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Hayden Aquilon

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The Real Estate market is nuts all over America - especially in Austin, TX

My wife and I moved into your typical track home March of 2020, which we bought for 525k.

Just over two years later (to avoid capital gains) we sold for over 1MM. After you account for after tax dollars my wife and I made more money from our house than each of us individually. It's like we had a 3rd person working for us the whole time. You gotta love Real Estate!

"Thats great, but where are you going to go Hayden?" - Where ever the f*&^ I want to.

I have two friends in the Lending space that are telling me rates are going to hit between 7-10% by the end of the year. What do you guys think is going to happen to Real Estate on the whole?

Not one person I have talked to seems to think it will effect prices negatively - I don't see how that is possible.

On a $1,000,000 home, every 25 basis points is roughly $250 extra per month. So even if the rates only go up 2% total for the year, you are already looking at that same mortgage costing you an extra $2,000/month.

Lots of people including myself were around 3% on a 30 year. Now its getting closer to 4.5% already on a mortgage for a good credit score and income.
 
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James007Hill

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The Real Estate market is nuts all over America - especially in Austin, TX

My wife and I moved into your typical track home March of 2020, which we bought for 525k.

Just over two years later (to avoid capital gains) we sold for over 1MM. After you account for after tax dollars my wife and I made more money from our house than each of us individually. It's like we had a 3rd person working for us the whole time. You gotta love Real Estate!

"Thats great, but where are you going to go Hayden?" - Where ever the f*&^ I want to.

I have two friends in the Lending space that are telling me rates are going to hit between 7-10% by the end of the year. What do you guys think is going to happen to Real Estate on the whole?

Not one person I have talked to seems to think it will effect prices negatively - I don't see how that is possible.

On a $1,000,000 home, every 25 basis points is roughly $250 extra per month. So even if the rates only go up 2% total for the year, you are already looking at that same mortgage costing you an extra $2,000/month.

Lots of people including myself were around 3% on a 30 year. Now its getting closer to 4.5% already on a mortgage for a good credit score and income.
I’m coming from a UK perspective but it sounds similar to what is going on in America…and I’ve been thinking for a while now how screwed people will be if interest rates rise massively. Which is why I don’t think they will. Inflation is rampant and so the response is to start increasing rates, but if they do it too much, we’ll see a collapse in house prices in my opinion. It’s a tough one for central banks as they want to raise rates to control inflation but probably can’t raise them THAT much without causing repossessions on a truly epic scale!
 

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Real estate is basically functioning as a pyramid scheme, with the need for housing as a way to force new entrants to be the greater fools.

Prices are not going up not based on value, but based on scarcity due to money devaluation (and eventually perverse incentives with restricting the supply of new houses). People en masse abandoned savings accounts for real estate as a way to protect against inflation. This is the reason billionaires row is half empty.

Houses are historically a bad investment. Illiquid, not divisible, high maintenance, depreciation, easily taxable, regulatory risks, need for (good) renters. This was before the money printer tho, since nowadays investment funds don't even care if it is rented or maintained or not. The price will increase anyway.

Another point; the housing market has a lot of systemic leverage in it. Practically everyone buys a house with leverage, either due to being unable to pay cash, or cash not being a financially rewarding choice (cheap debt yay).

So what happens when the interest rates rise? The leverage dries up. New entrants are unable to buy in. Only big funds with access to cheap debt can still buy (blackrock etc.)

But the current people owning real estate will not sell as long as the money printer keeps going brrr, since it hedges against the inflation. They wont sell the house, since they will lose the low interest mortage.

I think the market will become stuck due to this. No retail sellers due to money printer, no retail buyers due to high interest. Blackrock buys up the houses of people who are liquidated due to cost of living rising and unable to pay mortgage.

Meanwhile politicians are looking for ways to regulate and tax real estate. High housing prices give a lot of political pressure, and are a cookiejar for untapped wealth to confiscate. E.g. a californian bill that wants to tax 'house flippers'.

