0
0

Average Joe's Take


 invite response                
2007 Feb 21, 11:50pm   21,120 views  283 comments

by Patrick   ➕follow (55)   💰tip   ignore  

From a reader:

I am a renter and I have been thinking that is time to buy RIGHT NOW. What if the market goes up and sellers stop offering price reductions and paid closing costs to buyers. I understand that a lot of home buying and building in the past few years has been speculative. but that means nothing when you consider the fact that the stock market is purely speculative and stock prices still rise. Is that "funny money" when you have stock market gains? It spends the same, it puts food on the table. What's the problem with financial gain whether or not a market is in a "bubble"? Are you opposed to people making money? So when should I stop renting and start taking advantage of the 50% off housing sale? Why buy ever? If buying is 50% cheaper in the future wouldn't rent be even cheaper as well?

Wow, where to start with this guy? How about this:

  • The stock market is not purely speculative. You can measure the value of a stock by its P/E ratio and dividend, among other things. Houses have no dividend, only rental income, or savings on rent. And by those measures, houses are grossly overpriced.
  • If you win the lottery, great. But it's a lousy investment strategy. That's the problem with the bubble.
  • I'm not opposed to people making money, only to millions putting themselves at risk of bankruptcy and foreclosure, and being smug about it.
  • You should stop renting when it's cheaper to own.
  • If house prices go down, that does not necessarily mean that rents will go down. It may make sense to buy then.

Patrick

#housing

Comments 1 - 40 of 283       Last »     Search these comments

1   DinOR   2007 Feb 22, 12:43am  

Partick,

I don't want to start this thread off on the wrong foot but here's what I read;

I'm a BUILDER. I'm offering incentives left and right! From granite counter tops to swiming pools and STILL attracting very few knife catchers. I'm dangling what should be enough bling and eye candy to get you off the fence! This "one time good deal" is only available through the end of February (or March or er... uh... May) and then I AM going to list through a realtor, I swear I WILL!

If you want to gamble with your money you're better off just going to Las Vegas rather than the stock market! Yada, yada....

2   DinOR   2007 Feb 22, 12:48am  

"Why buy ever?"

O.K so the guy has (one) good point. :)

3   Peter P   2007 Feb 22, 1:20am  

Again, what is wrong with buying if one can conservatively afford a long-term home?

4   SFWoman   2007 Feb 22, 1:29am  

The writer of this letter sees all things as speculative investments. Stocks are only speculative? My grandmother cut stock coupons for years, people used to buy stocks that had good earnings. This writer's experience with stocks seems to be that you buy the stock of a company that sells cat litter for less than wholesale, includes free shipping, and then you sell the stock to the next sucker, hopefully at a higher price.

If you see every single investment vehicle only from the extreme bubble perspective it is easy to see how someone would think that a bubblicious house, and actual tangible bubblicious house, is a valid purchase as an investment right now.

5   Brent   2007 Feb 22, 1:30am  

I'll buy when I'm only bidding against 4-5x documented income or when I don't have to pay the property taxes for my entire block. I'm really beginning to wonder if that will ever occur in CA.

Who's still buying NFI, NEW or their product? I considered a token purchase of NEW awhile back as an insurance policy; betting against your favorite team guaranties the win or the money.

Can builders buy sub-prime to bootstrap their earnings?

Oh well, back to working on what I understand.

6   DinOR   2007 Feb 22, 1:33am  

PAR,

True, it would have been nice had this "reader" given some specifics about the market he is contemplating buying into. CEPR has a great Rent/Own calculator that breaks down into very specific metro areas. (Granted, it's not the Bubblizer (TM)) but for quick and dirty calculations it will give most a pretty good idea where they stand.

Here's a quick question, if you had a co-worker/distant relative that was on the verge of buying, would it be better if we encouraged them to look at much smaller, independent builders (saving ONE guy's bacon) OR starving out the smaller builders and going w/publicly traded builder? Just curious. The smug factor from rinky dinky builders just bothers me more than FB smugness. :)

7   astrid   2007 Feb 22, 1:33am  

Nothing wrong with buying expensive Japanese knives either, even if it is a 500% premium for 10% improvement from a set of Forschners.

