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Recession threat?

4,286 Views | 32 Replies | Last: 5 yr ago by jt2hunt
SteveBott
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AG
Very real possibility at this point. The biggest worry is the Yield Curve. This is the difference between short term and long term interest rates. We are almost flat now and an inverse curve, shorts higher then longs we have had a recession every time. Tariff war will really kick in next month.

https://www.bloomberg.com/news/articles/2018-06-25/curve-flattens-anew-as-powell-s-long-end-harder-question-holds

This would be a mixed bag for RE industry. Yes my rates would go down and offer refinancing opportunities but also dampen the value of the market which would have less buyers. Less buyers less sales.
wildmen09
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AG
less buyers, more renters?
MAS444
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Following... Potentially good for me in getting a construction loan in 6 - 8 months. Bad for me in looking to sell current house in 18 months or so. Wish I could sell it now...
dsvogel05
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AG
So, good news for those waiting to buy a house if a recession hits?
O'Doyle Rules
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dsvogel05 said:

So, good news for those waiting to buy a house if a recession hits?


Yes if you keep your job
SteveBott
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AG
Exactly. Again we are not in recession now. In fact our economy is in the best shape in a decade. But as we saw in 2008 it can change 180 degrees in weeks. I watch bonds daily and let you know if we invert. An inversion is almost 100% predictor for recession
Tonyperkis
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AG
What are your thoughts on interest rates in the near term? I'm considering re-financing a rental property, but do not have a set time where I need to do it.
SteveBott
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AG
We have seen a noticeable dip off highs a few months ago. I'd watch the market the next month and what happens on tariffs. We go full trade war we could see a significant drop. Real tariffs will be implemented in the next 15-45 days
Tonyperkis
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AG
Thanks Steve!
Kearney McRaven
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I would suggest that we are at the top of the third real estate bubble during my career. The late 80's with the S&L scandal, oil crisis and tax law changes, the Bush/Obama stated loan bubble and today.

The Dodd-Frank Act is one part at the root of the issue. Credit score requirements continue to be reduced allowing for basically unqualified buyers to purchase real estate. Mortgage interest rates have been steadily declining since 1980, and are at an all time low since 1970, thus, increasing purchasing power. The historically implied standard of 20% down payment has virtually vanished allowing for FHA and conventional mortgages with 3.5% down payment requirements. In many cases such a down payment does not equal annual taxes and homeowners insurance. Additionally, PMI has been altered to stay with the loan through its duration. This is the financially most attractive aspect of holding the mortgage. It is no wonder that the government has to hold and service at least 50% of all mortgage loans. Who would want to back an average or below credit rated 30 year investment with essentially 100% collateralized equity at around 4%?

In my market, we are also experiencing such buyers offering above list prices for properties because they are asking sellers to pay closing costs causing hyper inflation within the lower price range of the market. All of these artificial influences used to stimulate the housing market are draining both the supply of available properties as well as the the supply of future homeowners. While at the same time stalling the residential rental market by converting renters into unqualified buyers. This is not the case in the upper end of the market where most influences remain rather standard.

The big question is how will the market crash be handled. Will it be handled in a wholesale fashion when Fannie and Freddie crash as G H Bush did in the late 80's and early 90's, or will we see the return of the short sale industry holding the market flat until the economy rebounds like the Obama administration utilized. President Trump, being a real estate developer, began the creation his fortune during a real estate recession, so I believe he will trend more toward the Bush mechanism.
Shooter McGavin
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AG
Kearney McRaven said:

I would suggest that we are at the top of the third real estate bubble during my career. The late 80's with the S&L scandal, oil crisis and tax law changes, the Bush/Obama stated loan bubble and today.

The Dodd-Frank Act is one part at the root of the issue. Credit score requirements continue to be reduced allowing for basically unqualified buyers to purchase real estate. Mortgage interest rates have been steadily declining since 1980, and are at an all time low since 1970, thus, increasing purchasing power. The historically implied standard of 20% down payment has virtually vanished allowing for FHA and conventional mortgages with 3.5% down payment requirements. In many cases such a down payment does not equal annual taxes and homeowners insurance. Additionally, PMI has been altered to stay with the loan through its duration. This is the financially most attractive aspect of holding the mortgage. It is no wonder that the government has to hold and service at least 50% of all mortgage loans. Who would want to back an average or below credit rated 30 year investment with essentially 100% collateralized equity at around 4%?

