patrick.net

you have about 1 more year for the California housing apocalypse to play out. After that a little rule goes away and people will no longer be able to walk away or short sell their house without penalty.

once the change goes into effect expect a huge drop off in the number of distressed sales.

I remember reading a comment several months ago on CR. They guy had two choices: rent in Antioch or buy in Concord (duckyland). Can anyone guess which he did?

toothfairy says

you have about 1 more year for the California housing apocalypse to play out. After that a little rule goes away and people will no longer be able to walk away or short sell their house without penalty.

once the change goes into effect expect a huge drop off in the number of distressed sales.

Is that just your personal opinion? Gut feeling? Or do you have any data/analysis to share that will back it up?

kunal says

Why will home prices not go below rent?

rents keep going up, but home prices stay same or down slightly.

Prices depend on interest rates, and interest rates can do down from here.

~50% down from here in fact.

http://research.stlouisfed.org/fred2/graph/?id=MORTG

That graph is telling you something.

The San Francisco Bay Area C/S Index fell 1.5% month-to-month. To be frank, that number is pretty brutal. It beats every other Aug. to Sept. drop except the free fall in 2008. I'm fairly confident of new relative lows come this January (year over year).

Here's the thing. Even if the market is flat ( which as seeing by the price drops lately I don't really buy) the rise in inflation will in turn eat away at overall values to the tune of about 3-4% annually. Look it up. Fairly common economic basics. So if your house just sits there not appreciating then its still losing value.

I find the pro-bullish sentiments in regards to housing a tad comical. I mean- cmon'. Housing in the Bay Area peaked around late 2005 and we're almost into 2012- representing a 7 year period of decline. Even if the absolute best scenario plays out and somehow everyone discovers they have an extra 100-150k in cash sitting around to pay more for Bay Area housing in the next year or so then when all is said and done we're looking at a total of an entire decade of a housing slump. Yet here we are, having these same arguments: Housing is grreeeat! Invest in em'. Buy a whole city block of em'. Because housing has shown itself to be such an absolute stellar use of investment capital.

Bellingham Bill says

rents keep going up, but home prices stay same or down slightly.

Huh? Rent go down too, its all demand and supply.
Huh? Home prices go down too, its all demand and supply.

Bellingham Bill says

Prices depend on interest rates, and interest rates can do down from here.

~50% down from here in fact.

http://research.stlouisfed.org/fred2/graph/?id=MORTG

That graph is telling you something.

Yes, its telling me that the interest rates are trending downwards. Whats your point? That prices ONLY depend on interest rates?
Not in income?
Availability of loans?
Jobs?
Economic trends?
Govt Intervention?
Supply?
Demand?

I'll just re-state -> Home Prices (or cost to own) has to drop below cost to rent for people to want to shift. At that point not everyone can shift, they'll have to qualify for loans or have a bunch of cash.

This is another circular argument. Sort of like what came first- the chicken or the egg. The reality is that neither decision- whether to buy or rent- is better than the other. As I previously mentioned everyone these days will need AT LEAST one million dollars in retirement per person for a fairly meager yearly income. Buying or renting isn't going to create that wealth. Your investments in retirement funds will. People need to become better educated about finance.

edvard2 says

Buying or renting isn't going to create that wealth. Your investments in retirement funds will. People need to become better educated about finance.

Yes and no. If you own your home, you eliminate a major retirement expense. That definitely creates wealth.

tatupu70 says

Yes and no. If you own your home, you eliminate a major retirement expense. That definitely creates wealth.

retirement!! would not worry. chances are good you are gonna croak long before then buddy

tatupu70 says

Yes and no. If you own your home, you eliminate a major retirement expense. That definitely creates wealth.

Maybe. If you had taken the same money spent on a house and instead stuck it in stocks you would actually be better off... to pay for your future old folks home- where we'll all wind up anyway.

edvard2 says

Your investments in retirement funds will. People need to become better educated about finance.

