patrick.net

http://online.wsj.com/article/SB10001424052702303901504577460550067846454.html

According to above article, the biggest group of foreign buyers of US RE is Canadians. Second is Chinese, they prefer California.

What, China doesn't have enough empty real estate in their own country?

While I was a renter the vast majority of my "investing" was via 401K up to the point of maxing out the company match. Knowing that I may one day buy a pad kept the almost the rest of my savings in cash vehicles so as not to lose the potential downpayment funds. In a hypothetical world if I would have remained a renter, I seriously doubt that I could have been an extremely disciplined investor outside of 401K for the rest of my life. After a few bad months thoughts would have crept in how this money would be better spent buying a house, consuming various goods, traveling, etc. It is easier said than done to be a renter/investor for life and stick to it.

edvard2 says

Because that's precisely what my wife and I did, as well as two other friends of
mine. In fact, around here I know quite a few people who did the same.

You were definitely fortunate if it worked out for you to accumulate your downpayment funds via investing in stock market. It is an extremely risky strategy that can backfire and set you back for years. From what I have read, the vast majority of investment professionals recommend saving for downpayment in cash equivalent vehicles.

In keeping with the turn this thread has taken, let me present an example from my own life. My coworker bought his house in 2006 for $560k. He used two loans, one being a piggy back to do it. He's now only about $70k underwater on his house, and his payments cost upwards of $3k/month. He recently got a hardship refi, but his payments barely changed, because now they withhold tax. .
I saved for 10 years and then recently bought a house. I paid $420k, put down $70k, and am that much in positive equity now. My PITI is $2100/month, which is very easy for me. My wife and kids love the new place, and we have high hopes for the future.
I think it's easy to see who "won" that house race.

robertoaribas says

But, despite a decade of pain, your coworker will still come out ahead, in the longrun.

How will the co-worker in question come out ahead when they bought at the peak and Quigley bought at the trough? Sounds to be that Quigley is already well ahead of the co-worker.

But in general, the so-called coworker is probably not saving any money at all and spending it all on an underwater house. Seeing as how the peak was around 2005-2006 or so, we're talking about an 8, and almost 9 year stretch where that person has basically had zero financial gain. Zero while at the same time a renter would have and still be saving for that entire time period.

edvard2 says

But RE has never been an investment that was able to outperform plain ordinary
stocks and the overall stock market.

That is true. Average stock returns are 8.8% vs housing returns of 3.1%. Housing mirrors inflation. However, this analysis needs to be expanded. Lets take a renter who has 100K available for downpayment and is able to buy a $500K pad with 20% down. Or they can keep on renting and stick 100K into a index fund. A buyer controls the entire price starting point of 500K. If housing continues to appreciate at a historic trend, the pad will be worth $1,000,000 in 24 years. Lets be optimistic and assume that stocks will return 9% going forward. That means that portfolio value will double every 8 years. So 8 years later, renter/investor has 200K, 16 years later they have 400K, 24 years later they have 800K. So, 24 years into the ballgame, the buyer is still ahead net worth wise even though housing only appreciated at rate of inflation. And we are not even accounting for the fact that most likely the rent will double in 24 years as well at least. While the buyer by that time with any sort of discipline will already pay off a 30 year note and capture the "dividend" which is market rent for their type of residence that they don't have to pay minus property tax + HOA.

dublin hillz says

That is true. Average stock returns are 8.8% vs housing returns of 3.1%. Housing mirrors inflation. However, this analysis needs to be expanded. Lets take a renter who has 100K available for downpayment and is able to buy a $500K pad with 20% down. Or they can keep on renting and stick 100K into a index fund. A buyer controls the entire price starting point of 500K. If housing continues to appreciate at a historic trend, the pad will be worth $1,000,000 in 24 years. Lets be optimistic and assume that stocks will return 9% going forward. That means that portfolio value will double every 8 years. So 8 years later, renter/investor has 200K, 16 years later they have 400K, 24 years later they have 800K.

Except you are forgetting the roughly $200,000 total worth of property taxes that the buyer would have forked over in that 20 year period, Of course the interest, not to mention the maintenance that their house will need, on top of all the other crap they are going to do to it- like buying light fixtures, washing machines, and clothes driers that the renter won't have t be doing.

Secondly, your comparison shows a buyer who was fairly aggressive and plopped down a hearty 20% down payment on a fairly expensive home. If you buy a 500k home then you'd better be making north of 100k per year in income. So that being the case, we can assume the renter also makes that amount. So let's say they too make 100k. If that being the case then your model has the renter putting down a measly 5% of their annual income into stocks, which is about 50% of the minimal suggested amount you should be stashing away into retirement every year- 10% minimum. So of course in that scenario the renter will lose because they made a stupid financial decision. Anyone who knows anything about investing in stocks and retirement knows the percentages they would need to invest.

