Even after Fed pauses (not reverse course), unless cap rate goes up, RE will remain a bad investment. Historically cap rate has to be 2x interest rate considering the risk and pain that involves RE management. This implies prices need to come down to half, or rents need to double. Rents are already falling, so the only logical outcome is prices to fall.
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This is a total fallacy. Look at history. From 1978 -1982 interest rates went to 18% and RE prices went up.
There is a shortage of properties and lots of investors looking for something safer than stocks. Besides lots of investors can access low mortgage rates for muti family. In the low 5s. Plus there are plenty of cash buyers, owner financing and hot1031 money.
Anyone selling on this forum???
I am looking at Kay Property that handles DSTs for 1031s. They currently have 25 deals looking for 1031 money. A lot are 0 debt deals.
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RE is kind of bond market, won’t drop heavily.
Have seen Cupertino homes going from $300k to 3M in last 25 years, it is beyond my imagination. This recession seems to be Crypto crash, not even tech heavy bankruptcies.
With this, easy reduction is from predatory list price, and likely less than 20% (depends on location) home price.
My kids want to buy primary homes for them, I am holding them to wait for stock market bottom. Definitely one will buy bay area with cash (or little loan) and another one at Los Angeles. This will happen as soon as stock is bottomed.
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May be mortgage was not a thing back then and most deals were all cash. And may be houses were very cheap back then (relative to after tax income levels).
And by the way RE didn’t go up back then per Case Shiller index.
| Year | CS Index |
|---|---|
| Dec 1, 1982 | 148.84 |
| Dec 1, 1981 | 152.05 |
| Dec 1, 1980 | 158.10 |
| Dec 1, 1979 | 166.80 |
| Dec 1, 1978 | 168.02 |
Maybe you are clueless and have one tenth the knowledge I have about RE. I bought my first house in 1976. I was there. I don’t need useless charts. Those charts don’t help your 50% loss theory. Plus they are national… nothing to do with BA RE.
Anyone who follows or quotes Shiller is an idiot.
Shiller lives in shithole New Haven… there is no appreciation in New Haven … does not even keep up with inflation.
I am here to give BA neophyte’s historical perspective.
My grandfather bought lots in Berkeley for $500 in the 30s. My personal knowledge goes to back then.
I remember the first house I lived in . $20k in the Berkeley hills bought in 1950…. The only real drop in value was from 2005-2011… maybe 20%. Pretty much true in all prime BA neighborhoods.
Keep living the 50% dream.
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BA prices are almost 15% down. So, a third of the way there already. And this happened within 6 months. Prices did not fall this fast even in GFC.
I saw a home yday in LA listed for 5.5 and there are no buyers for 2 months and 2 price reductions. The agent said a 5M offer will most likely get through. And just 6 months ago, on the same street, a smaller and slightly inferior home sold for 6.5. That’s almost a 25% decline.
I will believe you if can tell shit from Shinola.
Scott McNealy white elephant. 50% off could happen.
How much will this one sell for?
https://www.zillow.com/homedetails/610-Los-Trancos-Rd-Palo-Alto-CA-94304/64706362_zpid/
12-16M.
These homes are terrible investment if you cannot time them well.
As I said I’m seeing 25% decline in LA and PA from May peak. The higher you go the more the decline.
One thing that is different from the 70’s and early 80’s is that the Fed seems to think it can tame inflation by holding the fed funds rate at just half the inflation rate. We’ll see if this works. If not people will start looking almost anywhere other than cash to park their wealth.
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- Inflation is not as high as in 1970s.
- Effective fed rate = fed rate (currently at 4%) + QT (equivalent to … %)
- To achieve effective fed rate > core PCE growth (currently at 5.1%)
- Inflation = M2 x velocity of money, M2 is reduced by QT
At terminal rate of 5%, unless core PCE shot up a lot, effective fed rate should be higher than core PCE growth. Also, while fed rare hike is paused, QT would continue.
We cannot compare very old 70’s and 80’s today, the nearest and worst for real estate was 2008-2011.
All 2008-2011 happened with big real estate (millions) of home, but now tech job loss may occur, but owner won’t sell the home for loss.
The main difference is tech’s can join anywhere in USA with permanent WFH policy. Like my company opened a new role “Permanent WFH employees” and sold all NJ, NY, LA high-cost downturn assets and made all employees WFH roles.
With this tech’s can shift jobs, even TWTR or any company, and stay at home, need not sell the home.
The current is not even near close to 2001 recession, forget 2008-2011 deals !
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During GFC, prices in Austin MSA hardly change but currently, prices have declined by 15-20% already. I recalled prices in CU declined by 10-15% during GFC, has already hit this price decline today. The big difference between GFC and today is likely very few foreclosures but price declines are likely to be larger.
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I remember about CUs, there were only 3-5 foreclosures during a quarter when our place 40% (100+) of homes were foreclosed. The drop in median price was 5%-7% (hardly any drops) I did not get any home at Cupertino - for move up - we came to our place and bought a short sale at $200/sqft (2005 built home -presently at $550/sqft level). I used to see many cash offers were there ranging $900 to 2.5M level. Remember Ptiemann was also bidding many CU and Sunnyvale homes.
Today, we see the initial drops from predatory list price reduction due to no competition, but without foreclosures, we cannot get deals like 2008-2011.
The outskirts of bay area, like Tracy, Mountain house, and Manteca, are in good deals now and may likely have such deals next one year.
The issue here is S&P not getting bottom quickly. Until then, we cannot say real estate reached a bottom.
When will RE prices bottom out. My earlier projection was Q1 2023 but it seems like the Fed rates will peak later and RE has not yet dropped enough. Does this mean RE will keep declining all of 2023.
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I don’t follow median price, doesn’t mean much. I bought two one-story SFHs during GFC, one near the top (2007), and another near the bottom (2011), the difference is 15% 
The 2nd one is bigger in square footage yet 15% cheaper.
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Normally, median $/sqft gives the correct level. Realtor price the home (appraiser pricing as they need to qualify for loan) $/sqft.
If a home is coming on the market, appraiser takes 3-5 near by homes and calculate $/sqft and multiply by actual sqft and valuation is done for loan.
If this median $/sqft drops more than 20%, then foreclosures start as homeowner can walk away. During 2008-2011, my home was built (it was built sold value) appx $400/sqft, but market went down to $200/sqft level, resulted mass foreclosures.
Looks to me great deal you had.
That is 2008-2011 deal.
I bid many in CU, almost 15 bids, but lost all.
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I always win the first time. What I did is estimate the highest bid, add a few % (up to 5%) more. In an uptrend, price keeps going up and take time to look for another, by the time, price could have shot up. Just bite the bullet and paid up.
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You can err on the safe side of not buying any till Fed starts cutting rate since you already own a large RE portfolio. I will wait till Q2 2023 to decide course of action. Buying one more SFH at higher price doesn’t hurt my long term return. If your situation is similar, just wait.
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This should be good enough reason for Fed to do a 75 bp or 100 bp hike as rampant speculation is still going on in RE. I bet a large fraction of these are by large corporate investors to rent out to masses.
Sales up, what about price? Wonder what deals are developers offering?