Author Topic: Indicators of an overpriced market  (Read 1630 times)

pnw_guy

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Indicators of an overpriced market
« on: January 03, 2021, 11:08:48 AM »
One common belief I've read on this forum recently is that the housing market is overpriced. And while this is admittedly a form of market timing, it might be better to purchase rental properties until the housing market (inevitably) corrects.

However, does anyone have an indicator of how much the housing market is overpriced? I was thinking that price to rent ratio might be a good one - kind of like price to earnings for stocks.

If price to rent ratio is a good one, how would I know that the market has corrected enough to be a "good deal"? For stocks, I think the long term average is something like 16 or 18, which puts the current price per earning ratios of 30+ in perspective. Wondering what might be a price to rent ratio that would signal to enter the market.

iris lily

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Re: Indicators of an overpriced market
« Reply #1 on: January 03, 2021, 11:54:46 AM »
A classic indicator of a hot real estate market in our household is this: we buy in that market.

Our real estate adventures are centered around buying high and selling low. This is sad but true.

pnw_guy

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Re: Indicators of an overpriced market
« Reply #2 on: January 03, 2021, 12:24:54 PM »
A classic indicator of a hot real estate market in our household is this: we buy in that market.

Our real estate adventures are centered around buying high and selling low. This is sad but true.

Let me know if you're thinking about selling!

Jon Bon

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Re: Indicators of an overpriced market
« Reply #3 on: January 03, 2021, 12:49:05 PM »
If your government has injected 7 trillion dollars into the market assets might be a bit overvalued.



pnw_guy

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Re: Indicators of an overpriced market
« Reply #4 on: January 03, 2021, 01:17:07 PM »
If your government has injected 7 trillion dollars into the market assets might be a bit overvalued.

Definitely makes sense. The current state is that prices are sky high.

I guess that what I'm more looking for is information on how I might be able to tell whether it's a good time to get into the market.

Imma

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Re: Indicators of an overpriced market
« Reply #5 on: January 03, 2021, 01:27:17 PM »
If your government has injected 7 trillion dollars into the market assets might be a bit overvalued.

Definitely makes sense. The current state is that prices are sky high.

I guess that what I'm more looking for is information on how I might be able to tell whether it's a good time to get into the market.

I'd compare the stats on many homes are available for purchase and how many people are currently looking for a home.

In my country, we are short about a 350.000 houses (4% of total amount of homes). So in our case, prices are extremely high, but unless literally hundreds of thousands of people die of Covid soon we're stuck with the current situation. If prices are going up while there are tons of homes available, there's something wrong with the market.

waltworks

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Re: Indicators of an overpriced market
« Reply #6 on: January 03, 2021, 01:31:42 PM »
I think the issue here is that (as always, I guess) this is a new situation.

In the past, an experienced small-time RE investor could look at local markets and see if there were cash-flowing properties available, or flips with enough meat on the bone to be worthwhile (something not a lot of people talk about here, to be fair) and buy or not, with the knowledge that such properties would be available again within 5 years if they weren't at the time.

But I think there's a possibility we're in Australia territory now, where the housing market is such a big part of the economy that it is going to be explicitly prevented from crashing for as long as possible. People (including me!) have been predicting/waiting for a housing crash down under for at least a decade if not longer. Hasn't happened.

If you want to geek out, Calculated Risk has the numbers:
https://www.calculatedriskblog.com/2020/12/real-house-prices-and-price-to-rent.html

Real prices, and price/rent aren't at the 2007 bubble levels yet, but the data lag by quite a bit so we'll see what things look like in a few more months. Of course there is a ton of regional variation, too. I imagine price/rent is going nuts in, say, San Francisco where people are moving out and working remote. Not so much in the rust belt.

-W

pnw_guy

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Re: Indicators of an overpriced market
« Reply #7 on: January 03, 2021, 01:51:42 PM »
I think the issue here is that (as always, I guess) this is a new situation.

In the past, an experienced small-time RE investor could look at local markets and see if there were cash-flowing properties available, or flips with enough meat on the bone to be worthwhile (something not a lot of people talk about here, to be fair) and buy or not, with the knowledge that such properties would be available again within 5 years if they weren't at the time.

But I think there's a possibility we're in Australia territory now, where the housing market is such a big part of the economy that it is going to be explicitly prevented from crashing for as long as possible. People (including me!) have been predicting/waiting for a housing crash down under for at least a decade if not longer. Hasn't happened.

If you want to geek out, Calculated Risk has the numbers:
https://www.calculatedriskblog.com/2020/12/real-house-prices-and-price-to-rent.html

Real prices, and price/rent aren't at the 2007 bubble levels yet, but the data lag by quite a bit so we'll see what things look like in a few more months. Of course there is a ton of regional variation, too. I imagine price/rent is going nuts in, say, San Francisco where people are moving out and working remote. Not so much in the rust belt.

