patrick.net

Eman says

My friend sent this to me. $750k for this fixer upper in East San Jose, blue collar working class neighborhood.

Its appreciated about 5% annually since 1998. I recall Professor Shiller stating the long term (+50 years) median annual appreciation is 4%.



.

ad says

Eman says

My friend sent this to me. $750k for this fixer upper in East San Jose, blue collar working class neighborhood.

Its appreciated about 5% annually since 1998. I recall Professor Shiller stating the long term (+50 years) median annual appreciation is 4%.



.

@ad,

This is Rubicon’s point about buying and dollar cost averaging as we don’t know where the top and bottom are. For me, as long as the numbers penciled out, I would be a buyer regardless of where we are in the cycle of the housing market be it high or low interest rates. Do you remember if real estate in the Bay Area was expensive in 1998 with 8% or so mortgage rate?

From an owner’s POV, 20% down payment with 5% annual appreciation = 25% ROI given it’s leveraged 5:1. Also, the monthly mortgage payments are fixed for the next 30 years, which means no rent increases.

From an investor’s POV, the ROI is 20% with 25% down payment given it’s leveraged 4:1.

This is why the mom and pop investors are more comfortable with real estate investing. They can understand the numbers more easily.

For my partner and I, we try to use this formula with some scale to own more rentals. The value-add/forced appreciation is where it allows us to recycle our seed capital. That’s all there is to it. It’s not rocket science.

Eman says

That’s all there is to it. It’s not rocket science.

Yes, I see as far as the banks willing to lend money and just require the landlord investor to provide only a 25% down payment.

The landlord increases their portfolio of rentals each with only a 25% down payment (or use of collateral).

Total net income and equity nearly exponentially increase as the size of the landlord's portfolio of rental properties steadily increases.

The closest I'd ever come to this is to use a HELOC to invest in the S&P 500 for at least 7 years and earn an average real annual return (i.e., S&P 500 index fund annual return minus the HELOC interest rate) of around 4%.

That is the closest I'd come as far as earn money off OPM (others people money), or through leverage.

With interest rates likely to decrease by 2024, I'd look into maybe a bond fund like Vanguard Total Stock Market Bond fund or ETF also, such as invest 70% in the bond fund and 30% in the S&P 500. This seems like a safe gamble to make easy money off leverage or borrowed money.
.

“The closest I'd ever come to this is to use a HELOC to invest in the S&P 500 for at least 7 years and earn an average real annual return (i.e., S&P 500 index fund annual return minus the HELOC interest rate) of around 4%.”

@ad,

In the last decade, I know folks in the Bay Area, who used their HELOC money @ 3%…ish and lent it out at 10-12% through a private mortgage broker and made the spread. The broker charged 1-2%, aka points, for the loan to the borrower. Most of these loans were short-term 6-18 months.

With HELOC at 8%…ish now, it no longer makes sense to take the risk. This puts a liquidity constraint to the real estate market.

Eman says

With HELOC at 8%…ish now, it no longer makes sense to take the risk. This puts a liquidity constraint to the real estate market.

Yes, but there is at least a 4% spread between HELOC rate and the S&P 500 index annual return.

Its free money essentially as there is no collateral or cost basis. Its like winning $20,000 with a $1 lottery ticket for a HELOC with a 2 year term.

I see as some investors like you would want a larger spread than 4%.

.

WookieMan says

Renting is a lose/lose if you need stability. I'm not trying to change your mind. I'm just saying as an owner, it doesn't make sense to me having done both. You do you. Fact is there are cheaper places to own by a long shot outside of CA or even AZ or any West of the Rockies state, CO included.

This. I rented my whole life until last year. I'll NEVER go back. Owning is bomb but I also bought beneath my means in an amazing area and I have lots of cash to do stuff to the house. I get to modify my castle just the way I want it and no one (landlord) can easily take it away from me as long as I pay my fixed payments. Being a landlord's bitch is emasculating.

Eman says

One penny, which compounds every day for a month (30 days), will be over $1M. The power of compound interest. The power of control and leverage. Let time do the heavy lifting. It’s like planting a tree. It’s a one time effort while we get to harvest it for the rest of our lives.

