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The only reason real estate works as an investment vehicle for people is because it's a slow market. The inefficient pricing and the slowly updating pricing al

The only reason real estate works as an investment vehicle for people is because it's a slow market. The inefficient pricing and the slowly updating pricing allows for the HIGHEST amount of leverage to work for people. In any other market, unsophisticated investors would have been margin called overnight. Instead they get to sit for years on slowly moving prices, and use those years to continue boosting their collateral as if nothing happened. So you can't expect a significant drop in home prices just yet. But definitely pay attention to foreclosure auctions. The court houses are not even processing these yet until the economy turns back on in the local municipality. You're too early, but wait for it. For now we are all trying to quantify just how leveraged people were. Many people don't think there were that many AirBnB speculators to affect the housing market. So every article to the contrary just helps form the picture. For the 2008 great financial crisis, it only took 7% of mortgage holders defaulting to cause the market convulsions (as in there really weren't that many "bad" borrowers, people overwhelmingly played by the expected rules to the best of their ability). Expect that the % necessary to cause distress to banks to be bit a higher these days, due to some marginal reforms, but also watch to see how many are going to default because that could also be a much higher percent its interesting because so many more people already won't be able to pay their mortgages because the unemployment already happened first.

api 7y ago
Makes me wonder if companies flipping homes and other fast high tech financial types getting into RE will actually lower prices in the long run. Part of the thing keeping prices high is that people see RE as a no brainer safe asset where they can just dump money. A faster market would end that perception.
- jrockway 7y ago
  There are a lot of people that see real estate as a no brainer safe asset, but some of that is intrinsic in what real estate is. You can go inside your house and it keeps the rain out, which is nice. I am more interested to see what happens to commercial real estate. I have a feeling that hotels are kind of unhappy about their real estate holdings right now. The question is whether they can get rid of it (and if someone can turn a hotel into apartments successfully, which sounds like a challenge to me). Ultimately, I think the status quo will prevail and nothing will change. The cost of change is too high.
  - vmception 7y ago
    > but some of that is intrinsic in what real estate is. You can go inside your house and it keeps the rain out, which is nice. yeah and that remains true when real estate is exchanged for the amount of cash people have on hand, instead of how much cash they could theoretically produce in 30 years. the game is trying to figure out how much of that intrinsic value is relevant right now, or how close is the current price to that 'intrinsic value' since they can be far far far away from each other. its just a commodity no matter how married you are to the asset class: if there is a glut of supply because people can't afford the mortgages or property taxes then prices go down. The banks and states don't care, they already earned what they wanted from the mortgage/property owner and are derisked. when you default they will get the property off their book as fast as possible.
  - bobthepanda 7y ago
    More directly with commercial real estate, WeWork is almost certainly going belly up after Softbank pulled out of its bailout. It's the largest office space lessee in New York and I would imagine in most other US real estate markets as well; its implosion will not look pretty.
    - ghaff 7y ago
      And combine that with the fact that, even the overall economy aside, at least certain types of companies will slow real estate growth. I certainly don't believe that lots of companies are going to go fully remote. But I do think, based on talking to people, that at least some level of WFH is becoming normed. And one result (depending upon what floor plan changes companies make) is that there may be fewer dedicated desk/offices.
  - clairity 7y ago
    many hotel operators have long divested out of that underlying risk. most large hotel chains own less than 30% of the real estate they operate out of. it's the smaller operators that will have a hard time.
  - korethr 7y ago
    >and if someone can turn a hotel into apartments successfully, which sounds like a challenge to me It can be done, but I've more often seen apartments built over ground scraped clean than retrofitting an existing building. Honestly, hotels are probably the closest kind of building design that one could get that might be worth converting into apartments. There are two buildings near downtown in my city. One was converted into studios, the other now bills itself as "student housing".
beervirus 7y ago
> The inefficient pricing and the slowly updating pricing allows for the HIGHEST amount of leverage to work for people. > In any other market, unsophisticated investors would have been margin called overnight. Instead they get to sit for years on slowly moving prices, and use those years to continue boosting their collateral as if nothing happened. This is a really interesting point. I've never thought of it this way.
- kkotak 7y ago
  The economy without credit/margin/leverage is unfathomable at this point and were it be that way for the past millennia, the size of the overall global economy would've been very very tiny fraction of today's, but arguably could've prevented most stress related diseases :).
rhplus 7y ago
The only reason real estate works as an investment vehicle for people is because it's a slow market. Don't forget the tax incentives (at least from a US centric view). There aren't many investments where you can depreciate the basis for tax write-off, while also realizing gains in tangible value.
blackrock 7y ago
The 7% figure of bad subprime borrowers might be accurate, but, my understanding of what truly caused the market to melt down, is that the leverage that the financial companies used, to package these poor mortgages into other investment vehicles, and mark them as AAA investment quality, is what ultimately caused the financial crisis. Aka: shenanigans of the financial industry
- vmception 7y ago
  The leverage is why it only took 7% of borrowers not paying to bring down the whole system. Banks were leveraged 40 to 1 and the value of their collateralized bonds fell a few percentage points, that's it. Yes, that is what our entire society is based around, the assurance that this doesn't happen.