-W

Thanks for the thoughtful reply.

Haven't read about the housing situation in Australia. Will have to go and take a look to learn about what the situation is like down there.

As to your point about regional variation, seems like there still might be some markets that could be good buys. I live in a very HCOL area but have considered looking in the Midwest or South to track down some rentals for my portfolio.


waltworks

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Re: Indicators of an overpriced market
« Reply #8 on: January 03, 2021, 01:56:41 PM »
There are 1% rule properties in the midwest, yes. Whether they are a good investment or not is going to depend on your analysis of the long term trends in those various areas. A lot of them have been slowly bleeding population for 50+ years and another 50 years of that means no more town. You might do fine, only to fine out that you can never recover your initial outlay as the house is impossible to sell.

I mean, there's nothing I would buy anywhere in the US right now, at least that is on the open market. If you can find some senile person to take advantage of, or just get really lucky/get offered something by a relative or family friend, different story.

-W

pnw_guy

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Re: Indicators of an overpriced market
« Reply #9 on: January 03, 2021, 01:59:22 PM »
There are 1% rule properties in the midwest, yes. Whether they are a good investment or not is going to depend on your analysis of the long term trends in those various areas. A lot of them have been slowly bleeding population for 50+ years and another 50 years of that means no more town. You might do fine, only to fine out that you can never recover your initial outlay as the house is impossible to sell.

I mean, there's nothing I would buy anywhere in the US right now, at least that is on the open market. If you can find some senile person to take advantage of, or just get really lucky/get offered something by a relative or family friend, different story.

-W

What about places in the South? Seems like population is increasing in areas where manufacturing jobs are on the rise (e.g., Boeing opening a new plant). Point taken though about bleeding population in the Midwest.

waltworks

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Re: Indicators of an overpriced market
« Reply #10 on: January 03, 2021, 03:35:36 PM »
Honestly I'm not even looking. At these interest rates and with the Covid dislocations, I don't have much confidence in any RE market.

-W

Jon Bon

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Re: Indicators of an overpriced market
« Reply #11 on: January 03, 2021, 04:09:40 PM »
Honestly I'm not even looking. At these interest rates and with the Covid dislocations, I don't have much confidence in any RE market.

-W

+1, things are about as crazy as they have ever been, I don't think anyone can make any predictions about RE with any confidence. RE should reset at some point, but with the Fed's behavior over the past 10 years, no asset class is going to go down in value.

I definitely feel like most of the big cities are approaching Aussie levels of NIMBY-ness.

PMJL34

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Re: Indicators of an overpriced market
« Reply #12 on: January 03, 2021, 04:10:47 PM »
OP,

In a sense you are asking us for a crystal ball and asking us how to time the market. None of us know what the future holds.

The current price to rent ratio could be the new norm or continue to get worse without correction the same way some argue that stock CAPE could be the new norm.

Many on the west coast choose to invest in LCOL areas. Like Walt said, unless you have some insider deal, I don't see any worth jumping on. This doesn't mean that you can't profit.   

My suggestion is to buy when you can if you have the funds and if your investment timeline matches up. Inflation is your friend for long term investments. I personally choose to invest in what I know. Which is my local + extended area. I am very hands on and like to do my own management+repairs.

Best of luck!

pnw_guy

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Re: Indicators of an overpriced market
« Reply #13 on: January 03, 2021, 05:38:59 PM »
Thanks all for the valuable input. This dialogue has been very helpful.

Also, if you have any other advice on getting started in real estate investing, please PM me. Been looking for mentorship for getting started with real estate investing but it's been tough. For example, I got on BiggerPockets looking for people that might be able to help be get started but all I found was people that wanted to be my real estate agent or just recommended taking on a lot of leverage.

iris lily

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Re: Indicators of an overpriced market
« Reply #14 on: January 04, 2021, 12:56:19 PM »
A classic indicator of a hot real estate market in our household is this: we buy in that market.

Our real estate adventures are centered around buying high and selling low. This is sad but true.

Let me know if you're thinking about selling!

Well, we did buy a unit 3 months ago. Over heated market? Check.

If things go well we will be selling out city house in about 18 months. You are welcome.

pnw_guy

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Re: Indicators of an overpriced market
« Reply #15 on: January 04, 2021, 08:51:53 PM »
A classic indicator of a hot real estate market in our household is this: we buy in that market.

Our real estate adventures are centered around buying high and selling low. This is sad but true.

Let me know if you're thinking about selling!

Well, we did buy a unit 3 months ago. Over heated market? Check.

