Folks, it's 2000 (or 2008) all over again.

[hellolin]

ugly out there.....and still lots of these stocks are overvalued

This is what happens when you only play financial speculation without actually trying to increase the productivity of the average Joe. They are still who they were the years ago in relates to knowledge and productivity yet the market went up anyways, that's exactly how you make a bubble. A health economy is backed up by productivity and incentives, since QE was used as the tool to get us out of recession it has always been more up and down swings in the market.

 

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[Mineralogic]

This is what happens when you only play financial speculation without actually trying to increase the productivity of the average Joe. They are still who they were the years ago in relates to knowledge and productivity yet the market went up anyways, that's exactly how you make a bubble. A health economy is backed up by productivity and incentives, since QE was used as the tool to get us out of recession it has always been more up and down swings in the market.

I think the average wage/salary has gone down in real terms for decades, don't quote me but it ain't working(the incessant money printing )

 

[hellolin]

I think the average wage/salary has gone down in real terms for decades, don't quote me but it ain't working(the incessant money printing )

It is, because on average people's productivity hasn't gone up, but technology has made overall productivity go up, which made people even more expendable, while making higher educated guys more valuable, hence the huge income gap you see now. Think about the assembly line, its truly an innovation that made stupid average joes on the streets a middle class life, because all you need is hard work and you can make a living, but now that's gone throughout the world, even China. We are in desperate need to have the next innovation that can give average Joe a shot at doing meaningful and productive work.

 

[Iwokeup]

SO.....a good time to have a cash position?

We're thinking of selling our current house now, renting, and seeing where property values are in six months. @Red ?

 

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[Mineralogic]

It is, because on average people's productivity hasn't gone up, but technology has made overall productivity go up, which made people even more expendable, while making higher educated guys more valuable, hence the huge income gap you see now. Think about the assembly line, its truly an innovation that made stupid average joes on the streets a middle class life, because all you need is hard work and you can make a living, but now that's gone throughout the world, even China. We are in desperate need to have the next innovation that can give average Joe a shot at doing meaningful and productive work.

yes, interesting is at first the productive technology (aka Ford assembly line innovation) seemed to actually afforded lots of wage increases and now its done the opposite

 

[SteveO]

We're thinking of selling our current house now, renting, and seeing where property values are in six months.

I don't think that housing is in a bubble. It has taken a medium drive along the path of recovery. It may falter a bit but the big run-up has not occurred. Apartments seem to be in a bubble though.

 

[Iwokeup]

I don't think that housing is in a bubble. It has taken a medium drive along the path of recovery. It may falter a bit but the big run-up has not occurred. Apartments seem to be in a bubble though.

Thanks for this. We're looking to buy some land and build our (hopefully last) home. Worried that I'm going to over pay. Luckily we have a RE agent that we trust so I'll ask. But always better to have less biased opinions...

 

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[Ezio]

In a lot of articles from davidstockman.com this have been mentioned long ago. Expect possible defaults especially from energy/drilling sector.

 

[HyperFocus]

Thanks for this. We're looking to buy some land and build our (hopefully last) home. Worried that I'm going to over pay. Luckily we have a RE agent that we trust so I'll ask. But always better to have less biased opinions...

Sell and wait on the crash and then buy land. Your agent will rush u into selling or buying as they make commissions. He is right about selling but wait with the buying part

 

[Ezio]

seems to me like it's going to be hard time for some people

 

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[Ubermensch]

@MKHB: Remember when I told you what I was going to do the careers of a few idiot Cushman and Wakefield employees?

If you want hedge fund manager money, you need to to look at the world through hedge fund manager lenses.

Paging Ms. Cleo... AGAIN.

@Vigilante:Facts and Research... smh.

2015 Construction Outlook: An Economic Recovery Finds Its Footing - Published 2015, by Jeff Gavin in January 2015.

@Iwokeup: Check out the article, specifically the section regarding the residential market.

You will find that @SteveO 's view is backed up by - and validated by - a rather high pile of empirical data.

