patrick.net

errc says

Well "something had to be done" to help save us from lower housing prices. And the gop reaction was to do nothing and let it sort itself out.

I think it had more to do with the economy tanking than it did with lower housing prices. The problem is that when people are foreclosed, they tend to cut spending. Reduced spending = less demand = layoffs = higher unemployment = more spending cuts = more layoffs, etc.

I think you can see why that's a bad thing for the overall economic health of the US.

But, regardless, please post a link to anyone from the GOP saying do nothing and let the thing sort itself out. The bailout was passed by a Replublican President, don't forget.

errc says

I know, I know. You're smart and I'm stupid, cuz that would have brought about the end of the world as we know it. And wee all better of with The State infusing itself into the big banks well being. Cuz shits mad expensive now, and that's good! Cuz, look at my 401k!!

Again with the strawman arguments. I'd certainly argue that low unemployment beats high unemployment. Even if that means higher prices.

tatupu70 says

I wouldn't call that overpriced. It means you can't afford it, but it doesn't mean it's overpriced.

Right and similarly many people would call it "affordable."

FunTime says

tatupu70 says

I wouldn't call that overpriced. It means you can't afford it, but it doesn't mean it's overpriced.

Right and similarly many people would call it "affordable."

The market doesn't care about how any one or even many people thinks.

If 1M is so overpriced, you would think there would be more than 600 or in the market.

In any case, the whole point of my thesis is expensive and overpriced are completely separate concepts.

errc says

All these pro ownership folk base the entire "solid investment" argument on the premise that appreciation continues for eternity

not really - I base it on the fact that I have X amount of money to spend per month to provide a roof over my head for my family. I can rent or buy.

If renting costs more than buying why not buy? By the way - I could care less what my house is worth on paper. Makes no difference to me - what I care about is that my payment is locked in and won't change until its paid off. Can't say that for rent. It only goes up over the years.

fact remains that my neighbor here is renting his house (which is smaller) for $1000 more than what my payment is (mortgage plus prop tax and not figuring in the tax break even) - you tell me who has made the smarter move here.

JH says

Quite the circle jerk when house prices are "recovering" to a "sustainable" price point. Did patnet exist in 2006? If so I imagine a very similar thread was posted then. Boom times are great...

some people here are permanent bears and others permanent bulls - both will be wrong in some moment of time...the trick is to switch sides when the tide changes.

SubOink says

fact remains that my neighbor here is renting his house (which is smaller) for $1000 more than what my payment is (mortgage plus prop tax and not figuring in the tax break even) - you tell me who has made the smarter move here.

In 2007 my neighbor was renting her house for $2k less than my mortgage payment.

New Renter says

E-man says

Had one bought in the last 2-5 years, some of the properties had more than doubled themselves

That's because those same houses LOST 50% of their "value" or more in the 2 years prior.

I can't argue with that. One man's troubled asset is another man's fortune.

The thesis of this website is not correct. It is only one man's opinion. As much as it saved people during the bubble years, it also hurt people during this downturn. People have to realize that real estate is local, and the gauging parameters for each market is different.

For the last 40+ years, the housing market for CA tends to bottom out at a housing affordability index of 40% and tops out at 17%. During the bubble years, it topped out at 11% in 2006 due to suicide lending. Ironically, the strict lending standards following the mortgage meltdown drove HAI to 56% in 2011. That was an opportunity once in a lifetime. Now, the HAI for CA is at 32% so you have a decision to make. To say that we have reached another bubble is ignorant.

2009-2012 was a great time to buy. If you're lucky, you could still get great prices in 2013 from the pending short sales in 2012 that fell through. Of course, you need to have connections to get those deals.

At the end of the day, it's your job to educate yourself about your housing market. This website is a double edged sword. It cuts both ways.

Good luck to the homeowner wannabes. I have provided you with the data. It's your job to educate yourself about your own market. You have a decision to make if now is an okay time to buy. If you want to wait for another 8-10 years hopefully to buy at the next housing bottom, I hope you could be much more decisive the next time around. We only live once. There is no reason we should settle to live in a rental house that we don't care for while we're building someone else's dream.

Best of luck.

E-man says

Best of luck.