api 7y ago

Makes me wonder if companies flipping homes and other fast high tech financial types getting into RE will actually lower prices in the long run. Part of the thing keeping prices high is that people see RE as a no brainer safe asset where they can just dump money. A faster market would end that perception.

jrockway 7y ago
There are a lot of people that see real estate as a no brainer safe asset, but some of that is intrinsic in what real estate is. You can go inside your house and it keeps the rain out, which is nice. I am more interested to see what happens to commercial real estate. I have a feeling that hotels are kind of unhappy about their real estate holdings right now. The question is whether they can get rid of it (and if someone can turn a hotel into apartments successfully, which sounds like a challenge to me). Ultimately, I think the status quo will prevail and nothing will change. The cost of change is too high.
- vmception 7y ago
  > but some of that is intrinsic in what real estate is. You can go inside your house and it keeps the rain out, which is nice. yeah and that remains true when real estate is exchanged for the amount of cash people have on hand, instead of how much cash they could theoretically produce in 30 years. the game is trying to figure out how much of that intrinsic value is relevant right now, or how close is the current price to that 'intrinsic value' since they can be far far far away from each other. its just a commodity no matter how married you are to the asset class: if there is a glut of supply because people can't afford the mortgages or property taxes then prices go down. The banks and states don't care, they already earned what they wanted from the mortgage/property owner and are derisked. when you default they will get the property off their book as fast as possible.
- bobthepanda 7y ago
  More directly with commercial real estate, WeWork is almost certainly going belly up after Softbank pulled out of its bailout. It's the largest office space lessee in New York and I would imagine in most other US real estate markets as well; its implosion will not look pretty.
  - ghaff 7y ago
    And combine that with the fact that, even the overall economy aside, at least certain types of companies will slow real estate growth. I certainly don't believe that lots of companies are going to go fully remote. But I do think, based on talking to people, that at least some level of WFH is becoming normed. And one result (depending upon what floor plan changes companies make) is that there may be fewer dedicated desk/offices.
- clairity 7y ago
  many hotel operators have long divested out of that underlying risk. most large hotel chains own less than 30% of the real estate they operate out of. it's the smaller operators that will have a hard time.
- korethr 7y ago
  >and if someone can turn a hotel into apartments successfully, which sounds like a challenge to me It can be done, but I've more often seen apartments built over ground scraped clean than retrofitting an existing building. Honestly, hotels are probably the closest kind of building design that one could get that might be worth converting into apartments. There are two buildings near downtown in my city. One was converted into studios, the other now bills itself as "student housing".

beervirus 7y ago

> The inefficient pricing and the slowly updating pricing allows for the HIGHEST amount of leverage to work for people. > In any other market, unsophisticated investors would have been margin called overnight. Instead they get to sit for years on slowly moving prices, and use those years to continue boosting their collateral as if nothing happened. This is a really interesting point. I've never thought of it this way.

kkotak 7y ago
The economy without credit/margin/leverage is unfathomable at this point and were it be that way for the past millennia, the size of the overall global economy would've been very very tiny fraction of today's, but arguably could've prevented most stress related diseases :).

rhplus 7y ago

The only reason real estate works as an investment vehicle for people is because it's a slow market. Don't forget the tax incentives (at least from a US centric view). There aren't many investments where you can depreciate the basis for tax write-off, while also realizing gains in tangible value.

blackrock 7y ago

The 7% figure of bad subprime borrowers might be accurate, but, my understanding of what truly caused the market to melt down, is that the leverage that the financial companies used, to package these poor mortgages into other investment vehicles, and mark them as AAA investment quality, is what ultimately caused the financial crisis. Aka: shenanigans of the financial industry

vmception 7y ago
The leverage is why it only took 7% of borrowers not paying to bring down the whole system. Banks were leveraged 40 to 1 and the value of their collateralized bonds fell a few percentage points, that's it. Yes, that is what our entire society is based around, the assurance that this doesn't happen.