Despite publishing cautionary posts about investing in stocks, bonds, and alternatives at current levels, the biggest caution I should be writing about is taking out massive debt to buy property at record highs as of 1Q2020.
If you lose 50% on your stock and bond portfolio, you’ll be upset, but fine. If your property loses 20% of its value, however, this means you’ve lost 100% of your 20% downpayment. In this scenario, you’ll also probably still be fine – if you don’t have to sell. But when property prices correct by 20% or more, many people become forced sellers because they’ve also lost their jobs.
I understand that millennials are coming of buying age and inventory is on the decline, making competition for buying a home fierce. However, only if you are fully cognizant of the following points I’ve highlighted below should you proceed with a property purchase today.
Things To Know Before Buying Property Now
1) Rents have softened from peak levels in many of the most expensive cities. Given property prices are a function of rental income multiples, a real estate buyer should be looking to buy at similar pricing discounts from peak rental periods. For example, research whatever comparable New York property you want to buy today that was sold for in March 2016 and aim to buy at a 14.8% discount to the March 2016 price because that’s how much rent prices are down.
In 2017 I experienced softening rents first hand when I tried to find replacement tenants for my SF rental house at a similar rent of $9,000 a month. After 45 days of aggressive marketing, I only got two offers, both for $7,500 (-16.7%). I even hired a rental listing agent for two weeks to find people for at least $8,000 and he failed. As a result, I sold. Pricing pressure starts at the most expensive markets and works its way down. The large supply of condos in many expensive cities has really put a damper on rents and housing prices.
Buying at peak prices when rents have fallen from peak levels means you are paying a higher valuation. This is a dangerous scenario that can’t last forever.
2) Mortgage rates are uncertain. With the surge in the 10-year bond yield all the way up to 3.2% in 2018, mortgage rates followed suit. They’ve since come down in 2020 after the 4Q2018 stock market meltdown and the Fed backpedaling on more rate hikes.
My last mortgage refinance was in 4Q2019 when I locked in a 7/1 Jumbo ARM at 2.626%. I got lucky because rates collapsed in 2H2019. But rates could easily rise up again given we’re at close to record lows in 2020.
Check for a free mortgage quote here with Credible. They are one of the largest online marketplace where lenders compete for your business. All the quotes are free to use as leverage against one another.
Although rates have come back down in 2020, this also means that the bond market is expecting economic weakness. If economic weakness gets too great, housing prices could fall accordingly.
One of the biggest signs of an upcoming recession is if the Fed starts cutting too much. It’s an indicator that the Fed sees lots of economic weakness on the horizon.
3) Prices have blown past their previous peaks in many cities. While every city is different, if you look at the prices in Denver and Dallas, you’ll find that the prices are roughly 45% higher than they were in 2006-2007. This price performance is similar to San Francisco’s. Meanwhile, hot cities like Seattle and Portland are only about 20% above previous peaks.
The US median existing home price is about 12% higher than its previous peak, which is a modest rise since over 10 years have passed. As a real estate investor, your goal is to invest in markets that have both underperformed and have the potential to catch up.
San Francisco is one of the leading indicator cities. Notice how prices collapsed by 11.5% starting in March 18 and are back to all-time highs in San Francisco. Places like NYC have been weakening for well over a year.
4) Tax reform takes time to negatively impact housing prices. Conceptually, we all know that limiting state income and property tax deductions to $10,000 and limiting mortgage interest deductions on new mortgages up to $750,000 are net negatives for expensive coastal city real estate markets. Until homeowners file their 2018 taxes in 2019, however, no financial pain will be felt.
Think about it. Let’s say you own an average 3 bedroom, 3 bathroom home for $1.5 million. Your property taxes alone cost $17,000 – $20,000 a month, depending which state you reside. Let’s say you earn $120,000 a year. You’ll have paid $6,000+ in state income taxes. In the past, you could have deducted the entire $23,000 – $26,000 from your income. Now, you are limited to $10,000 in deductions.
Some will argue that lower income taxes will offset these deduction limitations. Perhaps. But nobody really knows for sure until 2019 tax returns are filed and accepted. Tax reform is a headwind, not a tailwind for coastal city property price appreciation.
5) Inventory is slowly creeping higher while rents are flatlining. The construction boom we’ve experienced over the past several years is finally showing up in the data as a wave of new inventory hits the market. When there’s more inventory, pricing comes under pressure.
Although inventory is still historically low, it’s important to realize the inflection point we’ve experienced in mid-2018. In just several months, the amount of inventory is back to where it was at the end of 2012. If the trend continues, we could quickly get back to 2008-2010 levels.
Here’s a more detailed inventory job of specific cities in 4Q2018. It is too late to sell in places like San Jose, Vallejo-Fairfield, Santa Rosa, Denver, Napa, Seattle, San Diego, San Francisco, and Oakland for maximum dollars. But giving downturns generally last 2-5 years, pricing is likely going to get worse.
2Q2019 YoY inventory up in many markets
Higher inventory also leads to flattening or lower rent prices. Here’s what’s going on with Seattle and San Francisco rent, for example. These two property markets have been the hottest in the country. But finally, we are seeing a cooling as buyer fatigue sets in.
6) It takes a while to recognize a peak. The housing boom that began in January 1996 ended in March 2006. But it wasn’t until the beginning of 2008 that people started to accept that the housing market had already peaked. Until 2008, property investors were still clinging to hope or at least were in denial that prices would no longer be going up. Once Bear Sterns was sold for nothing to JP Morgan in March 2008, people started to panic. Then Lehman Brothers went under on September 15, 2008, a full two and a half years after the housing market peaked. And things got even worse, with the S&P 500 finally bottoming out on March 9, 2009.
Below is a great chart that shows how badly housing prices corrected in some of our major cities. Notice how the previous boom lasted 10 years and the crash lasted 5 years. We’re now going into the 8th year of a bull market.
7) The stock market crashed. We saw a violent 20% sell down in the S&P 500 in 4Q2018. Given the S&P 500 is a reflection of the economy, this 20% downward move needs to be taken seriously. Stocks are valued based on future earnings. A 20% sell down means the future is not looking as bright as it once was.
From policy errors by the Fed, to trade wars by Trump, to slowing global growth, to a potential war with Iran, companies everywhere will be more cautious on their spending in 2019 and beyond. If you were the CEO of a major company and saw your company’s value get cut by 20%, are you not going to be more cautious in your hiring and spending plans? Of course you are, unless you’re an idiot.
Incredibly, the S&P 500 rebounded handsomely in 2019 and is now ~112% above the regression line. Just know that prices tend to revert back to the mean or overshoot on the downside very 4 – 10 years. Real estate takes 2-5 years to correct, so there is no rush to buy now.
Keep Your Unbridled Enthusiasm For Housing In Check
The mass media and the real estate industry will focus on strong demand, strong job growth, and a dearth of inventory as drivers for higher property prices in 2020 and beyond. That’s fine if you can surgically buy in strong job cities via real estate crowdfunding. If you look at property nationwide as a whole, prices will probably continue to inch up.
However, if you look at individual markets, you are beginning to see cracks in the foundation. I don’t recommend leveraging up to buy expensive coastal city real estate as an investment at this point in the cycle. Look to the heartland instead, where valuations are much cheaper and net rental yields are much higher.
If you’re dying to buy a primary residence today, make sure you can withstand a 20%+ correction over a five year time frame, if history is any guide. If you don’t have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn. Better yet, pay cash.
Too much debt is really what will kill you if we ever return to hard times. Buy a house to enjoy life instead of looking to make a profit. I doubt we’ll have a correction as violent as the last one given lending standards became far tighter after the housing crisis. All the same, please buy and borrow responsibly. The stock market is a forward looking indicator that is showing strains ahead.
Explore real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, don’t want to tie up your liquidity in physical real estate, and are looking for real estate diversity, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Less than 5% of the real estate deals shown gets through the Fundrise funnel
What I recommend homeowners, fight the system. Every year protest your property taxes, it is a right that every taxpayer that owns a home has. I helped people in Texas and hopefully around the Country empowering them with relevant information that could reduce and control their property taxes. We need to make our own bailout..
What would you suggest regarding a new construction cabin flip in a up and coming tourist area, for right now? Hochatown (Broken Bow) Oklahoma
I am disgusted with our nation’s housing problem. It makes me ashamed. Any attempt people find to live affordable such as tiny homes or rvs is treated with contempt. I am a full time RVer and a professional gainfully employed in child custody work and I’ve been told by city employees (when renewing plates) that I am homeless and then treated like trash. It’s disgusting that counties cant be more open minded to alternative housing options for people. This should still be the land of opportunity but instead it is the land of judgement and the all mighty profit at the expense of promoting an american dream for all. If I could to move to another county, I would. America is only great in some ways…
Well said, Luna! Any attempt people find to live affordable such as tiny homes or rvs is treated with contempt… and discouraged. The corrupted mortgage industry and the corrupted realtors’ profession can’t let you get free. Some wish American economy to go down, which in turn is assumed to teach us a lesson and force us into communist / socialist (“democrat”) government oppression, where everybody is kept so poor that they cannot rebel. If you think that democrat socialism is good for something, check middle class and poor people’s housing in China, Ukraine… and California.
The economic, debt-slavery is brought to you by the International Banking Cartels. Few people seem to be aware of their history and motives. Of course our mainstream media will never expose their nefarious techniques.
The easy money of the Federal Reserve that was created out of nothing and loaned to home buyers up until 2009 enslaved many to homes that they could not afford. Therefore, the housing market collapsed after that with millions becoming homeless with the loss of their homes.
So what did the Federal Reserve do? They reinflated the housing bubble again….to be repeated most likely in the coming year or two.
Moral of the story. Stay out of debt and don’t get caught in their web like an ant being preyed upon by a deadly spider.
And most of all….educate yourself about this criminal cabal destroying individuals and nations since the day the Rothschilds began their takeover of the banking systems of the world. You can read about this in: The Creature from Jeykell Island- A Second Look at the Federal Reserve by Griffin….and in Secrets of the Federal Reserve by Eustace Mullins. Both books are available on Amazon. Read them and share them with friends.
agreed.
I grew up on the west coast- lived in Vancouver BC, LA, San Francisco, San Diego, Seattle and a few stints in NYC. I moved back to the west coast in 2008. Seattle crashed hard in 2008/2009. Prices plummeted far below comparable cities like Vancouver, BC and San Francisco. At the time it felt like the City would ever recover, yet it did- and it exploded! We have since sold our Seattle home and purchased in another desirable west coast City. We own our home outright thanks to the 2017 Seattle boom. Real estate is cyclical but one thing is certain- over a 10-15 year investment , it will go up. Maybe not crazy up like what happened in Seattle and other west coat cities, but it will appreciate. Cities with amenities are a great investment. It comes down to simple economic supply and demand principles. Cities are becoming more and more desirable, with amenities, public transportation and JOBS and therefore there will always be a demand and so your investment is safe even if a recession occurs as long as the economy doesn’t completely collapse. If you are jumping into real estate for a short term investment or to flip, it can be risky. It doesn’t really matter when you buy if you are looking over the long term, it just matters that you can get in the game. My advice to millennials and (I teach our very young child) is.. to buy real estate as soon as you can. My only regret is that I never bought in NY or SF in the early 2000’s. Happy house hunting!
I absolutely hate when people say “it doesn’t matter if you’re looking to stay in the house long-term “. Of course it does, why…..well here’s some examples. 1) You hate the house you live in and now are stuck. 2) Your mortgage is outrageous. 3) You bought at the wrong time and could of had less of a payment. I’m guessing you sell real estate because everyone in that field says those exact words.
Attention wise buyers do yourselves a favor do not buy any property in this unrealistic and overpriced market! You will be paying 45% to 50% more than the real value of such property.
Zillow.com, Redfin and other major real estate investors are at the final stage of buying the last cheaper distressed properties and putting a little cosmetic work on them to flip those homes for double or even more than they are really worth. If you buy a home now you will regret it because the market is about to take a dip and it will correct the unrealistic prices that those investors are getting richer at on your account!
Wait just a little longer because in 2020 the market will take a dip and you will buy your homes for the right price and value!
