patrick.net

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.

tatupu70 says

He can always walk away

He can certainly walk away, but it s a debt. Is there recourse, or no recourse?

tatupu70 says

but it's far from a certainty

Let me take this, and say I am certain that there will be defaults in Europe, or Ireland, or other forms of debt forgiveness.

Sounds good, right? However the price of these leveraged asset will fall, further.

That debt PockyClipsNow has will be a liability to whoever has the paper, and he's just one person.

So it's not the price of the property that concerns me it's the value of the commercial paper, and who will want it, or want to trade in it. Once you take out the common investor, once you take out the banks, you are left with large commercial investors who will clamp up the mortgage market until they can be made whole.

Fewer mortgages, smaller buyer pool.

tatupu70 says

so he'll never lose more than the $175K

There is a great investment strategy. Lose 175K. Never in my lifetime will that ever be an issue for me. Hence why I am still gladly a renter in the BA, but a buyer in many other places (i.e. NOT phoenix)

RentingForHalfTheCost says

There is a great investment strategy. Lose 175K. Never in my lifetime will that ever be an issue for me. Hence why I am still gladly a renter in the BA, but a buyer in many other places (i.e. NOT phoenix)

If you invest in the stock market then it's an issue for you. Every investment comes with risk.

Also don't forget that 100% of your rent payments go down the toilet.

Home Fart says

Also don't forget that 100% of your rent payments go down the toilet.

I never have gotten this argument about renting. If housing is a place to live, and if every one has to live some place, then the renter is getting everything they are paying for.

The person with the mortgage carries the risk, which I guess, according to tatupu, is what makes housing an investment.

David Losh says

The person with the mortgage carries the risk, which I guess, according to tatupu, is what makes housing an investment

Correct--carries the risk and is entitled to the rewards.

Home Fart says

Also don't forget that 100% of your rent payments go down the toilet.

Also don't forget that mortgage interest payment+property taxes - the deduction go down the toilet too. Hell,the principal part of payment goes down the toilet too if the property is very pricey and if there no appreciation. You'd be lucky if there is no depreciation cuz if it does it is double whammy - worst case scenario,underwater mortgage. So try that argument somewhere,not on a housing bear forum.

tatupu70 says

RentingForHalfTheCost says

There is a great investment strategy. Lose 175K. Never in my lifetime will that ever be an issue for me. Hence why I am still gladly a renter in the BA, but a buyer in many other places (i.e. NOT phoenix)

If you invest in the stock market then it's an issue for you. Every investment comes with risk.

I employ a strategy of capital preservation and take on risk that I understand. I have yet to lose any capital in 20 years of investing. Although, I don't chase after 20-40% returns either. 7-8% has been absolutely fine form me. You can get that easily with some dividend kings and selling calls.

David Losh says

Home Fart says

Also don't forget that 100% of your rent payments go down the toilet.

I never have gotten this argument about renting. If housing is a place to live, and if every one has to live some place, then the renter is getting everything they are paying for.

The person with the mortgage carries the risk, which I guess, according to tatupu, is what makes housing an investment.

Couldn't agree more, and I think everyone would see it this way if they didn't have skin in the game.

tatupu70 says

David Losh says

The person with the mortgage carries the risk, which I guess, according to tatupu, is what makes housing an investment

Correct--carries the risk and is entitled to the rewards.

asset depreciation is no reward.

RentingForHalfTheCost says

I have yet to lose any capital in 20 years of investing.

OK--whatever you say Warren.

RentingForHalfTheCost says

asset depreciation is no reward.

Agreed. Asset appreciation is.

bubblesitter says

Home Fart says

Also don't forget that 100% of your rent payments go down the toilet.

Also don't forget that mortgage interest payment+property taxes - the deduction go down the toilet too.

As Patrick has said before, you either rent the house or rent the money (mortgage). Mortgage ain't too effective at stopping the toilet flush sounds if you move every 7 years or refi every time interest rates tick down another .01 percent.