What I’m about to share might be scary, but remember, the most money ever made in real estate is made in a real estate crash.
So if you’re trying to make sense of what’s happening in the market today… Get in line!
As of this morning the stock market has given up all of its gains since January of 2014. No the stock market isn’t the economy and it isn’t the real estate market but its time to take a hard look at these 9 charts so that you’re not caught off-guard.
The talking heads are going to blame it all on China ignoring the fact that we, here in the U.S., have deep systemic issues that despite the Feds best efforts just won’t seem to go away.
The fact is that we’ve never recovered from the 2008 Global Financial Crisis.
They tell you that everything is looking up and that unemployment is reaching historic lows.
Just look at the historic surge in stocks over the last 5 years!
Cap rates are down!
Home prices are up!
Everything is freaking hunky-dory! Make hay!
Maybe. But I see something else and I’m not alone, not hardly.
I’ll state this bluntly.
Asset prices, including real estate, have risen across the board due solely to cheap massive debt.
But cheap debt is good right? Its what stimulates the economy!
That’s one view.
Another view is that what stimulates the economy is revenue, then saving capital, then investing that capital into research, production, sales and marketing.
Profits drive the economy.
Earnings drive the economy.
Salaries drive the economy.
Instead, what we have is massive speculation.
- Companies that should have died or retooled years ago are coasting on easy credit.
- Corporate stock buybacks, bought with debt, have driven stock prices.
- Startups with no revenues are receiving massive valuations and employing people at exorbitant salaries.
- Hedge and private equity funds own tens-of-thousands of single family residences, many purchase on margin.
- Millions of private investors have purchased rental properties a huge number of them second homes that they’re filling with AirBNBs or VRBO short term rentals.
What happens when cheap easy debt goes away and the margins get called?
Return to the mean, that’s what.
The problem, friends, is that our asset price inflation lacks the basic fundamentals of healthy growth.
What should drive real estate prices?
- Demographics, new buyers, move up buyers, old sellers moving on
- Real household income
- Retail spending (commercial and retail property)
- Employment (office)
- Production, manufacturing (industrial)
I’m not economist (so don’t take it from me) but I know how to read a chart and I bet you do too so lets have a look at a few and then you can decide for yourself.
We have the lowest percentage of people working since after the recession in 1983
U.S. households are making less than they did 20 years ago
The Real Unemployment Rate is more than 10%
WHO THE F do you know “stops looking” for work and what kind of B.S. removes them from the unemployment count? DON’T believe the hype. The 5% full employment figure touted in the media is pure propaganda.
Homeownership rates have been knocked back to 1966!
Business debt is soaring
Rather than investing in their businesses corporations are buying back stock (on margin!)
Why? To please shareholders and take large sums of money off the table to put in their pockets.
Non-Performing business debt is on the rise…
More businesses are going into default on their C&I loans.
Office vacancy remains above pre-recession levels
But! Cap rates are severely compressed
That means prices are higher in case you haven’t been paying attention.
Will There Be a Real Estate Crash in 2015?
I have no crystal ball, nobody does. But what I do know if that it smells an awful lot like 2007 only without the broad increase in the wealth effect we felt last time.
It seems plain to me that the fundamentals in the U.S. do not support the wildly inflating asset (home, commercial real estate, stock) prices that we’ve been “enjoying” up until now.
A real estate crash doesn’t happen at the speed of a stock market crash. Its slower.
You Can Profit in a Real Estate Crash
Pop quiz: Who holds the cards when real estate crashes?
Answer: The lenders.
Here’s what I know after 16 years in the real estate business, 6 of which were dedicated to working with banks to clean up the last crisis.
Don’t fear it, prepare for it.
The most money made in real estate is made during a crash. Its all about the “buy”.
Here are a few more thoughts on the subject
If you’re in the debt position, meaning you own notes secured by real estate, you’re in the best place in the capital stack. Owner’s equity gets wiped out first. Period. The lower you are in the stack the safer your investment.
If you’re sourcing deals as a broker or middleman then dealing with private sellers who are going to be underwater (again) is pure torture. The owner holds few cards when he’s underwater. You need institutional clients who are equipped to sell.
If you’re already involved in projects and you’re highly leveraged in them then its time to de-leverage or start looking for an exit. I have foreclosed on many, many developers, speculators and investors who were caught too late in the cycle with their pants down. Its heartbreaking.
If you’re looking for deals to buy you must consider your purchase price and whether or not your numbers will be supported upon a return to the mean. Will your numbers survive a correction is the question you have to answer.
You can’t fix a debt problem with more debt
Someone please tell Janet Yellen.
The reason we have soaring asset prices and no fundamentals to back it up is because we have huge volumes of cheap cash sloshing around the economy looking for yield… not because we’ve become productive, profitable, smarter, better investors… or any of the other things that make a market soar.
We Have Not Fully Recovered from the Last Real Estate Crash
There’s been so much rosy mainstream news that you’ll be forgiven if you’ve missed the fact that THOUSANDS of banks still have $170B+ in non-performing real estate notes and REO.
If you don’t have relationships with lenders who can become sources of deals then don’t wait another minute. Start this quarter and arm yourself for what’s to come.
I’ve got a lot more to say on this subject and I have more charts to share with you in the coming weeks.
I’m not claiming to be an expert economist and you need to make your own decisions about how to proceed. I will however do my duty to share with you the data that I’m looking at and working from.
Let me know what you think is going to happen (and when) in the comments below, and PLEASE share this below.