I am a wise buyer and am also waiting because I refuse to contribute to those investors leverage lives they have from deceiving the hard working class Americans like us!
I agree that homes are overpriced everywhere. But my take on it is this… And i don’t hear this pov often. Everything is driven by the job market. With a job market as strong as we have today, it doesn’t matter if you buy an overpriced home. You just continue to make payments and live your life. However, you lose your job and everything changes. Look at the Government shutdown we had a year or two ago. Within 2 wks, we saw horror stories of ppl in financial turmoil. TWO WEEKS. My prediction is this–Once we see cracks in employment, you could see foreclosures in a way that rivals 2009.
Attention wise buyers do not fall into a trap of overpaying for a property in this unrealistic overpriced market.
Zillow.com, Redfin and other major real estate investors are buying older houses pitting a very little cosmetic work on them and selling those old houses for double or even higher then they are really worth. If buyers stop buying those overpriced properties the market will go down and will be forced to readjust to real value of those homes.
Wise buyers do not buy any property at this overpriced market! Wait because very soon you will be able to buy better properties at 45%-50% less from the unrealistic prices at this present time!
I am a safe and wise buyer that is why I am also waiting for thee right market, which will soon be here!
Hi, This is very helpful (thanks!), but having trouble with the timelines on when you wrote this versus some of the comments.
My wife and I live in a great neighborhood in SF with our 18-month old daughter and pay a whopping $5k/month in rent (gulp) for the convenience of being by her school and the shuttles to silicon valley (where my wife works) but our budget is pretty maxed when factoring in daycare costs (minimal savings). We are starting to think about having another kid but absolutely know we cannot have another and live in the city. Thus, our options are either move to a place outside of the city and find cheaper rent/childcare (or a cheaper neighborhood in SF, sure, but the childcare is prohibitively costly) OR buy a place. We were fortunate enough to save about $300k prior to our first child and want to live in the bay area outside of the city in a good school district with a doable commute (parts of Marin, Orinda/Lafayette, etc.). The timing would be summer or fall of 2020. Based on where we are with the markets today and especially the uncertainty out there (trade discussions, 2020 elections, etc.) would you wait and get another rental or buy something? Budget is probably in the $1.2mm to $1.5mm range… We would want to live there at least 5 – 10 years (if not longer) but are worried that there may be a major correction during that time and we jumped the gun… However, according to your article, we may actually have good timing? Any guidance would be much appreciated, thanks!
I wrote this article a couple years ago.
But I think 2020 and beyond is looking good.
See: https://www.financialsamurai.com/a-golden-opportunity-to-buy-real-estate-is-upon-us/
I’m freaking out!
I like in Broward county, FL. I own a condo payed $122k cash and would probably sell for $150-170k. Married with a baby, living with parents and would love to have more children. So a 4+ bedroom is the only option for me. Houses I’m interested in Parkland and Boca Raton(only good schools) are selling for $400-450k. I would more than likely be approved with tight budget. I don’t know weather to take a large mortgage now or 2020. Taking one now or later could mean thousands of dollars difference. I need to take the right decision. We have outgrown way over my 2 bedroom condo. Please help
No need to freak out if you paid cash for your condo and can sell it for a profit. Shouldn’t she be happy if the housing market is slowing and you want to upgrade? You get to pay less for your upgrade whoo hoo!
I’m looking for a modest priced home to buy in Vermont in which to live(I’ve lived here a long time but sold a few years ago). The recent RE market here has me concerned. Housing prices have skyrocketed in many parts of the state. It’s currently a sellers market here. Lots of sellers are putting serious junk on the market that they have been unable to sell in the past and selling it now. I’m seeing a lot of “aspirational pricing” and sellers don’t want to budge. Places that are non-habitable, need total gutting, seasonal properties etc are on the market for a lot. I’ve seen a number of homes sell quickly as the buyers agreed to forgo any home/septic inspection which seems risky to me. Some lower priced homes have gone on the market and are listed as “pending sale” within a day or so. Affordable homes have many offers within a day of being listed.
At the same time, rents have become unaffordable. While they are nothing compared to NYC, SF etc. salaries here are nowhere near those cities.
So, what do you think is going on here? Should I just try to wait it out and hope sales prices start coming down?
Planning to retire in Fort Worth. I was really amazed on the number of newer homes still rented in the Fort Worth-Dallas area from the 2008 recession. Housing prices appear to have doubled since 2010 +/-. What a roller coaster.
Any comments by local realtors, on past housing price declines experienced in the last 50 years and how severe the current housing bubble is percentage wise. Another words what to expect if the future recession starts next year and lasts 1.5 to 2 years?
Complete fear mongering, just like CNBC in late 2008 early 2009. They bought those companies at rock bottom as well as real estate.
First the 18yr real estate if applied towards the recovery of 2009. That puts a time stamp of 2027..
Rising labor cost & materials cost
Depleted foreclosure inventory
Baby Boomers, choosing to age in place
401k accounts up
A lot investors made money on bitcoin
A lot investors still accumulating gold
There is a lot of foreign investors as well… I’m not selling til at least 2024
You think after a 10 year bull market, 2019 is like the BOTTOM of the previous financial crisis?
A lot of investors made a lot of money on bitcoin, huh? OK.
I’m actually watching markets, not imagining the future, and all western markets are definitely down in a way that is new from the skyward march they were doing from 2012 on to last year, which was literally insane. THere’s no new tech boom to ride off of, this country is up to its eyeballs in debt on every level, boomers own the best real estate and will be forced to or want to sell it to enjoy retirement and travel, and yet, if they haven’t sold by now or don’t soon, they will be left in a mass of sad sacks, because this stock market is running on fumes and corporate buybacks, and is going to implode very nastily.
Good points about the dangers of buying homes. Do you think it’s still as risky now given Trump’s determination to keep rates down, and that new construction is lagging too? Rents have gone back up this month and are expected to rise over next 12 months. I’m still of the belief that once this slight 2020 downturn is done, the US economy will rocket forth!
Hello Sam,
I wish I had seen your information last year. My husband and I bought a large home 8/18 in Fresno area to move my aging parents in. They are now moving out and homes are not selling. How long do you think we will need to wait to sell without losing money?
I was surprised I didn’t see Denver on there more. As Denver keeps turning into the next silicon valley, more people are moving here for the great work-life balance. However, it makes buying a home difficult.
At this point, it’s almost worth buying a house in the current market because it just keeps going up. I’m terrible at predicting the future. lol
-Andrew
The real sad part, Society’s view of making large purchases has entered into the full blown mentality of “what’s my monthly cost”. Its like the car salesman question of “how much do you want your monthly note to be? Now its, How much do you want your mortgage to be for this $412 per sqft builder grade flip? Ignorance is bliss and its real blissfull here in Austin, Texas.
The fraud of the us empire is finally showing after 400yrs of hustling, huckstering, and endless delusional optimism whilst ruthlessly exploiting others. 2020 May be quite exciting.
Hello,
Currently I live in NY in a rented apartment. I am planning to buy a Multifamily or single family house in New York as an investment property and wants to rent it out . Because I have a plan to move out from New York to other state next year or following year . But still I would like to invest in New York market. I could put $110K down payment. Our family income right now $170K in a year with one child. Should I wait for the EXPECTED recession to hit next year 2020 ? Or Should I try Now to buy??
Which areas I should focus to buy property with 0 vacant rate and low crime ??
Sellers have been under crunch to sell fast. The golden era of milking cow on houses selling business has long gone. Market has been declining ever since for seller market. Of course some exceptional regional story is unique. I’ve made a software that tracks listing price vs. sold price for thousands of homes in many part of the country, and I have yet to see listing price held selling price value. In some part of the country it looks scary, and seems like seller wants out fast. How often do you see fed lower interest rate while economy seems just fine? That’s what they call calm before storm. Many new generations holding hope to snatch a house within next year or two, but that dream will shatter for many. That’s because not all have cash ready to dump, and best of luck banking a house on your job or loan. 14 to 18 months from now we will see blood bath, it will be slower and depressing housing market. Until then hold tight as much as you can. Cash will be king.
Do you have a github for that software. Would love to learn about it.
Hi there,
We bought our home in 2017 rather quickly with a VA loan in Buckeye, AZ. We would like to sell to be closer to family in Waddell, AZ that has 1 acre lots. Prices are high there and we worry about getting a good price for our current home. We’re anxious that we would be paying too much for the new property and we’re not sure when or if to sell the current property. The big drivers of the moving at all is the idea of having lots of space with no HOA and being a 5-10 minute drive from family. All in all following the market is confusing.
Thank you,
Brandy
Wanting to buy a single family home for my daughter in Minneapolis area. We looked a little prices are very high . Does waiting a year or 2 sounds like a good idea?
I think so. i am looking for an investment property, however, I will wait until the houses’ price get the correction
Hello, I have a daughter going to Jacksonville University and am thinking about buying a condo there for her 2-year graduate studies, she might work there in the 3rd year. It’s a seller’s market in Jacksonville Florida, there are multiple offers on listings, listings selling in days some in less than a day. Rrentals for 2 bed rooms run in the 1200-1500 month range, the reason I thought it would be a good idea to buy a condo.
What do you think about the Jacksonville FL market?
Great question, following this as well.
jacksonville is not a sellers market. all of florida (and especially in major cities/ coastal towns) has softened. look at sales figures for last 8 quarters- it shifted from seller to buyer late 2018/early 2019, with values slumping about 10-20% from their peak in lat 2017.
Now, one factor that DOES make buying difficult for local/US buyers is that there is still a number of wealthy foreign cash buyers looking for real estate investments, especially from China, the middle east and south/central Americas. As well as US transplants from out of state (also predominantly cash buyers), looking for their “dream home”.
Both of These buyers are hard to compete with as they tend to bring strong and higher offers, forcing some overvaluation to occur. Though these are the same demographic that will be first in line for foreclosure if/when the recession hits.
as your situation is not long term (7-10 years or more) my advice for you is to rent.
Hi, new to the blog here, but great information. What are your thoughts on the Utah marketplace with the whole Silicon Slopes boom? We are looking at buying a home and trying to rent our 2800 sqft townhome to help offset the mortgage versus selling and using that as a down payment. Thoughts?
Hi Sam,
My husband and I are looking to buy our first primary residence (we own a vacation house in the Sierra). It’s hard to find a liveable house for our needs that won’t stretch us quite a bit–we need a home office, room for elderly parents who will live with us 10 months a year, as well as our young son.
We both have high paying jobs and a 20% down payment for $1.75M house and great credit, but now worry that we are headed for another big recession. If we buy now and the market tanks, we could be out of jobs again.
We are looking to keep whatever we buy for at least 12 years, so a 2-5 year downturn won’t hurt too bad unless of course we lose our jobs (and no, we don’t have 10%, $175K in cash after we buy the home). Are we foolish to get into the market now? We lost nearly everything we had in 2008 and have just now recovered to a point where we can buy again.
Let’s just say, the fear is real for us, but clearly, so is the desire to finally own a home.
Forgot to mention, we’re in the Bay Area. Peninsula burbs, looking at 680 corridor and Half Moon Bay.
Whats a “high paying job”? You got secure contracts for 12 years with golden parachutes if your canned or deemed obsolete?
A $1.75M home is affordable if you’re making a million a year. If you’re making 150K a year combined, good luck with that one.
Just because you have a “high paying job” today doesnt mean you’ll have one tomorrow and a expensive house, which is equally expensive to own, will make quick work of savings in a unexpected event.
Thats the problem with everyone today, buying things and never taking into consideration that things can and will change.
Is it any wonder that real estate investors never have any problems finding motivate sellers?
A story heard time and time again, bought because they were making good money but then job loss, medical bills, Illness, divorce, and whatever else and the house is sold for pennies on the dollar and the investors with cash to buy rake in the gold for nothing.
Sounds like you’re emotions are guiding you to ‘finally own a home’ you are forgetting one thing…..A home owns you……..
Appreciate feedback but your tone is very condescending, and I’d bet you have little understanding of the Bay Area market.
