patrick.net

This is a great video, and worth watching.

There is a lot of denial going on in Real Estate today because of what has happened to the market place since 1998.

The 1990s were certainly a great time to buy property. We have had nothing but volitility, and exhuberance ever since.

It's just hard to predict how far our government, or governments globally, will go to prop up property prices, and save the banking industry as we know it.

He owns 2 houses. Enough said. No excuses.

golfplan18 says

Despite the fact that house prices crashed, wiped out millions of loanowners, and wiped out the illusory equity of an entire generation, people persist in believing owner-occupied housing is a good investment. Most people believe house prices appreciate 5% to 10% or more each year and by simply owning real estate they can become wealthy. It doesn’t work that way.

I would like Shiller to explain why my house inspite of a housing crash is worth 4 times more than it was 25 years ago. That is 6% growth compounded every year. The same goes for everyone else I know who purchased in Southern California.

Raw says

golfplan18 says

Despite the fact that house prices crashed, wiped out millions of loanowners, and wiped out the illusory equity of an entire generation, people persist in believing owner-occupied housing is a good investment. Most people believe house prices appreciate 5% to 10% or more each year and by simply owning real estate they can become wealthy. It doesn’t work that way.

I would like Shiller to explain why my house inspite of a housing crash is worth 4 times more than it was 25 years ago. That is 6% growth compounded every year. The same goes for everyone else I know who purchased in Southern California.

Because the worth of your house gets conflated into the worth of the land it sits atop of, silly. Your house decays over time, and requires upkeep and maintanence. The land that's included in the piece of real estate, is what appreciates. Your house depreciates.

errc says

Because the worth of your house gets conflated into the worth of the land it sits atop of, silly. Your house decays over time, and requires upkeep and maintanence. The land that's included in the piece of real estate, is what appreciates. Your house depreciates.

So the structure depreciates, while my investment appreciates.
A 6% bottom line return with tax benefits would be a no brainer.
Therefore Shiller is dead wrong. Would that be right?

If a person can afford a home at current cost using a fixed rate mortgage then why not? When it is time to retire their housing expense will be minimal if not non-existent. Plus rent rises. That monthly mortgage payment will stay the same. I live in SF Bay area and have paid close to 220K in rent over the last 10 years.

robertoaribas says

Because the house depreciates!

I was telling my wife about this earlier, yes the house depreciates. You're talking about the rate of inflation, two different things: http://thecostofliving.com/index.php?id=102&a=1

jahreigns says

If a person can afford a home at current cost using a fixed rate mortgage then why not?

Because the mortgage is debt that needs to be repaid. If all of the things said on these threads are true you have more flexibility in a rental.

You get no equity out of a mortgage in the first fifteen years, and that is getting to be a very long time in a volitile financial market place.

People used to buy homes as a safe place to build a nest egg, but today it can be a mill stone, and albatross.

No one here knows for sure what will happen, but the financial landscape is indicating housing will be put on the back burner very soon, because it hasn't performed.

It is all speculation, the cash is sitting in reserves, and when the margins get small enough investors will move on.

robertoaribas says

hmmm. I guess that is why the original owner of the house I'm sitting in, paid $30,000 for it in 1968. I paid $230,000 for it 1.5 years ago, and it just appraised for $300,000.... Because the house depreciates!

Well, Shiller studied house prices globally going back 400 years. He found that prices did no better than the monetary inflation rate.
Yes, the physical facility depreciates (per the tax code) over 27.5 years, 100%.
I guess Shiller should have talked to you before he made a fool of himself.

robertoaribas says

If the value of my homes goes up at the inflation rate for ever,

The value of your home can only increase to the amount of rent it can take in.

One of the things I talk about is that we have had little or no construction of apartment buildings in the past ten years.

Builders built single family homes to sell because it was quick cash. That is the cash we are seeing in the Real Estate market today.

The good paying construction jobs are now building apartment complexes. That gives renters more choices.

It also means the values of your properties, all properties, can only rise as much as people can afford to pay, or are willing to pay.

The part about inflation is we would have to have wage inflation for your rents, or property values to go up. What we have is a rise in commodity prices, like with Real Estate. That is different from true inflation.

Gold can go up forever because no one needs it, it's useless, it's an illusion, but Real Estate is tied to economic principles of affordability.