That whole comment was very well said. SFace also said wisely that real estate is inherently competitive; whether people like leverage or not, the fact is people use it so those who refuse will lose out. The issue is, leverage is a double-edged sword. During the downturn, the leveraged got wiped out; during the upturn, the leveraged have prospered.

An issue with leverage and HAI is the borrowing is based primarily on recent income, with only a brief nod to valuations that are also largely based on the recent economic numbers for the area. As the baby boomers (born 1946-64) are in peak earning years and saving for retirement, pension fund capital is flooding into startups and dot-cons, and those are employing many engineers at high salaries. The midpoint of the boomers is now around age 60, so net capital inflows to the area may continue for another decade, then reverse as more people are drawing on their pensions and 401(k)s and fewer are paying into them. So, bottom fishers have to wait probably a decade.

OTOH, I do think housing is overpriced due to multiple factors, including on both the supply side (zoning and planning restrictions) and the demand side (the MID and ZIRP and QE and FHLB and other policies that promote more leverage). In RSFBA, these national factors amplify the overpricing based on local factors outlined above. All that merely illustrates what Warren Buffett said years ago: markets can stay irrational for longer than you can stay solvent. Time passes, people have to live their lives somewhere.

SFace says

The market doesn't care about how any one or even many people thinks.

I don't really know that much about his ideas, but based on what little I know, Robert Shiller, for one, disagrees. He's been suggesting that economics has a significant component which is driven by what people think no matter how rational.

I agree with your point, though. Expensive and overpriced are different and one could argue that I'm a fool to even consider owning a house in San Francisco because it is obviously just too expensive for all but those in a part of the top percentile of income. However, the fascinating thing to me is how many people in even my lowly income have decided that it's affordable.

SubOink says

fact remains that my neighbor here is renting his house (which is smaller) for $1000 more than what my payment is (mortgage plus prop tax and not figuring in the tax break even) - you tell me who has made the smarter move here.

As soon as I see that kind of difference, I will definitely look to buy. In San Francisco, my situation has tended toward the opposite where my rent looks to be $1000 or more less than just a mortgage payment without considering all the other expenses. Right now that's largely because I've rented through a huge upswing in rents and house prices without a change in my rent.

SubOink says

JH says

Quite the circle jerk when house prices are "recovering" to a "sustainable" price point. Did patnet exist in 2006? If so I imagine a very similar thread was posted then. Boom times are great...

some people here are permanent bears and others permanent bulls - both will be wrong in some moment of time...the trick is to switch sides when the tide changes.

Pretty much. But to make the general statement that housing is a good investment is invalid. It's a great investment when it is increasing in value (above realtor fees, repairs, etc.), and a poor investment when declining in value. Much like everything else in the world. What makes permanent bulls think that NOW is a good time to invest in a house is beyond me.

In addition, the current market is fixed by the banks and government. It is a bullshit market.

JH says

But to make the general statement that housing is a good investment is invalid.

Historical data certainly shows that houses are not good investments compared with other investments.http://www.econ.yale.edu/~shiller/data/Fig2-1.xls

FunTime says

JH says

But to make the general statement that housing is a good investment is invalid.

Historical data certainly shows that houses are not good investments compared with other investments.http://www.econ.yale.edu/~shiller/data/Fig2-1.xls

This gets quoted over and over again without the whole context. That is so disingenuous to have a good debate about his data. Also, Robert Shiller is a perma-bear IMO. When was the last time he said the housing prices were reasonable? Like Patrick, he was bearish at the bottom of the housing market when home prices were the cheapest based on historical standard.

Historically,

RE appreciates 4%-6.5% p.a.
Stock index 7%-11% p.a.

Above exclude special situations. For special situations, individual stocks always win out e.g. $40k in TSLA in early 2013 is now worth $260k, $53k in AAPL in Apr 2013 is now worth $100k, a call with expiry date Jan 2015 and a strike price of $60 have appreciated 8 times, ahem.

JH says

E-man says

When was the last time he said the housing prices were reasonable?

There are no fundamentals to support a bullish outlook today.

First of all, I'm no longer bullish. I'm neutral at this point. Let's dig a little deeper.

When we were bearish in 2004-2007, you guys were bearish.
When we were bullish in 2009-2012, you guys were bearish.
Now, we're neutral, you guys are still bearish.