Actually, it's 10 million! But what's an extra zero between friends? :-)

SunnyvaleCA says

Eman says

One penny, which compounds every day for a month (30 days), will be over $1M. The power of compound interest. The power of control and leverage. Let time do the heavy lifting. It’s like planting a tree. It’s a one time effort while we get to harvest it for the rest of our lives.

Actually, it's 10 million! But what's an extra zero between friends? :-)

@SunnyvaleCA,

You’re absolutely correct. You actually took the time to do the math. It seemed outrageous to me when I first heard of this concept too so I also did the math. 🤣

It goes to show the power of compound interest. I’m glad I figured this out early enough and coupled it with the opportunity of the housing crash, which had allowed us to grow our little pile of savings exponentially in a short amount of time.

My wife asked me what would it take for me to go back to a W2. I said at least an 8-figure salary. 7 figures won’t do it. I’m at that point in my life where I realize our time on this earth is finite, and we can’t buy our time back once it’s gone. The pay scale is based on how much we believe our time is worth.

Interesting observation as housing accounts for 33-42% of the CPI. OER = Owners’ Equivalent Rent.

https://x.com/joecarlasare/status/1690715526211817472?s=46&t=5lEEPaezr6Ic-W4Z6huZ5Q

.

Morningstar predicts a 5% rate for 30 year mortgage in 2024. Goldman Sachs predicts 5.9%.

I figure peak prices in early 2022 were based on a locked-in mortgage rate of 4%.

So prices need to drop 20% if the 30 year mortgage rate is 6% based on housing affordability, that is a 10% drop in price for a 1% increase in the 30 year mortgage rate.

The price drop may be 18.2% by discounting for wages and income rising about 6% in 2022 and 3% in 2023.

20% x .94 x .97 = 18.2%

.

https://finance.yahoo.com/news/housing-market-outlook-where-expect-162543246.html

.

Eman says

Interesting observation as housing accounts for 33-42% of the CPI. OER = Owners’ Equivalent Rent.

https://x.com/joecarlasare/status/1690715526211817472?s=46&t=5lEEPaezr6Ic-W4Z6huZ5Q

I notice rent is at same price level as 2022. As housing may stay flat for a few years, while income rises about 2.5% to 3% a year. I am hoping income catches up more to housing.

3 bedroom, 2 bath, 2 car garage townhome about 2 miles from the beach in Panama City Beach rents on average for $2150. Rent was around $1500 back in 2016 for the same type of townhome.

.

.

https://traffic.americanmilitarynews.com/2023/08/us-debt-downgrade-means-mortgages-just-got-more-expensive/

For 30-year rates, however, the most relevant benchmark is the 10-year Treasury yield.

That brings up a quirk of post-pandemic mortgage rates: The gap between 30-year mortgage rates and the 10-year yield is unusually wide.

This interval, known to economists as “the spread,” typically runs between 1.5 and 2 percentage points. If the 10-year yield sits at 4%, for example, the 30-year fixed mortgage rate should track close to 6%.

However, the spread has jumped to more than 3 percentage points — the highest level since the darker days of 2009, according to Bankrate research. That means that instead of a 4% yield translating to a 6% mortgage rate, borrowers are paying 7% for 30-year loans.

,

https://sfstandard.com/2023/08/15/over-50000-to-lose-coverage-as-two-home-insurers-exit/

Two more insurance companies will exit the California homeowners market, further narrowing options for people seeking to insure their home or to purchase a house with a mortgage.

AmGUARD Insurance—a subsidiary of Berkshire Hathaway GUARD Insurance Companies—will withdraw its homeowners and personal umbrella programs in California, while Falls Lake Insurance will also end its homeowners program.

Both companies made the announcements in little-noticed filings submitted to the state regulator on July 21.

The two companies are the latest insurers to rush for the exits in California or limit their business in the state during the past year. But unlike heavyweights State Farm and Allstate, which declined to sign new homeowners business in the state, AmGUARD and Falls Lake will drop their existing policyholders.

That will force tens of thousands of California homeowners to seek new coverage at a time when the available options are growing fewer.

True, mortgages are often contingent on insurance coverage, and that just got harder to get.

This seems certain to add downward pressure to house prices in California.

Why are they leaving...fires?