So your model is lacking some key things here.

robertoaribas says

Not ahead of quigley, ahead of a lifelong renter in the same neighborhood. Is this really that tough to understand?

Except I've already established why this could easily not be the case. Sorry, but if you and others are going to throw out blanket statements that people who buy RE will always outperform those who rent, then you're not going to win that debate because its wrong to make such a statement to start with.

The reason why home buying can make the owner so much return is due to the miracle of leverage. When you essentially risk money that is not your own, you stand to make percentage on it. Putting 100k down on a 500k home gives you five times the leverage, or possible return, on an appreciating investment. So a 10% return in form of appreciating RE prices gives you 50k.
Putting the 100k in the stock market and making 10% gives you 10k.
Both assets performed the same, the difference was the leverage used in the RE investment made it pay off larger.

SFace says

If you invest $100 in the S&P 500 in 1977 the year I was born and $100 in a REIT index, (which is essentially real estate), almost any real estate index will blow away the S&P (by a large margin) which is proof enough that real estate > stocks.

no one would ever make such claim since 1977 to 1997, even in SF, that real estate would exceed stock prices. so why didnt RE prices skyrocket in prior decades. But you have also included the "bubble years" as some norm to path to wealth.

SF residents have nothing to claim as being millionaires, since the majority of prices were well under $300K before the bubble. After 1998 its all just a scam. Had it not been for the Tech stock bubble and Housing bubble, you would not be making such claims.

http://www.nytimes.com/1997/04/27/realestate/live-work-law-for-artists-roils-san-franciscans.html

A report released this month by the National Association of Home Builders put San Francisco's median residential price for 1996 at $285,000. With prices beginning at $175,000 to $200,000, lofts are the cheapest nonsubsidized units on the market,

thomaswong.1986 says

If being a landlord is such

a great move, perhaps you can have your dentist change his/her profession. LOL

Yep ... like that will happen. Landlord.. when you absolutely have no career to call your own. Laughable.

Well, many dentists and doctors are landlords at the same time. They have to keep practicing their dental and medical craft because they owe big debts for the degrees and the purchase of practice/license/building.

After I sold my previous home, I rented a much better house for 6.5 years till mid-2011, from a medical doctor.

robertoaribas says

thomaswong.1986 says

a reminder for the future, all prices revert to the mean.. there will be no sustainable double digit price inflation. Eventually even today prices will revert to the mean.

Mean reversion has worked out fantastic for me, buying in 2010 and 2011 here in Phoenix :-)

Beers are on Roberto!

Tim Aurora says

Yes it does. If a renter pays 2K a month for a house then if he would buy that house, his "transposed income" from the house is 2K. Now you can argue that we have to subtract maintainance, taxes etc and that is all fine. But it produces a "transposed income", which the renter has to pay anyways.

Laughable... as a home owner, like so many others back when I bought didnt no view our home purchase as some investment but no more than a typical necessities of life ... food, clothing, and shelter. Never in the past did people look for prices to skyrocket 100-200-400% ... it was not the norm. People like you are treating the bubble as a norm.. as some investment. There has never been a term "Transposed Income" in the past.. its nonsense.. your just trying to justify inflated prices.

thomaswong.1986 says

Tim Aurora says

Yes it does. If a renter pays 2K a month for a house then if he would buy that house, his "transposed income" from the house is 2K. Now you can argue that we have to subtract maintainance, taxes etc and that is all fine. But it produces a "transposed income", which the renter has to pay anyways.

Laughable... as a home owner, like so many others back when I bought didnt no view our home purchase as some investment but no more than a typical necessities of life ... food, clothing, and shelter. Never in the past did people look for prices to skyrocket 100-200-400% ... it was not the norm. People like you are treating the bubble as a norm.. as some investment. There has never been a term "Transposed Income" in the past.. its nonsense.. your just trying to justify inflated prices.

well said.. thank the Fed and Wall Street (with the assistance of an incompetent government) for turning a basic human need into a casino game rigged for the house, where huge amounts of leverage is used to make money off of future labor... as we saw in 2007/8 and will see again sometime in the future, they have managed to tie the fate of much more than the cost of housing on the outcome..

thomaswong.1986 says

As such that $300K home in mid 90s at best is worth only some 50% more ... and
not 300% more as you would seem to believe.

So I guess that when you decide to sell, you are going to list at 450k, instead of the 850K market price?

When the inevitable bidding war breaks out, with people lining up the block with cash offers of 600K, 650K, 700K, some of them literally begging you to pick them - you are just gonna say "nope, its only worth 450K because my chart says so" and take the first offer at list?

