patrick.net

BoomAndBustCycle says

So what, Stocks aren't going to have large moves like that ever again in history.. Unless they are moving in tandem with housing. If our economy improves stocks and housing will improve together. If the economy falls off the track again.. Stocks will probably drop 50% in 3-6 months. That won't happen to housing in such a short period of time.

Well, we definitely differ here then. I can say the same argument you just used the other way around. Earnings are the floor of stocks and hence are more protected than housing. Housing is a ponzi scheme and the rental floor is so much lower than current valuations. Many stocks right now are running at Price/Earnings of single digits. i.e. they are making 10-15% or more returns just on earnings. Consistently. Housing as an investment has a P/E of about 30. Good luck to all. The rain is coming so your shelter will at least keep your from getting wet. ;)

RentingForHalfTheCost says

and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index

I agree with Roberto--I'd like to see the study in more detail. How is he determining the above rental costs? Without more detail, I'm a bit skeptical of the study's conclusions.

I've never paid more to own then what I would be paying to rent.

tatupu70 says

RentingForHalfTheCost says

and the normal homeownership expenses (above the cost of renting) over the years in the Dow Jones Industrial Index

I agree with Roberto--I'd like to see the study in more detail. How is he determining the above rental costs? Without more detail, I'm a bit skeptical of the study's conclusions.

I've never paid more to own then what I would be paying to rent.

You most likely have, many (if not all) do and just don't know it. You are missing many important components like opportunity costs by having your downpayment and any other equity tied up in housing. People think comparing their mortgage payment to the rent payment is the whole story. It is not. Believe what you want.

robertoaribas says

I am closing in on a housing worth (net) of over 2 million dollars

That has one big caveat! It depends on the greater fools being around when you try to sell. ;)

$912 Prop Tax on a $875k property -- that's monthly, right?

BoomAndBustCycle says

So what, Stocks aren't going to have large moves like that ever again in history.. Unless they are moving in tandem with housing. If our economy improves stocks and housing will improve together. If the economy falls off the track again.. Stocks will probably drop 50% in 3-6 months. That won't happen to housing in such a short period of time.

Whoa, whoa, whoa. Stocks might drop 50% in 6 months, but they're crawl right back up within a few years - generally speaking. Yeah, there are exceptions like the Great Depression, but then you have the post-war boom and the 80s-90s boom, with a sideways dozen years inbetween both in the 70s and 2000s.

Many stocks still pay dividends when the price doesn't move. You can also Straddle stocks you expect to face volatility. You can buy puts to lock in gains. There are all kinds of option plays you can use to generate income from stocks you hold and to hedge against big moves.

These things are not available in the R/E Markets.

thunderlips11 says

$912 Prop Tax on a $875k property -- that's monthly, right?

yeah it monthly. very cheap property tax too. in TX it would be triple this amount. (low prop tax in CA is one of many reasons prices are sky high. A high tax rate that re-assessed yearly will cap house prices.)

War says

You get poor in a hurry buying retail items like houses.

For people like us, that may be true.. chill dude.

very cheap property tax too. in TX it would be triple this amount
Same, B/S in TX your hause will cost 3X less.

War says

No. For depreciating items like houses.

:) Right here on Pat.net, top article, Bears are right but prices are rising anyway.

http://ochousingnews.com/news/the-housing-bears-are-right-but-prices-will-go-up-anyway

Frightful short term reality I know.

RentingForHalfTheCost says

You most likely have, many (if not all) do and just don't know it. You are missing many important components like opportunity costs by having your downpayment and any other equity tied up in housing. People think comparing their mortgage payment to the rent payment is the whole story. It is not. Believe what you want.

lol. No I'm positive that I was paying less buying. I'm well aware of all the costs AND benefits of buying.

Don't forget about tax savings, principal repayment, inflation hedge, etc.

The fact that you think many if not all owners are paying more than renting is laughable.

However many of us live in the SF Bay area where real estate prices are some of the highest in the country.
It rained today.... wahhh!... Oh wait.... where are my skis?

PS - I'm kidding. I can't afford skis.

Our fearless leader said: But will prices continue to be much higher than rent for the same quality house in the same location?
Probably, as long as urbanization trends continue. To put this in perspective, the last two families I know of bought SFHs in Richmond. Not the Richmond District in Ess Eff, but Richmond, California.

No, fewer people can afford the debt. Consumer debt is at an all time high, just like the federal deficit. Consumer debt is $15 Trillion. Affording the payment is meaningless if you lose a job, have a pay cut, or need to move.

It's fifteen years of debt on a thirty year mortgage.

Let me correct you on the term tangible asset. Gold just sits there. There are no working parts, or reason to maintain, insure, or pay taxes.

Real Estate can either be an asset or a liability. Most, at least fifty percent of, property has debt associated with it. That makes it a liability until there is a solid equity position. Looking at Zillow, or an appraisal is much different than having a sale.