In my market, we are also experiencing such buyers offering above list prices for properties because they are asking sellers to pay closing costs causing hyper inflation within the lower price range of the market. All of these artificial influences used to stimulate the housing market are draining both the supply of available properties as well as the the supply of future homeowners. While at the same time stalling the residential rental market by converting renters into unqualified buyers. This is not the case in the upper end of the market where most influences remain rather standard.

The big question is how will the market crash be handled. Will it be handled in a wholesale fashion when Fannie and Freddie crash as G H Bush did in the late 80's and early 90's, or will we see the return of the short sale industry holding the market flat until the economy rebounds like the Obama administration utilized. President Trump, being a real estate developer, began the creation his fortune during a real estate recession, so I believe he will trend more toward the Bush mechanism.
Where is your market?

I'm in DFW and not seeing sellers paying closing costs.
Rice and Fries
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wildmen09 said:

less buyers, more renters?
Yes, pushing rents up even higher.
Rice and Fries
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O'Doyle Rules said:

dsvogel05 said:

So, good news for those waiting to buy a house if a recession hits?


Yes if you keep your job
I work in GSE lending, I hope I am fine. I've been sitting on the sidelines waiting till it was a more buyer friendly market.
Rice and Fries
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SteveBott said:

Exactly. Again we are not in recession now. In fact our economy is in the best shape in a decade. But as we saw in 2008 it can change 180 degrees in weeks. I watch bonds daily and let you know if we invert. An inversion is almost 100% predictor for recession
To play off this....I've watched as the 7YR (2.79%) and the 10YR (2.83%) treasuries narrow to within 4bps of each other, where as in September of last year, it was 17 bps wide.

I've also seen the bond buyers jack up the MBS fee (the part of the interest rate that goes to the bond holder) from 40bps to 71bps. It's gone up 10bps in the last two weeks alone. All this basically means is that MBS/bond investors are asking for more money to buy the bonds, because the overall view is getting riskier.

As steve said, it will be interesting in what happens when the tariffs actually go into effect.
Kearney McRaven
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San Antonio
The Fife
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Kearney McRaven said:

San Antonio
I'm seeing the same thing happening with coworkers here in Charleston. Property taxes are low but there's there's state income tax so transaction prices are a lot higher than what you see in Texas.
CS78
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Kearney McRaven said:


In my market, we are also experiencing such buyers offering above list prices for properties because they are asking sellers to pay closing costs causing hyper inflation within the lower price range of the market. All of these artificial influences used to stimulate the housing market are draining both the supply of available properties as well as the the supply of future homeowners. While at the same time stalling the residential rental market by converting renters into unqualified buyers. This is not the case in the upper end of the market where most influences remain rather standard.


Im in B/CS. For the first time this year, I was not able to prelease two of my properties. I blame this on the overbuilding of apartments not potential tenants choosing to buy. Rather than push things to the last minute I decided to list them in the $130s. Both went under contract above asking, but with me kicking in a bunch of closing cost. One VA and one FHA. Basically exactly what you're saying. Ive sold a bunch of these lower end houses in the past 7-8 years and this has been the norm. Maybe it wasn't before that? I can see how it contributes to price pressure but I see the lack of new supply as a larger driver and one that will continue as the dominant force in lower end homes. Even if financing were tightened, I think there's enough millennials out there with good jobs that prices will hold solid, at worst.
Kearney McRaven
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I'm from Bryan/College Station, and my friends and I have been wondering when the market would become super saturated with apartments, but they just keep building new complexes. With regard to your comment, I would state that the current low inventory for homes under $300,000 is directly related to the factors I mentioned in my original post.