8   astrid   2007 Feb 22, 1:35am  

I'm still trying to wrap my mind around "owning" a carbon copy McMansion as the end all be all experience of life.

9   Peter P   2007 Feb 22, 1:36am  

Nothing wrong with buying expensive Japanese knives either, even if it is a 500% premium for 10% improvement from a set of Forschners.

Of course. :)

10   DinOR   2007 Feb 22, 1:39am  

"I don't want to have to pay the property taxes for my entire block"

Brent, I don't know what you do (better than this) but whatever it is..... I'll take a gross.

11   sfbubblebuyer   2007 Feb 22, 1:52am  

See, I'd be willing to buy when I can get a house I like in a location I like. A place I'd be happy to be for 10-30 years. But only if I can afford to buy it without having to say "Well, when magic money falls out of my butt, then I can pay off enough of the mortgage to refinance it so that it's not taking up 50+ percent of me and my wife's salary!"

Seriously... ouch.

12   Ed S.   2007 Feb 22, 2:00am  

Wow!

Why do you think now is the time to buy? Is that based on informed research or on those with a vested interest in your purchase telling you it's a time to buy? Is there any basis in fact for the idea that prices will continue to rise? So, seriously, I challenge him to consider where he's getting his information from. If he wants a real time example, he can go down to the local Mercedes dealer. Wear ratty clothes and maybe not shower for a day. Have a beer or two before he goes. Pick a car, and then find a sales representative. ask if he can "get him into that car today". Anyone want to guess how many "No" resposnes he'll get?

Second, read what PAR says about affordability. Being able to buy vs. being able to afford are two different questions. For many an FB, they are discovering that they were able to "buy" a house, but are unable to "afford" a house.

Third, I'd recommend that he goes back and reads some earlier threads. Seriously. The pros and cons of buying vs. renting vs. waiting have been covered in excruciating detail at least 25 times.

Fourth, I think that his comment on the stock market is spot on. Wait -- hear me out. My guess is that the majority of individuals who read and contribute here have anywhere from a good to world-class understanding of capital markets. Even a good understanding is probably better than 99% of the people in the US. If this fellow's only experience in/of the stock market is, say, June 1999 to June 2000, then it does seem like it's only speculation. Actually, from the popular media's commentary, a la CNBC, the capital markets are little different from horse racing commentary. I suspect that if you substituted horse names, trainer names, and jockey names, for company names, CEO names, and analyst names in the CNBC commentary (or Cramer), you could use the commentary at Santa Anita. So, for him, it does seem like it's purely speculative.

But he's free to do as he pleases. Someone has to catch the falling knives and help the market on its way down.

Tangentially on topic:

http://tinyurl.com/2xmhp6

Jim Grant's Statement from a Hearing of the House Financial Services Committee, February 15 (the article I referenced on CDO's several threads back was from his publication).

13   DinOR   2007 Feb 22, 2:03am  

PAR,

I have absolutely no problem w/that. Let me guess? Muscatine, IA? When I first got out of the service my wife and I bought a 3/2 in Molalla, OR for $67,500 (1989) and there were so few places "to" rent it was actually a little cheaper to have bought. But only by about $20-$25 a month.

In your relatives case how much work could it be to maintain a 1,000 s/f? Our 1,100 s/f ranch took about a weekend and case of beer to paint. She'll be fine, just no beer, o.k? :)

14   Peter P   2007 Feb 22, 2:09am  

Why is it that people in the upper middle class seem to be willing to keep on buying in this obviously inflated market? I haven’t seen any pull back in the $1.5 to $2.5M price range, either in the bay area, Los Angeles or North County of San Diego.

Upper middle class people do not buy 1.5M to 2.5M homes in the Bay Area.

The price range is more likely to be 5M+.

15   DinOR   2007 Feb 22, 2:13am  

007,

Valued contributor Robert Cote' made this call almost as soon as a market peak was declared. A frantic final round of "musical chairs" while money was still cheap, and then..... Silent Spring. There's always a few "sucker's rallies" in any bear market.

16   netdance   2007 Feb 22, 2:28am  

I saw a report (on Square Feet, the merc re blog) that appreciation for $1m+ properties in the bay area was 1.5% yoy, and -1.5% last quarter. They spun it as "stable". I mocked them.