Home ownership in the Bay Area is tough b/c the homes are so expensive, but with the “home owning the owners” comes a lot of reward. I have witnessed ZERO friends or co-workers lose a home, but rather, make a lot of money in a very short time (3-5 years) b/c our market has appreciated so quickly. Home ownership has bolstered their wealth significantly, not threatened it.
Had we bought the home we rent now when it was offered to us at $1M 10 years ago, the mortgage was so low (by our standards), even with our job losses we would have been fine, and we would have gained $1M in equity. Yes, with zero improvements, the house we rent now is valued at $2M!
So, renting proved to be a risky proposition that didn’t pay off. Owning is risky too, but I’ve watched everyone I know who owns see that risk pay off. So it’s not just emotion speaking to me…it’s dollars and cents too.
Go catch the falling knife then. The property appreciated 100% in ten years, so it should do it all over again, right? I mean, there are SO MANY millenials (Gen Xers who can already bought homes for families long ago) with 4 million dollars 5-10 years from now!
Go buy the 2 million house. Do it. See what happens. Why would ANYONE buy a 2 million dollar house? These days you don’t want to be on an ocean unless you plan to eat a tsunami. Look at the Bahamas, look at eastern Spain. I bet there were a few 2 million dollar homes there turned to wreckage.
2 million dollars. You sound like such an American woman. The dude caught with the 2 million dollar mortgage should take his 1 million dollar share and catch a fast flight to Thailand, or move to Portugal and live like a king with an eastern european import that he doesn’t marry. Buy a bar, cover your expenses, and have a party every night. SF is a BORE. One restaurant after another, no interesting club life left, just a snoozefest with people so fleeced by developers they do nothing fun, and the homeless run riot. Same is true in Seattle, though there is still some life left, not much.
The Bay Area is such a bore. I remember partying there when it was fun years back. It’s a dump now, heinous commutes, ridic prices on everything, and people who really want to convince themselves how great they have it.
If I was going to do CA, I would go to Santa Barbara, not exactly cheap, but at least the SoCal beach culture is still exciting and you get your money’s worth. The only part of the bay area that nice is Half Moon Bay, and it’s cold in comparison to So Cal. Hell might as well move to Hawaii and get good weather constantly until you get sick of it and want to go skiing.
I tell you something, below a certain age, NOONE gives a f*ck about that level of expensive house. Sounds to me like a liability to worry about night and day. The only possible reason is if you are making a sheitload of money and have kids. Even then, there might be preferable alternatives.
wow well said common sense beats spreadsheets every time
that paw up was for raptap common sense
“looking at 680 corridor and Half Moon Bay.”?
Shelly, I’m a real estate & mortgage broker in San Jose.
I don’t know if you may consider my real estate & mortgage services?
It sounds like the Dallas market is overheating, but I have been struggling to find some definitive metrics. Doesn’t look like the same severity of Denver.
If I were to buy a home, it would be somewhere in the $300K range and I would want to rent the other bedrooms to pay for the mortgage. Where I am at right now, I would have to sell some stocks to pay the down payment, and I am probably a bit shy of the 20 + 10. Should I be biding my time instead?
Hi Sam –
I’m in the Bay Area and my husband and I are weighing our options about buying our first house right now. I’m wondering if we should stick it out longer in our rent-controlled duplex even though we are starting a family and things are getting tight. Moving to a bigger rental would wipe out the saving gains we are making currently. We’ve saved about 10% and can use a mortgage assistance program for teachers that matches the 10%, in exchange for 25% of the appreciation when we pay back the initial investment. We are hoping for a duplex or in-law situation so we can get rental income to assist with the mortgage.
TLDR: Life circumstances are pointing towards buying in an expensive Bay Area market, but given an impending down turn and lack of your recommended 20% + 10% in savings, is it better to wait?
Hi Crystal,
The bay area real estate market softened by about 10% in 2018. We’ve rebounded in 2019 as rates have collapsed and people are getting liquid from the tech IPOs starting in 4Q2019.
I think the anxiety of not having enough down and having a higher mortgage payment will be worse than the anxiety your feeling of missing out.
Feeling extremely tight on money is a really bad feeling. There is more inventory now, so it’s worth looking and trying to get a bargain on some stale properties.
S
Hi Sam – thanks for this really insightful and well-researched post. We are Bay Area condo owners looking to upgrade to a home (Oakland/East Bay). We have pretty specific requirements, so only a small subset of the available homes are within scope for us.
We definitely are seeing the market soften, but more often than not, homes (within our criteria) are getting pulled from the market instead of the price being dropped to align with what buyers will actually pay. It seems that the slowing market is not yet recognized by sellers. But, when will they realize they aren’t going to get appreciation even beyond the 2018 highs? I would imagine that at some point, some sellers will just need to sell at reduced prices, but I’m generally not seeing that yet.
Any data/insight you can share on this trend, how long it might last, etc. Or, am I just wrong on my observations?
Another point on this – it seems that many homes were bought 10-20 years ago, so while the sellers stand to make a lot of money off appreciation, they also may not feel any pressure to sell now.
Your observation is correct that the SF Bay Area market is slowing as inventory is rising.
I think a lot of people have A LOT of equity in their homes, and will simply just take their homes off the market if they can’t get the price they want.
See: How The Tech IPO Boom Could Cause SF Prices To Fall Further
It’s really supply that’s the big variable.
But I expect Spring 2020 to be strong again given the tech IPO lockup periods are starting in Nov 2019 from Uber, Lyft, Pinterest, etc. And a handful of people I’ve talked to there ALL want to buy property and diversify their net worth.
Bottom line: I see a 10% – 15% pullback in SF Bay Area property max. Now and through Winter 2019/2020 is probably a great time to start looking.
Related: The Best Area To Buy Property In San Francisco
Thanks for the quick reply, I appreciate it! I’ll read the link you shared, too.
I have read that the IPO lockup periods are less important because a lot of banks will loan money to early employees in advance – so, while they have a lockup period, it isn’t as much of a barrier as in the past….
We’re specifically looking to house hack with an income unit, so any thoughts on how rents will change over the coming year? Over here in Oakland there are thousands of units being built, though generally very expensive and only in a few areas. One could argue that other nice neighborhoods that don’t have as much supply will still see rental appreciation, especially as more jobs come over to Oakland and more people see it as a real alternative to SF (not just a cheaper alternative).
Back to your reply, I was thinking that going into 2019, we’d see more supply on the market as people saw just how much they could sell their homes for – and while we are seeing more supply, there’s less motivation to just sell and liquidate than I would have expected. I would have thought that someone who’s been here 20-30 years, ready to retire, would just say – I’m making enough to move anywhere, live comfortably, regardless of whether I get asking or even 10 percent less than asking. Sometimes mentally “cashing the check” will lead seller to be more motivated, or an assumption that prices will go down in the future will too (sell now at a slight discount because tomorrow the discount will be even more) – but, this does not seem to be happening at all, and based on what you say, sellers may just be able to ride out the down cycle, even if it lasts a few years… The other trend – with very renter-friendly policies, do those homes sit vacant or get rented out? Still not sure about that either.
Thanks much!
How’s it going now?
I’m curious. We bought in May 2019 and read articles like this and it feels all silly.
At the end of the day, there’s tons of people sitting in the sidelines waiting for “a deal”.
Tech companies are still booming. Yes your uber and lyfts are big names….but look at tall the other stuff. Molekule, coconut water- freaking everything still has a ton of growth in the area, and still no new development in most cities.
It’s a supply issue, driven almost entirely by prop 13. Why sell for a $1M profit if you put your profit into a new home with a huge tax base and end up paying more per month?
All the boomers are locked in until they die or move out of the area. And all the tech people are waiting in the sidelines to get into the game hoping for a crash….but the only crash that’s coming is if the tech market tanks jobs…but even then most of those people don’t own homes, so it may not even affect housing much unless there’s some big exodus of the area….
Sure I get nervous that we “bought at the wrong time”. But I’m 6 months into a mortgage now and things have been mostly flat. do I wait 2-4 years and hope they go down while paying rent or do I just buy the house and move on with my life? I just planted my first garden today… love it…not everything is about maximizing your asset valuation….sometimes you just need to assess what you want
Are you able to sense where the SF condo market will be in Spring 2021? What percentage pullback from 2019 prices are you anticipating at that point? Thank you!
imo? (ive been buying and selling homes for over 35 years) – WAIT. please wait. potus is selling off usa industries. farms, steel – both will bankrupt. he’s hollowing out what little healthcare support americans have – pple will lose their homes. his ridiculous trade war is going to result in raised prices on goods and he will begin war in iran which will explode the price of gas & oil. his approach to immigrants will also affect the economy in multiple areas: via incoming students, people seeking internships, people seeking to immigrate – all of these numbers will decrease exponentially, decreasing USA’s net worth/income. imo – wait. wait 1-2 years. you will be able to get pretty much any house you like for 30% less at least. within 3-5 years I believe 20%-30% of homes will foreclose or be on the market. sit tight. usa is in for a huge reckoning – the upside is you’ll be able to get a home for much cheaper. i would defin
I’m trying to find data that supports your thoughts about home prices dropping. We want to buy a house but can’t stomach the prices of even small homes in our area right now. We hope prices drop, although of course, we don’t want it to have to come at the expense of others having terrible hardship! Do you think the prices will drop everywhere? We live in the suburbs of a major metro city on the east coast (not NYC). Just looking for some hope that someday we can get a nice home within our means!
You’re full of poopoo, Amy. It’s not POTUS’s fault that a 3bedroom 2 bath on 3,500 square feet plot of land in Long Island sells for 700k. The markets are infalted because all the high paying jobs are in big cities and millennials are flocking there to be the next big tech firm.
The housing market will crash for sure, but it wont have anything to do with POTUS.
You have a point to wait for 1-2 years. All the news about the real estate market specially the Bay Area did not factor in the massive layoff in the tech companies and their employees that owned homes. We all know very well that the trade war between US and China precepitated uncertainties both in the US economy and in the global market and it spells R-E-C-E-S-S-I-O-N. It all boils down to this: if there are no demands on the companies product and their stock tanks then the layoffs begin. I sense that before the end of this year there will be a lot of tech people with a very sad Christmas.
Why does your data seem so different than what’s out there on the web? For example for Chico, Zillow says:
“Chico home values have gone up 13.6% over the past year and Zillow predicts they will rise 8.4% within the next year”
I understand the prediction could just be a formula they have and you’re doing a much deeper analysis, but shouldn’t the home appreciation be aligned? Your table shows that home appreciation is down 26% in Chico which is the opposite of what Zillow and some of the other mainstream real estate sites show.
Not sure if you are familiar with the Boston real estate market more specifically South Boston, but it is the place to be for the younger people in the city. Prices for rentals and condos/houses for sale have increased dramatically over the years. There has also been a ton of apartment buildings going up all over the city that are 2k+ per bedroom. I am curious to hear your opinion about the Boston market and whether it is a bad time to buy there? At some point I feel like there will be more supply than demand.
Boston will be ground zero for the next downturn.
what about milpitas ca?
What do you think of the housing market in las vegas,should I buy now or keep renting.?Iam currently renting a 3bed/2ba $1400/mo.If I buy
House in this area mortgage goes around $1800/1900,but my rent will go up for sure this year at the end of my lease.When do you think prices will go down in vegas?
Inventory is going up in Vegas and Vegas has been one of the fastest appreciating markets over the past several years. I would bide mine time. Hunt for deals in the winter!
Hunt for deals in the winter??? Yeah that will be what, a 2 percent savings MAYBE??
Seasonal hunting is delusional, the prices of housing right now is crazy.
How do you think the upcoming IPO boom could affect the housing prices in Bay Area? Mainstream media says they’ll send the prices through the roof, but some folks disagree. What do you think?
I think it’s going to have a small impact. I think for San Francisco, you want to be buying single-family homes on the west side under $2 million. That is the sweet spot that is going to see huge demand.
https://www.financialsamurai.com/how-new-tech-ipos-could-actually-accelerate-the-decline-in-sf-bay-area-real-estate-prices/
Hi Financial Samurai: I wanted to get your thoughts on how the housing marked is shaping up for this Spring season. Are you expecting home prices to increase, stay the same or drop? My location is Boston, MA. Thank you for your valuable feedback!
do you know if the Los Angeles/Southern California housing market is following in the footsteps of San Fran’s weakness yet?
