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1407   knewbetter   2009 Dec 11, 1:46am  

Troy says

thomas.wong87 says


ergo you have a unsustainable price bubble. eventually prices will fall back which earnings will support.

Not if rents hold. Rents support everything.

The current decline in the price of rents isn't driving the market but following it. Because property isn't selling, more people are trying to recoup something by renting out, thus increasing the number of units. Also, more people are staying togeter/moving in together to share the burden. All smart stuff, but the rental market is a reflection of what's going on with housing/jobs ect.

Rents don't control the market, they reflect it. Wait to see what happens when interest rates hit 10%. The price of property will nosedive but rents will go through the roof!

1408   shultzie   2009 Dec 11, 1:50am  

elliemae says

shultzie says


if you need to remember why you left south florida I will be happy to remind you…

…I’m a west coast/mountain girl. Actually never been to Florida - I hear tell of crime and tons of people packed in like sardines out there. I’m kinda spoiled, because they print all of the crimes in the county in the local paper and it only takes up one column. It was just kinda goofy, made me think.

Huh - why did I think you moved from here a couple of years ago? - my apologies. someone else I guess

1409   PeopleUnited   2009 Dec 11, 2:07am  

TOT, thats right.

Both major political parties are fraud. Bait and switch.

But people keep voting them in. It is amazing. Fool us once shame on you. Fool us for 95 years? Shame on us all.

1410   LAO   2009 Dec 11, 2:53am  

knewbetter says

Rents don’t control the market, they reflect it. Wait to see what happens when interest rates hit 10%. The price of property will nosedive but rents will go through the roof!

RENTS can't go through the roof.. Legally they can't raise my rent by more than 5% a year.. and some rent-controlled areas even less!! Housing prices can drop by far more than 5% a year... So renting is still saving you alot of money over buying now.

1411   pkennedy   2009 Dec 11, 3:11am  

I like elliemae's view on home ownership. There is a lot more that you gain from owning a home, than just no rent, equity and retirement funding (possibly).

However, the comment about the criminal in the back yard vs no criminal? The number of people who die from heart attacks every year, vs random criminal shoot outs isn't even close. The time from attack to getting help is measured in minutes at best, with 3-4 minutes being about maximum. The chances you'll have a heart attack later in life are pretty high, just using statistics. If an ambulance has to go even 1 mile extra to reach your property, that could mean the difference between you living and dying. So buying an acre and feeling secure, is probably a major false sense of security when compared to what is likely to get you.

1412   Â¥   2009 Dec 11, 3:44am  

knewbetter says

Rents don’t control the market, they reflect it. Wait to see what happens when interest rates hit 10%. The price of property will nosedive but rents will go through the roof!

"Through the roof", huh? Where, pray tell, will renters be getting the cheese to pay these higher rents?

Will Walmart be paying $10 per hour then? If not, no high rents. There are already 20 million vacant homes in this country. Employment drives rents. I fail to see why this is controversial, though the recently departed real estate economy (the flippers/RE brokers/home equity/loan broker circle-jerk) temporarily hid the fundamentals this decade.

1413   knewbetter   2009 Dec 11, 4:08am  

Ok, this may be hard to handle, but renters don't really count when it comes to the housing market. Ok? People rent for various reasons, but they are in control of very little. Renters are for the most part retail shoppers that have to buy something or else move back in with mom-n-dad.

If you can't afford a house, then you rent. If no one can afford a house because interest rates are too high then a lot more people will be renting. That has nothing to do with how much Walmart pays its employees. Walmart couldn't care less if you share an apt with 2 people or 6, or if you drive to work or take a bus, because Walmart has to make money and so do landlords.

All that being said, I sold my apts in 2002 because I couldn't believe what people were willing to pay me for them, so as far as an adjustment I agree. But the price of rent has more to do with the cost of ownership than the price of of a comparable home. Well, as long as you don't live in a rent-controlled, property tax controlled state.

300k @ 5% = $1610/month
170k @ 10%= $1610/month

Wanna save up and buy cash? Great, but if you can't that house is going to cost you the same price to rent no matter what.

1414   knewbetter   2009 Dec 11, 4:15am  

rmm221 says

knewbetter says


Rents don’t control the market, they reflect it. Wait to see what happens when interest rates hit 10%. The price of property will nosedive but rents will go through the roof!

RENTS can’t go through the roof.. Legally they can’t raise my rent by more than 5% a year.. and some rent-controlled areas even less!! Housing prices can drop by far more than 5% a year… So renting is still saving you alot of money over buying now.

Where do you live, Cuba? Friggin' communists!

