Paradise Valley Weekly 307th Edition - Apr 9, 2016
Some recent headlines are giving me a sense of déjà vu:
Miami Condo Bust Looms Subprime Predatory Lending is Back
Is this 2009 or 2016? Have we entered a real estate time warp, and the lessons of the last crash are completely forgotten?
Most importantly, are these warning signs of another crash to come?
It's unlikely that another real estate crash is coming soon, for reasons I will outline below. Nevertheless, it's important to proceed with caution. Not all real estate is the same, and there are huge differences from region to region.
Miami condos I wouldn't touch with a vaccinated crow bar. California is running on "greater fool theory" and people will make huge money... until they don't.
On the other hand, residential rental properties in the Midwest offer compelling value. Properties in Arizona are great investments if they are bought right, though it takes more work - and fast action - to snag bargains in our competitive market.
There are 4 key reasons real estate is different now than in 2009:
1. Bank capital ratios are at the highest they've been in 80 years, according to Barron's. It's important to remember that it was the financial system that brought down real estate in 2008. As the old proverb says, "there is no bad land, only bad debt." If banks had been well capitalized back then, there would have been no need for a bailout.
2. Lending standards remain stringent, for the most part. While there are non-bank lenders who are engaging in subprime again, the banks that lend the vast majority of the money are still being very stingy. The documentation and credit requirements are the polar opposite of the "liar's loan" days of a decade ago.
3. The ominous warning signs of bad debt are in two areas outside of real estate: auto loans and student loans. Auto loan balances have passed $1 trillion with very sloppy underwriting. An astonishing 40% of student loans are not being repaid.
4. Investment dollars, both at the institutional and individual level, don't have better alternatives to real estate. Bonds have tiny yields, and people will lose a fortune if rates rise. Stocks have whipsawed this year, corporate profits are flashing warnings, and valuations are above historical averages. Commodities are always volatile, and now is no different. Thus, whatever imperfections real estate may have as an asset class, they pale next to the alternatives, and hence continue to draw investment.
If any of this resonates with you, and you'd like to allocate more funds to investing in real estate, please click here for investment properties -- whether for cash flow or long-term appreciation, I'll either find it for you, or point you in the right direction.
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