That's good no brainer advice for people who dont have the time to understand finance. Actually buying a house and investing in your 401k should be part of the no brainer path to retirement which is why most people are on that track.
Renting is not a no brainer.. For that path you need to get clever enough to have investment returns to outpace your rent that's increasing with inflation.

edvard2 says

Maybe. If you had taken the same money spent on a house and instead stuck it in stocks you would actually be better off...

best hope you time things right. some folk I knew lost there butts who retired in 2000 or 2008

toothfairy says

Renting is not a no brainer.. For that path you need to get clever enough to have investment returns to outpace your rent that's increasing with inflation.

you paint it a little rosey bub. rent also can go down. i have had to lower rent before.

JodyChunder says

you paint it a little rosey bub. rent also can go down. i have had to lower rent before.

or I guess you could say it's the ultimate no brainer. If you're not even thinking about retirement and dont know the first thing about buying a house then renting it is.

toothfairy says

If you're not even thinking about retirement and dont know the first thing about buying a house then renting it is.

it aint brain surgery man. every on I know thinks they got it figured.

everyone is a big time dude til they loose there butts. investment property is they way to go right now. i am doing well. it is a NO BRAINER

if that is your kitchen tere its a nice one... very elegant feminine.

Listen to the man from Victorville - he's living the dream. Victorville is known for ballers and shot callers.

Hysteresis says

B.A.C.A.H. says

The only way they will ever know its the bottom is after the prices are increasing again. By waiting, they will miss it. Instead they should base the decision on their own situation instead of trying "time the market"

missing the bottom is my strategy.

i'm fine with paying a premium to know prices have bottomed (by waiting many years after the bottom has occurred)

Hysteresis,

watching for a bottom is being in reactive mode, reactive to what others are doing.

Another way to act, is, to be more in control. If the total ownership cost is right for you, based on your own personal analysis, then go for it. Who cares what other people think in setting "the bottom"? Just do the right thing instead of reacting to what others do.

For me, buying now is not the right thing. All things considered, I am satisfied with the returns on my dividend stocks.

SubOink says

Listen to the man from Victorville - he's living the dream. Victorville is known for ballers and shot callers.

you been to this part of the high desert? you razzing??

edvard2 says

If you had taken the same money spent on a house and instead stuck it in stocks you would actually be better off

We can argue that all day, but I'll just say that someone who buys a house and holds it through retirement willl almost never be worse off than someone who rents their whole life.

ptiemann says

I'm sure someone will comment how that remodel money will never be recouped and that renters get free landscaping in their apartment complex's common areas.

Otherwise.. congratulations.

Don't forget also how much money you are savin gin taxes by writing off your interest abd preoperty taxes! I myself bought 5 rentals in the last 4 years for cash...Cheap in Richmond and Oakland but guess what? I have a cash flow of $7000 per month coming in and all of them are worth more than I paid for them at the time. I bought them all under $100k and they are worh about $110k-$125k each.I just bought another on ein October for $86k in Richmond and the person who Short sold it wanted to stay as a renter at $1200 per month so I said sure you can stay. That gave me a 15% return on the $86k cash I invested.

You can work this recession if you know how and have guts. ll these properties are returning 12-18% return on the money invested plus future growth.No gloom and doom here!

mike2 has the right ideas. KTF

B.A.C.A.H. says

Hysteresis,

watching for a bottom is being in reactive mode, reactive to what others are doing.

Another way to act, is, to be more in control. If the total ownership cost is right for you, based on your own personal analysis, then go for it. Who cares what other people think in setting "the bottom"? Just do the right thing instead of reacting to what others do.

For me, buying now is not the right thing. All things considered, I am satisfied with the returns on my dividend stocks.

waiting for the bottom -is- reactive but more importantly, it is a wealth preservation strategy.
i don't want to "lose" money, even if it is only on paper.

if price/income and price/rent ratios make sense, but prices continue to fall, it is very costly to buy in a down trending market. why?

1) because a financed house purchase is leveraged 5 to 1 (if you put 20% down). a 1% drop in house price is equivalent to a 5% (unrealized) loss of the down payment. a 20% drop wipes out your equity completely like the millions of people today that are underwater.
once your equity is gone, the odds of losing your house increases sharply.