The problem today is having a sale, for a lot of reasons. Low inventory coupled with low interest rates is only creating exhuberance. Gold is an exhuberance commodity, and now we can add Real Estate.

The problem is the banking industry, and it's continued loan practices on the consumers promise to pay, rather than what the "asset" will sell for.

When you go to the court house step auctions you see property, after property returned to the banks for a higher price than the consumer, investor, or public is willing to pay.

The price of Real Estate is obscene. There is no room for growth. If you are hoping for inflation you're going to have a long wait, and longer if Romney is elected.

Once we start paying deficit, the money banks have been happy to loan will get tougher to get.

PockyClipsNow says

This board is filled with idiots who hate the system and dont care to work within it.

I don't think people hate the system enough...too lazy or distracted or comfortable or scared.

David Losh says

No, fewer people can afford the debt.

Even more accurate would be to say that more people are eligible for more debt. There is a reason for this! Remember, we need the wealth effect more than we need actual wealth or even solvency!

I think wealth effect isn't just an economic driver in this credit-fueled consumer economy, it is also a palliative for the working class. We need people to feel like they're building wealth just by virtue of living in a property. These phantoms of freedom keep people in the harness, where they are needed, and distract them from the rug that is being slipped out from under them.

“…everyone but an idiot knows that the lower classes must be kept poor, or they will never be industrious.”

—Arthur Young; 1771

It was not always so. John Talbott's excellent book "Sell Now!" demonstrates that the price/rent ratio in San Francisco was the same as everywhere else before the year 2000.

From Amazon's review of Sell Now...

"As a guide for the average homeowner, this book is a convincing argument broken down into laymen's terms, albeit one fueled by bias: Talbott admits he, "allowed his anger and bitterness," to influence his writing, making it less a studied survey than a "creative analysis," as Talbott terms it."

Hanging your hat on the "creative analysis" of someone fueled by bias with a self admitted axe to grind is propbably not the best proof that the price/rent ratio in San Francisco, let alone the fortress, was the same as everywhere else.

robertoaribas says

You can't live your life worrying about the worst thing that could happen. You could have a stroke tonight and die too, so don't ever invest anything...

That is your argument for accumulating debt in real estate holdings. That is a philosophy on living. Not an argument to analyze risk of housing verses risk of other investments. BTW, I agree for a change in what you just wrote. The debate is where people see risk verses reward. We each have a different view. I'm glad we do or one asset class would get all the loot.

How about accounting for the 175K DP stuck with the bank? You should at least deduct your imaginary profit by the conservative estimate of returns from that 175K,that also over the life of loan.

Here's a link to another thread, http://patrick.net/?p=1218026#comment-888205

What the other guy is saying is that your equity can go negative quickly with Real Estate. When it does you can be prepared for rent reductions.

Rent reductions are very real. It has happened many times in the past couple of decades.

All I can say is this site just keeps on Delivering!

I don't like the information I'm getting.

But I realize I am not a hedge fund or a wealthy cash investor that can waltz up to the court house steps and snatch up a bargain.

The overpriced bank dribble is just plain irritating.

Well, you're not getting the larger picture of what we just experienced. Property equity went negative. Millions of people are under water. Those properties you bought at auction are from people who sent the property back to the bank.

The problem however is the banks are still standing and we have a new group of banks that are too big to fail.

Unless the economy was allowed to collapse, unless banks forgave debt, unless you bought below fair market value, you are sitting on negative equity in every property you bought.

Banking, the Fed, the government programs are all propping up the housing industry so we can kick the can down the road.

So bank your rental income, because you are going to need it.

It's happened before on a much smaller scale, but nothing like what is going on today.

Oh, and rent reductions have happened massively in the 1980s, 1990s, and 2000s. Some properties are just now digging out with the exhuberance of the market place we have. What could possibly go wrong?

JodyChunder says

in the thirties when there was a 17.3% fall in rents

Im sorry to take issue with that because rents are fluid. One month's free rent is a 12% rent reduction.

The rental market is continually propped up by concessions on rent. If you look at rents in the past couple of years you'll see that rents have risen across the board for no good reason, but in 2007, 2008 there were massive concessions on rent.

1980s, come on, how could you forget? 1990s? come on land lords were begging for section 8 renters.

Housing price to owner rental looks benign, but it is fluctuation high lighted by the concessions, and vacancy rates.

David Losh says

If you look at rents in the past couple of years you'll see that rents have risen across the board for no good reason, but in 2007, 2008 there were massive concessions on rent.

You're right, actually. They fell in 2010, too, though only by 0.2%. 1995 saw a fall in rents, too, as I recall. However, the greater overall trend as tracked by the CPI is rising rents. (Keep in mind, I'm referring to California here!)

I don't know much about the Seattle market in specific. I do see that RRE prices there are starting to go through the ceiling again, though.

robertoaribas says

what is that $400K I put in the bank?