5% per year appreciation is more than the housing market will see for the next 10 years. I'm not counting on the price of property to go up, just the cost of everything. If you can't buy then you have to rent. Not everyone who rents has to rent but if you can't then you have no other choice, right?

1415   Â¥   2009 Dec 11, 4:18am  

knewbetter says

because Walmart has to make money and so do landlords.

An empty unit collects no rent.

1416   The Little Guy Lobby   2009 Dec 11, 4:24am  

I just want to say that Patrick.net is the most interesting website on the net.

Maybe life isn't a box of chocolate like The Gumpster said, but life is just a bubble and another one waiting to happen.

From Tulips, to dotcom, to houses, to gold- things get bid up and them drop like a Led Zeppelin. Why you ask. Because bubbles allow people to get something for nothing- if only for a short while.

I think the takeaway here is that to not Beware of Dogs, but to Beware of bubbles. For they can bite you in the ass big time.

As far as home ownership, Patrick has it nailed. Simple. The one true ratio. Rent vs Buy. That's all you need to know. Nothing else. I keep checking out where I live (Gotham, WI) and it is still cheaper to buy than rent due to low taxes, low interest rates, and low average home prices. If I still lived on the coast, I'm sure it would be different.

Dreaming of a white xmas,

Cheese Curds forever

1417   simchaland   2009 Dec 11, 4:28am  

knewbetter says

All that being said, I sold my apts in 2002 because I couldn’t believe what people were willing to pay me for them, so as far as an adjustment I agree. But the price of rent has more to do with the cost of ownership than the price of of a comparable home. Well, as long as you don’t live in a rent-controlled, property tax controlled state.
300k @ 5% = $1610/month
170k @ 10%= $1610/month
Wanna save up and buy cash? Great, but if you can’t that house is going to cost you the same price to rent no matter what.

No, not really, even you have the answer to that in your comment above.

Rent isn't really based merely on the cost of ownership to the landlord. Rent is based mainly on what the tenant is willing and/or able to pay to live on a property.

If there aren't enough tenants to go around who can pay top dollar for rent and you are a landlord who has a 2br/2ba house that you would like to rent for $1610 per month to cover your costs and maybe eek out a little profit, you won't get $1610 per month in rent for that house.

If everyone else is charging $1200 per month for similar 2br/2ba houses in the same neighborhood because they need to attract renters to recoup some of their costs while renters can't or won't pay enough to cover expenses, you'll eventually have to drop your price too or get nothing. When faced with the decision to continue to advertise that you will only rent your place out at $1610 per month while holding a property that costs you $1500 per month that sits empty because no one can/will rent it at your asking price generating $0 per month, or to hold that same property with a tenant who actually can and actually does pay $1200 per month, most landlords would choose to rent for $1200 per month and live with paying the $300 to keep the property if they are able to do so.

1418   AltonS   2009 Dec 11, 5:04am  

knewbetter says

Troy says

thomas.wong87 says

ergo you have a unsustainable price bubble. eventually prices will fall back which earnings will support.

Not if rents hold. Rents support everything.

The current decline in the price of rents isn’t driving the market but following it. Because property isn’t selling, more people are trying to recoup something by renting out, thus increasing the number of units. Also, more people are staying togeter/moving in together to share the burden. All smart stuff, but the rental market is a reflection of what’s going on with housing/jobs ect.
Rents don’t control the market, they reflect it. Wait to see what happens when interest rates hit 10%. The price of property will nosedive but rents will go through the roof!

Meh. Apartment rents are dropping locally to 5 year lows with some nice incentives (free vacuums, rent free washer/dryers in apartments etc.). Older rental homes are dropping as well, especially if they're in the not so nicer parts of town. The only thing holding relatively steady are the 3/2 starter/mid/high range homes due to a lack of supply I think, perhaps with some denial by owners/landlords. I'm willing to pay more for a nicer home with AC these days as I'm just sick of living where I'm at. I want a home with no shared walls for once.

The moment the prices drop to reality, I'll be seriously looking to buy with cash.

1419   P2D2   2009 Dec 11, 5:06am  

knewbetter says

Ok, this may be hard to handle, but renters don’t really count when it comes to the housing market.

What? Don't renters buy home? Let me put it this way: excluding the bubble period of last few years, the mortgage and rent prices have more to do demand for housing. And demand for housing includes both owning and renting. And the demand of ownership comes from demand of housing. So, rent price and housing market are dependent on each other. Most of the people starts their life as renters. They save up and buy home - near their jobs. No job, no demand for housing. No demand for housing, no renters and demand for ownership. Want example? Detroit.

knewbetter says

ut the price of rent has more to do with the cost of ownership than the price of of a comparable home.