Patrick says

That will force tens of thousands of California homeowners to seek new coverage at a time when the available options are growing fewer.

And that coverage will have very high deductibles. Also, you may see the State of California sell policies of last resort.

HeadSet says

that coverage will have very high deductibles

Yup.

Our earthquake policy has a $30k deductible. Chump Change to techies I suppose.

.

https://www.foxbusiness.com/economy/housing-starts-rise-more-expected-july-despite-rising-mortgage-rates

New U.S. home construction ticked higher in June after declining the previous month, even as the housing market continues to confront headwinds like higher mortgage rates.

Housing starts rose 3.9% last month to an annual rate of 1.45 million units, according to new Commerce Department data released Wednesday. That is slightly above Refinitiv economists' forecast for a pace of 1.44 million units.

.

GNL says

Why are they leaving...fires?

@GNL

https://abcnews.go.com/US/wireStory/california-insurance-market-rattled-withdrawal-major-companies-99855058

Two insurance industry giants have pulled back from California's home insurance marketplace, saying that increasing wildfire risk and soaring construction costs have prompted them to stop writing new policies in the nation's most populous state.

Economists say 30 year mortgage rate could hit 8%. I wonder if the plan is to crash the economy by end of this year and then have a rigged or phony recovery at least 3 months before the November 2024 election.

https://www.marketwatch.com/story/mortgage-rates-could-hit-8-economists-say-citing-a-worrying-sign-not-seen-since-the-great-recession-edf2b4a4

Patrick says

Two insurance industry giants have pulled back from California's home insurance marketplace, saying that increasing wildfire risk and soaring construction costs have prompted them to stop writing new policies in the nation's most populous state.

Darn. I thought they would start offering DEW insurance.

Other people are still out there hustling the real estate market. Hard money loan at 9%.

https://www.linkedin.com/posts/marshall-reddick-real-estate_hardmoney-realestate-hardmoneylender-ugcPost-7095494366013571073-3imo

I paid $890,000 for Home Last Year, Now It’s Worth $600,000

https://www.youtube.com/watch?v=2qYsG8jWy_Y

Rubicon says

Anyone forecasting a RE crash would need to have an idea of how inventory is supposed to skyrocket from todays levels:

What an interesting chart. The bottom of the 1990’s housing market was around 1993-1994. It coincided with the lowest inventory at around 1.5M. Then inventory started to build while prices also climbed gradually. Then in late 1990’s, housing prices started to go ballistic due to the dotcom boom and coupled it with gradually declining inventory.

Then the dotcom bust and 9/11/2001. Housing prices took a little dip, then took off again till 2006-2007, likely due to easy lending (aka NINJA loans), while inventory building. Then the bottom fell out with NINJA loans and housing inventory soared to all time high with distressed sales for a few years…an opportunity once in a lifetime. New construction came to a screeching halt. Home builders have been extremely cautious since.

Now, record low inventory, strict lending requirements for the last 1.5 decades, home builders are not over building, we need massive job losses to create distressed sales.

Eman says

we need massive job losses

Wishing that is Bad Karma

Actually, job losses have been on the rise since October 2022 especially for higher paying jobs. This reminds of the MSFT, GOOG, META layoffs, etc last year. Simply mind boggling how the housing and stock markets have been holding up since. It’s not as simple as people think.



https://x.com/samro/status/1690835119299342337?s=46&t=5lEEPaezr6Ic-W4Z6huZ5Q

Eman says

we need massive job losses

Eman says

job losses have been on the rise since October 2022

Good for you!

Folks pushed out of the housing market = more renters to exploit.

B.A.C.A.H. says

Eman says

we need massive job losses

Eman says

job losses have been on the rise since October 2022

Good for you!

Folks pushed out of the housing market = more renters to exploit.

I doubt he rents to unemployed folks. I wouldn't.

Rubicon says

EMAN,

“ Now, record low inventory, strict lending requirements for the last 1.5 decades, home builders are not over building, we need massive job losses to create distressed sales.”

Bingo! Until we see significant increases in unemployment we don’t need to worry about skyrocketing inventory.

