasing in most regions. Deal flow is still coming through, but at a slower pace. CoC/IRR have been reduced due to rate increases, but in general I still see profit to be made if the asset is managed properly. Onwards and Upwards.

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I know of a 2016 Built large MF complex that is under purchase contract right now at a 4.25% cap rate. When looking at the GPR and NOI, it has a 56% expense ratio mostly due to RE taxes and some other unavoidable expenses tied to the deal (think ground leases). Even at the best rates, it's still going to get a 5.25% interest rate at best. So these investors/buyers are pretty much underwater day 1 even at 40%+ of hard equity ahead of the loan. I asked the internal question of what these guys are planning to do to increase the value and it was just rent growth projections. Not sure about that and definitely didn't get any warm and fuzzy feelings. That deal probably needs a purchase price haircut to make it pencil better but hey. Not my money.

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That cap rate and that expense ratio gave me acid reflux. I hope that these are institutional buyers who are planning to hold this for the next 50 years, otherwise there doesn't look to be a prayer of exiting in the money.

The big take away is extra demand (investors) are what's coming out of the market soon unless they're buying in cash. In theory more cash purchasing will take place, but shouldn't make up for the fact financed purchased will essentially stop as financially it just won't make sense with all the increased costs.

I could also see people who were considering buying up staying put as they realize it will cost them almost double to finance a house compared to the beginning of the year.

What I'm interested in is what happens to the housing market in places largely driven by tourism (VRBO, etc.). The prices in those markets blew up because instead of people predominantly buying second homes for personal use, investors bought them for short term rentals. What used to be small cabins and fish camps is now million dollar homes.

I've always wanted a small second home in a particular mountain community. Interest rates were low, but housing prices were just stupid. We've talked about waiting until a housing correction, but even if prices get cut in half, the payments would be the exact same or higher with interest rates. So I guess now I'm hoping land prices also fall and I can scrape up enough to just buy a little piece of property to camp or build a small shack on until interest rates come back down next decade.