You may be seeing an active top end market, but I'd like some of what you're smoking, so I can see it too (along with the fairies and pink elephants).

17   DinOR   2007 Feb 22, 2:30am  

It's hardly about the total price for the home! It's about "howmuchamonth" is this gonna cost me!

18   Peter P   2007 Feb 22, 2:37am  

I didn’t know where to classify it actually. Up to $5M seems to be a bit much for middle class though? I don’t know that many people willing to say they are middle class in the bay area living in a $4-5M house. But maybe I haven’t been hanging out in the right circles.

The middle class is huge. I believe upper class membership requires the ability to sustain high standard of living on PASSIVE INCOME only.

I don’t know that many people willing to say they are middle class in the bay area living in a $4-5M house.

Willing to say? ;)

I thought 86% of all drivers believe they are above-average drivers.

19   Peter P   2007 Feb 22, 2:49am  

Palo Alto is still very hot though. Mountain View is at least semi-hot.

Buyers are after schools and proximity to employment. Do upper middle class people care about those?

20   Peter P   2007 Feb 22, 3:01am  

As a side note, I now feel a lot “poorer” than I did an hour ago.

Feeling poor is good motivator to make more money. ;)

Perhaps even Bill Gates should feel poor when compared to JDR.

Outside high-cost areas, even upper class people may live in 2.5M "palaces".

21   SFWoman   2007 Feb 22, 3:12am  

007,

I have a friend who bought a house for about $2.2 million in November. The house is almost 10x her husbands income, she makes a tiny bit of money as a (you guessed it) Realtor (TM). They put almost 1/2 down (inherited), so the mortgage is 5x their combined income. Property taxes hit them hard.

She told me that they are OK as long as they don't need a new car. They give only a tiny amount to their kids schools' annual fund (yes, that means other people are subsidizing their kids' tuition). They can't afford to vacation or even go to high end restaurants the way they used to. I'm watching the money stress help their marriage to unravel.

I asked her 'Why are you buying now???" She said that she has to live in a single family house in a nice neighborhood or she doesn't think the family will be happy. I said "Why don't you wait a bit and see what's happening with the market?" She owned a lovely, large apartment that they were living in. "It can't go down here, we can always sell it at a profit if something happens."

She bought her previous place in 1989, a few weeks before Loma Prieta, but the Real Estate Industry Kool-Aid has apparently wiped out her memory of the six years of depreciating prices her old place went through.

Some of the 'upper middle class' that are buying now aren't that economically savy, and are living on borrowed time.

Also, +1.5% increase in prices in luxury houses is actually a real loss when taking inflation into account. They never seem to mention this in the articles.

22   Randy H   2007 Feb 22, 3:39am  

Patrick

You should stop renting when it’s cheaper to own.

Not to pick, but you have to be careful about that statement. It is historically always more expensive in nominal terms to own than rent. The exceptions are usually short periods of economic distress, or longer periods in severely depressed areas (think rust belt).

The cost of owning will generally always exceed the cost of renting over the long term by:

psychological premium + utility premium + tax benefit

Psych premium is the "everyone owns" or cultural effect;
Utility premium is the net value one gets from owning over renting. Renting is more flexible, owning is more stable, etc.
Tax benefit is real and powerful, and creates a subsidization of leverage.

23   Randy H   2007 Feb 22, 3:41am  

News,

That is a downstream effect. I agree that subprime failures will ripple through the economy, mainly as hedge funds fail I suspect. But the real question isn't why hedge funds are investing in junk bonds, but why municipalities are investing in hedge funds.

24   DinOR   2007 Feb 22, 3:51am  

Randy H,

Not to nit pick but calling these "at least I got paid" MBS junk bonds is frankly..... well an insult to junk bonds!

25   DinOR   2007 Feb 22, 3:53am  

News,

What made the $6 bil loss "stunning" was that it happened in (one) day. Yikes! :)

In addition it's my understanding that San Diego could ill afford that kind of a hit.

26   DinOR   2007 Feb 22, 3:59am  

SFWoman,

The very situation you describe is why I (and a handful of others) firmly suspect that defaults will bleed over into the Alt A paper and beyond. Here are some otherwise reasonable people that, again.... leveraged their FICO to the hilt.