CDon says

does he slip the revolver in his mouth and end it now, or instead, turn it
outward, looking for the man who led him astray so many years ago with
authoritative sounding tales of mean

what a jackass thing to say... so, I conclude, you must be a complete jackass.. the only thing you have supporting your position on "market prices" is the Fed and a broken government... I will give you one thing, however, and that is it would have been wiser to not fight the fed from the onset on this one.. however on that, even the Fed can't prevent true market forces and basic math from eventually taken hold on your "market prices" theory.. you seem to disagree.. we heard jackasses like you spewing the same message in 2005/6/7...

kmo722 says

CDon says

does he slip the revolver in his mouth and end it now, or instead, turn it

outward, looking for the man who led him astray so many years ago with

authoritative sounding tales of mean

what a jackass thing to say... so, I conclude, you must be a complete jackass.. the only thing you have supporting your position on "market prices" is the Fed and a broken government... I will give you one thing, however, and that is it would have been wiser to not fight the fed from the onset on this one.. however on that, even the Fed can't prevent true market forces and basic math from eventually taken hold on your "market prices" theory.. you seem to disagree.. we heard jackasses like you spewing the same message in 2005/6/7...

Prices only revert to the mean based on some calculated, constant dollar value. So, mean reversion can be any combination of rising prices and declines in the value of the dollar. My bet is that the second factor will be predominant in any mean reversion.

kmo722 says

CDon says

does he slip the revolver in his mouth and end it now, or instead, turn it

outward, looking for the man who led him astray so many years ago with

authoritative sounding tales of mean

what a jackass thing to say... so, I conclude, you must be a complete jackass.. the only thing you have supporting your position on "market prices" is the Fed and a broken government... I will give you one thing, however, and that is it would have been wiser to not fight the fed from the onset on this one.. however on that, even the Fed can't prevent true market forces and basic math from eventually taken hold on your "market prices" theory.. you seem to disagree.. we heard jackasses like you spewing the same message in 2005/6/7...

Guilty as charged - pretty much on all counts. I simply tire of Thomas' incessant reliance on a graph and a concept that, while absolutely true in the "long" run can really hurt buyers who are trying to distinguish between buying in the bubble (which was a specific, temporary, one time event) and "waiting out" demographic trends (be it either the popularity of the bay area, or the hollowing out of detroit) which can last multiple decades, or much much longer.

As for the govt can kicking, yes, I am explicity assuming that the United States Government, the entity with the lowest carrying costs in all of recorded history, will continue to enact various can kicking policies as it has for roughly the last 200 years or so, and eventually, those policies are built into the market price such that anyone waiting is very likely to be sorely disappointed.

Case in point, dairy prices have been to some extent manipulated continuously since the depression. Immediately thereafter there were howls of protest (read the minutes from Sen McNary who was convinced the massive expense would cause the government to implode), and im sure some consumers decided to "wait it out" for the price to drop from the "manipulated" price of say $0.18 to the "true" market price of $0.13.

That was 80 years ago. Yet, something tells me that even if all supports were removed today, prices would not drop all the way down to $0.13, or even $0.18 thereby vindicating the few people still alive who made that claim.

Bottom line is this. Anyone looking at that chart in the mid 1990s would conclude "gee SF and SJ are still at 240K, and the trendline is at 200K -- since I dont want to see prices crash -20% after I buy, im going to rent and wait!!!" Anyone continuing to hold that position to this day will very likely die before they see 200K, or even the 240K prices they passed on in the mid 90s as being totally unsupportable.

JFP says

Prices only revert to the mean based on some calculated, constant dollar
value. So, mean reversion can be any combination of rising prices and declines
in the value of the dollar. My bet is that the second factor will be predominant
in any mean reversion.

Precisely. As I noted in another thread, if Shiller is correct, and the pressure relief valve for the overperforming cities is the building of new ones - then Thomas will eventually have is moment of vindication.

Problem for him is it may not be until the year 2133 when they build "Pelosi, CA" right out in the middle of the bay, causing SF and SJ to finally mean revert at the 2133 inflation line of 1.9 million dollars. Perhaps he should have a provision inserted in his will requiring his heirs dig up his grave and triumphantly exclaim "I told you so" on his behalf.

