An Utterly Serious Warning

[ecosophia]

There's an old Wall Street legend that came to mind today...

"In 1929, at the height of an economic boom in America, Joseph Kennedy Sr. (father of JFK) was working as a stockbroker on Wall Street. As the story goes, Joseph was walking around when he decided to sit down for a shoeshine. While polishing his shoes, the young worker gave Joseph some of his favorite stock picks. When Joseph heard the shoeshine boy giving out stock tips, he figured the party was about to end, and it was time to get out of the market. Joseph proceeded to exit his positions in the market and bought short positions that bet on the market going down. Shortly after that, the stock market entered a free fall." (Source)

The reason this came to mind is that I get therapeutic massage regularly these days, and my massage therapist mentioned today that she is getting into real estate investing. She's an extremely capable massage therapist -- but then I'm sure the shoeshine boy who did old Joe Kennedy's shoes was good at his trade, too. The rule remains the same: when people who have no previous background in investing start piling into some investment vehicle, a speculative bubble is in full swing, and will collapse catastrophically in the not too distant future.

I watched this same thing happen in real estate about a year before the 2008 real estate bust hit. When that arrived, everyone I knew who'd gone piling into real estate ended up in the bankruptcy courts. I also watched it in the stock market about a year and a half before the 2000-2001 internet bust hit, and a lot of people who'd put everything they had into interrnet stocks lost it all.

So, dear readers, if you find you're suddenly thinking about putting a lot of money into real estate investment, may I offer a piece of advice? You'd be better off shredding it all and flushing it down the toilet. Don't let yourself get suckered, because the market will sucker punch you.

Oh, and while you're at it, get ready for a whopping economic crisis, possibly as soon as this fall. The Dow Jones just hit an all time record, btw, and speculative investments are soaring while the productive economy lurches further and further into dysfunction. We're probably going to be in for a world of hurt within a year or so. Brace yourselves...

Comments

[prayergardens]

I'm following real estate right now. We want to move out of the city and to a smaller commuter town. We've had an agent since Fall 2022 and have been waiting for the bubble to pop. In the last 3 weeks, inventory started piling up like it hasn't in the last 18 months and is building fast, especially single family homes. Condos still move, I guess boomers are downsizing?

I think I recall someone asking you previously when you'd know the bubble was deflated and IIRC, you said "When there is a For Sale sign on every street". So I've been watching the inventory count for our county.

Do you still think that's a marker of when the bubble is done? We don't want to do anything dumb but after 2020-2021, we don't want to be a part of our city anymore and are motivated to change our situation. I'm hoping the emotion won't lead us to a bad decision, trying to be rational and patient....

[ecosophia]

Patience is a very good idea at this point. Now that inventory is piling up, there's a very real chance prices will crash in the months ahead, and if you wait a year or so after the crash you'll have your pick of properties -- everyone will be trying to get rid of them and will accept a much lower bid than usual. Waiting is your friend!

[prayergardens]

What's another 18 months of looking in the big scheme of things? If it saves us hundreds of thousands of dollars, it's a good thing! The time waiting for the bubble to pop has really forced me to confront my magical thinking "If we just move out of the city everything will be ok!". Rationally, I know it's not true but it's an easy fantasy.

I read Charles Hugh Smith of the Of Two Minds blog and he had an interesting post a few months ago. He theorized that it only takes 4% of the houses listed in a market to take a fire sale price to force the market downwards. He also noted that ~10% of the market in many places is short term rentals. So if/when the post pandemic tourist rush dries up, the pro-AirBnB hosts who have multiple properties and are overleveraged by buying in the last few years will be forced to start selling their less profitable properties. In addition to inventory stats, I've been watching the 'Sold' stats in our county as they come out for signs of the first fire sale. Hasn't happened yet but sales are slowing and we're at the point where the majority of properties closing are coming in under asking price.

Another wildcard is the fee restructuring for agents that happens in July as a result of the national law suit about artificially high realtor fees. I thought the big rush to put houses on the market last month might be real estate agents pushing people to list now so they can close while commissions are still high. Would be ironic if they pushed the market into decline to save their own fees.

I think late summer as the tourists go home, people who have already moved on realize they don't want to pay for an empty house in winter, and realtors not knowing how to price themselves might turn into the Wild West in our market.