I also think that the more bitcoin will prove to be an inflation hedge / savings account, a lot of the monetary premium from real estate will flow out, since most of the money is just looking for a store of value.

Crime is also rising very fast in cities (where the most real estate money is being made), and will only get worse with inflation running rampant. Work from home on the rise. Thinking long term..

==== conclusion:

Real estate is very high risk right now due to
1) bad investment qualities
2) propped up due to inflation
3) highly leveraged market
4) regulations / taxes are coming
5) increasing crime in cities and WFH
6) rising mortgage interest rates
 
Last edited:

Antifragile

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Thats great, but where are you going to go Hayden?" - Where ever the f*&^ I want to.

With just $1m? Hopefully you have a great business generating something for you and your family. These days I feel $1m isn’t a lot of money at all.
I have two friends in the Lending space that are telling me rates are going to hit between 7-10% by the end of the year.

Right and what will the inflation number be?

I recommend never looking at a single variable in isolation. Economy and assets like real estate are too complex for a single number to explain … well, anything.

Good topic.
 
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Hayden Aquilon

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With just $1m? Hopefully you have a great business generating something for you and your family. These days I feel $1m isn’t a lot of money at all.


Right and what will the inflation number be?

I recommend never looking at a single variable in isolation. Economy and assets like real estate are too complex for a single number to explain … well, anything.

Good topic.
In addition, I have savings. My wife and I both have 6 figure incomes and we have 5 industrial buildings that give us good cash flow.
 

Antifragile

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In addition, I have savings. My wife and I both have 6 figure incomes and we have 5 industrial buildings that give us good cash flow.

Great. But that’s my point… if you and your wife still have “jobs”, are you mobile? Are you now renting? How will inflation F*ck with your plans to buy a home later if you are wrong in your prediction of market going down?

Owning industrial property is a great tool for your financial well being protection. You seem to have it generally figured out. Kudos.
 

Hayden Aquilon

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Real estate is basically functioning as a pyramid scheme, with the need for housing as a way to force new entrants to be the greater fools.

Prices are not going up not based on value, but based on scarcity due to money devaluation (and eventually perverse incentives with restricting the supply of new houses). People en masse abandoned savings accounts for real estate as a way to protect against inflation. This is the reason billionaires row is half empty.

Houses are historically a bad investment. Illiquid, not divisible, high maintenance, depreciation, easily taxable, regulatory risks, need for (good) renters. This was before the money printer tho, since nowadays investment funds don't even care if it is rented or not. The price will increase anyway.

Another point; the housing market has a lot of systemic leverage in it. Practically everyone buys a house with leverage, either due to being unable to pay cash, or it not being a financially rewarding choice.

So what happens when the interest rates rise? The leverage dries up. New entrants are unable to buy in. Only big funds with access to cheap debt can still buy (blackrock etc.)

But the current people owning real estate will not sell as long as the money printer keeps going brrr, since it hedges against the inflation. They cant to sell the house, since they will lose the low interest mortage.

I think the market will become stuck due to this. No retail sellers due to money printer, no retail buyers due to high interest. Blackrock buys up the houses of people who are liquidated due to cost of living rising and unable to pay mortgage.

Meanwhile politicians are looking for ways to regulate and tax real estate. High housing prices give a lot of political pressure, and are a cookiejar for untapped wealth to confiscate. E.g. a californian bill that wants to tax 'house flippers'.

I also think that the more bitcoin will prove to be an inflation hedge / savings account, a lot of the monetary premium from real estate will flow out, since most of the money is just looking for a store of value.

Crime is also rising very fast in cities (where the most real estate money is being made), and will only get worse with inflation running rampant. Work from home on the rise. Thinking long term..