If you imagine a pie chart based on the population in terms of family units and housing needs, you can make a rough generalization that 33% of the population can purchase and sell a home at any given time. The second 33% percent has historically consisted of future potential home buyers. This group is made of up of those saving required down payment, working on repairing credit, transitioning from renter to homeowner or generally preparing to become a homeowner. The final 33% will typically always be in the rental market due to finances, credit and other related variables. As I mentioned above this is a rough generalization. The percentages are chosen for simplicity. To look at it from a numbers perspective, B/CS has a population of roughly 150,000 plus 60,000 or so students. Excluding the students, simplistically, that breaks down to around 75,000 homeowners or family units. So, roughly 25,000 family units can buy or sell at any given time. The third group of 25,000 primarily only factors into the equation on the rental side of the market. The middle 25,000 should trickle into the market place, thus providing a constant demand. Note, the B/CS market is unique due to the large student population which equates to almost 30% of the total population in the area., and many students purchase homes instead of renting albeit with the assistance of their parents, thus skewing the market. It is also important to note that from the investment perspective many of the home purchasers in this group also utilize the favorable lending options as they make strong investment sense.

The issue we have witnessed since the last real estate bubble is related to the second group. This group typically trickles out from the rental market into home ownership, thus perpetuating a constant demand of home buyers. Market demand is further strengthened by the average home ownership turnover of roughly 10 years provided by the first 1/3 of the population represented in the pie chart. Since the last bubble and going all the way back to the Clinton presidency, there has been a strong governmental push for everyone to own a home. It escalated during the Bush/Obama years terms. The factors mentioned in my first post such a low credit requirements, historically low interest rates and loan products with minimal down payments has allowed for a mass majority of the second group to become instantly qualified as home buyers rather than having to continue to save and prepare, thus flooding the market with qualified buyers. So, demand exceeds supply, and we witness inflation, and that is followed by shortage. And, here we are. As a side note, rental demand diminishes, occupancy rates decrease and rental rates becoming flat or even reduced. Those who own residential investment properties should be able to attest to this state of the market with the exception of those in the most highly sought after areas surrounding the campus.
Kearney McRaven
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CS78 said:

Kearney McRaven said:


In my market, we are also experiencing such buyers offering above list prices for properties because they are asking sellers to pay closing costs causing hyper inflation within the lower price range of the market. All of these artificial influences used to stimulate the housing market are draining both the supply of available properties as well as the the supply of future homeowners. While at the same time stalling the residential rental market by converting renters into unqualified buyers. This is not the case in the upper end of the market where most influences remain rather standard.


Im in B/CS. For the first time this year, I was not able to prelease two of my properties. I blame this on the overbuilding of apartments not potential tenants choosing to buy. Rather than push things to the last minute I decided to list them in the $130s. Both went under contract above asking, but with me kicking in a bunch of closing cost. One VA and one FHA. Basically exactly what you're saying. Ive sold a bunch of these lower end houses in the past 7-8 years and this has been the norm. Maybe it wasn't before that? I can see how it contributes to price pressure but I see the lack of new supply as a larger driver and one that will continue as the dominant force in lower end homes. Even if financing were tightened, I think there's enough millennials out there with good jobs that prices will hold solid, at worst.
On a side note with regard to the B/CS student rental market, one thing I could never wrap my head around was the onslaught of new development of the 4/5 bedroom student rental homes. I know several people who have built these properties, and made a bunch of money. When rental demand was high, they made great financial sense. However, when the rental market becomes saturated, what do you do with a five bedroom house with a tiny living area and kitchen and an all concrete yard for parking? Are families purchasing these homes now that rental demand is decreasing. I would like to hear about how those properties are being received.
Kearney McRaven
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I understand that is not the case in your market from the Brokers I know in that area. I think the Austin market is similar as well. But look at California, it has an entirely different kind of messed up residential real estate market.
aggiepaintrain
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AG
When Ag Shacks, pays $175k-$200k for a house to knock it down, and then spends another $200k+ building it, I'm not convinced they are 'making money'

FJB
Kearney McRaven
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aggiepaintrain said:

When Ag Shacks, pays $175k-$200k for a house to knock it down, and then spends another $200k+ building it, I'm not convinced they are 'making money'


They are not doing it with all cash most of the time. So, if the financial plan is provided and the lender approves, it must be working. I'm not sure who the entire ownership group is now, but I used to know a couple of the principles. At that time, they were making good money. My concern then as well as now remains to be what happens when occupancy and rental rates fall. Does the financial plan still cash flow, and are there buyers for that type of property at a break even or profitable sales price?
Rice and Fries
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aggiepaintrain said:

When Ag Shacks, pays $175k-$200k for a house to knock it down, and then spends another $200k+ building it, I'm not convinced they are 'making money'