Not really. If there is no demand of housing, rent price is going to be lower irrespective of cost of ownership. In my part of country (Silicon Valley), a $1.5 million home rents for $2500-$3000. That rent price does not even cover half of the mortgage.

1420   P2D2   2009 Dec 11, 5:16am  

knewbetter says

Rents don’t control the market, they reflect it. Wait to see what happens when interest rates hit 10%. The price of property will nosedive but rents will go through the roof!

Just look at the past. Interest rate did hit 10% (or even higher) in past. Did rent "go through roof"? Tying rent with interest rate is oversimplification. There are lots of other factors - demographic chance, job growth in certain area, cost of transportation etc.

1421   knewbetter   2009 Dec 11, 6:10am  

Ok, can someone explain to me on what planet a 1.5 million dollar house will rent for 2k/month? Even 3k/month?

I'm in the North East. People don't rent houses here, they buy houses. People here rent apartments. We also don't count on rent control to help our long term financial planning, so my comments must be viewed through the prizm of what something is actually worth, not what someone is trying to sell it for or what we owe the bank. We've had a crash but we don't have

As I stated earlier I sold apartments when someone (speculator) was willing to pay me 30 years rental profit in one check, so I took it with the belief no one could or would be willing to pay more in rent than the debt service with which this chucklehead was willing to bury himself. So I am in complete agreement that 3k/month can not support a 1.5 million dollar pricetag.

You folks out live in bizzaro land.

1422   P2D2   2009 Dec 11, 6:42am  

knewbetter says

Ok, can someone explain to me on what planet a 1.5 million dollar house will rent for 2k/month? Even 3k/month?

I thought your argument was "price of rent has more to do with the cost of ownership". If your argument was correct, landlord indeed would not rent $1.5M house for $3K.
Check this recently sold property. Craiglist has rental ad for same property - for $2700.

Bottomline, cost of ownership is not the sole factor for rental price. Demand of housing and speculation on it (speculation that either home price or rental price will increase soon).

1423   P2D2   2009 Dec 11, 6:44am  

knewbetter says

People don’t rent houses here, they buy houses. People here rent apartments.

That could be true for your area. But people near big metropolitan areas do rent homes.

1424   ghpacific   2009 Dec 11, 6:57am  

Almost bought a foreclosed home in a rough neighborhood. A friend said "Remodeling a house is easy, remodeling a neighborhood is hard." Smartest words I ever heard. Passed on the house.

1425   Patrick   2009 Dec 11, 8:10am  

Wow, they all do have that family resemblance.

I love graphs.

1426   Zephyr   2009 Dec 11, 8:46am  

Excellent chart on the Main Stages of a Bubble.

But the 500% ratio of top over the previous bottom is not a reliable ratio.
It could top out much higher or lower.

More to the point is that the bubble itself is the last phase when the prices go crazy, doubling in about two years time. The preceding modest slope is usually a fundamentally justified run. The bubble follows after that. Prices do seem to at least double in only a few years once the bubble phase starts.

That would suggest a bubble price peak for gold of somewhere above $2,000. However, the gold price is hugely a barometer of economic fear. So, depending on world events, anything could happen.

1427   Â¥   2009 Dec 11, 8:51am  

For those convinced we still have a lot of downside left, keep in mind that we’re now completing year #4 post peak.

Immaterial IMO since housing is *the* major component in most everyone's cost of living and not some side investment. It is primarily driven by area after-tax incomes [edit: and availability of credit] and is not just some commodity like oil or gold. While modern economics has tried its hardest to disguise it, land is the third factor of production, alongside capital and labor.

Japan real estate fell from 1991 through 2006. Land values were bid up past affordability and have slowly adjusted to what the market can realistically bear -- this is natural since the production cost of land itself is approximately $0. Land prices would be lower than now but for Japan's ZIRP and the availability of 2.5% fixed financing.

This is not to say that we won't see raging inflation this next decade and it's certainly possible that Walmart will be paying $20/hr in 2019. I'd have a shocked face, but what happened this decade sure shocked the hell out of me already.

1428   elliemae   2009 Dec 11, 9:14am  

ghpacific says

Almost bought a foreclosed home in a rough neighborhood. A friend said “Remodeling a house is easy, remodeling a neighborhood is hard.” Smartest words I ever heard. Passed on the house.

That was beautiful!

1429   jetbay   2009 Dec 11, 9:17am  

What does, "For those convinced we still have a lot of downside left, keep in mind that we’re now completing year #4 post peak." mean?

We only have 1 year to go?

1430   Zephyr   2009 Dec 11, 9:17am  

BTW, the price chart for gold is a little off.