The same thing can be said for Robert Shiller. The guys that are worth listening to are Bruce Norris of The Norris Group, Sean O'Toole of Foreclosureradar, Bill McBride of Calculated Risk and economist Chris Thorberg.

JH says

Pretty much. But to make the general statement that housing is a good investment is invalid

you have to live somewhere - renting or buying. Is renting a better "investment" than buying? - you simply spend money every month, its like an interest only loan. You are paying somebody else's house off for them.

Maybe the problem is thinking that everything in life has to be some kind of an investment.

Life costs money. Eating out costs money - can you buy the same steak for much less at the grocery store? You bet you can but sometimes its nice to simply overpay and have it made for ya.

You gotta live somewhere so you have to spend money. A lot of people are very comfortable with the thought of paying MORE for a purchase than renting. It's a much nicer feeling having a home you care about and improve upon and personalize and customize. (depending on your needs obviously, if you gotta move around every 3 months then not) - to many that is worth paying much more every month than renting.

hanera says

Historically,

RE appreciates 4%-6.5% p.a.

Stock index 7%-11% p.a.

Above exclude special situations. For special situations, individual stocks always win out e.g. $40k in TSLA in early 2013 is now worth $260k, $53k in AAPL in Apr 2013 is now worth $100k, a call with expiry date Jan 2015 and a strike price of $60 have appreciated 8 times, ahem.

Perfect. A typical buyer would likely put 20% down. That's 5:1 leverage. 5% appreciation = 25% ROI. An average investors typically put 25% down. That's 4:1 leverage or 20% ROI.

Cash buyers typically do a cash-out refinance after purchase and pull out 75% equity. In cases where the investors got a good deal, they would let the property seasoned for 6 or 12 months, get a new appraisal, and pull out most, all, or more equity out from their purchase price. Rinse and repeat.

With that said, why would a knowledgeable investor invest in the stock market when owning real estate or REITs blow the returns of the stock market out of the water? When it comes to real estate investment, it's all about control and leverage. To ignore these points is disingenuous.

Reit returns beat stock returns long term. Just need to look it up. Reit index kicks ass.

Real estate is the best business in this world and the number one source of millionaires. The index of real estate companies tell you that. The thing is real estate can be as small as 100k or 100b and the smaller business will do better. It does not need to scale which makes it the perfect business for mom and pops.

And if you are living instead of renting to someone else, you just have a guaranteed tenant, you. Not paying rent is less cash out which acts the same as a dividend. And of course if you borrow the money, the bank have the risk in exchange for interest and you get the benefit of leveraged return.

Stocks get double taxed, even tripled taxed. Real estate can be zero taxed.

If stocks tank, you are a bagholder, if real estate tank, the bank is the bagholder with smart planning.

E-man says

Now, we're neutral, you guys are still bearish.

Neutral? You are circle jerking about how housing is such a great an investment and you've made so much money and...

Tim Aurora says

Don't argue with the government. If the rates are low, tilt towards buying and lock in the rates.

...buy now!!!

You do realize, I hope, that interest rates over the past 30 years have gone from over 10% to under 4%. THAT was the "time to buy" because home values increased over the rate of inflation (because monthly payments increase over inflation due to falling rates) AND because 'owners' could refinance at lower rates to actually decrease their payments. Advising to buy when rates are low is realtor-speak. It is jargon with no basis in reality. If you really think homes are going to continue their forward march if rates rise, then buy now. However, there is no fundamental basis for this decision.

E-man says

An average investors typically put 25% down. That's 4:1 leverage or 20% ROI.

Takes money to make money. If you have enough cash to be throwing 25% down all over California, you are already set for life and should just move to Hawaii or Fiji with that cash.

Now, Imagine if that 25% down was used to buy AAPL stock in 2009 at $25 a share when our famous bull was calling out the bottom loudly? but hey what do I know about money? cuz I am not a housing bull.

bubblesitter says

Now, Imagine if that 25% down was used to buy AAPL stock in 2009 at $25 a share when our famous bull was calling out the bottom loudly? but hey what do I know about money? cuz I am not a housing bull.

Or imagine if that 25% was used to purchase RSH stock in 2009. at ~$18/share.

bubblesitter says

Now, Imagine if that 25% down was used to buy AAPL stock in 2009 at $25 a share when our famous bull was calling out the bottom loudly? but hey what do I know about money? cuz I am not a housing bull.

