The economy is going great right now, but some are saying there could be a major crash in the next couple of years. Maybe I've just been reading too many blogs, but it has me concerned.

Do you think this will happen?

And I don't mean this as a political discussion, but...I heard the Great Depression was preceded by a similar tax bill that increases the deficit, like the one that is being passed now.

I think the can will be kicked down the road for some time. Market at all time high (up 20% for the year!), Bitcoin at all time high, real estate markets as a general rule are doing well. I think they can keep it going for a few years anyway with the tax reform but it's got to crash eventually. The markets are not backed by anything except faith and greed. Eventually faith or greed runs out.

There is no proof that the tax bill will cause a crash, only speculation. Speculators and alarmists and those with an agenda pick the info they want to either bolster their agenda or to sell their products or advice.

The only thing certain is that things will change.

To get the best results first don't get everything on one place, town or premise. Second, be alert for developments and be willing to adjust to changes.

It's people who refuse to acknowledge reality of situations and to change when necessary who have large losses.

1. The economy is STARTING to get GOOD right now, with a pickup in INTEREST in business expansion. There is right now, no business expansion, but there is a lot of interest in exploring it.

2. This week, there is a CORRECTION (not a crash) in technical equities. It is a normal correction due to this years run-up in prices. In my opinion, neither the market nor quality equity shares are yet over priced.

3. I do not believe there is a major crash now in the works. What sort of market did you have in mind? Stock equities? Real Estate valuations? Rental prices? Employment? I don't believe that any of them are due for a crash in the near future.

Financial services are due to do well with rising interest rates. So will real estate ownership. Rental incomes will also rise, but the best windfalls will occur in areas with high rental demand.

4. A lot depends on the success or failure of our esteemed President. If he doesn't produce some real results, markets will take that into account. If he succeeds, then markets will likewise take that into account.

4. Mutual Fund distributions will take place today. I expect many of them to be substantial, especially in certain sectors.

5. There is every reason to be optimistic about the US economy, more so this year than in any of the past 8 years.

By the way, year-end report by my research service just arrived. I don't know where you are in FL, but:

Jacksonville racked up more than 6,000 jobs in healthcare and retail sectors, driving an overall rate of job creation that reduced area unemployment to a 10-year low. Hardly the conditions for a crash.

These additions coupled with a bump in financial-related professionals bolstered the median household income by $33,000 during the last 24 months. Increased earnings and the need for more employers to recruit from outside the market to fill openings spur a rise in millennial relocations and household formations. Many of these new residents have opted to rent during a period of rapidly appreciating home prices, heightening demand for apartments. Developers are responding with plans to complete more than 2,200 apartments this year, the highest annual total this cycle. Again, hardly a forecast of a crash.

There are always people that say the crash is right around the corner or boom years ahead.

Just invest with your sights on the long term. A very reasonable projection made years ago by Sir John Templeton was that the DJIA will be at 1,000,000 by the year 2100. It is currently at 24,000. So it would only be a 4.6% CAGR to achieve this level at that time.

Buy and hold.

Laser focus versus flood light worry.

One thing I've learned since I've started doing this is to not worry about the big picture paranoia stuff as much as I used to.

Growing up with my father, he was always worried about doom and gloom, doomsday scenario type stuff. He still is and I think that has been really limiting to him.

He is really into the stock market and are used to sit there and watch the stocks go up and down and worry about the latest headlines about the economy etc. It never made sense to me.

What makes sense to me is looking at a two bedroom one bath ranch house that will rent for 700 A month and have $30,000 or less into it. And that keeps me laser focused on the small world around me. The flood light focus I guess would be worrying about big huge things that I can't control. When I know what that two bedroom in my little town will do, I don't care what happens in China, North Korea, Florida, California or two counties away for me.

Every economic downturn is not a "crash". That's a term that the media loves to use to get the nervous nellies jacked up.

Is there an economic downturn ahead? Of course.

When will it happen? Sometime in the next few years.

How shall I prepare? Invest in good stock funds and real estate. Same as always.

Put $1,000,000 in the market and in 83 years your heirs will have $41,000,000 - which should buy a tube of toothpaste... sigh.

I think you may be able to buy a bit more than toothpaste!