The previous bubble peak price for gold was about $850 per ounce on January 21, 1980.

The long decline started the next day.

Anyone who owned gold during the following 20 years lost real and nominal value at a rapid pace. Even with inflation the price of gold fell like a rock for years. So much for gold being a reliable currency or store of value. It is neither.

1431   Zephyr   2009 Dec 11, 9:25am  

"...real estate exhibited the standard 5 year run-up."

Housing prices increased from a bottom in 1996 to a peak in 2006.
By my count that is about 10 years.

Real estate price declines usually last for about three years.
However, the 1990s decline was about six years.

1432   Zephyr   2009 Dec 11, 9:27am  

I guess the trick in fitting the 500% ratio is to pick the baseline value that supports your case.

1433   Ryan1781   2009 Dec 11, 9:46am  

I haven't been to Germany in years. Count me in. Anyone else from the blog going to Oder? I figure we can all stay in Frankfurt. I wouldn't advise swimming in the Oder. Far too cold. Not to sure we can spot the gullible liberal constituent, but we could at least have a picnic.

1434   Zephyr   2009 Dec 11, 9:52am  

500% is probably a reasonable rule of thumb for a typical bubble.
But it certainly is not perfect. And picking the "baseline" is not clear in every case.

But the key point is correct - that bubbles cause prices increase by multiples in a short time.

1435   Zephyr   2009 Dec 11, 10:06am  

Ok. But for the info to have value you need to use a baseline that you could have recognized at the time. Thus enabing you to buy in before the bubble. Setting an arbitrary begining date by subtractracting from the subsequent peak is something that will nothelp you.

1436   marko   2009 Dec 11, 10:11am  

Graphs and charts dont usually get me too excited but these are very very interesting. Possibly these point to psychology of people and how they get carried away. Could be why they have the same pattern. It might be even more interesting if we go back longer than 30 years and chart other bubbles in different ranges of time.
Say between 1910 to 1930

1437   Zephyr   2009 Dec 11, 10:13am  

For example, with housing prices in LA and SD counties, I have found that bubble peak prices tend to be roughly double the previous bubble peak, and roughly triple the preceding bottom. This is very crude, but it has useful value in guestimating the future price trend.

Obviously, there are many factors that should influence the actual result. But this rule of thumb kind of works. But it is dangerous to rely on such simplistic ratios.

1438   Zephyr   2009 Dec 11, 10:23am  

Bubbles reflect a very basic nature of how nearly all people make investment decisions.

They invest based on momentum, track record. That is to say, they invest in things that have already proved that they are going up. So the more the item has gone up the more convinced people are that it will go up more. And the faster it goes up, the faster they rush to get in on it.

Their exuberance blinds them to the risk, as the crowd rejoices in the easy money.

Bubbles are very profitable for those who get out in time.

To paraphrase Warren Buffet:
Be greedy when others are fearful, and fearful when others are greedy.

1439   Zephyr   2009 Dec 11, 10:27am  

So when the crowd says you can't lose, it is probably about time to start selling.
When the crowd says it is a bad investment, it is probably time to start buying.

1440   🎂 tatupu70   2009 Dec 11, 10:28am  

P2D2 says

That could be true for your area. But people near big metropolitan areas do rent homes

I think it's more of a West Coast thing. I've lived in Midwest and East Coast cities and people don't rent houses very often. But it does seem to be common in CA.

1441   knewbetter   2009 Dec 11, 10:34am  

Its because of prop 13

1442   Â¥   2009 Dec 11, 11:10am  

marko says

if we go back longer than 30 years and chart other bubbles in different ranges of time.
Say between 1910 to 1930

Or 1610 to 1930.

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

1443   Zephyr   2009 Dec 11, 11:15am  

Yes. You can trade the crash. That requires a very brave bet, as it is easier to be right about the ultimate outcome than it is to be right about the exact timing. You could lose a lot of money waiting for the crowd to stop their exuberant run.

As Keynes once said:
Markets can remain irrational longer than you can remain solvent.

I prefer to bet the long side only, sell at or near the top, and then watch the destruction from a safe distance.

1444   theoakman   2009 Dec 11, 11:20am  

How about these bad boys?

Here's the Sugar Price

And Cocao

1445   Zephyr   2009 Dec 11, 11:22am  

More charts showing that commodoties are on a run.

General inflation will not be far behind.

1446   thomas.wong87   2009 Dec 11, 2:56pm  

http://www.housingbubblebust.com/OFHEO/Major/NorCal.html

In the SF Bay Area we been in a 10 year long RE bubble, we peaked in Q1 2007.
So thats only 3 years.. but a long way to go.

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