Or imagine if you use 20%or (180K) down buy a house say 800M. The price goes to 1.3M on paper in 2011 and you open a 500K line of credit. You then use it to but Tesla @ $36 bucks or 13,888 shares which is now worth 3.6M.

So in 2009 - 2014, you made $3.4M.

Homeowners have all the money to buy stocks and benefit even more from S&P500.

SFace says

500K line of credit.

SFace says

you made $3.4M.

why the longer route? let's see. Stock went 26x to $645 from $25 in 2009. so 180K x 26 = 4.68M? 4.68M > 3.4M. So, you work more but still get less? Does not sound like a deal to me.

bubblesitter says

Imagine if

tatupu70 says

imagine if

SFace says

imagine if

Tim Aurora says

Locking low rates if you intend to keep the house for very long term ( > 15 years) is a good idea.

Ok, I agree with you (partially) also. ha. IF low rates = high prices, then buying at low rates is not good. But buying during rising rates is also risky...when will they fall? So it's a tough call. If I knew rates could go up OR down, I would be more of a neutral. Since rates cannot go down, I am bearish (well, that's 1 reason).

JH says

If I knew rates could go up OR down, I would be more of a neutral. Since rates cannot go down, I am bearish (well, that's 1 reason).

This has been discussed to death, but the whole--don't buy when interest rates are low--argument is really not backed by history.

There is basically zero correlation between interest rates and nominal house prices. This is, obviously, because interest rate effects are drowned out by wage growth effects...

bubblesitter says

SFace says

500K line of credit.

SFace says

you made $3.4M.

why the longer route? let's see. Stock went 26x to $645 from $25 in 2009. so 180K x 26 = 4.68M? 4.68M > 3.4M. So, you work more but still get less? Does not sound like a deal to me.

becuase it is split adjusted. your 4.68M is more like 700K. There was no 26 bagger in Apple in the last 5 years, more like a 5 bagger (with dividends)

tatupu70 says

There is basically zero correlation between interest rates and nominal house prices.

Look at Orange County, which has tracked with San Jose and other coastal areas of CA:
Over the past ~30 years, US inflation is 100%.
Over the past ~30 years, OC/US median household income is up 100%.
Over the past ~30 years, OC home values (in expensive areas) are up 200%.

The math does not add up. Oh wait, it does. Interest rates have dropped from 10 to 4%, making a payment cheaper and the overall purchase price higher. I don't care if it has been discussed to death; that does not make this an invalid argument.

SFace says

becuase it is split adjusted. your 4.68M is more like 700K. There was no 26 bagger in Apple in the last 5 years, more like a 5 bagger (with dividends)

Yo need to revisit your math basics!

bubblesitter says

SFace says

becuase it is split adjusted. your 4.68M is more like 700K. There was no 26 bagger in Apple in the last 5 years, more like a 5 bagger (with dividends)

Yo need to revisit your math basics!

Who cares, Apple is no 26 bagger the last 5 year. It was 180 ish back then, or 25 or so split adjusted + lots of divdends the last 2. don;t need to count the dividends. It is a 4 bagger with cash dividends banked.

Tim Aurora says

For example you do not buy a plane because you travel, or a hotel because you vacation.

thing is, traveling is a temporary consumer demand.

housing is different; we all need a secure place for our stuff regardless of our situation, and that's not something the Invisible Hand can currently provide outside of purchase or lease of a home of some sort.

At the extreme edge it is possible to create a serviceable home out of an RV, but that is pushing things and certainly not for everyone, and doesn't work at all outside of designated campgrounds and otherwise camping-friendly areas.

The dynamics of housing in the US has been relentless rent rises, more relentless in the better (higher-wage) areas.

What my parents rented for $300/mo in El Cerrito now rents for $2000, $500 more than inflation. 150hrs of (pre-tax) minimum wage work in 1974, 222hrs now. Same story in Salinas, what was $400/mo in the late 70s is pushing $2000/mo now. What I rented for $700/mo in LA in 1991 now rents for $2000/mo.

While the past can't predict the future, clearly the current status quo is biased towards a rising cost of living in housing.