Always hard to time the market, but I was considering selling my condo, perhaps renting for a couple of years and then buying back in.
It is the subprime mortgage business, which was a creation of Democrats and leftists. It was based entirely on leftist ideology, and that is that life is unfair. ‘If somebody can afford a house, everybody should be able to be in a house. It’s not fair that some can’t own a home. Not in an America that’s just and moral.’ So we had to come up with a way because market economics doesn’t work that way, because not everybody is equal. No two people can ever be equal if there is indeed genuine free will and freedom. It’s not possible. But that doesn’t stop the left. So it was created with, whatever, the Investment Redevelopment Act or whatever the name of the laws were. The banks were forced to make loans to people who could never pay ’em back.
In fact, loans were structured with no down payment. It was only principal that was being retired, and these loans were then sold. These worthless loans, these worthless mortgages were then sold to whom? Fannie Mae and Freddie Mac, who insured them — and guess who it is that’s not being reformed in any of this so-called financial regulatory business? Fannie Mae and Freddie Mac. Guess whose executives — and not just executives. A lot of people at Fannie Mae and Freddie Mac were also ‘Friends of Angelo’ who got sweet deals on their mortgages from Countrywide, along with Chris Dodd and Barney Frank and all the rest. So these greedy banks who were forced to make these loans to people that they knew were never gonna pay ’em back, had to come up with ways to turn something worthless into value.
So they came up with ‘Mortgage-Backed Securities,’ and they came up with ‘Collateralized Debt Obligations,’ and who the hell knows what else, and they started selling them to each other as insurance policies. Then Fannie Mae and Freddie Mac come along and buy up all these worthless mortgages and thus guarantee them, all because a bunch of liberal Democrats were buying votes and making sure that people who had no business owning a home owned them. Of course they couldn’t pay the utilities. They couldn’t pay to furnish them. They couldn’t do anything. So that was handled too with other loans that didn’t cost them any money for other things. That’s the foundation of this so-called meltdown. So we had a bunch of ‘toxic assets.’
We had a bunch of worthless mortgage loans, a bunch of worthless paper. Well, these people circle the wagons for each other, and the people in government (Hank Paulson and the rest) circled the wagons for them, and created this notion that we were going to have a worldwide financial economic collapse in 24 hours if we didn’t bail these people out and come up with ways to pay these toxic assets, or make them worth something. Hence TARP was born. But the first vote on TARP failed. It was two weeks before TARP was actually voted on, and in the two weeks we didn’t have anything near a financial meltdown. We were had. It was a giant, 100% scam.
And it was all based on the fact that the powers that be who created the problem had to then make their buddies whole so that they didn’t lose their homes in the Hamptons or in Aspen or wherever the hell else they have their second or third homes. So they had to bail out these people. These people who are creative on Wall Street had to come up with ways to make these worthless mortgages worth something, so they created all this stuff. You can talk to some of the people that were involved in this stuff at the time and they knew that what they were doing was ridiculous. They knew that most of it could not even be explained, much less understood.
They knew at some point the bubble was gonna burst on all of this because the only thing that kept this fraud alive was the continuing escalation of housing prices, real estate values. Once that bubble burst, the dam broke, and everything fell to the wayside — and that’s when the ruling class got into business and said, ‘We need these bailouts here. We need these bailouts there, because we need to make these people whole.’ The financial crisis was going to destroy the people who engineered the scam, and they had to be bailed out. ‘Financial meltdown’ implies that every aspect of our capitalist system fell apart, and it didn’t. That’s why we’re in the mess that we’re in now, because enough people were convinced that capitalism was corrupt and capitalism by design failed.
So all of a sudden now a whole system on which the greatest nation on earth was founded and operated is under assault, when in fact capitalism didn’t fail. Central Planning and command-control economies with subprime mortgages (and their creation and their demand to be implemented under fear of federal investigation) is what led to the meltdown. Liberalism! Socialism, Marxism, whatever you want to call it, that’s what led to the economic crisis that we’re in, not capitalism. You can say that these greedy bankers creating all these phony things (like CDOs, the Collateralized Debt Obligations or whatever) insurance policies, quasi that they came up with to try to give their worthless paper some value. They wouldn’t a-done it in the first place if they weren’t forced to make these stupid, worthless loans. No responsible person in the banking industry is gonna loan money to somebody that cannot pay it back and do it as a matter of policy.
They may have friends that’ll scratch their back like Angelo Mozilo. He’d give Chris Dodd a favorable deal on a couple mortgages or Barney Frank and the guys at Fannie Mae and Freddie Mac, but institutionally nobody’s going to give away money. It doesn’t happen! Yet it was happening. Banks and whoever else were giving away money, in effect giving away houses. So homes were being built that had no business being built because the people buying them really couldn’t. The whole thing was artificial, the whole thing was a fraud, and it wasn’t capitalism that did it. It was activist social engineering brought us started by Jimmy Carter, acted upon and enlarged by Bill Clinton, and then really amplified by Barney Frank and Chris Dodd. There were regulators who knew this, and there was the Bush administration who knew this and they tried to shut it down, and the regulators were impugned out of town. The regulators were harassed and threatened by members of Congress when they dared speak the truth about all this.
Deomcrats did not “create” sub prime mtgs. This was a Bush/Clinton initiative. I worked for the largest sub prime lender. Wall Street, comprised of both Reps and Dems wanted this paper as they were making billions. Don’t put this on the Dems. It was everyone’s fault. The gov’t, Wall Street, investors, home buyers, appraisers, etc.
What a load of BS! Before you post some other crap, read some history. Subprime was created by wall street, its as conservative baby as it gets, the greed that rules the world. If you cannot read, maybe you can watch a movie – big short – it clearly describes the idea of capitalistic greed behind the whole melt down. I did not think that there was someone so stupid left after 10 years of everyone explaining what happened and why.
Angela, Well said. Goldman fellows convinced Moodys to rate all crappy loans into one tranches from Triple B to Triple A which may appear as okay but all were subprime loans to go bust. If you read the US history, then its clear how the Fed Reserve act was created with the sole purpose of self regulating themselves without any oversight in the congress. JP Morgan is at the center of this crap. No matter who the President is(Dem or Repub), Goldman is at the top. These idiots don’t know much about the markets. All they worry about is giving bonuses in millions to themselves. As long as people like Ray(who blamed Dems for subprime mortgage) remain ignorant and uninformed, these big investment banks and firms will keep profiting and pass the losses to the ordinary folks. I wish everybody reads Michael Lewis’s The Big Short and Flash boys. People need to be outraged and those banks shouldn’t have been bailed out and instead broken down. Not to forget, Buffet owns(around in 2006) 20% in Moody’s whose analysts went by these firms when rating the crappy loans. Central Bank fellows(from UK) who were influential in drafting the Federal Reserve Act. Whereever central bank went, it only created income inequality. Here people knew that and that’s why there were no central banks until 1910 even though the top rich people tried to bring it to US. Since then, its always been the billionaires(not the politicians) who has been ruling the nation.
You’re a complete fool! You are trying to blame the massive fraud and resulting fallout of the Secondary Mortgage and Subprime mortgage market on Mexicans and Democrats, when it was Wall Street greed unchecked! Banks did bet against themselves! Just like terrorists actually flew the planes into the Twin Towers, in unprecedented actions against their own presumed self- interest. Inconceivable, but it happened. The banks also invented an insurance product to cover their downside, which they also traded as a stock. Banks bet against themselves somewhat unwittingly perhaps, given the relatively few people who actually understood what was happening in real time. Seriously, it’s so ignorant to try to inject right wing, fascist views into every subject.
People like you are why this nation is stuck in reverse, but the gears will be torn out and the transmission repaired. Keep delusion alive.
CNN just posted, PMI (Mortgage Insurance) is driving up cost of housing. lenders are now assuming no one has the 20% down are are blending it into the loan. A higher rate and a low PMI indicates that people “can achieve the dream” and buy the most expensive home they are approved for.
Bank of America will underwrite $10 billion in non-prime mortgages to non-traditional borrowers at a series of events across the country, according to a CNBC report. The company, Neighborhood Assistance Corporation of America (NACA) feels that “everyone should own a home by 2020”.
In 2008, Bank of America purchased failing Countrywide Financial for $4.1 billion which financed 20% of all mortgages in the United States, and all sub-prime at a value of about 3.5% of United States GDP, a proportion greater than any other single mortgage lender.
Trump has eliminated the Dodd-Frank Act for the’ “Choice Act”. University of Michigan Law School professor and a key architect of the Dodd-Frank Act, “It just seems like a recipe for a huge disaster,” he said. “Dodd-Frank put in place real guardrails against re-creating the kind of financial crisis we saw in 2008.”
We are now in the bubble expansion phase. Prices will increase, builders will build, but by 2020, the US Economy will enter a recession and by 2024 the RE market will break down. Unless those who are studying this at Harvard are wrong.
Citations:
https://www.mpamag.com/news/non-prime/bank-of-america-to-underwrite-10bn-in-nonprime-loans-113820.aspx
http://knowledge.wharton.upenn.edu/article/repealing-dodd-frank-whats-the-likely-fallout/
https://www.extension.harvard.edu/inside-extension/how-use-real-estate-trends-predict-next-housing-bubble
Thank you for this valuable information, and I hope you are right about the recession. I live in Miami, FL and it is impossible to buy a house at an affordable price.
Hi Sam, I live in Western Boynton Beach, Florida and am in my mid-thirties. I’m renting now but looking to buy a primary residence but all signs are showing this market is ridiculously high. Plus they’re all PUD developments so everyone basically has the same home. Most houses are $450-500k. I’m afraid, I’ll make the wrong move and buy in at the peak. Like everyone else I would the market to fall and THEN buy in. Do you or have any insight into this market and what’s happening down here?
I am in the same boat and have the same question as you….. did he reply privately to you?
I live and work in South Florida, and market is very soft now. I would not wait for lower prices, buyer market is booming.
What is your opinion/do you have any insight on the Austin, TX market? My parents almost bought when I was in school here in ’07, and prices have sky rocketed. I have put off buying for two years and have been pre-approved, but see mixed reviews on whether it’s a good time to buy or not.
WHO READING THIS HAS A MILLION DOLLAR MORTGAGE?! WTF?! Seriously. If you have a million dollar mortgage, I doubt you’re concerned if the price of your house goes up a grand a month….and if it does, you probably shouldn’t HAVE a million dollar mortgage. What a moron.
I honestly believe A LOT of people who shouldn’t have very high mortgages do…how else can people afford to buy in the most expensive regions? There are way too many people who just ignore it all and live with their million-dollar or half-million-dollar mortgages and hope all goes well and are concerned indeed to imagine their monthly payment going up much at all because they are stretched to the max, hoping that house prices keep going up so that someday they can cash out and make up for all the years of living hand-to-mouth despite high salaries–i.e., being “house-poor”.
Just the alarmed and amazed comment from Hancho should be a wake up call to all us bay area residents as to really how crazy it has gotten. Step outside the box for a minute and look in from the outside wow.
Lots of people in the Bay Area have $1M+ mortgages. They are probably dual-income tech families making a combined income of at least $500k/year.
I don’t think people realize the bay is another beast.
My wife and I made 105k betwene the two of us 5 years ago. Now we make 250k. There’s lots of growth here.
And no, not uber, lyft, etc. Just small tech companies. Tons of oppurtunities here.
Who knows, maybe it’ll crash. But if we keep our jobs and can afford the mortgage, what’s it matter? We’d just hold out. Sure we could’ve “timed” better in retrospect, but that’s always a fools errand. Were we supposed to pay 3.5k/month in rent for X years until we got a good timing in the market?
I do.
Wife and I make 250k a year between us before bonus, usually 270kish annual.
270 * 30 % = 81k/12 = 6.75k/month, which is $700 more than my mortgage+insurance+taxes.
After 401ks, expenses, and whatnot, we put about 4-4.5k in the bank a month.
