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Bubble, Bubble, Real Estate Toil and Trouble: Macro Climate for Real Estate Still Sucks, Despite New Bubbles
A reader wrote me complaining about the nonsensical bubble blowing in multi-family properties before the last bubble was even finished bursting. I feel his pain. Let’s run through a quick pictorial of how I see the macro climate for real estate as of right now…Everybody is getting squeezed, businesses, consumers, homeowners… Everybody!
Businesses have been pressured by wage inflation, but have managed due to growing revenues. The growing revenues portion has slackened considerably after .gov bubble blowing wore off.
I know many of you are saying, “But wait a minute!!!”. You said the
employment market was weak! Yes, I did say that and yes, it is. We have
historically high and stubborn unemployment, but that doesn’t tell the
whole story. That high unemployment crams more dollars into the
“average” hour worked, but many less hours are worked by less people in
the aggregate. See On Employment and Real Estate Recovery.
The reported unemployment numbers materially understate the amount of actual real unemployed there are in this country for it does not include the labor force participation. If you are not actively (or more to the point, have given up looking) for a job you are not included in the count.
The amount of people no longer counted in the labor force has been
steadily growing, thus steadily underestimating true unemployment.
Add to all of this the fact that banks had practically halted
foreclosures, thereby significantly exacerbating the shadow inventory
problem, and you have a mess on your hands. Subscribers should review
the latest Shadow Inventory Analysis Spreadsheet online
to see exactly what I am talking about. There is at least an additional
year or two of inventory not shown in (hidden from) these already
pessimistic numbers.
Add to this the fact that interest rates are going up around the globe, in some places eventually by force – reference Reggie Middleton ON CNBC’s Fast Money Discussing Hopium in Real Estate, and then reflect upon inflation vs. stagflation – Inflation + Deflation = Stagflation ~ Lower Real Estate Values! and don’t forget to remember that we are in a real estate depression: In Case You Didn’t Get The Memo, The US Is In a Real Estate Depression That Is About To Get Much Worse.
Sound gloomy enough yet? Don’t worry. Despite all of this, guess
what? The .gov/central banking cartel has successfully reblown another
bubble in real estate by messing with the circle of economic life.
My next post on the CRE topic will include some of my thoughts on
this gentleman’s situation. In the meantime, comments are always
welcome.
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Thanks for the insight, that does make sense. All the properties I have been looking at have a minimim of 10% CAP rates, some in the 13-15% range.
The thing about Phoenix that would concern me is the lack of a substantial industrial base or multi-national operations compared to other cities of similar size. If you can find something near the university or in a neighborhood with good schools and close to public transportation, jobs, etc... with a net cap rate of 10 then consider doing it. IMHO, that would probably give you the margin of safety you need in this economy.
I agree it may but 10+ years until housing begins to stablize (in most areas). However,
what do you guys think of purchasing investment properties at 70-80% off peak prices?
I am looking at possibly buying 1 or 2 single family homes in the Phoenix area, newer homes (yr 2000+) that already have tenants and are positive cash flow. I mean, i dont think properties in an area like this can fall much further.
What do you think?
I can't think of a worse time to buy then now with prices sinking, jobless soaring, food and gas soaring, tuition costs going up, taxes going up...better be able to pick up and move if you have to....
With all the Fed printing interest rates will rise any time now and house prices will fall another 40-50% imo.
This stagflation is going to be long and extremely hard.
I see so many closed stores, vacant houses, empty lots for sale.....
while MSM says "Great time to buy!"
RE will not be a "good buy" for another 9-10 years.
That's my case for why we are Japan now. Zombie Banks and Zimbabwe Dollars. The balloon is filling again.
If there is both a sudden and real slow down in truly strotspheric housing market in China "combined with a realization that GDP numbers are constantly being overstated by..." how would that play out with the banks? "You'd look for quality" right?
It would be so cool if we could get Bank closures listed now and them. Thoughts............
Check out 4 year chart: PCBS, FSBK, CSFL, IBNK, HCBK, SUBK, WIBC and CPF. Everything is fixed. HUH !!!
Lucious: I'm an old RE pro in SoFla. I'm not buying S/F to rent because the prices still have to drop another 20%. The vacant ones need mucho work. Occupied ones have owners that are still delusional. When I do jump in, it will be on properties that will yield at least 10% net located on, or walking distance to, public transportation in a good school district. Rents here for m/f units have jumped 5% YOY with no new developments planned or permitted; a very good sign.
One thing to consider about m/f is that, once the foreclosure backlog gets cleared there will be a lot of s/f units going on the rental market. That may keep m/f rents in check...
btw:
Thanks for your advice. I agree with what you said. Location is VERY important. A cap rate of 10 is a good margin of safety. I'm in the Seattle area, so prices have quite a ways to fall before they reach that mark. Even now, s/f rentals in prime areas are selling in the 5 to 6 net cap rate range. Everyone around here thinks we are special and different because of the jobs base with Boeing, Microsoft, Amazon, Costco and Starbucks all doing pretty well plus the biotechs, hospitals and University of Washington holding their ground. Obviously it has held things up so far (unemployment ~ 8%). But I still think that there is a lot of inventory the banks are holding off market. Plus, I doubt that the FEDs can continue to expand any sort of fiscal stimulus. We shall see...
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+1 Thank you.
Hmm, I see a crapton of commercial leases, but not sells and buys on comercial land as far as signs posted. This tells me they are trying to dump as much of the lowest cost items that they have the least invested in. No one in their right mind is building. I wouldnt doubt we have a commercial real estate bubble explode alongside the commodity bubble. These bubbles are nationwide and worldwide. If realestate prices moved 26 % down in one month in Bejing. I would be running like a madman until there are some bargins.
I'm in a similar situation as the gentleman in the email. Prices on SFHs are 40 to 50% below peak in my area and they are starting to cash flow out with 20% down. The whole inflation/deflation debate has my head spinning so I want to hedge for both. Having a leveraged RE investment is one way to do this but I am leary about all the inventory the banks are holding and if and when they release it. So far I have decided to wait until at least the Fall. If commodity and stocks deflate, then I'll sit on the sidelines until QE3. But then again, I don't know if there will be a QE3 because it would cause bonds to crater. The USG cannot fund itself without super cheap credit and, IMHO, the FED cannot support the yield curve indefinitely. Ultimately the bond market will take charge of the FED! Crazy times we are living in!
"I talk to a lot of potential homebuyers from around the country. So far, no one is really foaming at the mouth about Arizona's immigration law," he said. "But we'll see. If home sales fall off the cliff, then we have to look at the law as a factor."
Read more: http://www.azcentral.com/arizonarepublic/news/articles/2010/06/14/20100614arizona-immigration-real-estate-foreclosures.html#ixzz1LK66fCpT