How can it not, when there's so much debt tied to that valuation?

Shows we still have a $2T debt overhang, and our rising population isn't helping matters:

The bulls telling me it's a great time to buy does zero good when purchase price of SFR is 6.5x income+, but apt rents are 25% of take home(even condos are 4.5x income). Even in the 2009-2012 timeframe, if I bought, it would be an area I wouldn't have wanted to live long term but I'd be perma stuck there(homes were still $350-600k).

I just viewed a 3/3 2400 sq ft fully modernized upgraded home built in mid 90's in Henderson, NV(nice suburb of Las Vegas) listed at $239k

Scare tactics aren't necessary. I have 457 account. Retirement with no house payment, no state income tax, and $1200/yr property tax. I think my backup plan is pretty sweet. It would be nice not paying rent, but as far as what i can afford? Meh. And this way I can retire in 13 years at 55, rather than at 70.

Also FWIW, the great time to buy in LA was not 2009-2012....I know 3 people who bought in LA suburbs in that time frame. One was a professional who bought a middle range townhome. The other two had incomes in the mid to high $100's, bought modest homes in modest neighborhoods, and likely had the highest household incomes in a several block radius.

The time to buy in LA was in the 90's when interest rates were higher, but prices were low, particularly in the middle of the decade. Prices in some ok neighborhoods dropped to $130-175k, even in an are like west LA or Lakewood. Unfortunately I was in college until 1996, and by 2002, house prices had permanently eclipsed what I could afford, even with an income quite above average.

dodgerfanjohn says

The bulls telling me it's a great time to buy does zero good when purchase price of SFR is 6.5x income+, but apt rents are 25% of take home(even condos are 4.5x income). Even in the 2009-2012 timeframe, if I bought, it would be an area I wouldn't have wanted to live long term but I'd be perma stuck there(homes were still $350-600k).

You hit the nail on the head. I think for a lot of people on this board who rent, it's not that we don't want to buy necessarily, it's that we can rent for much less than the cost of buying. I don't want to be cash poor...I like renting because I have more disposable income to save/invest or handle unexpected expenses along with the flexibility to move for my career or whatever other reason.

debyne says

dodgerfanjohn says

The bulls telling me it's a great time to buy does zero good when purchase price of SFR is 6.5x income+, but apt rents are 25% of take home(even condos are 4.5x income). Even in the 2009-2012 timeframe, if I bought, it would be an area I wouldn't have wanted to live long term but I'd be perma stuck there(homes were still $350-600k).

You hit the nail on the head. I think for a lot of people on this board who rent, it's not that we don't want to buy necessarily, it's that we can rent for much less than the cost of buying. I don't want to be cash poor...I like renting because I have more disposable income to save/invest or handle unexpected expenses along with the flexibility to move for my career or whatever other reason.

That is the case initially in high priced areas, but as time goes by the rents keep increasing while mortgage payments remain mostly flat and eventually almost disappear.
All you need to do is go back 20 years. Your conclusion would have been exactly as it is now, but those who bought homes are sitting pretty.
Think longterm.

dodgerfanjohn says

The time to buy in LA was in the 90's

Yep, the last time a SoCal bubble burst back to a more realistic point. The 2010 drop in prices was not a bubble bursting. The banks and their cronies in government would have none of it. Now we are 10% from a full recovery and the economy is marching forward full steam...or something like that.

Strategist says

All you need to do is go back 20 years. Your conclusion would have been exactly as it is now, but those who bought homes are sitting pretty.

Think longterm.

As I stated earlier in this thread, there is nothing to support the idea that the next 20 years will be anything like the previous. In housing, when the government and banks manipulate the market, 20 years is not a "long-term" vision.

INVESTMENT101: Past performance is not a guarantee of future potential.

Strategist says

That is the case initially in high priced areas, but as time goes by the rents keep increasing while mortgage payments remain mostly flat and eventually almost disappear.

All you need to do is go back 20 years. Your conclusion would have been exactly as it is now, but those who bought homes are sitting pretty.

Think longterm.

But we don't want to live in crappy old homes just so we can own them. What's the average time people spend in a house if they own? Like 5-7 years? The best way to make your method work is to stay there for over 10 years, but then you've spent that 10 years in an old, small house with lots of maintenance.