I really wish these articles would preface their claim based on premiums people pay to justify their purchases.
There's just no way in hell a house that is either cheaper or as much as the average rent goes for a house that is less or equal to the square footage of the purchased house could be a poor investment.
You have to live somewhere.

A median no frill home, is better investment than renting any day. If the price was right.

errc says

Your house depreciates.

FWIW, when I was house shopping, I didn't see any difference in price on a house built in 1932, 1951, 1967, 1976, 1981 or 1995 the average price stayed consistent throughout the bubble, into the deflation of the bubble, to the bottom and even today there are no difference in price. The reason New houses cost more is due to all of the hands in the pie. Developers, General Contractors, Marketers, Realtor office in the Model units ect...

The only person involved in a resale is the Owner.

I am someone who is planning on buying a home for myself, even though I am as wary of this "recovery" as Schiller is.

I am someone who knows all too well what it is to lose a big chunk of cash on housing.(I bought a home with 40% down, spent $$ fixing it up, and "walked" last year after there was serious well issues and I was way underwater. Very difficult and stressful for me personally.)

However, my savings is not making any money, and rents are high. And while homes can be money pits, I really miss having a garden, the house the way I want it, and most of all, my critters! There are quality-of-life issues that are hard to put a financial value to.

I have been looking in Sonoma County for awhile now, and have given up. Prices are crazy, and the wheeling and dealing is cut throat. Since I am disabled and no longer work, I am heading up to Oregon, where prices seem saner, and where my neighbors are not as likely(?!?) to be investor-owned properties (like Blackstone.)

But no doubt, this is a scary/stressful time to find a home....

Correct if the monthly payment on a 20yr or 15yr fixed rate mortgage is used for comparison to rent. An adjustable mortgage would obviously have problem due to interest risk down the road potentially making mortgage payment far higher than rent. A 30yr mortgage has so little principle pay-down that over the 4-7 years that average Americans stay in a house, equity buildup may not be sufficient to pay for the 6% realtor's fee plus other fees like mortgage origination and closing lawyer fees without counting on housing price appreciation itself.

CaptainShuddup says

I really wish these articles would preface their claim based on premiums people pay to justify their purchases.

There's just no way in hell a house that is either cheaper or as much as the average rent goes for a house that is less or equal to the square footage of the purchased house could be a poor investment.

You have to live somewhere.

A median no frill home, is better investment than renting any day. If the price was right.

CaptainShuddup says

You have to live somewhere.

I hate this myth that as long as you have to live somewhere you might as well take on $400K in debt to do so.

It makes no sense, because at the end of the payment period you end up with the house free, and clear, but your return is only based on the rate of inflation over the life of the loan.

In the mean time you could have invested in any number of things that gave you greater returns.

By that reasoning, yes you should buy new construction, but you do have the fact it will depreciate. You could buy used, but it may require additional repairs over the life of the loan.

So, we have no set return on the personal home, just speculation of what could happen. Today that speculation is very clear that it is better to rent.

robertoaribas says

"home prices did no better than the inflation rate"... you say that is if it is a bad thing, or something that will bother me. You are of course 100% wrong.

Argue this with Professor Shiller, not me.
It is, of course, a "good thing", it's just that some people have been led to believe they would get a much, much higher return.

robertoaribas says

As of today, I take in roughly $15,000 a month in rent, and pay roughly $6000 in mortgages,

You have done very well and you are right to be pleased with your success.
One of the reasons that I value your contribution here and seek out your comments is that I have not been able to replicate any formula like yours here in my small town in Northern Cali. I cashed out of Tucson in '05, retreated up here and nothing has made sense to me since.

Good for the cashing out in '05, but why gamble in CA? It is a very unlikely bet. Prices have no basis there. Technology? They will sell out of CA and move to cheaper areas too. Companies relocate for their bottom lines. You have to do the opposite of what the herd generally does. The herd follows the news. The news is past.

Yes you can still buy in some places reasonably, but not SFBA. That is like putting it all on red.

David Losh says

I hate this myth that as long as you have to live somewhere you might as well take on $400K in debt to do so.