If things go well we will be selling out city house in about 18 months. You are welcome.

We'll be doing the same within a similar timeframe. You might have company when it comes to selling low.

clarkfan1979

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Re: Indicators of an overpriced market
« Reply #16 on: January 05, 2021, 01:36:33 PM »
My parents bought a house in Florida for 565K in 2006. They sold it in 2015 for 430K. It sold again in 2020 for 435K. They overpaid. 

When my parents got their home insurance policy in 2006, the rebuild cost listed on their insurance policy was around 300K for a 2,100 sq. ft. house with a 2 car garage. I think they paid 90K for the lot. This is $143 sq. ft.

I bought my house post crash, about 20 minutes away from my parents in 2012. I paid 95K. The empty lots sell for 30K. The rebuild cost of my insurance policy was 190K for a 1750 sq. ft. house with a 2 car garage. This is $108 sq. ft.


rothwem

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Re: Indicators of an overpriced market
« Reply #17 on: January 07, 2021, 06:32:32 AM »
There are 1% rule properties in the midwest, yes. Whether they are a good investment or not is going to depend on your analysis of the long term trends in those various areas. A lot of them have been slowly bleeding population for 50+ years and another 50 years of that means no more town. You might do fine, only to fine out that you can never recover your initial outlay as the house is impossible to sell.

I mean, there's nothing I would buy anywhere in the US right now, at least that is on the open market. If you can find some senile person to take advantage of, or just get really lucky/get offered something by a relative or family friend, different story.

-W

What about places in the South? Seems like population is increasing in areas where manufacturing jobs are on the rise (e.g., Boeing opening a new plant). Point taken though about bleeding population in the Midwest.

FWIW, most of the mid-south is overvalued in places with actual population growth. Good luck buying something with good numbers in Raleigh, Charleston, Atlanta. The deep south--LA, MS, AL, and TX (to some extent) are super dependent on oil production and are hurting bad right now and if they don't find some other means of economic production they're going to be in trouble with a shrinking population just like the midwest. 

anni

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Re: Indicators of an overpriced market
« Reply #18 on: January 07, 2021, 08:52:23 AM »
A classic indicator of a hot real estate market in our household is this: we buy in that market.

Our real estate adventures are centered around buying high and selling low. This is sad but true.

Let me know if you're thinking about selling!

Well, we did buy a unit 3 months ago. Over heated market? Check.

If things go well we will be selling out city house in about 18 months. You are welcome.

Since I have no better way to guess, I am now targeting my down payment savings goal for July 2022. :D

Mrs. Healthywealth

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Re: Indicators of an overpriced market
« Reply #19 on: January 13, 2021, 10:42:03 PM »
Don’t think there is a crystal ball. You can always dollar cost average into the market over several years. I like the low interest rates and as long as the cashflow is to my liking we purchase the home. I read a lot of mixed thought on real estate predictions since no one truly knows. My gut tells me to just try it out and doesn’t believe there will be this huge market crash.

vand

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Re: Indicators of an overpriced market
« Reply #20 on: January 14, 2021, 03:21:52 AM »
Sure you can look at historic ratios and see that prices are expensive or cheap, but you also need to do a fundamental breakdown for yourself.

As an investor, a property is overpriced when you can't make the numbers work for your particular situation, ie when the cashflow can't easily cover the expenses plus little extra profit margin whatever risk premium to justify the risk you are taking on with that investment... and you start assuming that capital growth will make up for the shortfall.

As a homebuyer it's overpriced when it costs you more to tie up your money in your home than it does renting an equivilent house.

Obvious this is different for everyone as not everyone will have the same costs and risk premium and life situation. And then you need to judge it against what sort of return you think you could be getting in other asset classes.


Mrs. Healthywealth

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Re: Indicators of an overpriced market
« Reply #21 on: January 14, 2021, 11:18:37 AM »
Sure you can look at historic ratios and see that prices are expensive or cheap, but you also need to do a fundamental breakdown for yourself.

As an investor, a property is overpriced when you can't make the numbers work for your particular situation, ie when the cashflow can't easily cover the expenses plus little extra profit margin whatever risk premium to justify the risk you are taking on with that investment... and you start assuming that capital growth will make up for the shortfall.

As a homebuyer it's overpriced when it costs you more to tie up your money in your home than it does renting an equivilent house.

Obvious this is different for everyone as not everyone will have the same costs and risk premium and life situation. And then you need to judge it against what sort of return you think you could be getting in other asset classes.

+1 this is well said. Agree 100%. You gotta make the numbers work. You put yourself at risk when over leveraging; trying to make an appreciation play in this kind of market—altho in some areas it may work.