I’m an accountant and she works in tech. 6 figures in the bay is pretty common.
The government will have to raise the rates back up if they ever want out of the mortgage business. There were 30 percent defaults in some markets during the last recession, and now we are to believe that 3 percent is a reasonable rate? HA!
Most real lenders today would not finance in places like SF and SV, Denver, Seattle, NYC, etc for less than 15% interest. And even that would be risky. One economic downturn and those million dollar studio apartment sized three bedrooms in Silicon Valley are going to lose half their value.
So, we get tax payer subsided interest rates though quasi government lenders.
It is similar to how they were in the bond market, and the FED will likely try to unwind their positions there as well. Expect seven percent interest and higher.
First, thanks for the great article! Just what I was looking for.
My situation: Renting a townhouse in Emeryville, CA for $2900/mo. I own two single family homes in Memphis, TN that I own free and clear, bought both for $50k, in 2010-2012, valued at $100k, net rent after expenses is $1k/mo. Also own a single family house in an Austin, TX suburb, purchased in 2016 for $120k, currently valued at $200k, and rents for $1400/mo; after mortgage and expenses +$400/mo.
I started purchasing single family homes in other states as investments because I couldn’t afford to buy in the Bay Area in neighborhoods where I wanted to live, my rental is affordable, in a great neighborhood and 5 minutes from my work. I’m 52 and planning to retire at 70.
My question: Do you think I should purchase a townhouse in West Oakland for $625k. Same exact floorplan and builder as the townhouse where I currently live and rent, just in the next town over. My living costs (mortgage, taxes, ins, hoa) would be about $1200 more -OR- should I continue renting and buy another investment home? I’m thinking of buying where I want to retire for $300k (thinking of FL), rent that out, pay the mortgage off in 15 years and then have a free and clear house to retire to, plus save an extra $1200/mo. I’m tempted to buy now, as I’ve already seen listing prices in the Bay Area drop, but it still seems that Bay Area real estate is overvalued and better values are found out of state.
I would love your opinion on this. Your logic about real estate in general and your knowledge of the market in the Bay Area seems spot on! Big thanks!!!
What are your thoughts on buying in Austin in 2019?
With the tech industry investing in Austin, I think Austin real estate will always be a good buy when ever you decide to do it.
Please everyone take your time study the etf symbol ITB .Look at 2007 and now look at 2018.If this follows the 2007 script then 2019-2022 will have a motor housing downturn.Also because of pensions the real cost of housing will get much worse because property taxes will sky rocket.Along with the new tax law .I think a complete collapse is coming because of DEBT!The stock market is a joke completely elevated by debt.Also in 1980 the Dow was 850 by 2000 it was 12000 and the national debt was 5 t.Today almost 20 years later the Dow has doubled because the national debt has more than quadrupled!This is insanity that people think everything is ok just unbelievable!
Joe, You are a genius. There are so many zombies on wall street. The high price of greed and stupidity is coming soon.
We are in contract for a property in San Jose for 760k, 3 bed 2 bath, 1,100sf. Mortgage 510k, rate 5.125. Should we back out, loose 23k deposit and keep our cash waiting for downturn or continue buying? It is going to be our primary home as we are current on a one bed room rent at 1,1k. Thoughts and advices are much appreciated
I’m interested in how the “Airbnb effect” is affecting certain markets. We own a single family home in Rockridge, north Oakland that used to be our primary residence and that we now manage as an Airbnb. Thanks to its location it’s pretty much booked solid at a rate that comes to around a 50% premium over what a conventional tenant would pay. We bought in 2005 and it’s now worth about 2x what we paid, so it’s very tempting to cash out – especially after reading posts like this one. But for the time being the nice income stream is convincing us to hold on a bit longer. I wonder if this third-way alternative is becoming a significant factor in deciding whether to sell or hold…at least in some areas.
Hopefully at the time of you asking this you had at least spoken to a realtor in regards to selling. According to the article and others businesses are expected to scale back on spending which has the potential of not only affecting expansion but also slashing the current workforce as well. This would greatly reduce the amount of people moving around for work or having extra money for vacations thus affecting profits of Airbnb properties. You may want to take the money and run.
Looks like my previous post did not come though:
Actual price we paid was 500k. Based on recent sales in complex, now value is about 460-470k. mortgage 350k. renting for 2200/mo. we bought it for long term investment, thinking the value will continue to go up. shall we cut our losses short or hold on to it? Thank you!
also interest rate 4.75
We bought an investment property in boston this summer and just realizing that we paid too much for it. Prices are beginning to fall. It is currently renting. Should we hold on to it or sell it before the value drops even more? Your advice is appreciated. Rita
I would need to know some more details, like the actual price of the property, the rent, the mortgage, the interest-rate, etc. Also, what was your reason for buying the rental property? Usually people buy property and then hold onto it for at least 5 to 10 years. Did something change recently?
How do you know prices are we getting where you are? Get back to me with these answers I can better provide some guidance. Or, you can check out the FS forums for Community advice.
Thank you for your response. Price we paid was 500k. It will probably sell now for 465-470 based on recent sales in complex. Rent is 2200/mo. mortgage 350k. we purchase it for long term investment, thinking that prices will continue to rise..
Property prices generally for anywhere from 15% to 25% in major cities From peak the trough. If you are OK with that type of the decline, then I would hold on. Selling cost is about 5%.
Over a 10 to 20 year period, things don’t turn out OK. So depends on how great your liquidity need is during this time.
Did you find this article after you bought?
I don’t need to liquidate now. So are you advising to hold on to it? I’m worried that the value will go down to 400k or less in the next couple of years. 30k loss is better than a 100k loss. Do you think this is likely to happen? Unfortunately I came across this article after the purchase..
It depends on your financials really.
Losing $100K on paper sucks, but if you are worth $3M+, and make $500K, it’s not that bad.
The Forums will have more feedback IMO.
Looking at the real estate market in the twin cities
Builders are getting greedy again. Low quality and high prices
Despite an average increase of 4-5000$ in material costs and the same amount in labor
Builders have raised prices to exorbitant levels. Where is the great tax cut they received from trump. They have not passed this on
I own several rental properties and they are doing fine however much higher property taxes are cutting into my profit
Buying a new rental is too costly as you won t have a roí even if you pay 80% cash and one can not raise the rental prices permanently
This will lead to high turnaround and delinquent renters
Though no one can predict a time when the correction will come but the traffic lights are set to orange
Sellers and builders will get a reality check and make there way back to planet earth
Didn’t see this in time. We just made a mistake in buying a house in bay area by overbidding. Frankly we went way over our budget and simply lost to our emotions :(. We don’t have 10% reserve, and the downturn is already confirmed. If we sell now, we probably lose all our 20% down payment and have to cough up cash to cover the agent fee. If we hold, we can probably just cover it if nothing happens to the jobs. Not sure what to do.
Not sure if you are serious or joking, but I doubt your house it’s over 20% less so soon. It takes a couple years for the realization that prices are on the decline and bidders go away. Although transaction fees are a killer common and off an amount to 5% to 6%. How did you find this article? And why do you think the downturn is confirmed? Maybe we pick up a little bit towards winter or the spring of 2019. Nobody knows for sure.
I found this article by googling ‘real estate prices are ridiculous’. I live in Albuquerque.
NO NO NO….you didn’t loose out. No on can predict a downturn. Those who own a home can see the appreciation, those who rent are hoping for depreciation. Both are right.
Of course someone can predict a downturn. In 2005 everyone that I worked with, which was a group of more than 20 maintenance technicians in a factory saw the housing bubble, knew about the trillions in ARMS coming due, and correctly predicted the downturn.
I agree My lawyer was petrified in 2005 that our real estate investment would get clobbered and he was right
If you think you’re in trouble now, it’s likely only to get much worse, because the US debt is through the roof overall, and a massive credit crunch is coming that will stop the housing market in its tracks. I’d get out and take a loss instead of losing it all. When this market seizes up, NOTHING will sell. NOTHING until prices crater 50% back to where they were before this latest nonsensical run started. I’m talking west coast big cities now. BTW, Portland is already softening mightily in fall 19, and Seattle has peaked. That said, lots of jobs in Seattle for the moment.
I too think housing price is peaky. Especially here in New York. What is your view on rising minimum wage and generally low unemployment rate? Should we expect wage to pick up in the near future along with lower tax to drive up consumer buying power? And therefore more higher housing price? I am at point where I need to consider buying a house. But I am so skeptical of the health of the housing market.
Situation:
Most of my net worth is tied up in a primary residence, West Oakland 2000sqft condo purchased in 2012 that represents a likely +100% upside upon sale over purchase.
Cant stay because of schools. I don’t like the idea of selling and relocating to another bay area residence due to closing costs and taxes on a new purchase, increased financial exposure. Unsure if bay area is the right long term location. My gut says pack my bags and leave but that may be pulling the rip cord too soon on bay area income. If I planned to be in the bay area for 1- 5 years… Would you recommend selling this year then renting, selling at the time of move, or hold as a long term rental even if I am out of state?
If your primary residence is it, I would spend the next several years trying to boost your savings and investments to lower the percentage from 100%.
I think at most the property market will correct by 10% to 15% here. Given your up 100% as you think, it’s not that big of a deal.
If you want, you can do what I did and do a private listing. If you get your sky high number, then sell. If you don’t, then just enjoy your house and sell when you want to move.
Yup. Primary residence is my one and only; I should have made that clear. Given your thoughts on crx being 10-15% would you rent or sell in order to relocate to a better school system? (remaining somewhere in Bay Area) I’ll need to make that decision by next summer as my oldest will be ready for 1st grade and private school doesn’t seem like the best thinking.
Thank you for sharing your thoughts. Private listing is a great idea.
I’m looking at a restored Victorian in Vallejo for $395 in Vallejo since it’s the only place outside of Antioch that you can go single family under $400k. It’s a 2/2 at 919 Napa. I have a feeling it’s the next hot market, but it would hurt my feelings if it tanked $200k after I bought it. Any crystal ball advice? I’d much rather live on this side of the bridge but the Victorian heritage district in Vallejo is pretty cool.
I am in LA and the housing market is downright depressing and anxiety provoking. My husband and I were bicoastal and renting. Fast forward 5 years and we now have 2 kids, are miserable in our 600sqft apartment, and completely priced out of every good school district. We put an offer on a tiny house and it sold 400k over the Redfin valuation. At this point, it’s not clear if we should keep looking or find a better rental until a recession comes along (and how long would that even take?). If I was single, the answer would be clear. I lived in a studio for a decade. There is so much freedom in renting. It’s harder with a family because kids need a stable living situation and good school. I don’t understand how this housing market is sustainable. I know loans are more secure these days but with these outrageous prices, more families must be tapped out.
I understand that it’s hard. So many people I know are anti-housing when they are kid list, and then they have a huge urge to buy house once they have kids.
I would just try to sign a long-term rental lease in a neighborhood that you like that has a good school district. A lot of landlords love families because families tend to be stable and be there for a long time. I wish I found a family of four to run to in 2017. If I did, I wouldn’t sell because I know that they will stay for at least three or four years. But I couldn’t find a family, so I sold.
I have always been anti-house ownership because jobs lack the stability they used to. I find home ownership constraining. Also, my husband was out of work for a year and we were mostly fine because we have always tried to live within one paycheck. I can’t do that with a mortgage in LA.
I couldn’t afford your $8000 price tag! I think we need to bite the bullet and just spend more in rent but our priority has been shoveling money into our 401k and their 529 plans, neither contribution I want to sacrifice.
Hmm, yeah, being out of work for 1 year will definitely make you anti-housing. It’s great you guys are contributing to a 401k and 529 plan at least.
But instead of buy a $8,000 price tag, why not just buy a $4,000 price tag? Focus on your budget, not mine.
Related: How Much Should You Have In Your 401(k) By Age
If we want a good school district from K – 12, those areas almost exclusively have single-family homes with a buy in of 1.5 million. I don’t think it makes a lot of sense to buy a condo in an area that only has a good elementary school since we will have to revisit everything in six years. There are less than a handful of communities in LA with good middle and high schools.
