patrick.net

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?

knewbetter says

because Walmart has to make money and so do landlords.

An empty unit collects no rent.

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

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.

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.

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.

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.

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.

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).

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.

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.

Wow, they all do have that family resemblance.

I love graphs.

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.

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.

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!

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?

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.

"...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.

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

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.

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.

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.

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

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.

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.

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.

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.

Its because of prop 13

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

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.

How about these bad boys?

Here's the Sugar Price

And Cocao

More charts showing that commodoties are on a run.

General inflation will not be far behind.

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.

^ I know that chart well. I was FOB in the south bay in mid-2000, and saving for a downpayment for the first two years. Then I caught a layoff and became a spectator 2003-2004. Thanks to reading CR from 2005 I knew we were in the end-game. I thought a repeat of the 1989 spindown was the minimum, and once I learned about Casey Serin in late 2006 I knew things were going to just blow up, due to all the outright fraud.

Down here though, I think GOOG and AAPL are distorting things a lot to the upside. The SCV was subdivided out a generation ago and all the convenient places are built out as much as they're gonna be. As long as prices are falling more than my annual rent I'm a happy renter, but I'm going to have to buy sometime!

Bap, this is obviously not the first bubble built on leverage. The final burst of most stock market and commodities bubbles is a combination of institutional leverage and J6P enthusiasm. That final stage of the rocket usually requires the banks to loosen up on their lending standards, but most do because their advisors see the bubble as a "can't lose" proposition.

For those who love bubbles, I recommend reading some Nassim Taleb. He's made billions betting for black swans, because they happen more often than people are willing to admit.

"Is this the first bubble built on (almost enitirely) debt?"

Debt has been a major factor in many bubbles - perhaps all of them.

Tulips: 60x in 3 years.

That's 6,000%

...or about 1,700% per year.

Now, that's a bubble!!!!

well ... damn, then fixing the easy-debt issue wont help end the bubble cycle ... or will it?

IQ testing for borrowers ... and voters? lol. But, seriously, will demanding full recouse loans, including debters prison, help end bubbles?

"But, seriously, will demanding full recouse loans, including debters prison, help end bubbles?"

Only to the extent that the borrowers believe they might lose money, and have other significant assets that could be put at risk by the recourse. I suspect that the fools who thought that the easy profits were a sure thing would not have been concerned about full recourse.