That's not what I advocated at all. In fact, I don't think anyone should own a house over $250K, unless they have the funds to actually buy it out right, even if they did financed it though a bank. And as for the other comment about an ARM, I think in the last few years, it is all but illegal to sell a house to your average home owner

( less than $225K), by using traditional financing.

No bank will even touch those loans anymore, they are all serviced through FHA.
The day of people buying a 150K shithole using an ARM loan are over.

I have a bad investment in the form of a rental house I'll rent to you. Your monthly rental check will pay for all my costs for owning the house and then some. Due to your generosity in paying my costs, you will pay all the interest charged by the bank to loan me money on this house over the course of as long as 30 years. Thank you! During that time I'll reduce my taxable income by writing off the depreciation on the house, for 27.5 years anyway. Inflation will cause the "value" of the property to rise of that time, not in a straight line, but definitely up. So my downpayment instead of having a fraction of the purchasing power it would have having been stuck in a bank, will at least be equal in purchasing power to what it was when I bought the house. Finally, once I'm old and you as my loyal renter have paid off my mortgage, paid for upkeep and maintenance along the way as well, I will have a recurring monthly income from your rental check that is now much higher than when we started due to that pesky inflation, so it's also more valuable now then when we started, ie purchasing power parity. So I can sit at the beach showing off my wrinkly old man boobs sipping a pain killer (great cocktail, look it up if you don't know about them) and thinking about this ridiculous website spreading misinformation about personal finance as it relates to housing all these years after the housing crash... Notice I mentioned rental. Owning your own home is not an "investment" it is a home. But Schiller doesn't rent for a reason...my comments on that another time

David Losh says

It makes no sense, because at the end of the payment period you end up with
the house free, and clear, but your return is only based on the rate of
inflation over the life of the loan.

I don't follow you at all here. Are you assuming that you live in the home? Because, if so, your return is much more than just the rate of inflation.

robertoaribas says

Robert Sproul says

I have not been able to replicate any formula like yours here in my small town in Northern Cali. I cashed out of Tucson in '05, retreated up here and nothing has made sense to me since.

I thought some parts of nothern cali weren't so expensive. I particularly like the area around Chico...

Hmmm. I guess this is all relative. I have been looking in the Chico area for some time, and to me anything attractive to live in (both from the point of view of the house or the neighborhood -- often you choose one or the other) is in my view way too expensive. Chico seems to be a skewed market in that local wages absolutely do not support current house prices. House prices here, from what people in the biz say, seem to be 'artificially' inflated because it is an attractive place for people decamping from the bay and other even more inflated areas. Usually these are people whose timing was fortuitous, and they have a pile of equity that they can use to buy something cash. This seems to be the cause of prices here being so far out of whack vis a vis salaries.
Moreover, the market here is ailing, and is very manipulated. I know personally of many houses that have tenants where the bank has simply refused to foreclose for years. Some of these are in the toniest of neighborhoods, too. The lower end doesn't appear to be so false, as it is primarily directed at the sizeable student population...

tatupu70 says

I don't follow you at all here.

Because if you buy a home, the family home, that is paid for with your wages, that loan ends up being twice the purchase price.

So if you bought for $200K, you pay $400K over the life of the loan.

gonzo says

so it's also more valuable now then when we started,

You don't know that and I would say it probably isn't going to be true.

New construction, and land use has been advancing by leaps, and bounds. At the end of thirty years you may need to consider demolition in favor of new construction on your lot.

David Losh says

Because if you buy a home, the family home, that is paid for with your wages,
that loan ends up being twice the purchase price.

So if you bought for $200K, you pay $400K over the life of the loan.

It depends on the interest rate of the loan, but that's not what you should be looking at. You need to look at the difference between rent costs and ownership costs.

robertoaribas says

I get a mortgage of $1400 a month.

In Chico.

Come on, let's enter reality here, what's the wage base of Chico? That's $50K a year to afford that debt for thirty years.

robertoaribas says

David Losh says

robertoaribas says

I get a mortgage of $1400 a month.

In Chico.

Come on, let's enter reality here, what's the wage base of Chico? That's $50K a year to afford that debt for thirty years.

yes, but for many people retiring from a career, that is easily affordable, a nice place to live, and they can still drive back to the bay area to see family and friends. I'm generally anti California, but I'd consider moving there...