Funny paper!

robertoaribas says

If housing is never an investment, then when i bought 4 properties in the 90's, only to sell in 2004 and 2005, what is that $400K I put in the bank? non investment income???

It was the Feds extending you tax payer money to be honest. Just because it happened once doesn't mean the future will do the same.

robertoaribas says

rentingwithhalfabrain: You never make money in real estate...

robertoaribas: here are my transactions, I made $400K

rentingwithhalfabrain: that money doesn't count...

hahahaha

I never said you never can make money. There have been times and there will be times again where you can, but in the long run you will just track to inflation or just above. Like anything, you can get lucky and have a windfall. Just like you I have done a big withdraw from the real estate market over the years. I am not foolish enough to see it as an investment though in the long run. I now use that money to do real investing and in the last 3 years have pretty much doubled my windfall. Just saying...

Wait a minute, I just read this premise again, and it makes absolutely no sense.

With an interest only 5/1 ARM you aren't buying this property at all, you are renting.

Not only are you renting you put up $175K of your money to do that.

Not only that, in your best case scenario you get $1000 a month in profit, but it takes you fifteen years to recover your $175K, more, or less.

In the mean time, all of this time, you owe $700K to a bank.

Can anybody explain why we are discussing this?

David Losh says

Can anybody explain why we are discussing this?

I'm guessing he is betting the price will go up with all the market stimulus going on.

David Losh says

With an interest only 5/1 ARM you aren't buying this property at all, you are renting.

Yes. At that point, you are essentially renting the debt.

David Losh says

Can anybody explain why we are discussing this?

I think the best way to look at this from a financial viewpoint is that he is buying a $175K bond that pays $2,000 per month (savings versus renting). Just under 14% on his money doesn't seem too bad to me.

Sorta overlooks the opportunity cost, which is not nothing at a $175K, but I get your drift.

tatupu70 says

buying a $175K bond

But he's not buying, because he owes the debt. As long as the property stays at current price, or increases with inflation, uh oh, we have a problem because there is no true inflation because our currency keeps getting to be the go to currency in the global market place.

You are making broad global economic assumptions when you say his $175K is safe, like in a bond.

This may be speculation like in oil, gold, cotton, or corn, but it is certainly not safe.

David Losh says

Wait a minute, I just read this premise again, and it makes absolutely no sense.

With an interest only 5/1 ARM you aren't buying this property at all, you are renting.

Not only are you renting you put up $175K of your money to do that.

Not only that, in your best case scenario you get $1000 a month in profit, but it takes you fifteen years to recover your $175K, more, or less.

In the mean time, all of this time, you owe $700K to a bank.

Can anybody explain why we are discussing this?

Someone is finally thinking on this thread. You just nailed it! Kudos to you for actually doing some good math. Unless the rest of the jokers on this site with everything they own tied up in useless wood and nails and their investment strategy being mainly about hope.

David Losh says

You are making broad global economic assumptions when you say his $175K is safe, like in a bond.

Bonds are not guaranteed either. The higher the risk, the higher the return in bonds. So, you can make your own judgment about whether a 14% return is adequate for the risk in this scenario. But I think the analogy is right.

RentingForHalfTheCost says

Someone is finally thinking on this thread. You just nailed it!

lol--no he didn't. Try actually thinking for once.

tatupu70 says

RentingForHalfTheCost says

Someone is finally thinking on this thread. You just nailed it!

lol--no he didn't. Try actually thinking for once.

more blinded lemon replies. Thanks for keeping up the fight. Your dedication and predictability is honorable. ;)

RentingForHalfTheCost says

more blinded lemon replies. Thanks for keeping up the fight. Your dedication and predictability is honorable. ;)

Now that's funny. I posted a pretty detailed explanation as to why Mr. Losh was incorrect. Did you miss that?

tatupu70 says

lol--no he didn't. Try actually thinking for once.

Let's try this again. When you buy a bond you buy it at face value. There isn't a $700K debt that comes along with that.

There are all kinds of bonds that are paying high yeilds, like Greece, Italy, and Spain.

You're ignoring the larger picture to make a point that is questionable. We just saw the price of housing tank, it goes up a little, and goes down again below where it was.

This is an election year when there is a lot of hope, but after the election reality sets in, no matter who gets elected.

David Losh says

Let's try this again. When you buy a bond you buy it at face value. There isn't a $700K debt that comes along with that.

Agreed. What's your point though? He can always walk away so he'll never lose more than the $175K

David Losh says

There are all kinds of bonds that are paying high yeilds, like Greece, Italy, and Spain

Exactly my point. I think we can agree that those bonds are risky, right?

David Losh says

You're ignoring the larger picture to make a point that is questionable. We just saw the price of housing tank, it goes up a little, and goes down again below where it was.

So, you think housing is going to drop further? You're certainly entitled to your opinion, but it's far from a certainty. I guess my larger picture looks different than yours.