What part of LA are you looking? I was born and raised there. 1.5mm for a good school district certainly sounds like an exaggeration.
The high rents didn’t just happen. During the last recession a person I knew was told by his bank that if he could not make his full payments, that was okay, as long as he didn’t lower the rental price. But if he lowered the prices, they would foreclose. (When the recession hit, a lot of people moved in together, and there was a glut of houses on the rental market for a while.)
Sam – Interest Rates – I am in the same situation as you…I bought my primary residence back in May of 2016. I did a 5/1 ARM at 2.7% with 2% cap change increase per year and a 6% cap total. So at worst I am at 8.7% in year 7, obviously not ideal and I was on your train regarding interest rates….my thoughts were (and I think still are) that come reset time in 2021, 2022, etc..rates will not be significantly higher. In fact, I think we are in store for a pretty large economic correct within the next 5-6 years. I was thinking this would mean rates would be stagnant if not lower than they are today.
I am a little bit of an outlier in that I have been paying my mortgage down aggressively – original balance of $536k (after 20% down) and now my balance is $483k. I did the ARM to beat the banks on interest…but this house is for now..my forever home. I have run worst case models and the worst case mortgage payment would not scare me…
However, am I still in a position to beat the banks you think?? Or is the best play right now to refinance? I would think no way – I just don’t see a normalized market with 6 month libor (my index) at 6.2% (resulting in my max 8.7% after the added 2.5% margin).
Did you refinance your ARM? Curious your thoughts here.
I wouldn’t refinance right now. I would beat the banks by simply earning more money, investing more money, and paying down debt as interest rates rise. Great job on paying down 20% so quickly.
I guess I’m kind of living in my forever house, well at least for the next five years before my son goes to kindergarten. If we are blessed with another child, then we might get a larger house.
Sam,
My husband and I are turning 65 this year and he is retiring this year. We own a decent house in a good neighborhood with value of 560k in Surburb of Detroit and will be profit for 350k if sold. Both of our two kids are married and lived in NYC. We own 2 one-bed condos in Queens, NY. one for rent and one for second home. Right now we have a dilemma:
1. Should we take lump sum pension of 900k to purchase a 650k condo of 3-bed in Bayside, Queens and rent out both one-bed units for net profit of 3500?
2. or take traditional pension of 4500 monthly and stay at our second home?
Any advise is highly appreciated. We do have 1.4M in IRA. Our combined SSA is around 3600. Second home is paid off and rental has a mortgage of 330k with the rate of 3.875 for 15 year fixed and 13 years remaining.
Thanks.
Troymama
Let your husband make the decision. He earned all the money. At 65 you should spend more time doing things. You’ll be dead soon. Don’t answer any phone calls, asking the internet for advice puts you at the level you’ll lose all your husbands hard earned money by scammers.
WOW! Her husband made all the money and she should stay off the internet? Dam, I had a flash back to 1920 over that.
Someone doesn’t understand money here, and its not her. If combined SS is over 3000/month. BOTH spouses worked. No way was it HIS money.
Shame on you. Your attitude reflects that you’ve been on this planet longer than she has, so your time is even shorter.
Wow you both sound like very hateful and jealous people. I’m also guessing you are both men. Looks like she has done just fine by guiding the family, as most women do. You should both learn to respect people and take your own advice and stay off the internet. Worry about yourself more.
Hi Guys -what are your thoughts on Connecticut housing. My area Fairfield county seems to be quite competitive, read reports CT as a whole is still 16% below peak median sales in 2007 of $295,000.
With our population shrinking and high paying jobs leaving the Fairfield county area, why does it seem most inventory does not sit long?
Everything I’ve been watching has been sitting forever. I’m in the 600k price range though.
Following! My husband is getting transferred to Connecticut- wondering if we should rent and wait or buy in october – predicting the future is stressful!
I’d never heard of the 10% buffer rule and I like it. I’ve been reading you for a couple years now with the knowledge that I want to buy a non-investment condo sometime in 2018-2019. You’ve been consistent in your predictions and your exhortation to prepare.
Do you count the 10% buffer as an EF or is this on top of it? If I found a $150K condo and put 30K down, I would need to mortgage the $120K. To be prepared for eventualities, I should have an additional $15K available in liquid assets just in case? I was planning on having a $10K EF at that point. I have no dependents.
I live in one of those expensive coastal towns, but have below market rent. I’m keeping that as long as I can stand, and will shortly begin aggressively paying down some of my school debt to get my DTI within a range that makes me feel more comfortable. Especially as the federal government is talking about changing up how some of us pay our loans. Don’t want to acquire a mortgage and then get surprised that my SL payment shot up.
I think you can consider the 10% buffet as part of your emergency fund for sure.
There really is no need to rush to buy a place in the coastal city market is right now. I would be very, very picky. And bargain hard.
Thanks for the feedback. The only rush would be getting away from terrible roommates, but, thankfully (?), I don’t think I’ll be able to position myself until 2019 to really make the jump. Hopefully things will be clearer then.
This post is spot on. So many of my millennial friends buy houses for the sake of doing what others are doing. They put in less than 5% down payment and end up paying mortgages/PMI that is more than half their monthly income. Ridiculous.
Can prices really drop if inventory is so low? Where I am there’s a lot of overpriced junk, but with more buyers than sellers for the next conceivable 5-10 years is this time different?
That’s where I think we will see a melt up before housing GDP attrition of inventory starts to liquefy other asset solvency. It is already making renters insolvent in some markets because investors are suing solvent tenants who pay already high rent on time to make turnover higher and force higher rents up. That’s really what we call real estate market extortion. They’re panicking, having overbought with their prior equity and multi family housing being dumped, where people’s elder folks are dying, leaving them unable to pay, forcing a sale and often, renovations to let out units that have only pushed more insolvency.
At some point, banks will reposes these multi gen SFH starts and convert them into 1/2 address or duplex and four plex multi family address parcels because of the need for it vanishing as baby boomers die off. Investors in the multi generation casita or mother in law suite sector are going belly up, with 3-4 sale signs per block and we’re seeing the same thing in trailer and 55+ communities where owners are passing away and medical debts repossessions through forfeiture are dumping homes onto the markets.
Now, who wants to live forever?
What’s the best way to cash in the gains from the real estate investment, but defer tax other than 1031 exchange? Since 1031 exchange would be forcing the exposure to the market again.
If the market is dry, no good deals, and you are worried about a bubble, I would hold a strong rental property or go for a low cap commercial investment.
Hi, we live in Northern Virginia area, and house prices are so high. What do you recommend, waiting after 2020 to purchase a house?
Thanks for your feedback.
I stopped buying rentals in early 2012. Prices were moving up quickly, the numbers did not make as much sense, plus I was running out of cash to deploy. I’m busy paying off debt on the older rentals and piling up cash to buy the next asset class on sale.
Perfect. Couldn’t have said it better myself. Build cash and wait for future discounts somewhere. It’ll happen. No one knows where or when, but it’ll happen. You made my day with your post!
Hi FS,
I would be curious to hear your take/analysis on the Canadian housing market, more specifically, the Toronto Housing market. Our debt is out of control!
1) Multi-family =/= single-family. Rents are coming down because there is way too much new multi-family supply coming on to the market in nearly all major markets. This was the case in 2017 and should continue through 2019. Multi-family starts are down but take 18-24 months to be completed. Urban multi-family pressures will continue (look at EQR/ESS/CPT’s recent releases). Suburban multi-family should outperform.
2) It would take the 30-year mortgage rate to climb to 5.25% for affordability to return to long-term average – not even become unaffordable, but just to hit the long-term average. Affordability defined as monthly payment + PMI, etc as a % of after-tax income. Using non-supervisory production wages as a proxy for typical income.
3) Denver is certainly a hot market and I am cautious on it. That being said, nationwide, the reason prices are ripping so much is not because of 2004-2006 type situations. Its because there is no demand. Look at single-family inventory as a % of households in the US – it is at ALL TIME lows. Look at days on market for entry-level and 1st time move up – all time lows (luxury is certainly sluggish and has been for a while, but constitutes less than 10% of national existing home closings and even less of new home closings). There is so much demand right now for the entry-level and first time move up product, and that product was not being produced by national builders until 2015 because of a lack of confidence in the cycle. Now, they can’t build enough. Family formations are blowing through the roof, homeownership is starting to pick up – this is because homeownership and having children was delayed because of the financial crisis and changing lifestyles.
4) Tax reform is a positive for housing. There’s two ways to look at it – the demand side, and the supply side. Let’s look at the demand side first. It is projected that 84% of all households in the US’s after-tax income is going up because of tax reform. The 16% going down? On the coast like you and me my friend. That is unquestionably a positive for national housing (Definitely a headwind for coastal markets though, no doubt!). Second, mortgage interest deduction piece being capped at $750k? Again, let’s look at that on a national basis not a coastal one. Over the last 13 years, that would only trip 1-2% of all mortgage originations! Like I said, nationally tax reform is a positive for homeownership.
5) People have been bearish on housing since 2008 my friend. Sam Zell went on tv two years ago and said homeownership would never recover and would go down to 50% – its accelerated each of the last four quarters it has been reported! Look at all the points you made – these are echoed a lot in the financial press. Coastal markets are certainly mature, but nationally – we are still mid innings.
Your thoughts mirror mine
i know you’re using aggregated data to compile the city appreciation statistics, but i can confidently say that seattle is up more than 20% post peak.
we bought in nov 2006 for $373k. we will be listing in april for $650k (min, maybe higher) and fully expect a bidding war up to $700k.
What did you sell it for? Can you share prop location? I’m planning to bring my brand new condo into market soon. so trying to gauge the market. Thanks
Is it time to start worrying about the stock market again? ;-)
Sam, I live in the heatland(Go Thunder!) and have 10 rental homes. I started building my portfolio here about 4 years ago. CAP rates were in the 12% range. In the last 6 months I’ve been collecting cash because the returns are shrinking as prices, taxes, and insurance have increased but due to supply rental prices have stalled if not slightly decreased. Even though our local economy is not as robust as the nation I believe that outside money (Cali and beyond) is influencing housing prices. While I don’t think a major correction is in front of us there is no doubt as liquidity begins to dry up a correction will ensue in all markets including housing. I plan to be ready and pick up opportunities as they present themself. I’m also really interested as I discussed with you previously the fall out of the crowd funding sites. I’ve dabbled into this space but will not place more than a few percent of my net worth there until crowdfunding goes through a stress test.
Thanks again for your work on FS!
Sam, a couple of years ago I was actively participating in the RealtyShares fix-flips – specifically older homes that were torn down in expensive areas (Beverly Hills, Newport Beach, Brentwood, etc.). I was getting a nice 16-18% IRR on these for awhile, but I did notice my last few took much longer to market and price reductions were becoming the norm instead of the exception. Thus, I’ve stayed out of this fix-flip space for a year now and invested into an apartment syndication in TX for cash flow. It’ll be interesting to see how things fluctuate this year. I definitely wouldn’t want to be in the market for a primary residence currently.
My wife and I closed on our co-op in Manhattan this past summer. The price was well within our budget, essentially the same monthly we were paying in rent. However, I’m worried that the new tax plan is going to result in a 10-20% downturn in the NYC housing market. If we have 2 kids wthin the next 5 years we will need to move out, in which case we may need to sell at a loss or rent out our place to cover our monthly cost and then buy a less expensive property in the southern US with far less money down. My hope is that foreign cash buyers (China, Russia, etc…) will keep the NY market stablized. If any other readers live in this market let me know your thoughts….
What price range are you in? It seems like most of the weakness is in the $2M+ price range in Manhattan these days. There isn’t enough supply in the $1M or less, 2 bedroom market and over building in the high end. I’m ditching Manhattan for Westchester right now. I’m more concerned about the impact of the tax reform on Manhattan and Brooklyn prices than I am in Westchester. You have lower property taxes but are still paying the city income tax. There will always be people trying to leave the city for the suburbs when they have kids which provides a fairly steady bid under prices despite the added costs from the tax reform. There isn’t much construction happening in areas with good school districts so it’s hard for me to see how 5 years from now prices will be down much when your alternative is $50k/year in private school tuition. Steady/rising demand + limited supply growth = fairly stable market (I hope!)