That is what seems to happen... As you described above it is a pretty decent college town, with lots of beautiful places within a relatively short drive, and the bay area is with luck 3 hours away. So pretty great for people on the downslope of life, but for people starting out it is not so possible. That is why I say prices are out of line with 'local' (emphasized) wages. This seems to be a common and not often talked about factor in many many markets.

See, and I wouldn't under those conditions, and that pricing.

Why would I spend that kind of money? It means all housing is in that price range so the wage earners are now priced out, but not forever.

Economic equilibrium has to be reestablished at some point, and these retirees will lose money. We are all losing money in this economy, even you.

robertoaribas says

first off, that is bullcrap. People who retire with pensions will be able to afford there forever.

second off, a $1400 mortgage on a 1800 square foot home with a 2 car garage is pretty god damn affordable. $400 or so is going to debt paydown anyways. Even a college student could rent out the other 2 rooms and afford that home while waiting tables part time. Hell, I got $500 a room in Tempe, I doubt chico is any cheaper!

sometimes you guys are just ridiculous... what price do you expect homes to be? when the mortgage is $700 a month would that be ok?

I think both are sides are right, actually. It seems that people on pensions will be able to afford that, and I also think that the overall mechanism of people retiring into a place like chico prices out of the market younger people. The end result is that the town becomes something with a very bifurcated populace -- poor students and much better off retirees with little in between.

Also in the longer term, my own limited view of public finance/policy is that the changes that occurred because of prop 13 will need to be substantially revised -- higher property taxes are on the way, which means downward pressure on real estate. Also, I think the debt burden of young people leaving college has yet to be fully understood. From what I have seen, that is an enormous (non-dischargeable, unlike a mortgate!) debt that will make it very very hard for the younger generation to get started. The demographic bulge of baby boomers heading into retirement is also a factor.
The last 50 years were a sweet spot for the u.s. in the global economy, but the brics have put an end to that. Good solid middle class jobs will be harder to come by, and at least in Chico a good solid middle class job does not pay enough to buy a local house.
So, to your last comment of what is the appropriate price of a home, I think the equivalent of 700$ is about right, actually. It would make it possible to save appropriately for retirement, adequately fund all the local services (schools, etc etc.), raise a family, etc. It will take 10, 20+ years to get there, but I think housing is still overpriced. Again, this is a personal view colored by my experiences, which include a frugal upbringing, brief spells of relative affluence, and now a period of relative prosperity. I've seen that things come and go, sometimes very suddenly... This doesn't mean nobody should buy a house, or even that I shouldn't buy a house, I'm just having a hard time swallowing the idea right now.

robertoaribas says

a $1400 mortgage on a 1800 square foot home with a 2 car garage is pretty god damn affordable.

It's affordable if you make $50K per year, but in a college town that may be hard for the majority of people.

Second, you are right, people in a college town double, and triple up. It's transient.

Actually, it makes no difference, yes $700 is about right for a college town rent.

No one needs that house unless they are going to stay there, and there is no reason for any one to stay there. There is no economic upside.

Retirees are getting slammed, unless you haven't noticed, we are at the tail end of those great yesteryear pension plans. Social Security is on the ropes, Health care is in question, so no retirees aren't going to be plunking down a pile of dough on housing without a return.

You're in a complete state of denial about the economy, because your sector, as a land lord is having a day in the sun. That's also coming to an end.

The price for housing will decline as rental income or home prices. There's no choice. This example of Chico is a classic, $200K? for Chico? and that's the low end? Come on.

Roberto: I think you are mostly correct on you comments. Whether it is expensive or not is where people disagree... If you are cheap, or poor, or are looking for something not readily available, it is expense. Purely a personal matter and I certainly don't fault Chico for it. I do wonder how we'll all adjust to the next decade or so, though.

Let's see what happens when the fed stops devaluing the dollar and interest rates go up. I for one as a saver, am tired of getting 1% interest on my savings. I would like the prime to go up to 8% again. Also, let's require 20% down payments on house sales.

robertoaribas says

I'll pick this apart piece by piece:

You didn't pick anything apart.

Retirees aren't going to be buying in Chico, or anywhere else. That doesn't make any sense what so ever.

What motivation would a retiree have to buy into a housing unit that wasn't managed, and maintained?