JFP says

Prices only revert to the mean based on some calculated, constant dollar value.
So, mean reversion can be any combination of rising prices and declines in the
value of the dollar. My bet is that the second factor will be predominant in any
mean reversion

that's part of the answer to market forces and mean reversion.. you forgot wages and income in your theory.. I've seen enough data to know how wages and income work in this country.. talk to me about mean revision when wages and income take a hit after housing prices flatten or start to fall.. most everyone talking econmics in this country neglects to acknowledge the roll of rising home prices and the risk to the economy when that is no longer the case.. leverage and risk works both ways... I'm sure the Fed is aware.. that's why they are buying mortgages with both fists.. we'll just see how the US economy does when that home is no longer the golden egg of wealth (the asset side of the balance sheet) and becomes a liability as well (the other side of the balance sheet).. we'll see how jobs and wages and reversion to the mean are connected then.. even the mighty Fed can't keep them rising forever..

kmo722 says

we'll just see how the US economy does when that home is no longer the golden egg of wealth (the asset side of the balance sheet) and becomes a liability as well (the other side of the balance sheet).. we'll see how jobs and wages and reversion to the mean are connected then.. even the mighty Fed can't keep them rising forever..

I predict that the Fed will debase the currency before they allow nominal asset prices to drop significantly. They've already shown their willingness to do so. What will cause them to change their course in the future?

CDon says

NYC became a world class city,

Really ? Some keep forgetting how much how deep NYC sunk as the worst city in the USA EVER... Fucking parts of NYC looked it went through WW3, the other side lots of people were all Heroin/Coke Junkies with streets infested with Gangs.. Yea... Real fucking beautiful POS !
.
.
And when it all hit the fan.. NYC asked for a bail out. Drop Dead!

CDon says

Yet in 2013 the argument is "Do you think people who pay millions to live in Paris or New York..."

You forgot to add Singapore, New Zealand, Sydney and Melbourne (Australia).
How many Australians do you see in California or any other US states.. Rare except
the surfers who visit CA. They are all pretty happy living down under.

BUT you find few of these Asians in the midwest buying up homes.

thomaswong.1986 says

You forgot to add Singapore, New Zealand, Sydney and Melbourne (Australia).

How many Australians do you see in California or any other US states.. Rare except

the surfers who visit CA. They are all pretty happy living down under.

What the hell are you trying to say? Is there a point here? Have you had a stroke?

Quigley says

I've had plenty of anecdotal evidence that there is a serious Chinese invasion happening. Now here are the numbers. No wonder California house prices are going nuts!

A serious Chinese invasion!!!!! WOW!!!! OMG!!!! Let's see 7.2% of real estate sales last year were foreign. Of those 18% were chinese. California is 23% of foreign sales. Let's see 23% of 18% of 7.2%, my calculator says .29% of real estate sales were foreign chinese in CA. Yep that's real serious all right.

No wonder California house prices are going nuts!

@bob2356,

I am talking about only the bay area and southern California not the entire USA.
For some odd reason the Chindians love the bay area and southern California. Might be weather or history who knows?

SJ says

@bob2356,

I am talking about only the bay area and southern California not the entire USA.

For some odd reason the Chindians love the bay area and southern California. Might be weather or history who knows?

You took your post from an article with only national numbers. So what percentage of ba and scal real estate purchases are foreign chinese buyers that it constitutes a serious Chinese invasion happening? Where are the numbers you are basing this on?

Hausmeister T says

thomaswong.1986:

"House prices go up equal to inflation (3% or whatever)" I don't think that's true.

In 1950 or 1960 a house buyer was a working family man that had 5 kids and a stay home wife. Single income, 7 mouths to feed, 12% mortgage with 10%+ down. Only Pennys left for the mortgage payment.

By the 1990's that changed to double income and 2 kids. Lots more money available for the now only 9% mortgage. price goes off the chart.

and yet proven time and time again, prices barely edge over inflation. Its no wonder both the media and govt dont want to discuss the natural long term prices of housing. I suggest you read Robert Shillers books...

We have a mental sickness over RE prices...

here is a swift dose of common sense...

https://www.youtube.com/watch?v=d__GPqOVNbE

Hausmeister T says

There is no way that prices will fall back to historical inflation adjusted numbers unless we go back to large families with single income, high interest rates and few foreign investors....and no institutional buyers...

look around... why did prices fall in recent years... look back to 1989 to mid 90s.

We had dual incomes since the 70s, and all the other factors.. prices fall as they had before.

bob2356 says

thomaswong.1986 says

You forgot to add Singapore, New Zealand, Sydney and Melbourne (Australia).

How many Australians do you see in California or any other US states.. Rare except

the surfers who visit CA. They are all pretty happy living down under.

What the hell are you trying to say? Is there a point here? Have you had a stroke?

It is true - NYC did have a very awful period in the 70s. I purposefully chose to focus more on the period say 1990 onward.

That said, you really are out of your league here Thomas. You may not realize it, but you are actually undermining your point (SF prices will revert to the mean) instead of bolstering it.