" Put $1,000,000 in the market and in 83 years your heirs will have $41,000,000 - which should buy a tube of toothpaste... sigh. "

BUT:

My well-chosen portfolio has gone up 42% YTD (including the current tech correction);

CPI-U (Nov 1 2016 through October 1, 2017) has gone up 2.0%

SO, if the above claim is true, then I would invest in toothpaste.

During my life I've seen 3 up and down cycles in real estate. I've invested through 2 major up/down swings and still managed to stay a float. Why? Because of the following:

1) I never relied on anyone for help or to bail me out.

2) I always put enough money down and secured decent long-term financing, nothing that would would come due in 5, 10 or 15 years. Even though interest would shift from a fixed rate to a variable, the loan would continue for the term -- 15 or 30 years. A

I kept my costs in check and was able to "LOWER" tenants rents to compete in a "Flat" market with "NEWER" buildings that offered Pools, Work Out Rooms, a Game Room and Free moving with no deposit.

I remember when a 1 bedroom rented for $500 a month and people were loosing their jobs and were going to move to a single (no bedroom) apartment and only pay $375 per month. Around 17 of my tenants gave me notice so I had to put a plan into action.

I explained that my builds were under rent control and I could only raise rents 3% a year. The newer buildings with all of the thrills were renting for $600 a month for single units and $875 for 1 bedroom. After their first 6 month lease of $375 was over, they would be raised to $600 or more.

I offered to lower their rent to $375 for the next month or two, so long as they tried to get a job (has lost their job in the bad economy OR tried to get a roommate to live in the den/living room and split the rent of $500, then only costing each $250 a month..... Instead of $600 themselves in the newer building.

Because I could lower rents, I had put down 30% and had lots of room to play, I managed to Keep 12 or the 17 tenants. They got new jobs or got a room mate.... Of the 5 tenants that left, three of them moved in with my other tenants.

If your "well chosen portfolio" can manage a CAGR of 42% over 83 years, you'll be the richest man in the world's history!

lol well put Kurt

I think we have a bifurcated economic situation. A good portion of America has crashed already. We see this in the tenant pool with folks not having money and not being able to raise $ 500 in a pinch. The tax cuts and low interest rates are designed to boost the FIRE (Finance, insurance and real estate) economy alone. There was a time when the FIRE economy mirrored a true underlying economy that involved manufacturing and the creation of decent paying jobs. Decent paying jobs for masses of working people runs counter to never ending growth in share prices which is the main reason these jobs were sent overseas. There are two Americas literally; we happen to function in the one that hasn't crashed and as long as the money printing game continues, it won't unless a black swan appears out of the blue. Things are so thinly supported by fundamentals that it wouldn't take much to send things into a tailspin.

" Anyone who has minimal or no leverage deployed would be king of the hill. "

David--It depends on how much debt you have. In a worst case deflationary spiral, leverage becomes a hammer. Let's say you bought your place for $ 200,000 and it's generating gross rent of 36,000 annually with net cash flow to you of 13,000 after expenses and debt service. Let's assume debt service is running you $ 12,000 annually at fixed rate and term. Let's assume further than your total mortgage debt is $ 180,000 Everything is going fine and than all of a sudden loan creation drys up putting everything into a stall where real estate markets become discontinuous---with an extreme imbalance between buyers and sellers. Let's assume the value of your real estate drops to $ 100,000 putting you immediately underwater. Let's also assume this deflationary spiral results in job losses which cut your rental income by 50% either through vacancies or rent decreases. Here's what your numbers will look like:

Before After

Rent: $ 36,000 $ 18,000

Expenses 11,000 11,000

NOI 25,000 7,000

Debt Svc 12,000 12,000

Cash Flow 13,000 (5,000)

Even with debt fixed and fully amortizing, you have major problems; you're feeding the property and can't sell it for enough to clear the mortgage. Other folks in the same situation are walking away which makes your situation even more precarious. If you were relying on the income for retirement, it becomes a cascading problem throughout all of your finances. If you multiply this by the number of people in the situation, then you can see how a downward spiral gathers momentum and becomes self reinforcing. If you had minimal leverage or none at all, you might not be dancing on the table, but you're still netting positive cash.