[methylethyl]

I have set searches on the major real estate listing sites too, and they email me little capsule updates every morning: listings sold, listings with price dropped, new listings in your parameters. I have noticed that just in the last few weeks, the number of listings in those updates has fallen off. One listing instead of five. So the thing is already in motion, I think-- the first little pebbles falling, before the rockslide. There's a lag for bankruptcies, but we're off the starting block already and there is no going back.

[jenniferkobernik]

I recently inherited a (small, old, kind of crummy) property in a fishing town on the coast. We decided to let the realtor do as she liked, and she listed it for an eye-popping quarter million dollars (which people say is cheap for a house when I boggle about it to them!). It hasn’t sold so far (it’s been about a year), so I’ve been encouraging her to bring the price down. She says that prices are dropping back to what they were pre-COVID, but that places are sitting on the market for a lot longer because owners don’t want to accept reality, and most of them are investors or vacationers, not motivated owner-occupiers, so they can afford to hold out.

[(Anonymous)]

The problem with that kind of bust, is that the all-cash investor vultures will beat you out. I went through this in 2012 - with the market AND interest rates at near-bottom. The cash investors will beat you every time - no loan contingencies, no inspection contingencies. Additionally, a crash of this magnitude will freeze the credit markets, or at least make banks super picky, so getting a mortgage will be hard. We only got our house in 2012 because our realtor convinced a flipper mid-flip to stop renovations and sell out to us.

[ecosophia]

My late wife and I bought a very nice 3 bedroom craftsman bungalow in western Maryland in 2009 for $35,000, with decent mortgage terms. (I'd still be there except for her failing health, which made a move to a smaller place with better local resources necessary.) You have to know when to go back into the market; 2012 was to my mind rather too late in the last cycle.

[methylethyl]

I don't think it could possibly be any worse than it is now. We've been trying to buy a house for two years already, made four or five offers, and every time-- blasted out of the water by investors making cash offers above asking, no inspection. We could borrow more, and maybe outbid them. The bank would loan us the money. But it would not be financially responsible of us to take on that much debt. We'd lose the house the first time it needed a new roof.

So.

I've been keeping tabs on the reddit real estate investing subs lately trying to figure out how all that financing gimmickry works-- like, it drives me bonkers that people who want to buy a house and flip it or rent it out, have access to completely different types of financing than people who just want to buy a house to live in, and I *need* to understand how this works, or the walls close in and hope departs.

And this is not all being driven by the big firms. The pricing is driven by them, but the rush into REI is also a lot of just-some-dude types who've decided that being a landlord is the next Bitcoin. They're going into serious debt to do this, and counting on being able to collect enough rent to make a profit and service multiple high-interest loans, which is why rents are getting so ridiculous. That's not going to last in a declining economy, and as soon as we reach a critical mass of people not being able to afford the rent anymore, the whole thing tips over into the canyon. As Charles Hugh Smith points out, repeatedly, the working class is already up against the wall. We are paying as much as we can possibly pay for rent already. There's no squeezing out more, and groceries aren't getting any cheaper. So at some point very soon, a lot of us are going to lose the ability to keep paying, and either end up homeless or move into Uncle Bob's garage-- and then nobody will be paying rent on that dwelling. They're so heavily leveraged that lowering the rent isn't an option: they wouldn't be able to service the loan. The avalanche happens when these guys start defaulting. And they will: what they're doing is radically unsustainable. There'll likely be a little hang-time where everybody's hanging on for dear life, hoping things turn around. After that, only the big investors will still be in the market, the small fry cash investors will not be lining up to get burned again very soon. And they are the ones crowding us out of the market where we live. That might not be true of places where the big companies are heavily involved, like Atlanta and Charlotte, but it'll be enough in a lot of places, for regular people to finally afford a home. I think. I hope.

[methylethyl]

We've been out there looking since 2020. Made four offers on houses that were reasonable. Every offer fell through as we were outbid by investors who could overpay and offer cash without inspection. Most recent offer less than six months ago. At least in our area, this is definitely not over yet.

I think we may have peaked already, but there's a lag where people try to hang onto their "investments". The real excitement happens when the bankruptcies get going.