==== conclusion:

Real estate is very high risk right now due to
1) bad investment qualities
2) propped up due to inflation
3) highly leveraged market
4) regulations / taxes are coming
5) increasing crime in cities and WFH
6) rising mortgage interest rates
Well thought out reply. I appreciate the time you put into it. I totally agree and understand what you're saying.

The whole topic still leaves so many questions.

The answer to all this seems obvious, but it's so much more complicated. The first domino to fall is definitely interest rates.

Higher rates -> Less borrowing -> Potentially lower housing prices (in theory).

A large piece comes down to companies and their continued employment to keep up with this insanity. I assume many businesses have been able to continue paying and raising wages due to EIDL loans and PPP grants.

A crap ton of money was given out and those loans keep getting pushed back by the feds. EIDL was going to be payable starting March but now it was pushed back another 6 months.

Many business owners I knew took lots of money. Probably more than they needed. Seemed like they spent it as if they didn't have to pay it back in my opinion.

The start of that loan repayment could be another domino for sure when that becomes active. Also student loans just recently started back up if I am not mistaken, so you need to watch for that as well.

This isn't a doom and gloom post as much as maybe a potential look out for opportunity. I know some of us in here invest in RE from what I have seen.
 
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mr4ffe

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Real estate is very high risk right now due to
1) bad investment qualities
2) propped up due to inflation
3) highly leveraged market
4) regulations / taxes are coming
5) increasing crime in cities and WFH
6) rising mortgage interest rates
What do you think this implies for people in their early 20s who are forced to live with their parents, live with roommates, couch-surf, or live in their cars due to the insane house prices (compared to salaries) right now?
 

Hayden Aquilon

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Great. But that’s my point… if you and your wife still have “jobs”, are you mobile? Are you now renting? How will inflation f*ck with your plans to buy a home later if you are wrong in your prediction of market going down?

Owning industrial property is a great tool for your financial well being protection. You seem to have it generally figured out. Kudos.
Ya we are fully remote - both of us. We are renting right now. We have our next home already figured out (going to be building on my dads property - selling us half the land).

Another thing is building supplies - is that going to come down at all or is this just the beginning? Got quoted 260/sqft.
 

Hayden Aquilon

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What do you think this implies for people in their early 20s who are forced to live with their parents, live with roommates, couch-surf, or live in their cars due to the insane house prices (compared to salaries) right now?
I don't see how this situation ever gets better for that group. My only thought is that this remote environment allows for you to live anywhere in the US to work.

They need to move to where it is affordable. My father in law lives in Harrison, AR. You can still buy a 3/2 for under $100,000 and that is a nice house. If they don't want to move there because "who the hell would want to live there" I cant help them. Live on a couch your whole life then.

I am super bullish on RE in red states for the future that are harder on crime and generally friendly towards business and RE. AR, FL, TX, ID, just to name a few.
 
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Hayden Aquilon

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I’m coming from a UK perspective but it sounds similar to what is going on in America…and I’ve been thinking for a while now how screwed people will be if interest rates rise massively. Which is why I don’t think they will. Inflation is rampant and so the response is to start increasing rates, but if they do it too much, we’ll see a collapse in house prices in my opinion. It’s a tough one for central banks as they want to raise rates to control inflation but probably can’t raise them THAT much without causing repossessions on a truly epic scale!
I hear you, but I don't think they have much of a choice.
 

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Well thought out reply. I appreciate the time you put into it. I totally agree and understand what you're saying.

The whole topic still leaves so many questions.

The answer to all this seems obvious, but it's so much more complicated. The first domino to fall is definitely interest rates.

Higher rates -> Less borrowing -> Potentially lower housing prices (in theory).

A large piece comes down to companies and their continued employment to keep up with this insanity. I assume many businesses have been able to continue paying and raising wages due to EIDL loans and PPP grants.

A crap ton of money was given out and those loans keep getting pushed back by the feds. EIDL was going to be payable starting March but now it was pushed back another 6 months.

