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.