In respect to the author, please read the article in the above link if you want the full story.

I'll quote some of his more salient points below:

"Enough pauses. We are finally in the midst of a sustained recovery. Fundamentals are strong. Growth is ever steady, and momentum assuredly recovers when unexpected events such as severe weather hit. While the pace of the recovery can be frustrating, last year marked the first year where all but one of the major construction markets made gains or stayed positive. As in 2014, some sectors may cool in 2015 while others heat up."

"Engineering News-Record’s Construction Industry Confidence Index survey, 52 percent of subcontractors surveyed reported an improving market with confidence growing throughout the year. That number jumps to as high as 64 percent when looking out the next 12 months

“[2014] marks the first year where the institutional sector is no longer pulling down the other construction sectors,” said Robert Murray, chief economist and vice president, Dodge Data & Analytics (DDA) [formerly McGraw-Hill Construction (MHC)]. “In fact, the recovery in nonresidential is now established. It’s clear we are in broad-based and recognized recovery that is cyclical and reminiscent of 1990s, which led to a 20-year period of stability and growth.”

"This is a recovery being driven by the energy sector, high-tech and resurgent manufacturing,” said Alex Carrick, chief economist for CMD Group."

"
Speaking at the conference, Paul Sheard described a difference in this expansion from others. He serves as the executive managing director, chief global economist and head of Global Economic & Research for Standard & Poor’s. 


“This growth follows the worst depression since the [Great] Depression,” he said. “It’s up and down, but we’re in pretty good shape with moderate growth. There are plenty of positives due to the right policy moves during the crisis. TARP [Troubled Asset Relief Program], the stimulus [The American Recovery and Reinvestment Act, or ARRA], and Fed rate cuts (0–0.25 percent) all helped us avert another Great Depression. Our economy is doing well, and that should continue.”
"

@Cyriex : Pulled this out of my Super Secret Gordon Gekko file.

This is capitalism at its purest, finest and most sublime.

As the data shows, those actually building the economy - and within it - are doing spectacularly.

Growth is consistent.

Deals are closing.

Projects are happening.

 

[Red]

We're thinking of selling our current house now, renting, and seeing where property values are in six months. @Red ?

Not sure how I missed this tag, but I did...

Real estate is a completely local variable. Some areas will continue to grow year over year, while simultaneously, other markets will bottom out. To add to the complexity, some metro areas will have conflicting trends within various price points -ie: our high end luxury (as opposed to plain luxury) is coming back down a bit, while entry-level Single Fam homes in the infill are still rising.

Just for your FYI, if the IRS hasn't changed the rules, you can currently hold any profits on the sale of a primary residence for 18 months before paying any cap gains taxes -but this is usually not enough to capitalize on market trends. Sorry!

 

[Iwokeup]

Not sure how I missed this tag, but I did...

Real estate is a completely local variable. Some areas will continue to grow year over year, while simultaneously, other markets will bottom out. To add to the complexity, some metro areas will have conflicting trends within various price points -ie: our high end luxury (as opposed to plain luxury) is coming back down a bit, while entry-level Single Fam homes in the infill are still rising.

Just for your FYI, if the IRS hasn't changed the rules, you can currently hold any profits on the sale of a primary residence for 18 months before paying any cap gains taxes -but this is usually not enough to capitalize on market trends. Sorry!

Thanks for the info re: holding profits. Where can I order your book again?

 

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[Red]

Where can I order your book again?

How To {NOT} Get Screwed by Your Real Estate Agent

(But sorry, there's no tax advice in there, LOL)

 

[Fathazard]

Just holding cash now too. Spidey senses are tingling.

 

[obrian]

buy gold and silver.

 

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[GPM]

SO.....a good time to have a cash position?

We're thinking of selling our current house now, renting, and seeing where property values are in six months. @Red ?

I live in a city that is driven by oil and gas, in a province that pretty much solely relies on it. I saw the writing on the wall and sold my place in November 2014. Been renting and watching since then, and glad I have. Houses in the price range I had are not moving. I have a friend in the neighborhood and my old neighbour have both tried selling their places (way nicer than mine was, listed for the same price as mine was) and they have gotten zero interest from buyers.

