Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
Well, well. It seems that talk has started again on whether or not we’re in a housing bubble.
I read two different pieces lately that had completely different opinions on this. I wanted to share their info with you so you can make your own decision.
Me?
I have no clue. As a buy & hold investor with a day job, who also does a lot of wholesaling, I really don’t care. Although another crash would be a very good thing for my rental portfolio…
But I digress. Here’s what the two pieces had to say.
We’re in a Bubble
The first piece was by a guy who calls himself Simon Black, or Sovereign Man. He travels the world and writes a lot on current economic trends.
He attended a conference recently and met with the chief economist for Fannie Mae who was speaking at the conference.
Simon asked the economist what he thought of the U.S. housing market right now.
The economist replied: “It’s overpriced.”
And during his presentation, he went deep into the data, which showed that beyond a shadow of a doubt, U.S. housing is “late in the cycle,” which means that prices may soon peak and then suffer a substantial correction like we saw 10 years ago.
His rationale - property prices across the United States have been rising at a much more rapid rate than wages and salaries. And that’s totally unsustainable.
The economist also pointed out that a number of prominent real estate investors and developers have said they’re no longer buying. And that one person who owns and operates more than 10,000 apartment units said that he can no longer find any properties that meet his investment criteria.
So, his bottom line is that everything is overpriced, and investment returns are falling.
Affordability is definitely becoming an issue. In my market, I’m seeing the price of entry-level housing going up and out of reach of first-time homebuyers.
Who’s going to buy these properties when first-time homebuyers can’t?
There Is No Bubble
Holding the opposite opinion, predictably, is the real estate chattering class, led by our “friends” over at NAR.
They began their piece by saying that “the U.S. housing market seems in very good shape.”
They say that contracts to buy existing homes jumped 5.5% in February, the biggest increase since July 2010. And Fannie Mae’s National Housing Survey showed that Americans expect home prices to rise 3.2% over the next year as its sentiment index reached a record high.
Their rationale continued with “it’s different this time” reasoning.
They said that the housing bubble of the early 2000s was driven by subprime mortgages and other loose lending practices. And the subsequent collapse left many potential new homeowners with inadequate credit scores, not enough money for a down payment and insufficient job security to buy a house.
So, homeownership plunged and those who did form households moved into rental apartments instead of single-family houses.
They continued by saying that despite the recovery in house prices, rents have risen at a much faster pace. As a share of median income, rents have jumped while mortgage costs have fallen.
So their argument is that rising rents will give people the incentive to buy.
In a normal market, maybe. But with housing prices increasing faster than wages, just how is that supposed to work exactly?
They went on with a lot of nonsense about housing starts, long-term homeownership rates and changes in GDP.
But in the entire piece, they never discussed affordability.
I know I’m showing my bias, but this affordability thing has the potential to bring the housing market to a halt.
Couple that with interest rate increases that will certainly happen this year, and what have you got?
At a minimum, a housing market that’s showing a whole lot of risk.
Be careful out there.
And for gosh sake – read the economic news so you can be prepared when the market starts to show signs of shifting.
What Say You
You’ve heard these two articles and what I think… what do you think? Share below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.