Many business owners I knew took lots of money. Probably more than they needed. Seemed like they spent it as if they didn't have to pay it back in my opinion.

The start of that loan repayment could be another domino for sure when that becomes active. Also student loans just recently started back up if I am not mistaken, so you need to watch for that as well.

This isn't a doom and gloom post as much as maybe a potential look out for opportunity. I know some of us in here invest in RE from what I have seen.
Student loans are deferred again as well. Those are some big signs of trouble combined with those you mentioned as well. We are in the biggest debt crisis in history basically, but the bubble has not popped yet.

I think there is reason to have a doom and gloom outlook with the current economy. Especially from a value investment point of view, you want to have a certain margin of safety when taking a risk.

I see real estate right now as way overvalued comparing to intrinsic value, which is hard to measure, but you can feel instinctively that RE prices are batshit crazy. This gives it a bad risk/reward ratio.

chart-1-768x341.jpg



People are currently fleeing bonds and equities into the safety of the dollar, unaware that the dollar itself has become high risk and interest rate hikes will not solve the problems. I personally see bitcoin as a great opportunity in the stagflation (or even inflationary depression) environment we are getting into, for the same reason gold did really well in the 70's and 40's. Commodities are another possible opportunity.
 

Hayden Aquilon

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Student loans are deferred again as well. Those are some big signs of trouble combined with those you mentioned as well. We are in the biggest debt crisis in history basically, but the bubble has not popped yet.

I think there is reason to have a doom and gloom outlook with the current economy. Especially from a value investment point of view, you want to have a certain margin of safety when taking a risk.

I see real estate right now as way overvalued comparing to intrinsic value, which is hard to measure, but you can feel instinctively that RE prices are batshit crazy. This gives it a bad risk/reward ratio.

chart-1-768x341.jpg



People are currently fleeing bonds and equities into the safety of the dollar, unaware that the dollar itself has become high risk and interest rate hikes will not solve the problems. I personally see bitcoin as a great opportunity in the stagflation (or even inflationary depression) environment we are getting into, for the same reason gold did really well in the 70's and 40's. Commodities are another possible opportunity.
Yes, I started to really feel that intrinsic value was off while we were living in that house. My wife and I would say almost daily, how is this house worth anything close to 1MM? It made no sense and left a pit in my stomach.

When we bought at 525 we felt we were definitely getting some value. The day before we moved out I asked my dad (who flew out to help us move) what he instinctually felt the houses on our block would be worth.

He said about 600k. I was right around there myself. Batshit crazy is right my friend.
 
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BizyDad

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Higher rates -> Less borrowing -> Potentially lower housing prices (in theory).
Another thing is building supplies - is that going to come down at all or is this just the beginning?
Yep, the thing you left out of your first equation is the thing you mentioned in your second quote.

Higher rates mean less borrowing, mean less people wanting to buy homes, combined with higher building costs, means builders building less.

I used to have several small scale builder clients in Phoenix. They all complain they've been priced out of the market now. Now the big boys are the ones building the homes.

But we're still in a housing shortage. Personally I think it's artificially created by banks and big housing funds and zillows of the world holding on to real estate. They are artificially constricting supply, driving up price.

But if they're smart about it, and don't dump everything back on the market immediately, with builders being priced out of the market, I think these big funds are going to reap a whirlwind of money.

First they drove up prices. Then they drive up interest rates. Then they slowly sell their inventory of homes.

Financial institutions have influenced all sides of the real estate market.

Therefore, I really doubt you're going to see a drop in real estate prices. More like a slowing down and plateauing of price increases...

FWIW The last few times we had an increasing interest rate environment, you did not see a drop in home prices...

 

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What do you think this implies for people in their early 20s who are forced to live with their parents, live with roommates, couch-surf, or live in their cars due to the insane house prices (compared to salaries) right now?
It implies a very tough position to be in, since a basic need (housing) is being used against you, to make a profit off your labor.