We bought for $550k, it’s an 800 square foot 2 story apartment (two studios combined). We are in an excellent location on the upper east side 1 block from the new Q train. My hope is that 2nd Avenue blows up. A two bed would hae pushed our purchase price to $1mil, and i”m glad we didn’t do that given th new tax law.
Are you sure your co-op allows you to sublet? I’ve heard the ones in Manhattan are especially strict. Even mine in Queens only allows us to rent out for 1 year…maybe 2 if board approved in special circumstances. How big is your co-op? Don’t assume you’d have to move just because of the kids. We rented a 600 square foot apartment when we had one baby…moved to a 800 sq foot co-op and have 2 kids now. Sure it gets tight but it’s fine when they’re little. We might get a bunk bed soon! As for price drops…it’s possible but I feel that long term, you’ll be okay owning in NYC, especially in Manhattan.
Fortunately our co-op has a liberal renting polcy…we are able to rent it out indefnitely after 3 years of occupancy, with board approval of course. OUr place is 800 square foot, 2 story 1 bedroom. So we will have a dining nook that will be come the child’s bedroom upstairs. When/if baby#2 comes however, things will get tight. But it’s nice to hear you’re in a similar situation.
Please check the rules of your co-op. My sister lives in NYC and decided to keep renting after she realized that all the co-ops she was looking at strictly prohibited renting the units out.
“Better yet, pay cash”.
This is timely, I am about to build a new house and have been grappling with paying cash, 50% or 20%. Outside investment liquidity needs play into the decision. Paying cash is tempting, but at what point does anticipated inflation not justify leverage? Perhaps the answer is: In a rising rate environment with arguable economic uncertainty from deleveraging historically overweight balance sheets.
Ah, the pitfalls of real estate. I’m wondering if rising interests will force more buyers off the fence and cause a temporary spike in housing. And I’m still flabbergasted by interest rates. Right now a 30-year mortgage is 4.18%. When I bought my first property in 1998, my interest rate was 7.75%. And that was considered a great rate.
Hey, FS.
I am in Reno, NV. The housing market here is flat out crazy. I was renting last year, and I got sick of the rent increases, so I bought instead. I am in Reno, NV. What is your opinion if I just paid off my primary residence? I owe 100k. Would it matter then if there is a 20% correction?
Pretty perfect timing.
My wife and I are already in the process of buying a new house.
Luckily, this will be something we plan on staying in for years and we’ll have 10% the value in savings.
Still, this write-up was all great stuff that we needed to hear.
Staying with one property to live in and focusing on paying it down. Big corrections in the market like today are a great reminder to have a balanced strategy no matter how you are investing. For me that includes paying off my loans instead of acquiring as much as possible.
The more I work/invest the more I realize the only piece I have control over is the costs I choose! That includes how expensive of a home you mortgage yourself into. Looking forward to the day of no debt including the mortgage. Life is already better then it was holding just a modest mortgage in a HCOL area.
I am confident if I choose to “move up” in home it will be much easier then those folks who are wanting to go backwards and “move down”.
Local Vancouver over leveraged folks which make up most of the owners are up for some rude awakenings with tighter regulations and mortgage requirements.
There’s very little inventory here but I agree wages where I’m at can’t support much more. I always buy for cash flow rather than appreciation which is getting tough as ever now.
Couldn’t agree more. In Palo Alto there are many investment homes now come on to the market, each selling for $3.5M & up. 2 homes we visited the agents told us they were previously renting for $7K (we checked zillow and apparently they’ve been trying to rent $10K, then $8K, then $7K, etc..). Assuming their mortgage was $1M, the property tax + mortgage payment would exceed the rental income and have negative carries.
Granted primary home rarely make sense in buy-to-rent ratio or have positive carry, but even with with $2M cash down payment, we’re talking about $1.5m+ mortgage , which will take a two income family 15+ years to pay off (when spouse work you need to hire nanny, which is another $3K/month). This put the borrowers significantly at risk of default in the event of job loss, divorce, or interest rate hikes, etc..
Overall It feels like 2004 all over again, the problem with property bubble is they’re like slow train wreck, you just watch their 5/1 or 7/1 ARM coming due in 2022-2024 then refinance at 2x the rate will pop the bubble, but it’s oh so slooooooooow to happen because borrowers are hoping rate will miraculously get lower again to bail them out, or their spouse will be content to work to bring in income while raising 2 kids and cooking your dinner and forgoing vacations, etc… So who knows? If Fed stop raising rate in March, there may be another asset/monetary inflation around the corner to bail out these borrowers again.
Nobody buys homes in PA for investment. The people selling their homes would be making a killing! Also, if you can afford to put 2M in DP, you are talking about a totally different type of buyers. Not sure if you were around in 2009, but at the bottom of the housing market, dilapidated homes were selling for million plus. Cities like PA are independent of rates…. Now if you are talking about Fremont, that is a different story. But I do think we are close to the peak of this housing cycle, but there is not going to be a repeat of 2009. That was an opportunity of life time. There are very few buyers putting less than 20% DP in bay area. There are no NINJA loans, negative amortzation loans etc. At best we will see slow growth or a sideways market!
That’s not true. Talk to those agents listing homes for sale or go look at their listings on zillow and see if they are previously renting, you’d be surprised how many were investment homes. We know a few people bought homes in PA for “investment” purpose, some have negative carry, even if they bought them cheap during 2009-2011.
At current 2018 price and with rising interest rate, it’s definitely insane to buy them for investments, that’s why the market has slowed and you will see more investors dumping when their 5/1 7/1 ARM come due.
No, rich Chinese people (by which I assume you mean Chinese nationals) are looking for a place outside China to park their cash. Much harder for asset seizing by their government. For many wealthy citizens of other countries, US real estate is affordable and more stable than investments back home (I’ve sat in cafes next to people who do this and heard their conversations … in Mandarin …)
Hi Jay. My due respect, but what you say is the final argument trying to show everything is a paradise. You are trying to sell a LIE, but talking about foreign buyers and related lies. Yes, there might be a couple for some segments of properties, but nothing else. At this point you habe no argument and you are lying to us
This same discussion seems to be happening here in Australia – whether our great property boom has come to an end. Sydney house prices are up around 75% in the past 5 years, and nearly 60% for Melbourne – our two biggest cities.
I’ve never invested in property outside our family home – the debt levels needed are just frightening.
Ditto your comments.
Australian property market has some odd features which make it difficult to call.
I think high debt levels are common for property investing, where as a business activity it’s easy to buy and hold but vulnerable to shocks and cashflow problems.
I think it is likely the next drop will be much worse because people have been trained to default for a better deal. The people who went into default made out during the last bust and created much greater moral hazard.
Too much sideline money still. You see a 15-20% drop and people will be buying stuff up left and right. There is A LOT of sideline money still.
I think we’re witnessing a dangerous game where investment landlords are bankrupting their tenants by renting out bedrooms or shared space. That condition didn’t exist in the 08 crash, this is causing those new incoming workers to areas that are beach cities to go into their first bankruptcy before they even have a chance to go to a single open house in the new cities theyve moved to. Worse, employers are losing money due to turnover because these people are being removed from housing market participation.
Speculation has driven investors to high turnover, short term rentals to capitalize in short term real estate earning gains that even IRS won’t recognize. They’re going to catch a heck of a clip to the teeth when they realized they just made the last round of potential 1st time home buyers that the Fed set up to bail them out INSOLVENT. All because they were too loud or because they are conservative? I want to see those losers in prison for mortgage fraud, I will spend my next 7 years settling my score. These people’s properties are about to be forced into default by tax authorities and lenders, because they’re illegally making the property prices rise by renting piecemeal. Only those homes in property management because of bankruptcy and insolvency rules are available to rent on a non room per room basis. Thats what were seeing in’hot market’ cities. They aren’t even bothering to rent their homes any longer, they are trying to rent out the basement to one family, the attic to another, the guest house to another, and the garage to another. That’s something that will make the last recession look like apple pie – it really is going to cause a lot of bleeding when these inventory rentals become boarded up, unusable, and IRS, FTB, or lender owned. Worse because many of them were made available in the inventory via the last bailout, we will need to make it so that they cannot be bought by non first time buyers or we’ll see this cycle repeat and speed up. Then we’d be at war with other countries like China and Korea or Russia for making our own economic volatility so bad that our markets are rigged and insolvent because there is a chance that we could see up to 1/3 of our real estate inventory in hot market cities like L.A., Vegas, Portland, SF, Denver, etc. be removed from the market GDP.
If its bad now, imagine how bad it will be once the inventory for housing is reduced by 1/3 and the local officials refuse to regulate hoping they and their friends can profit..
Do you own real estate or rent? Helps me understand your doom and gloom. Thanks.
I think you are spot on. It’s so hard to see the peak and it’s definitely important to be cautious in this time. Rents have really come down in SF. You sold at a great time.
The rental market in Portland is slowing down. I’m having a hard time filling my one bedroom condo. One of my prospects told me their landlord forgo the scheduled rent increase to keep them at their old place.
People are still moving to Portland and many new buildings are going up. Newer units are more expensive so I think they will help increase the market price, but who knows.
Anyway, I’m hoping to fill my unit by the end of the month. The weather is improving and I have more interests now.
I just went under agreement to buy a house in the heartland. It’s a duplex with rent going for $1175 a month with a purchase price of $79k. Pretty good, but not great. Add in an expensive 15 year mortgage and a house that revealed a ton of deferred maintenance and I’m out. It’s an expense I don’t want on my ledger with leaving my job and steady income.
Where is that located? I would buy that up all day long. I have a free and clear rental in San Diego, 2/2 condo, paid 290, rents for 1850. It has appreciated 25% or so, but 79k with $1100+ rent is a no brainer. I’d take 4, cash.
That seems like a pretty good deal depending on how much deferred maintenance there is. Let’s say $20k with def maintenance for all in cost of $100k. 1175 * 12 * 85% (assuming 15% maintenance, vacancy and property taxes combined) is $12k or a 12% un-levered yield. That is a very solid return.
I’m seeing some softening of the rental market here in Los Angeles as well. My neighbor’s house has been vacant for three months at what I consider a pretty reasonable rent. (No complaints, the previous tenant was noisy.)
I also have two coworkers in their early 30s who recently paid way over asking in neighborhoods that wouldn’t have been on their radar even two years ago. The market seems peak-ish, though I’ve thought that for some time and been wrong.
I’ve been watching the LA market as well and see some properties sit for 60+ days finally lowering their asking price. Inventory is still low but the future is promising.
In Los Angeles, how long would you say to hold out on buying a house? Not sure if I’m understanding correctly but after 20% down, having 10% of the property value seems unreasonable.
Why is it unreasonable to have a cash or semi-liquid buffer of 10% of the value of the house just in case something happens? It’s important to study the previous financial crisis. So many homeowners were forced sellers after they lost their jobs.
I commiserate with the folks who need a home now. We are in same situation on the West Coast in the city of San Luis Obispo. Prices are up and up and up but the city has lots going economically with a state university and a state prison (downside a closing nuclear plant in 2025) and outstanding tourism trade with location near the coast, excellent weather and wine tourism growing. All in all, if a home is needed with a long-term plan, the very expensive market can make sense still if prepared. What worries me so much is the lack of deleveraging after the last crisis. I try to make sense of all the articles (many doomsday scenarios) supported by outlandish international, national, corporate, and household debt. Will that time bomb go off? What happens to real estate when/if it does?
Were you reporting on that noisy neighbor? You’ve probably made them insolvent. Good luck with your foreclosure and tax nightmare.
I bet your street will have 5 for sale by the end of March and 2-3 foreclosures by April 17. No thanks to snitches throwing people onto the street who pay rent because you don’t realize YOU are going insolvent next. The bigger you come, the harder you fall.
I have a 5/1 ARM that resets in 2021. That’s still a long time, and I’m very happy to have locked in a 2.625 rate (summer of 2016 when you were advocating for it), and who knows where I will be then.
