30 year mortgage rates just hit 5.85% after the last reading from a low of 2.8% last summer.
Residential seems screwed. With partial WFH still (e.g. Only 30% of Manhattan is back in office still per WSJ) commercial office real estate seems screwed too. Amazon is indicating that they over built on warehouses so maybe that is screwed, but I can't really tell to be honest.
Meanwhile construction is at a peak since 2006-2007.
How much of a correction / downturn do you think there will be in prices?
Take a step back for a second and realize the Bubble just isn't in RE - it's in just about every asset you can think of. Let that sink in. Shit is about to get brutal within the next 12mo.
Think of all the stimulus money (PPP, ERC, Stimulus Checks, Child Tax Credits, etc.) that is no longer there that propped up prices for just about everything. Most importantly, the Fed is getting serious now and we're only in the 2nd inning at best - people can't afford houses at these rates... the investors/flippers are going to have to start unloading SF Residential RE quick and that will greatly increase supply.
To hit on a few more bearish things going for the economy as a whole:
- Cash out Refi's/HELOCs put even more money into the economy at cheaper rates (with the latter being variable and going up). What if these people start to lose their jobs?
- The layoffs have just started - I have a friend who never went to college that is a Mortgage Banker at Quicken... he made over $330K in 2020 and probably more in 2021 -- there are numerous people like this in the Mortgage Industry that made a ton of money that will either 1) get laid off; 2) be lucky to make 60% of their peak earnings in 2020/2021 in 2022. How will Real Estate Agents do? --- these are high paying jobs.
- Those RSUs for the Tech Companies? Vapored. Big source of money in the large metropolitans for down payments, etc. --- curious to see how many Tech startups go under.
- Consumer Sentiment is very important and we just got the lowest reading ever
- Can anyone say, GAS PRICES? The poor/lower middle class are getting raped. This will also hit over-leveraged middle class people. Gas likely will hit $6 nationally, quick.
- Is the COVID era Home Renovation rush over, or at least stalling?
I could go on, feel free to add to this. Needless to say, very bearish.
EDIT: Don't think that since the markets corrected ~20% that this in the end and RE will drop in similar proportion --- it took us over a year to bottom in 2008/2009.
Agree with all of this and one big one is also car price gauging and people leveraging against inflated car values. Eventually, more average people will be upside down on their cars then ever before.
I hate it when people are all doom and gloom based on old information. Everyone already know everything you just wrote. That’s why stocks are down 20%
As an example, this guy has a topic from 1 year ago: “Hidden Lucrative Job: Mortgage Banking”. Yeah man you’re really great at predicting the future
Good points. While we're on the topic, let's dig a little deeper into the root causes of the shit-storm we find ourselves in.
We will Stand Fast. We will NOT forget the weaklings who burnt this country, abandoned our allies, opened our borders, and tried to disarm our citizens. We will not forget that the Democratic Party devolved into a post-modern communist soup of moral decrepitude and propaganda.
Do you hear it? I can hear it in the distance... faintly now but growing... Let's... Go... Brandon...
..
Re: dry powder - maybe. What you saw in those first few months of COVID was that even with the amount of dry powder that was in the market, people weren't transacting. Two primary reasons that dry powder might not be able to overcome poor fundamentals: (1) lenders have to be willing to play ball and (2) uncertainty/volatility introduces....well, uncertainty. To that latter point, if we get hit with some ugly headwinds, retail capital will die off almost immediately. If you've talked to anyone in crowdfunding lately, this is already starting to happen. You'll also see many institutional capital allocators start to get gunshy because they are not incentivized to take outsized risks (ie, catching a falling knife). If the general sentiment is things will get worse, most people will sit on the sidelines until they have to put out money. More than anything, sellers aren't going to offload at bad prices until they have to, so transaction volume will crater for awhile before loans start to mature.
The big one though are lenders. What are lenders willing to lend on? They are by nature conservative and they hate volatility. A recession introduces a lot of volatility.
Agree with CRESF that lenders will drive deal flow
I would disagree about all the money that is supposedly on the sidelines. (i) No one wants to catch a falling knife. (ii) 1-year ago people were looking at stabilized rental buildings at 3% / 4%/ 5% cap rates (depending on location), and the US 10-year is at ~ 3.35%...so why take the risk of buying now when you can get comparable yield and by sitting on the sidelines and waiting you might be able to get it at a discount in 6/9/12-months' time
Office is typically volatile, so I am surprised that WFH hasn't increased this dynamic.
Industrial should be solid in urban centres. Geography matters here
Retail I am not a fan of until I become a nightclub baron catering to the rich and famous
Rentals should be solid based on population flows. The math on annual migration into a city vs. annual construction of places to live is pretty simple. Chart that since 2008 and you can eyeball whether rents are high or low
On development, we are getting hammered on the cost to build. Stuff is just more expensive
Commenting as somebody who is a MF lender during the day and an MF investor at night.
Ive been speaking to a bunch of ppl who are in their 50s/60s at work - some of the best yet simplest insights are below:
1) 07/08 GFC was a literal financial crisis - i dont think anyone needs a history lesson as to what happened but the market simply 'STOPPED' - from my lens that means nobody was making loans since, well, you know why. My company, along with others, are still making loans but have become much more selective (better markets, higher DYs, etc). Perhaps things get worse over time (and i think they will) but its really tough to see shops completely stopping doing deals for an extended period of time other than for firm-specific issues (running out of capital, back-leverage providers arent working with you anymore).
2) At least for Multi - we know that there is a 'bottom'...what does this mean? Well the pullback right now in MF is mostly (but not exclusively) due to higher rates (both index/SOFR + spreads). Plug the higher spread + steep SOFR curve into your model (add 25-50 bps to your curve to account for further steepening), then back into the purchase price that works for the IRR/EM you are targeting. Chances are you will find the price is 15-35% lower...thats the 'bottom' right now
3) Finally, we all know this, but CRE/MF and even SFR are all 'submarket specific' - meaning that a fact pattern happening in one part of the country or a specific city wont apply to another. In the market i personally invest in, we've literally seen values double ever 9-12 months for MF deals 'as-is', meaning you could barely do any renos and sell for double the price - this didnt happen in NYC or major markets. Not expecting every market to behave the same way during a slowdown.
Just to add my $0.02. Ive only been in the industry for about 15 years and was in college during the GFC and talking to folks who have seen 3-5 cycles (not just GFC) is always very helpful.