[su_quote cite=”Donal Trump” class=”wwd-post”]”It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate”[/su_quote]

Dear Member,

Many people I have spoken with lately have told me that they are buying houses for appreciation. This is a huge mistake in my opinion, I believe within the next 3 to 5 years these individuals are going to get burned badly.

Now I have always liked residential real estate as a cash flowing hard asset. Real estate is in my blood, since I was young I was attracted to it and understood it well which drove me to buying my first rental property at age 18. As a young man I was buying in the late 90′s at the very start of the real estate bubble. Living in California at the time I was easily seduced into forgetting about cash flow and becoming a full time speculator whose only experience was price appreciation. Which is exactly what investors are experiencing now…

Long ago the real estate market was taken over by the government with the introduction of the 3 decade loan, unqualified buyers receiving government backing, and of course the government sponsored enterprises introducing the low down (no skin in the game) mortgage. This fueled real estate prices higher for decades and when that slowed down, the Federal Reserve kept the party going with low interest rates.

Today we have a serious problem in the real estate market, when it comes to prices where the majority of Americans live, residential real estate is a house of cards.

Here is a chart of the 10 year Treasury at a near record Low

Real Estate House of Cards Chart

Let’s do some simple math on home affordability in the future with rising interest rates. With a $300,000 mortgage note with the standard 3 decade loan, here are the payments:

  • 4.5% = $1,520.06 monthly payment (currently today’s rates)
  • 8% = $2,201.29 monthly payment (1990′s norm)
  • 19%= $4,766.68 monthly payment (early 1980′s spike)

Prior to 2003, rates below 5% were unheard of; so today’s buyer is completely disconnected from a normal interest rate environment with rates at  just over 4% in 2014.

Realtors and sales people across the country will often cite the 2006 highs in proving to you the potential for further price appreciation; but we should remember that from 2004 to 2006 sub-prime loans exploded in their growth which won’t happen again so close to the 2008 bust. The stated income loans, no documentation loans, and the 1% option-arms are gone; so is the secondary mortgage market for that matter, at least for the foreseeable future. believes that the upside for further gains in real estate, specifically California, Nevada, Arizona, and the north east is very limited, perhaps another 10% over the next 18 months. However, beyond that the downside is huge, as interest rates rise, we expect to see a 30 to 50% price decline in some of these inflated markets.

Especially in places like Arizona and Nevada where an unusually high number of investors have swarmed those areas looking for “flipping opportunities.”

Our recommendation is to buy houses for cash flow or become an investor who adds value to a property in order to make a profitable sale.

Don’t get caught in this house of cards because when this bubble bursts, it will be far worse than the last one. Real Estate bubble 2.0 will see rising interest rates due to the FED’s loss of control, so there will be no rescue this time or soft landing, it will be blood in the streets.

Best Regards,
Daniel Ameduri