Doesn't matter. As long as they can keep it rented out and service the debt note on the house, they can let the equity build and hold until they do make money.
SteveBott
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AG
FYI 2 years are 2.5 and 10 years are 2.85. again not inverted but getting close
one MEEN Ag
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snowmnag970 said:

aggiepaintrain said:

When Ag Shacks, pays $175k-$200k for a house to knock it down, and then spends another $200k+ building it, I'm not convinced they are 'making money'


Doesn't matter. As long as they can keep it rented out and service the debt note on the house, they can let the equity build and hold until they do make money.
Right, but who is buying that house out from under you? Its value is now exclusively in being a rental property. It won't be a family moving in there, it will always be a student rental until its torn down again in 20-30 years. Traditional homes that are student rentals can always just be lightly remodeled and then put on the market for a family. Ag Shacks trade that dual nature in for an aggressive cash flow.
JP76
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The money is in the replat from 1 to 2 or 3 residences
I know of one where dirt was 90k,replatted and built 3 for 600k that sold for around 900k total. 846k after realtor commissions nets you 156k profit on a 690k investment. BCAD eats it up as they now get 10x the previous tax revenue. Put up 20% of the 690k on loan and net 156k on your 138k investment.
JP76
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snowmnag970 said:

aggiepaintrain said:

When Ag Shacks, pays $175k-$200k for a house to knock it down, and then spends another $200k+ building it, I'm not convinced they are 'making money'


Doesn't matter. As long as they can keep it rented out and service the debt note on the house, they can let the equity build and hold until they do make money.


That's works until your note is $2500 and your 5/5 was getting $600 a room but what happens at $300-$400 a room after you bought at the top ?
Rice and Fries
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one MEEN Ag said:

snowmnag970 said:

aggiepaintrain said:

When Ag Shacks, pays $175k-$200k for a house to knock it down, and then spends another $200k+ building it, I'm not convinced they are 'making money'


Doesn't matter. As long as they can keep it rented out and service the debt note on the house, they can let the equity build and hold until they do make money.
Right, but who is buying that house out from under you? Its value is now exclusively in being a rental property. It won't be a family moving in there, it will always be a student rental until its torn down again in 20-30 years. Traditional homes that are student rentals can always just be lightly remodeled and then put on the market for a family. Ag Shacks trade that dual nature in for an aggressive cash flow.



They traded that in for a portfolio that is cash flowing. There is and will be value as long as there is positive NOI.

Vo=Io/Ro (Value=Income divided by Capitalization Rate)
Rice and Fries
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JP76 said:

snowmnag970 said:

aggiepaintrain said:

When Ag Shacks, pays $175k-$200k for a house to knock it down, and then spends another $200k+ building it, I'm not convinced they are 'making money'


Doesn't matter. As long as they can keep it rented out and service the debt note on the house, they can let the equity build and hold until they do make money.


That's works until your note is $2500 and your 5/5 was getting $600 a room but what happens at $300-$400 a room after you bought at the top ?



You're not wrong. Which is why Agshack and it's lenders hopefully underwrote the note to ensure there would be adequate Debt Service Coverage Ratios to ensure they could (within reason) continue to generate enough income to make their note payments.

Plus, that's only factoring one house out of the many that Agshacks owns. When you have market share and a portfolio, you normally get a loan on the overall portfolio (via a facility) and not individually, so as long as the portfolio is still above a 1.00x DSCR, the note gets paid.
SteveBott
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AG
Update on the rate inversion. 10 years bonds are at 2.92 and 2 years are at 2.80. Getting close right now. My best guess is the tariff issues. Trump claimed that he had an interim deal with China but today no one can officially confirm and the stock market dropped 800 points
mazag08
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AG
SteveBott said:

Update on the rate inversion. 10 years bonds are at 2.92 and 2 years are at 2.80. Getting close right now. My best guess is the tariff issues. Trump claimed that he had an interim deal with China but today no one can officially confirm and the stock market dropped 800 points
Real estate investors are literally sidelined. Watching and waiting.
jt2hunt
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AG
Not stopping foreign investment into real estate.
SteveBott
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That is two different data streams. Foreigner money is more about money safety not ROI. They look for asset preservation
jt2hunt
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AG
Yes, of course. That makes it difficult for typical investors because the ROI is less than what banks are making on the loans.
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