"they are o.k as long as they don't need a new car"? You mean all it would take to derail their well laid financial plan is add'l $247.81 on a car payment?

27   astrid   2007 Feb 22, 4:21am  

I doubt $300 or even $1,000 a month would break many $2.2 Million house families. Divorce, loss of employment, or an ARM jump are much more likely culprits.

28   DinOR   2007 Feb 22, 4:23am  

After factoring in, going over miles on the lease and/or negative equity on your trade-in and paying off your old auto loan your *new* payment will be $247.81 HIGHER than your old payment? I mean counting the undercoating and extended warranty, right? Or something like that.

I just can't believe anyone would take a small inheritance, put HALF down on a house and STILL be in a financial bind! Had it been me I'd have found something I could just have paid off or banked it but then again I'm not a realtor so I don't need or want a "showcase" home.

29   Peter P   2007 Feb 22, 4:39am  

What kind of car can you buy with $247.81/month car payment. It would be 10 K car. Do you really think people who buy 2.2 million dollar house, will buy a 10k car?

$247/month can get you a lease on a 20K car.

Sam Walton drove a pick-up truck.

30   Peter P   2007 Feb 22, 4:42am  

Hedge funds regulation is necessary but a bit too late.

Hedge funds regulation is completely unnecessary. They are just private investment ventures and they should be able to operate freely.

31   FormerAptBroker   2007 Feb 22, 4:42am  

Casey Serin is in the Wikipedia but Patrick Killelea has not made it yet.

http://en.wikipedia.org/wiki/Casey_Serin

32   DinOR   2007 Feb 22, 4:51am  

Well, I don't want to speak for others but 6 bil is 6 bil (no matter you pee'd it away).

For those bored enough, a great description of "fiduciary responsibility" is on www.fi360.com. Perhaps the good folk in San Diego should have read it first.

33   Randy H   2007 Feb 22, 5:01am  

FAB,

You do realize that anyone can write their own Wiki entry I hope. Maybe I'll go create a Randolph entry when I get some free time.

But seriously, we should consider making Patrick Killelea Wiki, x-refing the housing bubble entry, and then we can all link our own sub entries off of there.

Any takers? I'd start the process but I'm bogged down again between real work and not learning my lesson starting blog fights with people who buy cartoon real estate and pay for cartoon sex.

34   Randy H   2007 Feb 22, 5:08am  

There, I started it in a minor way. I added this blog to the external links reference of the Real Estate Bubble wiki entry.

http://en.wikipedia.org/wiki/Real_estate_bubble#External_links

Maybe I should run a thread that shows everyone how to go contribute to wiki. There's all kinds of bubble and reic stuff out there that could use our love.

35   Peter P   2007 Feb 22, 5:09am  

Maybe I’ll go create a Randolph entry when I get some free time.

We should write an entry for King Randolph. Long live the King!

36   astrid   2007 Feb 22, 5:09am  

I wouldn't recommend spending the time to write entries on Wikipedia. Those guys are extremely narrowminded about what's acceptable knowledge. I put up an entry on a rather innovative and popular humor blog and they erased it because they thought it was irrelevant.

At the very least, I'd recommend proposing Patrick's name and then get a wiki "editor" behind the entry, otherwise, any entry you put up is likely to be deleted very soon afterwards.

38   Randy H   2007 Feb 22, 5:12am  

astrid,

My stupid critical article about Second Life landed me in the "mainstream press coverage" wiki on Second Life, which is heavily monitored by the company itself.

I thought they'd delete it, but it seems to have survived. So I'm mainstream now.

Then why have I only earned $2.12 on my blog ad revenues? lmao

39   astrid   2007 Feb 22, 5:14am  

I like Wikipedia a lot as a resource, but it's controlled by a bunch of pinheads. They totally do act like the Encyclopedists from Foundation. Great for finding all the alternate universes in the Marvel/DC Comic canon, less good for current events coverage.

40   Peter P   2007 Feb 22, 5:17am  

Wikipedia is a great thing.

Great for finding all the alternate universes in the Marvel/DC Comic canon, less good for current events coverage.

An encyclopedia for current events?

Comments 1 - 40 of 283       Last »     Search these comments

Please register to comment:

api   best comments   contact   latest images   memes   one year ago   random   suggestions