I went for a bike ride with the ex grumptycat/rich kid in the fall and we counted the number of houses for sale along a lake-front street. Literally 1/3rd of them were for sale. Of course it all depends on where you live, but we are about to get hammered. Prices have not fallen yet, and people think they won't ever (real estate always goes up!), but nothing is selling.... something has to give.

 

[JustAskBenWhy]

Very interesting thread. I see many of the same dynamics in real estate. I am not smart enough to know when it comes and what that will look like, but the valuation methodology out there, and the risk pricing folks are pursuing is to me more than aggressive, presuming upside of future revenue streams that is difficult for me to get on-board with...

There is a way to buy - discounted to intrinsic value. But how much discount??? Any yield is better than no yield, but how much do we pay for this yield...getting naughty out there boys and girls

 

[Greyson F]

Why do I have to study Finance and Mathematics and see this at the same time...

Ignorance is bliss; education is responsibility I guess.

 

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[Iwokeup]

How To {NOT} Get Screwed by Your Real Estate Agent

(But sorry, there's no tax advice in there, LOL)

Purchased!

 

[Michael Raphael]

Read the thread, lots of info I've been reading and researching myself. To be honest I think this is happening and quick. My only question, how can I use the capital I have and benefit from this. Is this a greek situation where I pull out cash now and keep in a mattress? Or is this a buy a resource in X country and wait? Would really like some input on this matter? I have no idea what to do with the capital I have and would love to know.

 

[Ubermensch]

Read the thread, lots of info I've been reading and researching myself. To be honest I think this is happening and quick. My only question, how can I use the capital I have and benefit from this. Is this a greek situation where I pull out cash now and keep in a mattress? Or is this a buy a resource in X country and wait? Would really like some input on this matter? I have no idea what to do with the capital I have and would love to know.

If you have at least $200k liquid cash saved up, you have some good options.

 

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[JustAskBenWhy]

To address the real estate aspect (and the general investing aspect)...

Your point that any yield is better than no yield only applies when you have unlimited capital -- when that's the case, feel free to jump at any positive NPV opportunity. That said, I don't know too many people (or companies) with enough capital that they can ignore opportunity cost. Spend your limited capital on low yield opportunities now and you'll be making money...but at what cost? (Hint: The cost is not being able to fund the much higher yield investments that will likely come along in the near future and kicking yourself for it.)

You and I both started looking for large multi-family opportunities a year or two ago, and neither of us found anything good. That's not coincidence. Cap rates are below where cost of capital could be in the near future, and again, even if not, there's still an opportunity cost of tying up capital in low yield investments. I happily gave up the search...sounds like you did too (for the most part).

My point is, inaction isn't always bad. Personally, I've stopped taking on any real estate investment opportunities with a time horizon more than three months out. And, for only the second time in my life, I've moved to pretty much an all cash position (other than some SFH rentals). The first time was 2008, about a week before the market crash. I was very lucky with my timing then, and given that I bought a bunch of just-out-of-the-money DIA puts two weeks ago (that I sold today), I was lucky this time as well...

For now, I'm going to spend the next few months focused on my non-real estate business (and writing another book), and hopefully some good real estate opportunities will present themselves in 12-18 months...

J - When I say that "some yield is better than no yield" I am being sarcastic. Nobody has unlimited availability of free capital, but they are acting as though they do... If you actually underwrite to NPV, and if you discount the current delta to the opportunity cost (you and I are both doing things with much less capital for much more profit), as well as the risk of where the cost of money could be in 3 years, not to mention that top-line in RE has been going up for years while people's income has not, it becomes impossible to justify risk of deployment. I agree with you completely. I think we looked at the same time, in the same part of the country, and arrived at the same conclusions...

I have to admit - I am not happy to stop looking. I've got millions of partner capital sitting on the sidelines, some of it right here on FL, but what the hell can I do - I am not bigger than the marketplace. So, I still look, but it's getting more and more comical out there.