Seadog

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Re: Indicators of an overpriced market
« Reply #22 on: January 18, 2021, 07:18:34 AM »
Sure you can look at historic ratios and see that prices are expensive or cheap, but you also need to do a fundamental breakdown for yourself.

As an investor, a property is overpriced when you can't make the numbers work for your particular situation, ie when the cashflow can't easily cover the expenses plus little extra profit margin whatever risk premium to justify the risk you are taking on with that investment... and you start assuming that capital growth will make up for the shortfall.

As a homebuyer it's overpriced when it costs you more to tie up your money in your home than it does renting an equivilent house.


Obvious this is different for everyone as not everyone will have the same costs and risk premium and life situation. And then you need to judge it against what sort of return you think you could be getting in other asset classes.

While I'm extremely bearish on RE (especially in Canada), and agree and am currently living that exact ethos since my current rental is around a 0.5% cap rate (thanks LL!), something can be said for the stability that goes with owning and feel a bit of a premium should apply there. I think Europe is a bit different, but frequently in Canada rental investments are often viewed by LLs as the best of owning, with the best of an investment. As in, they feel it's their house to do whatever they want with, and can dictate terms and make demands much like if you loaned someone your power sander. Tales of tenants being forced out because the LL thinks they can get higher rent, renovictions, my brother was given 6 days notice to vacate in Vancouver because his LL got an unsolicited offer. No where close to legal, but the LL was shocked when he told her she couldn't do that. Laws are frequently ignored by LLs who didn't even bother to read the tenancies acts, or get an even basic understanding of contract law. So while you might be able to rent the same pile of wood and bricks for less than the non recoverable costs the LL carries, you're not renting the same total living situation, if that makes sense.

SndcxxJ

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Re: Indicators of an overpriced market
« Reply #23 on: January 18, 2021, 09:28:14 AM »
There are two numbers I often think and talk about, and find useful.  One is the gross rent multiplier, the other is the cost of construction.  Gross rent multiplier is the purchase price of the property divided by the total annual rent.  Oftentimes, depending on your personal economics, management style, and management costs, a fully leveraged property (80% LTV) requires a 9 gross rent multiplier (for me) to break even including all things (mortgage, insurance, property tax (in my area), maintenance, capex, vacancy, etc.).  The lowest gross rent multiplier for a market rate property (that I would actually be interested in purchasing) in my 20 year career was in the 11 range (again in my area).  The cost of construction is another consideration when thinking about real estate.  In my area the cost of construction is in the neighborhood of $250-$325/sq ft depending on quality of construction, excluding land.

BicycleB

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Re: Indicators of an overpriced market
« Reply #24 on: January 18, 2021, 06:58:41 PM »
A classic indicator of a hot real estate market in our household is this: we buy in that market.

Our real estate adventures are centered around buying high and selling low. This is sad but true.

@iris lily, that is literally my favorite real estate comment of all time.

May your future adventures reverse the trend!

Sure you can look at historic ratios and see that prices are expensive or cheap, but you also need to do a fundamental breakdown for yourself.

As an investor, a property is overpriced when you can't make the numbers work for your particular situation, ie when the cashflow can't easily cover the expenses plus little extra profit margin whatever risk premium to justify the risk you are taking on with that investment... and you start assuming that capital growth will make up for the shortfall.

As a homebuyer it's overpriced when it costs you more to tie up your money in your home than it does renting an equivilent house.

Obvious this is different for everyone as not everyone will have the same costs and risk premium and life situation. And then you need to judge it against what sort of return you think you could be getting in other asset classes.

Great comment by @vand.

@pnw_guy, if you haven't read it before, find a copy of "What Every Real Estate Investor Needs to Know About Cash Flow...And 36 Other Key Financial Measures" by Frank Gallinelli. Apply what's in it to sample properties. If none of the properties work, maybe it's a bad market! More importantly, by the time a good market comes around, you'll be in better shape to recognize it. And to get a good property, thanks to your detailed analyses.

I have a friend who bought a decent rental in a rising market but lost money due to bad tenants, outsourcing all labor, making false assumptions about what upgrades tenants would value, and assuming that average property prices were ok instead of "learning the business", so to speak. I can trace that to inexperience, which caused moves like the unneeded "upgrades" and taking undue risks in his tenant qualification process, but he viewed it as bad luck + this is the wrong business for him.

At least he now recognizes it's a business. Rental property is not like buying an index fund, outcomes depend on owner skill and effort as well as market factors. Learn, learn, learn.
« Last Edit: January 18, 2021, 07:10:13 PM by BicycleB »

norajean

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Re: Indicators of an overpriced market
« Reply #25 on: January 18, 2021, 07:29:05 PM »
It depends on your definition of “overpriced”. Overpriced relative to what? Income? Future prices? Demand? Alternatives like renting?