GKARL was talking about "deflation" which is price decreases.

If you had a fixed loan your payment wouldn't decrease proportionally with all other values/wages/etc.

So say for now your debt payment is $500 fixed. You could buy a medium-grade watch with that amount of money. With deflation now perhaps a new car is $500. That $500 payment is "more expensive". Rents people could pay may go from $800/mo to $100/mo, yet you still have a $500/mo payment. And your $100,000 house may be worth $30,000 so you can't refinance out of it as you may now be underwater.

" Decent paying jobs for masses of working people runs counter to never ending growth in share prices which is the main reason these jobs were sent overseas. "

Really?

Consider the following:

Lower corporate taxes makes American companies more competitive and able to make and sell more. In order to meet this demand, they must expand the company and hire more workers. Investors see this potential early and buy stock, making the value of stocks go up.

So, it is business expansion that creates both opportunities for investors and decent paying jobs for workers.

What happened in the last 8 years? The President ignored American companies inability to compete, funneled huge amounts of government cash to benefits, only poor-paying jobs were created resulting in zero wage growth for workers. The President intended the incoming president to follow his footsteps.

Is something different with the new President? Equity market goes up, businesses seriously looking toward expansion. If it works, then what will happen with decent paying jobs?

Is there some reason that the stock market went up this year? Was it to be expected? Was the 42% increase in my portfolio to be expected? Did I know something that maybe others didn't? Or, was I just lucky? Or, do you suppose that I am not telling the truth, because if you didn't take advantage of these circumstances, then no one did?

GKARL, Kurt, the problem with dropping house values and dropping rents also applies if you have paid off houses.

J, YouTube "Charlie Browns parents talking".

Yes, David, but all of your other expenses drop also. Taxes, utilities, insurance, repairs, may also reduce in $ cost proportionally. So one's return on assets may still be similar on a % basis.

A fixed debt will NOT "deflate" accordingly. Thus creating a potentially monstrous negative cash flow issue.

Of course the market will correct in a few years, just as sure as the sun will come up tomorrow.

This is news?

It seems that deflation is more academic than reality based. I am sure it could happen but I've not seen it happen. The economic woes of 2000 and 2008 did not produce deflation. Stagnation sure but not deflation.

Remember when gas prices surged and everyone started adding gas surcharges to their shipping prices or they upped their prices and said "it's because of gas being expensive". Did any of the prices decrease or go away when gas prices returned to normal. No they did not. Prices still stayed up and profits went up.

There will be another down cycle as it is only a matter of time, the question is severity and what will be effected.

Debt is a necessity for a real estate investor. The trick is to manage the debt and keep it reasonable.

My ex partner had 14 million in property in 2008 and an equal amount of debt. He lost everything. My debt ration was 20% and I survived 2008.

For the U.S. the most recognizable period of large deflation was the Great Depression.

But doing a cursory search there were a couple of periods in the 1800s in the U.S. we had deflation as well. More recently Japan saw deflation in the 1990s.

It certainly isn't just academic. In theory the federal reserve is there to combat deflation (or too much inflation). They seemingly do a nice job at their stated goal of keeping inflation in the ballpark of 2%/yr

The federal reserve actually tracks the probability of deflation to occur (however meaningful that is). In 2008/09 they stated it at 70% probability, today it is at 0.5%

fred.stlouisfed.org/series/STLPPMDEF

Anyone who tells you they know what will happen in 2018, much less the next 7 years, is selling a bill of goods. If anyone were that clever, they'd have better things to do like writing a book on how they made $100+ million last year... and even though I know and love ya all, I kinda doubt someone in that position would be hanging out here on a regular basis chit-chatting. ;-)

In my hood real estate hit a HIGH in 1987 followed by a LOW in 1995 then HIGH in 2007 then LOW in 2011.

" Still plenty of people under water. Plenty of room to run"

Perhaps. I struggle with this and of course no one has a crystal ball. I know someone who was in his house for nearly 8 years without making a single mortgage payment. This was the slowest foreclosure I had ever seen. The bank literally wanted to keep him in the house and delay matters almost as if they were waiting for prices to recover. There are a number of people similarly situated and there's a shadow inventory of housing that was held off of the market back in 2008 that's still there. This guy's house is a mini mansion that he paid $ 500,000 for. On the other hand, I see a lot of bank owned houses on the market on the lower end of the spectrum and foreclosures on the low end seem to occur much more quickly. In my area, these low end houses might have gone for $ 100,000 at one point and are now half.