I am still heavy on rentals, which I bought before 2013. And I'll buy more if the opportunity is right. I am growing JustAskBenWhy significantly, because $295 is a fair price to keep people from losing thousands and hundreds of thousands in RE due to ignorance. I am helping @TheDamageUndone launch her platform, which will likely be the most important life's work either of us has ever done. And - I would love to co-author a book with you, Jason. Not sure why it hasn't happened yet, but I think we could be quite effective... Inaction doesn't mean inaction. Focus and Diversification can work well together...

 

[Ubermensch]

Curious what you recommend?

The commercial real estate industry and commercial construction and commercial energy sectors are the hottest places to make (big) money right now.

Look at the entire picture; don't just look at residential.

There's more, but I'm short on time.

 

[Ubermensch]

J - When I say that "some yield is better than no yield" I am being sarcastic. Nobody has unlimited availability of free capital, but they are acting as though they do... If you actually underwrite to NPV, and if you discount the current delta to the opportunity cost (you and I are both doing things with much less capital for much more profit), as well as the risk of where the cost of money could be in 3 years, not to mention that top-line in RE has been going up for years while people's income has not, it becomes impossible to justify risk of deployment. I agree with you completely. I think we looked at the same time, in the same part of the country, and arrived at the same conclusions...

I have to admit - I am not happy to stop looking. I've got millions of partner capital sitting on the sidelines, some of it right here on FL, but what the hell can I do - I am not bigger than the marketplace. So, I still look, but it's getting more and more comical out there.

I am still heavy on rentals, which I bought before 2013. And I'll buy more if the opportunity is right. I am growing JustAskBenWhy significantly, because $295 is a fair price to keep people from losing thousands and hundreds of thousands in RE due to ignorance. I am helping @TheDamageUndone launch her platform, which will likely be the most important life's work either of us has ever done. And - I would love to co-author a book with you, Jason. Not sure why it hasn't happened yet, but I think we could be quite effective... Inaction doesn't mean inaction. Focus and Diversification can work well together...

You're in Ohio?

Why not put PACE projects to work.

Poof.

Side-lined investor money flies into projects that result in 10% - 35% IRR's.

PACE is the best thing in real estate right now since land.

PACE - stands for Property Assess Clean Energy

PACE - is growing throughout the nation.

PACE - is often the topic of conversation at the White House.

PACE - allows both commercial and residential property owners to upgrade their homes with energy efficiency type upgrades. Dozens of initiatives - from LED lighting to HVAC to solar and renewable technology, controls, window film, roofing upgrades... - apply.

PACE - stands for Property Assess Clean Energy. The amortization lengths are 15 - 30 years, depending on the region (32 states are currently PACE eligible, with more on the way).

PACE - is structured as a tax assessment on the property.

Therefore, it is not like traditional debt financing.

The financing, in essence, stays with the property after the sale.

So, you take a $20,000,000 office building.

Increase its value to $23,000,000.

15% increase.

Take 3 - 9 months to do with, with a PACE project.

Depending on your lease structure with the tenants, you can pass back the costs to them.

Sell the property for $23,000,000.

That's for both residential and commercial.

 

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[SteveO]

I have seen the apartment market explode to unsustainable heights in my opinion. I searched for well over a year to find commercial retail or office properties to move the apartment proceeds into. I was able to find one deal but as time progressed, the deals got tougher to find.

Most of the easy single tenant type deals in decent locations were basically break-even events. The only real money being made was the principal paydown and the future rent increases. But if the market went the other direction just slightly, I would be underwater. This is a problem if liquidation is needed at a moments notice.

There were other deals out there but there was always something wrong with them. Poorly located, too much capital improvement needed, not in a growth path, etc....

Not only was it difficult to find something with upside potential, it was difficult to find something that would simply operate with decent cashflow.

I gave up on the quest, bought the golf course and began planning for retirement.