Best option is WFH from a low COL location, rent and save/invest, and wait for an inevitable correction.

If the correction does not happen to the market (due to government/FED policies) the correction will happen to the government itself. Either civil unrest, or revolution. And you don't want to own real estate in that situation either.
 
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BD64

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A lot of really interesting financial/economic analysis in this thread.

When it comes to fearmongering about crashes/corrections/etc, one thing I have not heard mentioned but I think is crucial to the health of any given real estate market is the affordability index. This metric is different for each RE market and is probably the best indicator of how over-inflated the properties in that given market may be.

The fact is, in most markets if you look at the affordability index, it would show you that it's certainly getting tighter as rates rise but for the most part, things are okay. Certainly not in major correction or crash territory. This is because affordability is determined by payment; price and rate/term.

To expand on rate, just because we are no longer in the 2s and 3s doesn't mean rates are high. In fact, 5s and 6s are still incredibly low if you were to look at where they have historically been over the past 50 years. Edit: Most of that time they were in the 8s and 9s. Even getting mid-teens during the Volcker years of the fed. It's only been since the 2000s that we've been consistently going down from the 6s to where we were a year ago. In addition, lending structures are much safer today than in the past. We have 9/10 people getting 30 year fixed loans with these low-interest rates. Coupled with substantive down payments since prices are higher, it shows that these folks are generally well-qualified buyers.

Together, the high prices and strong loans equate to payments that are actually a smaller % of the average HHI than in the past, meaning that mortgages are from the day of origination, more affordable and have no interest rate risk since they are fixed and not adjustable.

However...

The appreciation we have seen in the past few years is completely unnatural and something will happen as a response. In my opinion, you'll see certain hyperlocal RE markets go through turbulence and in a broader sense the luxury markets with homes substantially above the median will either freeze or slowly come down in price.

Homes at, around, or below the median will continue to be white-hot competitive as you'll actually see supply destruction: inflationary/stagflationary environment + raising rates, cost of rent, etc. All these sorts of things will disincentivize folks from selling their home since they'll compare their options and realize they just can't get in a situation better than the one they are currently in with the amazing loan they got. Fewer homes on market, already supply-constrained. Demand may go down but supply will too, hence my prediction that this stays hot.
 
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On a $1,000,000 home, every 25 basis points is roughly $250 extra per month. So even if the rates only go up 2% total for the year, you are already looking at that same mortgage costing you an extra $2,000/month.
When I saw 5% and climbing for 30 year fixed rate mortgages last week, I told my wife the real estate bubble (and stories like yours) just ended. It will just take some time to finish coasting. Hopefully, it ends up better for people than 2008.

BTW, Austin and the other media friendly hot spots are hardly typical for the entire country.

Check out this census map:

Almost hard to believe all those orange counties with zero growth.
 

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But we're still in a housing shortage. Personally I think it's artificially created by banks and big housing funds and zillows of the world holding on to real estate. They are artificially constricting supply, driving up price.
It's not artificial. Tons of builders and real estate developers went out of business after 2008. There's been a slowdown in new construction for at least ten years. Add in retired people staying in their homes longer and first time home buyer demographics exploding and you simply run out of houses. Zillow just DUMPED its entire portfolio after doing a comically poor job of managing it. I think it was worth $300M. That's only about 1,200 homes.

Freddie Mac estimates the shortage is 3.8 million homes in a report from last year.
 
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It's not artificial. Tons of builders and real estate developers went out of business after 2008. There's been a slowdown in new construction for at least ten years. Add in retired people staying in their homes longer and first time home buyer demographics exploding and you simply run out of houses. Zillow just DUMPED its entire portfolio after doing a comically poor job of managing it. I think it was worth $300M. That's only about 1,200 homes.

Freddie Mac estimates the shortage is 3.8 million homes in a report from last year.
Great time to be a builder

@Get Right
 
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