Deflation would put the federal reserve out of business along with most of the world's economic infrastructure. They will move heaven and earth to prevent that from occurring even if they have to force money into the hands of people.

GKARL, how ironic! I was just talking about the shadow inventory left over from the subprime crash with a friend this past week. I never did hear how/if any of that was "unwound." I recall about 4 years or so back there were an estimated 2 million+ houses in this situation.

1. Poor paying jobs would not push RE values in those places skyhigh "

David, you still don't understand what "pushes" real estate values.

Its not high or low paying jobs, or the job mix. It is VACANCY RATE! High paying jobs, low paying jobs, inflow of destitute immigrants alone "pushes" rentals (which in turn push RE valuations).

2. I don't understand your remark about my support of the current administration. It is not against the law (not in CA) for investments to increase in value nor to decrease.

3. " Of course the market will correct in a few years, just as sure as the sun will come up tomorrow. "

Do you understand what a correction is? (and why?) as opposed to a crash? and, do you understand what happens to the market after a correction (and why)? Are you supposing that the market simply goes back to where it was before it started to go up? Now THAT would be news.

4. JR, you have forgotten that I made 3 suggestions back early last year. What would have been the outcome if you had acted on them? I am presently giving good consideration to my strategy for next year, specially since the situation is not as clear as it was at this time last year. Last year, I referred to the 2017 situation as a once-in-a-generation opportunity. The same conditions no longer hold true, but new considerations are numerous.

5. " Buffet, Icahn, Soros, Bogle seem to top off at 25% over the long run ". So what? What were their investment objectives? "Long run" implies an average, averaged over good years and bad. I cited my 42% for a single (unusually good) year.

6. " Anyone who tells you they know what will happen in 2018 ... ". This is not crystal ball stuff. But anyone who has studied in a university knows about how certain information can be used to gain insight into the immediate future. For example, if you know that the weather conditions now will cause a failure in the turnip crop for this next year, and if the Department of Agriculture can furnish you with information about demand for turnips, would it make sense to consider investing in available turnip contracts, such as from far-off abroad? Stop and consider what trends are going on presently, and how you might be able to exploit them to your benefit You don't really have to be clever, just smart, educated and willing to do the homework. "I kinda doubt someone in that position would be hanging out here on a regular basis chit-chatting." If you didn't take advantage of this year's opportunity, thats your business. I grew up in a developing country, with wars and deprivation a constant intrusion on life. My hard work and perspicacity brought me an education second-to-none, and an opportunity to live in this great country. I have used all of those attributes to see that my children and grandchildren can have the better life that America offers. If you don't feel comfortable with other people knowing something that you don't, don't knock it; maybe you could learn and be happier that you did.

7. " In my hood real estate hit a HIGH in 1987 followed by a LOW in 1995 then HIGH in 2007 then LOW in 2011. " Thats not a very sophisticated analysis. Maybe you're in the wrong hood.

8. " Still plenty of people under water. Plenty of room to run" Anecdotal analysis is not as good as reliance on logical principles and information.

Do I think the economy will crash - absolutely. Do I know when - nope.....and no one really does.

There are a couple good marketing timing strategist out there but none of them cover my middle of no where location. I used Bruce Norris 2004 predictions to pull out of the SoCal market when I did, but he didn't forecast a national crash either.

My advice - if you feel (much like I do) we are closer to the top than the bottom, then just reduce your exposure or risk level. I am doing less transactions this year than I have over the past five years. The cash flow is still good on these deals so there is no reason to ever stop dealing.

R-N-P:

What do you think this crash will look like?

"Eventually faith or greed runs out."

Greed never runs out.

I expect a downturn in the next few years, but there really is no way to predict exactly when. Thus, I'm simply trying to reduce risk: risk of losing tenants, losing my day job, fires, floods, etc. Currently only own one property again, so I'm pretty safe. I could easily pay the mortgage for 10yrs even jobless. so I think I'll survive the next downturn.