You think retirees are going to be living the high life like they did from the 1980s dot com, high return 401(k) days? They aren't.

Read the threads here where people are begging for an 8% return. My Mutual Funds used to pay more than that, but not any more.

I understand you buy houses to rent out, that is much different than plunking down a few hundred thousand dollars to be stuck with a non performing liability.

The only thing that makes your houses assets is the rental income. To anyone else it's just a hole to dump money in. It's better to let you do that. It's better to rent.

David Losh says

tatupu70 says

I don't follow you at all here.

Because if you buy a home, the family home, that is paid for with your wages, that loan ends up being twice the purchase price.

So if you bought for $200K, you pay $400K over the life of the loan.

You can prepay the mortgage if you can afford to and prioritize that activity and siginifantly save on the total interest over life of the loan.

robertoaribas says

Better tell that to my friends parents,

OK, there's one.

robertoaribas says

If you think 200 to 300K is too much for anyone to pay, when rates are sub 4%, you are out of your freaking mind.

That is way too much, and a 4% loan doesn't mean anything to a retiree, they are at the end of financial viability.

Why would they buy a liability to the portfolio they have built, and added to from the sale of the family home?

The family home isn't paying any returns. It's a blob, a place to put your crap, and much more expensive than renting because it is a debt.

I'm very happy to have my money out of Real Estate because it makes no sense, any more.

You're not making any sense.

You have your formula where your rents cover the mortgages. Those properties produce income. The retirees aren't getting any income, they are paying a debt. They might as well rent.

Very honestly retirees better start looking at some other investment strategies, because those pensions, that Social Security, those Mutual Funds, and stock portfolios are as questionable as Real Estate is right now.

It's Chico California, houses should top out at $225K, not start there.

David Losh says

The family home isn't paying any returns. It's a blob, a place to put your crap, and much more expensive than renting because it is a debt.

That statement is completely idiotic.

There has been nothing in today's Real Estate market place that inspires confidence in me. All of the numbers I look at look cooked to the gills.

There was a period between 1998 to 2008 that made absolutely no sense, but I was happy to ride the wave.

This time however there is no compelling reason to take a lot of risk for the very small margins that I calculate.

I get it if you have millions, or billions to speculate with, package the income into REITs and sell shares. I get it, but mom, dad, and the kids , or retirees are guppies in a sea of sharks.

tatupu70 says

That statement is completely idiotic.

Make a point, prove me wrong, or is it the "everybody has to live some place" so they might as well pay a mortgage on hundreds of thousands of dollars in debt.

robertoaribas says

you are out of your mind. My friends parents built a freaking mansion, up on the hills backing to a golf club which they get automatic membership in. Not my cup o tea, I don't need that big of a home, nor a silly waste of space golf course, I want easy access to restaurants and coffee shops without driving, and to be able to mountain bike without having to carry my bike in the car. Kayaking near by would be nice too... but to say that prices should top out at something is ridiculous, there will always be some wealthy retires who want something ostentatious.

I know the area, and actually one of people I referenced earlier was renting one of the simpler houses in that development. The owner of the house had stopped paying 3-4 years ago, and the bank only foreclosed in November '12. The house was built (according to the link here at zillow: http://www.zillow.com/homedetails/3555-Shadowtree-Ln-Chico-CA-95928/66116689_zpid/) in 2004, sold in '07 for 614K, and is now on the market for something like 375K. Ok house, nothing special. Adequately (only) built.
Most of the houses around there are monstrous, tasteless messes. Driving by they seem to be inhabited by a dentist and his wife. You cannot help but think 'this is not sustainable, in any shape or form' when you drive through...

David Losh says

Make a point, prove me wrong, or is it the "everybody has to live some place" so they might as well pay a mortgage on hundreds of thousands of dollars in debt.

You claim buying is more expensive because it's debt? What does that mean? Either it's more expensive or it isn't. The total amount of debt is really not that important. What's the difference whether you're paying a landlord or whether you're paying the bank? If it's cheaper to own over your time frame, then you should buy.

Yes you pay a lot of interest to the bank on your loan. But how is that different than paying a lot of rent to your landlord?

kt says

There are quality-of-life issues that are hard to put a financial value to.

It is probably worth trying if quality of life is what you're after.