Agree/disagree. At some point interest rates will make a difference if they get high enough. Historically they're not bad. We just grew up or lived with low interest rates most of our adult lives. Job losses and really high interest rates are the only thing that can bring it down in my opinion. I don't see either getting massively out of line. Flat line, maybe a slight decrease. Housing ain't the issue in this economy. I don't have an answer, but housing isn't gonna be the "thing" this time.

Rubicon says

Bingo! Until we see significant increases in unemployment we don’t need to worry about skyrocketing inventory.

Be cautious. CA housing affordability index hit 16% in the 2Q of 2023. It was 19% in 1Q. From a historical perspective, the CA housing market peaks at 17% and bottoms at 40% in past decades.

We don’t know what’s the catalyst for the next housing downturn, but history tends to rhyme itself. It’s NEVER different this time. As Charlie Munger said sometimes it’s best to sit around and twiddle our thumbs. This is likely one of those times.

Was talking to a neighbor who thinks that there are going to be massive fires that make thousands of people homeless. She believes that is why so many insurers are dropping coverage , not taking new customers.

I’m not saying I believe her but it sure would be interesting if thousands and thousands of people were suddenly homeless due to raging “wildfires”.

Eman says

As Charlie Munger said sometimes it’s best to sit around and twiddle our thumbs. This is likely one of those times.

No, don't listen to that old fool. Listen to Rubicon...it's always the right time to buy. No matter the price, rates, economic cycle or location. Buy, buy, buy. NOW

https://finance.yahoo.com/news/mortgage-rates-top-7-hitting-21-year-high-160707969.html

Mortgage rates top 7%, hitting 21-year high

Rubicon says

GNL, i think you are finally getting it. Good job!

You are right. It’s always a great time to buy a house if you hold longterm and can comfortably afford the house!

If you bought during the peak of the Great Recession (peak was in 2006) you would do cartwheels today. 2006 is just a blip on the charts. If you buy in 2023 you will do cartwheels in 2043. Housing only goes up in the longterm.

I thought Eman was your hero. He's not a buyer right now.

Rubicon says

He already got several houses. I am not a buyer right now either. I also own several. Nobody said you should buy a house every year?

But if you don’t have a house and you plan on having one. And you meet the two criteria I gave: hold long term and can comfortably afford it, what’s stopping you from buying? other than the annual perma bear saying: it’s going to crash?

This is well said. Something got lost in the exchanges IMO. If one can afford to buy and hold long term, there’s no point of trying to buy at the bottom.

Since you have a job, you can afford to dollar cost average on your rentals. I need value-add properties to create equity and recycle my seed capital.

GNL says

Rubicon says

GNL, i think you are finally getting it. Good job!

You are right. It’s always a great time to buy a house if you hold longterm and can comfortably afford the house!

If you bought during the peak of the Great Recession (peak was in 2006) you would do cartwheels today. 2006 is just a blip on the charts. If you buy in 2023 you will do cartwheels in 2043. Housing only goes up in the longterm.

I thought Eman was your hero. He's not a buyer right now.

I’m not a buyer at the moment b/c the numbers don’t pencil out. The risk/reward is not there. I’m always a buyer and seller for the right price.

I get it guys. RE probably is one of the most assured paths to wealth. It can be done fairly quick or over the long term depending on 1. Risk tolerance 2. Intelligence and 3. Some luck. No one could have foreseen the last 3 years.

I've mentioned the family my daughter married into. Her husband's grandfather and his grandfather's brother built quite an empire. Seriously impressive. They were workaholics and only enjoyed a relatively small dollar figure of the success that resulted from it. What I've personally witnessed is what looks to me as unhappiness from those that inherited it. They don't work and there are many personal problems from criminal problems to drug problems to multiple divorces and baby daddies and nonstop worry over $$ etc. Unearned wealth is, in my experience, cancerous.

Well, some families and people handle things better I assume.

I will say that they've been very nice to me and my wife though.

GNL says

Unearned wealth is, in my experience, cancerous.

Correct. Every man who has been born poor but became successful has the issue of stopping his kids from being spoiled.

HeadSet says

GNL says

Unearned wealth is, in my experience, cancerous.

Correct. Every man who has been born poor but became successful has the issue of stopping his kids from being spoiled.

Did you hear what the founder of Hobby Lobby said/did? He gave his company to a charity because he didn't want to burden his kids with the wealth. Sounds crazy but that's as I heard it.