2) consider a 20% down payment.
at a price of $250k that's $50k down, at $500k, that's $100k, at $1M that's $200k.
if prices drop 20%, the unrealized losses are $50k, $100k, $200k.
if prices drop 10%, the unrealized losses are $25k, $50k, $100k.
if prices drop 5%, the unrealized losses are $12.5k, $25k, $50k.

most mortgage owners are highly leveraged at 5 to 1, meaning they start with a 20% down payment; some with a 3.5% down payment are 29 to 1 which is insane.

most people i talk to don't realize how likely it is that prices will drop and how much they can lose. you can argue paper losses don't matter, but if you could time it even roughly, wouldn't you?

i too have dividend paying stocks. they are outperforming the market by a very large margin, probably because people are looking for safer investments when every asset class today has so much uncertainty/volatility.

in this environment (homes trending down, stocks extremely volatile), i'd rather have my money in stocks/bonds. it's a tough environment for any investor, but with a lot of hard work and strong analysis, good decisions can be made. we're no longer in a secular bull market, we're massively deleveraging trillions of dollars of debt (not just mortgage debt, but consumer debt like credit cards, student loans and auto loans). this means strategies need to emphasize the risk part of the risk/reward equation.

i dont know how you could possibly be in the stock market if you dont like losing money on paper.

At least with a house you dont sit there and watch the number plummet each day not knowing whether it's going to zero.

toothfairy says

i dont know how you could possibly be in the stock market if you dont like losing money on paper.

At least with a house you dont sit there and watch the number plummet each day not knowing whether it's going to zero.

i have a high tolerance for stock price fluctuations - they move around a lot and move (relatively) quickly. so if the share price is down, it will go back up soon enough or if it stays down i can cut my losses.

house prices don't exhibit this behavior. they go down and stay down for years.
many of these peak buyers will be sitting on a paper loss for more than a decade.

i can cut my losses with stocks easily; even though it may be painful:).
underwater houses are much worse in my opinion; far less liquid. selling has heavy transaction costs and being underwater requires a short sale or foreclosure which has many undesirable consequences. or the owner can suck it up and keep paying into the loser month after month for years; i imagine this can wear on a person.

with stocks i expect to have losers so have strategies to deal with them. it's a numbers game. if played right, risk is reduced.
with a house you are concentrating a very large sum of money and income into this single asset over many years which in my opinion is risky. it's sort of like investing $250k-$1M, and in many cases people are spending half their income, on a single stock(ie their house) over 30 years.

i'm not expecting anyone to agree with me. investment strategies are very personal and have to be suited to the person's style and tolerances. what works for me, may not work for you and vice versa.

also all of my stocks have appreciated in price this year; most of them quite significantly (not crazy amounts but a very nice return).

toothfairy says

i dont know how you could possibly be in the stock market if you dont like losing money on paper.

At least with a house you dont sit there and watch the number plummet each day not knowing whether it's going to zero.

I'm going to sound like a broken record here but oh well. How could I be in the stock market? Well its all about averages and time. The same goes for any investment whether its houses, 401k's or other forms of financial investment. Historically stocks have averaged an overall 7-8% annual appreciation over the LONG TERM. I said "Long term" in caps because inevitably the response I hear is :

" I put money into the market back in 2000 and I haven't gained much!"

Well, sure. But a 10-11 year window is still considered short term. We're talking over the course of a 30-40 year time period. In comparison real estate on average manages to go up 3-4% annually over the same long period and that includes places like the Bay Area. Many people might scoff at that notion but the thing is that the housing market in the Bay Area is far more volatile. It goes up dramatically and then falls dramatically. When it falls it tends to stay down for years at a time- as it has been doing for the past 6 years, going on 7. In the end the average still works out to be around 3-4% over the long haul.

Even in this economy I've got a few investments- boring 401k's and mutual funds- that are up at a fairly healthy clip. One is up 13% YOY. Stocks tend to bounce back a lot faster too. My investments took a dramatic 45% plunge in value in 2008-2009. By 2010 they were back to their previous levels and are now gaining. The same can't be said for housing, which is still falling and will take years to make any significant gains.

Lastly, if someone in the Bay Area goes out and buys a house, by default due to today's lending requirements they're probably blowing a good 100k-200k at once for a down payment after which they must pay whatever principle remains. Given that it would take me close to 20 years to pay in rent what that person put down as a down payment I could just as easily make the argument that since my outflow of cash is significantly less then that I am in turn retaining more cash that can be used for other more diversified investments instead of putting it all on one thing- the house.

tatupu70 says

Does Patrick still have nominations for the dumbest posts?