 

[SteveO]

I'm very familiar with adding value to properties (I've written books on the topic), and for a $500K investment in energy upgrades to generate $3.5M in additional equity (i.e., 7:1 value to cost) isn't realistic in my experience.

@Ubermensch

Assuming that you were able to generate the additional equity. Of bigger concern is a change in cap rates. If they start expanding, it will take equity down rapidly.

I also believe that all buyers of a property at that size will be very sophisticated. You will need much more proof time and time to take all residual past performance off the radar. This means more like a three year hold. You can sell stories but those stories must be stronger than changing energy levels.

 

[Ubermensch]

First, I appreciate the recommendation, and not saying it's not a good one. But, I can't figure out this math (and I'm familiar with PACE)....

You purchase a property for $20M. You spend some amount (let's say $500K financed with PACE) to make the property more energy efficient. Then you sell the property for $23.5M (the $23M sale price and the $500K financed upgrades paid through the tax bill).

I'm very familiar with adding value to properties (I've written books on the topic), and for a $500K investment in energy upgrades to generate $3.5M in additional equity (i.e., 7:1 value to cost) isn't realistic in my experience.

I may not have been as clear as necessary.

PACE allows for, in general, property upgrades... total project values can reach around 20% of the property value.

So, in the $20,000,000 property example, 20% = $4,000,000.

Thus - even if we're speaking conservatively - PACE would allow you to add several million dollars in upgrades to the property.

You are correct in that the $500k LED package would only increase it by around that amount (depending on the price per kWh).

However, the remaining work would be with things like window film, roof repairs and/or replacements, HVAC enhancements, etc.

On the $20,000,000 office building, the window film would be several hundred thousand dollars.

The roof repairs would likely be a couple million.

HVAC could easily be seven figures.

 

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[SteveO]

I may not have been as clear as necessary.

PACE allows for, in general, property upgrades... total project values can reach around 20% of the property value.

So, in the $20,000,000 property example, 20% = $4,000,000.

Thus - even if we're speaking conservatively - PACE would allow you to add several million dollars in upgrades to the property.

You are correct in that the $500k LED package would only increase it by around that amount (depending on the price per kWh).

However, the remaining work would be with things like window film, roof repairs and/or replacements, HVAC enhancements, etc.

On the $20,000,000 office building, the window film would be several hundred thousand dollars.

The roof repairs would likely be a couple million.

HVAC could easily be seven figures.

I have made a lot of money repositioning properties. It is a great way to go.

My biggest concern is the current high demand and the number of players in the game that are driving the pricing. There is some ability to generate income though upgrades and, by your plan, reduce expenses. There are some people that feel cap rates could stay at this level or even go down with the uptick in foreign investment. I think there are many other variables that could take them up though. That is the single biggest risk in taking on a project. Especially something that may take years to come to fruition.

 

[Ubermensch]

@Ubermensch

Assuming that you were able to generate the additional equity.

It is an assumption that I am 100% willing to make, as long as the numbers add up.

I know that my price per kWh for electricity is X.

I know that a combination of energy conservation measures will reduce the total electricity consumption by at least 10% - 35%.

I know that property value is tied to NOI.

Of bigger concern is a change in cap rates. If they start expanding, it will take equity down rapidly.

Agreed.

The PACE game is one I would play with speed.

Get in. Get out. Reap the benefits.

Projects only take a few months to a few quarters, if done correctly.

Are you worried about a significant cap rate shift in that amount of time?

I am only getting started with it... however, I am completing one of the first seven-figure commercial PACE deals this year.

I also believe that all buyers of a property at that size will be very sophisticated. You will need much more proof time and time to take all residual past performance off the radar.

Agreed.

Case studies win the war.

This means more like a three year hold. You can sell stories but those stories must be stronger than changing energy levels.

Eh... I don't know. I don't think a three year hold is necessary. That strikes me as an overly bearish assessment.

However, changing energy levels equals changing Net Operating Income levels.

When a building owner lowers his energy consumption by 30%, his energy bill drops.

He profits more on the building.

He and his shareholders take more home when it's time for disbursements.