patrick.net

Housing here has always been cheap to foreigners. It was even cheaper during this mortgage meltdown. We sent tons of money over sea during the boom years. Now the money is coming back to our shore to buy real estate. Real estate here is safe, and it gives higher yield compared to their home country. It also gives foreigners a ticket to become legal residents. What's not to like?

Yup, the RE gig in China is starting to look pretty scary to people in China, so they are shifting focus to here where it looks safer. When I was there for work in 2012 I was talking to some of the Flextronics engineers about the RE bubble there. They said that 50%-90% of all new condo units (the only thing being built really) were sold instantly and left unoccupied as speculators were planning to sell them for a profit within a year. With Beijing starting to try to put some price controls in place, RE specuvestors there are turning their attention elsewhere. RE is just sort of ingrained as "the" safe investment in their culture since there has been a serious lack of faith in their own currency and stock markets for at least a generation. You'd think that they would look for a vehicle other than RE, but that's not really how people there think. Culturally, you are supposed to succeed by doing the same thing as everyone else but working harder at it than them, not by going off and doing something different. If RE is "what you do to make money", then RE is what you do to make money. On top of that, many of the million/billionaires there want their wealth OUT of China and into something that can't be confiscated by the Communist party if political winds shift. Houses in other countries are about as safe of a bet as anything.

Foreign cash buyers will save us!

What's sort of dumb about all of this is that the biggest buyers of US RE by far aren't Chinese. They're Canadians. Yet nobody ever makes a big deal about that, do they?

It was't Canadians outbidding me over and over again on California property. It wasn't Canadian buyers who take bus tours around here on property and neighborhood scouting missions. It's not Canadian realtors who exclusively work with Chinese buyers in the California market. This is an issue that affects everyone who lives here. If it continues, RE will be so overpriced that you won't be able to live where you work, and the younger generations are fucked.
But hey, our politicians have been fucking the younger generations for decades.
That's what this is about.

We're talking about nation-wide statistics. A LOT of Canadians buy in generically "warm" climates like Florida, Arizona etc ( I assume because they are tired of the nasty cold weather that is most of Canada) and pay about the same medians as the average American buyers, as in around 200k or so. Mainland Chinese buyers pay higher medians, but by and large don't collectively buy as much as Canadians do.

"Chinese buyers take over market"

Congratulations! It took you 10 years to finally figure it out and it'll probably take the morons who read your comment another 10 years to ACCEPT the fact ..but HEY ....better late than never, huh?

HydroCabron says

Foreign cash buyers will save us!

No one is saying that, but the reality is that foreigners are buying real estate here in America. Reality is a bitch sometimes isn't it?

"many of the million/billionaires there want their wealth OUT of China and into something that can't be confiscated by the Communist party if political winds shift. Houses in other countries are about as safe of a bet as anything."

Yep. Sometimes I feel Americans are so naive. We have had it too easy for the last 200+ years. I'm buying up as much real estate as I can now and for the near foreseeable future. I don't want my kids and grand kids renting from foreigners. I'd rather see it the other way around. Hate to be someone else's bitch.

Things could change. The fascist Obama passed FATCA, where foreign institutions are required to provide financial details of US citizens and Obama and his big spying organization will collect all data.

Now China is not playing along. It wants the data of all holdings of its nationals on US soil to agree to FATCA. Which of course the corporatist Obam refuses-can't have our corporations turn over records of foreign nationals. So now it is at an impasse-if Obama blinks-them Chinese nationals will probably flee to canada or some other place.

lostand confused says

Things could change. The fascist Obama passed

I didn't need to read any further. Nonsense as usual.

edvard2 says

lostand confused says

Things could change. The fascist Obama passed

I didn't need to read any further. Nonsense as usual.

I guess this is your usual mode of functioning.

lostand confused says

I guess this is your usual mode of functioning.

That's not the subject matter at hand. If you want to have a serious debate, avoid making statements like " ooooooohhhh that facist Obama" and maybe I'll take the conversation seriously.

edvard2 says

lostand confused says

I guess this is your usual mode of functioning.

That's not the subject matter at hand. If you want to have a serious debate, avoid making statements like " ooooooohhhh that facist Obama" and maybe I'll take the conversation seriously.

Oh yes it is. I don't post hoping for Lord Edvard2 to graciously respond to my post. I post what I feel like and if you don't like it-fine. It ain't a beauty contest .

lostand confused says

Oh yes it is. I don't post hoping for Lord Edvard2 to graciously respond to my post. I post what I feel like and if you don't like it-fine. It ain't a beauty contest .

I too agree that " It ain't a beauty contest". I thought it was a simple forum post. People tend to respond to comments that are baseless, which was what I was doing, that's all.

Can somebody please explain to me why people buy houses in certain markets like California where you can rent identical property for almost half what your TOTAL cost would be to buy when you include down payment, insurance, property taxes and maintenance ?

Depends on where in CA. Around here, I could rent my house out and at least break even on the total monthly expenses. Had I bought a year or two ago, I could have actually made pretty good money on top of carrying cost.

House ownership is jammed into Americans' minds from a young age and it is something that a lot of young adults feel that they aspire to do. Right or wrong, logical or illogical as the case may be. Then on top of that you have mega wealthy foreigners with no faith in their countries' fiat currencies and that (blindly) see real estate as the only true safe place to put money, and RE in this part of CA is both a status symbol to them and inexpensive compared to what the same money would (or wouldn't) get them in the homeland.

E-man says

many of the million/billionaires there want their wealth OUT of China and into something that can't be confiscated by the Communist party if political winds shift. Houses in other countries are about as safe of a bet as anything."

If the source was of the funds to buy property was 1) embezzlement or 2) or other criminal activity such as money laundering. The US govt has procedures to confiscate assets ( aka asset forfeiture) including property real and personal... this would be the case of any RE holding of aliens residing in the USA. This all stems from Drug and Human Trafficking cases. http://www.usmarshals.gov/assets/

there certainly are other laws on the books ...

http://www.law.cornell.edu/uscode/text/31/5332

31 USC 5332 - Bulk cash smuggling into or out of the United States

(a) Criminal Offense.—
(1) In general.— Whoever, with the intent to evade a currency reporting requirement under section 5316, knowingly conceals more than $10,000 in currency or other monetary instruments on the person of such individual or in any conveyance, article of luggage, merchandise, or other container, and transports or transfers or attempts to transport or transfer such currency or monetary instruments from a place within the United States to a place outside of the United States, or from a place outside the United States to a place within the United States, shall be guilty of a currency smuggling offense and subject to punishment pursuant to subsection (b).
(2) Concealment on person.— For purposes of this section, the concealment of currency on the person of any individual includes concealment in any article of clothing worn by the individual or in any luggage, backpack, or other container worn or carried by such individual.
(b) Penalty.—
(1) Term of imprisonment.— A person convicted of a currency smuggling offense under subsection (a), or a conspiracy to commit such offense, shall be imprisoned for not more than 5 years.
(2) Forfeiture.— In addition, the court, in imposing sentence under paragraph (1), shall order that the defendant forfeit to the United States, any property, real or personal, involved in the offense, and any property traceable to such property.
(3) Procedure.— The seizure, restraint, and forfeiture of property under this section shall be governed by section 413 of the Controlled Substances Act.
(4) Personal money judgment.— If the property subject to forfeiture under paragraph (2) is unavailable, and the defendant has insufficient substitute property that may be forfeited pursuant to section 413(p) of the Controlled Substances Act, the court shall enter a personal money judgment against the defendant for the amount that would be subject to forfeiture.

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?