I’m definitely getting nervous as well. Seems things are slowing down rather than speeding up. Be careful out there…
You nailed it with this insight: “If you don’t have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn.”
We have many millennial friends who are hungry for their first house. Being overly hungry inspires bad decisions on what to consume. We always tell them you want to be in a good financial decision before you buy a house (like your above comment) but people have to make that decision for themselves. When you’re financially stable, you don’t have to worry about a downturn or a correction. I truly believe one of the greatest definitions of wealth is the absence of worry in ones life. Aim to remove worry from your life, over the big beautiful financed house, and you’ll be set up great for the long term no matter what may happen to you.
I’m in the process of dramatically levering up to buy real estate right now but I’m buying a primary residence. I expect almost no appreciation in the value of my house but I’m buying to be in a good school district, not having to deal with moving all the time from rental properties and a better quality of life. I could buy a smaller house and hope to buy something bigger at a lower price if values decline in my area but with the absurd transaction costs in real estate (where else is a 6% commission considered acceptable in this technology enabled age?) and the hassle/stress of moving a family with small children I’m taking the opposite approach. Buying more than I need today knowing I can stay in the house for 15+ years with no problems. Yes it would be depressing to see my net worth take a hit if my down payment gets wiped out in the interim but I’m not expecting the value of this property to contribute to my wealth accumulation for retirement so in the end it doesn’t really make a big difference.
I’m in the exact same situation than you here in Long Island, NY. It’s ridiculous how pricey stuff here is (and the value of the homes are not really worth it plus most of them are ugly), but transaction costs are grossly expensive to consider starting with a smaller house and then moving to a bigger one later on. I’ve been in this process for 2 years but I keep on refusing taking the plunge. I’m motivated just because it’d be my primary residence + good school district, but other than that I would never do it. Of course the fiscal policy changes just made this whole process in this area a lot worse!
Not to mention the insane property taxes in Long Island!
Absolutely insane.. a total deterrent to purchasing a new home.
Cool. If you lose, Just know that at the end of the day it’s just money. Take the amount of money you’ve lost and divide it by your annual savings amount to see how much more you have to work.
What is it you do for a living?
One thing to consider before purchasing a home in a growing area is infrastructure. In our county (Union County, NC) a new highway connector system is under construction. At one point, it was set to cut right through our subdivision. Had that happened, property values would have declined and we may have had to re-think selling our home this spring. We made our profit in NY in 2005. We’ll be happy to break even on this one.
Interesting Mrs. Groovy! In our neighborhood they are calculating a light rail system to be placed in. It will be .7 miles away from us and I’m wondering the impacts. Most researches show highways as bad for neighborhood, I wonder about airports, rails, transit centers etc. Seems like a under researched area.
I would imagine a light rail system nearby would boost property values as most people want to be near transportation. As long as the rail is right next to the property or you can’t hear the noise…I think you’re good.
Really hope you are right Andrew! We are one of those people who would like to live near a lightrail / transportation hub so if things do pan out, selling might not even be a consideration!
Well according to my wife who’s a commercial loan banker here in Illinois, they are still seeing a lot of buyers in the rental property sector. She claimed that millennials are renting as opposed to buying. They’d rather not maintain a home and focus more on travel and some things they call matters most. Although nationally, the number of renters in the 55 years or older group increased dramatically in the last 7 years. I do like what you said to be ready for a 20% correction. The housing bubble prepared our minds now to think that way which is a good thing.
This is a trend I can attest to. My four rentals in Minneapolis are going gangbusters thanks to Millennials who prefer to rent, rent in the city, and have a yard for their dog.
Sam is right to point out that things will only get more difficult for potential buyers. As an investor, I’m hoping for another bubble burst and lower mortgage rates. As a human, I’m hoping for affordable housing to become more commonplace as evolve into a caring species.
I’d rather invest in REITs due to the hands-off/ultra passive approach. I know that the returns are lower, but the investment is also lower as well as the risk overall. But there are many times where I still ponder about buying a beat-up property in a hot area and fixing it up; just to try the whole process out.
I thinks it’s worth doing, even for the experience. Just be careful on costs and risk.
Great article and totally agree. It maybe 6 months or 2 years, but some cities are going to have a major correction. The big difference to 2008 is I believe this will not go national. There are 2 markets I follow. The Denver real estate market is ridiculous with double digit growth for 5 years plus. While Little Rock has seen barely inflation growth in home prices. I will tell you the underwriting standards on housing are significantly superior to the last time. Real estate corrections should be local based on what is happening in the local area. Greed and stupidity caused the 2008 crash.
The lending standards aren’t much better. Research NON-QM mortgages
Housing market is cyclical, prices go up and down depending on supply and demand, just like any other market. Affordability is down, Some Millennials are buying but as a generation, the millennial is not buying at the same level as their Boomer parents did (at the same age). also millennials are fine renting or buying newer multifamily developments closer to jobs than commuting to the suburbs. Exceptions exist, but these are the trends. We’re beginning to see buyers become wary, rate hikes don’t help sustain the over-inflated housing markets in some areas, we will see a correction.
Millenials are also not having children, and what is a bigger motivator for a house than that? Millenials are proud to travel the world, live in vans etc. They’ll want to buy for real right about the time Boomers are screaming to get the money out of the cash machine they thought would always be a gem, but turns out to be a zirconia.
I know your thinking has been low interest rates “for our lifetimes.” Is that still the case?
Feels like they are just starting to go up, for serious.
Good points, Sam. I’m 33, and still happily renting for the time being. A number of friends or colleagues are buying just because they feel they should be owning by now.
In Chicago, we’re still enjoying declining rents in a couple neighborhoods, including where we live. As you mention, the buying competition is fierce.
Mrs. BD and I do want to own a place someday, but (1) we’re just not ready at the moment and (2) the conditions do feel right for many of the reasons you highlight here.
Mike,
I admire your willingness to not go with the herd and buy just because that’s what “adults” do. I hit FI at 42 without ever owning a single piece of property and still don’t.
That sounds odd that the banks are not forcing their mortgage holders to stay firm on rent, even if it means vacancies. That is what they did in 2008.
I just moved a few weeks ago into a newer building in the same neighborhood; I received one free month of rent, a $500 rent credit for a friend who “referred” me to the building (he got $1,000), and an additional $1,000 rent credit for working for a “sponsored” employer in the area.
While rents have slightly risen, I’m still seeing an over abundance of new high rise rentals in downtown Chicago. It’s still good to be a renter; supply is continuing to outpace demand.
It is definitely NOT a good time to be a renter … or a home buyer. People are stuck. Houses are way overpriced and rents are too damn high.
It’s time to either tax the heck out of purposely kept vacant buildings or seize them so people have a place to sleep at night, for crying out loud.
Thank you for this valuable information. I’m currently positioning for a downturn in the real estate and stock market. Hoping to acquire some good deals soon.
-G$
This is always a tricky subject because we never know how much will a bubble last. People start talking about the “.com” bubble as early as 1996. The problem is should we completely stop investing? And do what in the meanwhile?
Also, bubbles can deflate very slowly and throughout some years.
In the case of real estate I always look for the average wage. Let’s say it’s about $15k per year. If an average house (in terms of quality and location) goes beyond 10-15 times (> $150k – $225k) the average salary on a region, I would say that we are in a bubblish real estate market. Therefore we should rethink our options of investment.
“If you don’t have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn.”
That’s the big gem here. It’s so imperative to know exactly where you stand finanically. That’s the best defense. If your eyes glazed over at the math then I wouldn’t make a move. I don’t think a downturn will be as violent as the last one either. Most of my millennial friends haven’t embarked or considered home ownership. They rather rent forever then leave the hustle and bustle city. Although my sampling is in the $$$ coastal cities.
Here’s my forecast, with the deficit clearing 1 trillion already and global markets and gdp on the downward slope we can expect a recession by April if not sooner first to go will be stocks and dividends then a major slowdown in luxury goods as soon as you see that housing markets will turn south with an already over built rental market and fed rates rising the correction of about 40% is likely to happen by mid Jun the Midwest has already seen their crops rotting because of 45s policies while in the rust belt manufacturers are cutting production layoffs will echo as Black Friday numbers disappoint and cyber Monday flatlines Washington’s policies and tax breaks for the top ten percent while all others are having tax hikes
Brace yourselves not even gold will save this one this time
Doom and gloom forecast above is drawn upon many negative scenarios working in unison to come to the conclusion provided.
While it remains to be seen, the actual performance of our economy as predicted by David will be negated by at least some positives not mentioned.
Awesome point! We all heard the term what goes up must come down. I understand the real estate market is banking well hoping on the millennial but my concern are they predictable or unpredictable? We all wish the market could withstand this large increase. But let’s be realistic here. There’s no way the average person can afford to pay 3,000 plus payment for 30 years come on man stop kedding yourselves please.
I totally agree. Ppl are lying to themselves big time. Especially the investors and real estate agents. I live in an expensive area (south Florida) to be exact and I watch the housing prices regularly. There are several houses sitting on the market, which have been completely remodeled that they still cannot sell. These homes have literally dropped $30,000 in price since they were 1st listed this time last year. That tells me they’re not even getting offers. The business end wants to say the housing market is sustaining itself, but the property listings say different. Continuously lying doesn’t make a lie become the truth lol.
Prices are down 5% – 10% in the SF Bay Area, once one of the hottest areas of the country because inventory is up 50% – 150% YoY.
Let’s see if Uber, Slack, and Lyft IPOs will save us in 2019!
Hi Sam,
Great write-up! Very well presented and backed up by data. Something to keep on watch. Thank you.
I’ve always been of the belief that when the stock market goes, so does real estate (401k’s effected negatively and more buyers sit out the market, selling of existing homes increase as people look to downsize, perhaps over-extended and think “get out now before prices drop more” etc). Of course, rising interest rates will eventually play a role to eventually turn the housing as well. I think the Fed is trying to do exactly that (raising rates) as we head into our 11th year of a bull market in stocks and housing and are aiming for a soft, gradual landing on that front.
Having said that, I think this recent correction in stocks (or “bear market” as some are calling it) will be short lived and the bull will be alive and well again sooner than later. I think markets end correcting by April/May and then the next leg of the bull begins. Our economy is strong. Job market is very strong. There is no risk of a recession Jobs are another KEY factor. How does housing fall any significant amount in the face of a bull market in stocks, a strong economy with strong jobs. I just don’t see it? What am I missing?
I do think the red hot housing market will cool off and pull back a bit as and we are seeing that now, but I think it will be very temporary and not much. Prices pull back maybe 5-10%? That’s nothing in markets that have seen 200%+ home price increases in the past ten years from the crisis lows. Thoughts?
I think prices pull back at 5 to 15% and just sit there for a couple years and then it’s back to the up and up. I don’t think interest rates will be going up anytime soon, for Mortgages that is, no matter what the Fed does.
I’ve held a bully for a long time now that the 10 year bond yield won’t get much higher than 3%.
Have you changed your view/opinion since this article was published in Feb?
No. I expect prices to continue softening, especially after the fourth quarter stock market correction in 2018.
Guess you were wrong.
Look back 70 years if you will. A recession about every 10 years give or take after the previous one ended, since WWII. All markets and economies move in cycles , always have always will. Last recession started in 2008-09, but it was the longest recovery in history almost 5 years before we saw any positive growth. (Have we forgot the great recession already) Most recessions take 12-18 months to recover.
So this puts us into the 2023-2024 time frame. Look at China’s growth rates, (worlds 2nd largest economy now) down 50% in the past couple years.
Another R/E bubble pop could speed this up, but I agree a slippery slope is ahead.
I am buying on the South East coast and am seeing very steady price softening.
Lily,
(this is actually a question for anyone who cares to respond)
I liked your post. my wife and I are closing escrow on our home in three days (Dec 23rd 2018 to be exact). We bought it in 2010 short sale for 225K and sold it for 565K. We have been looking to buy another but now are considering renting for six months or so in the hopes that home prices will drop substantially. We also have had our eye on a lot to build on . I am a GC with 20 yrs experience building and remodeling so there is some sweat equity to be had there. What do you suggest? should we buy a home now or sit out and rent? Buy the lot and build?