Sorry Tat.
Women were not part of the Home loan process prior to 1973. Real Property sales prices rose 70% by 1980, ( women earned %70 of what men were earning ) prices fell 17% in 81/82. Then 1983 the computer arrived.

double bubble !

Hysteresis says

so if the share price is down, it will go back up soon enough or if it stays down i can cut my losses.

So yo udo you determine when it's been down long enough to cut your losses? Like in 2008 when your stock is down 45% and your downpayment has gone from 200k to 100k on it's way to 50k do you cut your losses? I guess you didn't since you say you didn't lose any money in the market.

I call BS because I Know. I have housing as well as stocks. I dont put all my eggs in either basket but Stocks are far more risky in my opinion.

toothfairy says

Hysteresis says

so if the share price is down, it will go back up soon enough or if it stays down i can cut my losses.

So yo udo you determine when it's been down long enough to cut your losses? Like in 2008 when your stock is down 45% and your downpayment has gone from 200k to 100k on it's way to 50k do you cut your losses? I guess you didn't since you say you didn't lose any money in the market.

I call BS because I Know. I have housing as well as stocks. I dont put all my eggs in either basket but Stocks are far more risky in my opinion.

where did i say i didn't lose any money in the market?

Cutting your losses would be unwise when it comes to stocks. Most people for some reason fail to understand even the basics of stock investment. If you buy higher and sell lower then you've just lost your initial investment. Up to that point you have not lost a penny. Most people also react in the total opposite manner when it comes to stocks versus houses. When home prices go lower people go berserk and exclaim what a steal it is. When stock prices go down people panic and either sell everything or they get scared. As mentioned stocks are just like houses in that they're a financial asset. If a car was $5,000 cheaper tomorrow would you buy it? Of course you would. So why not the same with stocks? In my opinion its because people like to have something physical in their hands. If they can't actually hold it, its not "real". Hence why there is usually more enthusiasm to invest in houses and physical gold instead of simply buying gold as a symbol on the stock market at current rates.

edvard2 says

Cutting your losses would be unwise when it comes to stock

it entirely depends on your strategy.

i suspect you only buy and hold indexes. you don't have the luxury of buy and hold if you own shares in a crappy individual company.

You are correct in your assumption in that I don't buy individual companies. I've seen way too many people do that and lose tons of money in the process- my Grandmother included. For the most part if you invest broadly enough in many different sectors, industries, and in various international markets you'll in all liklihood do just fine.

owning the total market (domestic, foreign and various asset classes) using indexes is a great strategy for many people

one thing stocks have in common with housing is that people who try to time the market usually end up losing money.

I know people who sold their house at the "peak" in 2004 and have been renting for 7 years waiting for prices to come back down to 2004 levels.

The illiquidity of housing is actually a good thing because it forces you to ride it out and not panic and sell at exactly the wrong time.

Bellingham Bill says

Supply is fixed regardless of who rents and who buys.

That is not possible - Supply changes, here is one factor - Household formation, or currently the lack thereof.

http://www.bloomberg.com/news/2011-11-29/home-price-recovery-in-u-s-hinges-on-household-formation-gain-case-says.html

mike2 says

Don't forget also how much money you are savin gin taxes by writing off your interest abd preoperty taxes! I myself bought 5 rentals in the last 4 years for cash...

You, sir, appear to be a liar for writing an internally inconsistent comment. If you paid cash, you are not able to write off interest. Furthermore, your story at least appears inconsistent for other reasons, such as passive loss rules.

SubOink says

everybody jumped the gun on me and told me how I will regret my decision come xmas 2011

SubOink says

This summer we did so many updates and improvements,

Well, you are still in the "buyer high" mode. You havent known it yet, you already regretted it by spending so much on reno.

Looking back, for all the reno I spent on the many houses I used to own, I must say that I shouldnt have done so.

SubOink says

When you post something here, its sometimes easier to simplify a story to get the point across more clearly. Otherwise, you would have to explain the backstory and the story of that backstory. Not possible.

It can be, but there's a balance between too much info and not enough. I wasn't talking about you, btw, I was talking about mike2.

MoneySheep says

You havent known it yet, you already regretted it by spending so much on reno

I have no clue what you are talking about. Sorry.