patrick.net

thomaswong.1986 says

Schiller's argument is all about averages. Individual real estate markets can diverge greatly in either direction for long periods of time.

Sigh. I didn't leave them out. My point was (again) that trend is an average:

"Schiller's argument is all about averages. Individual real estate markets can diverge greatly in either direction for long periods of time."

Again, I'm not saying that the Bay Area is not in a "bubble." I'm saying that even if the bubble bursts, it still may not fall to what you consider a "reasonable price."

Robert Sproul says

JFP says

Detroit's property market has diverged and sunk well below average

I sometimes look around what some consider the Fortress Areas of the SFBA and think how Detroit went from being an Industrial Powerhouse and "The Paris of the West" to being a post-industrial wasteland in 50 years.

The stucco cheese and glass-curtain crap that comprises much of Silicon Valley would make for less interesting ruins.

I totally agree. They'd make a lot less interesting ruins than Rome did also.

New stuff doesn't ruin well. We are a Forever Young, newness-obsessed culture, but the problem with new is that when it ceases to be new, it ceases to have any purpose.

http://www.LGpTNZh20Kc

Robert Sproul says

I sometimes look around what some consider the Fortress Areas of the SFBA and think how Detroit went from being an Industrial Powerhouse and "The Paris of the West" to being a post-industrial wasteland in 50 years.

The stucco cheese and glass-curtain crap that comprises much of Silicon Valley would make for less interesting ruins.

Sadly we are closer to Detroit today vs say anytime between 1980 to 2000 as we saw growth in employers, employee, incomes etc etc. Today, its more of shrinking economy and workforce as more jobs are sent elsewhere.

JFP says

"Schiller's argument is all about averages. Individual real estate markets can diverge greatly in either direction for long periods of time."

Again, I'm not saying that the Bay Area is not in a "bubble." I'm saying that even if the bubble bursts, it still may not fall to what you consider a "reasonable price."

Shiller does not measure avg but tracks the same individual resell of homes.

http://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index

The indices are calculated from data on repeat sales of single-family homes, an approach developed by economists Karl Case, Robert Shiller and Allan Weiss. Case developed a method for comparing repeat sales of the same homes in an effort to study home pricing trends

Robert Shiller draws some key insights from his analysis of long term home prices in his book ‘Irrational Exuberance’. Contrary to popular belief, there has been no continuous uptrend in home prices in the US and the home prices show a strong tendency to return to their 1890 level in real terms. Moreover, he illustrates how the pattern of changes in home prices bear no relation to changes in construction costs, interest rates or population

Shiller notes that there is a strong perception across the globe that home prices are continuously increasing, and that this kind of sentiment and paradigm may be fueling bubbles in real estate markets. He points to some psychological heuristics that may be responsible for creating this perception. He says that since homes are relatively infrequent purchases, people tend to remember the purchase price of a home from long ago and are surprised at the difference between then and now.[6] However, most of the difference in the prices can be explained by inflation. He also discusses how people consistently overestimate the appreciation in the value of their homes. The US Census, since 1940, has asked home owners to estimate the value of their homes. The home-owners’ estimates reflect an appreciation of 2% per year in real terms, which is significantly more than the 0.7% actual increase over the same interval as reflected in Case–Shiller index.

JFP says

For example, London property price appreciation has been well above that average for a long time.

Mean reversion awaits London property

http://www.ft.com/cms/s/0/be2ba05e-f8e0-11e1-b4ba-00144feabdc0.html#axzz2VyIHmF48

International buyers have pushed prices into unknown territory but the capital cannot move out of kilter with long-term trends indefinitely
Reversion to the mean is one of the most reliable concepts in finance. Paradigm shifts are rare. Usually when prices move out of kilter with their long-term trend, they eventually revert to their mean.

The concept has limits in an era when the response to the crisis has left short-term rates at unprecedented lows. But it would be dangerous to ignore it. Those surfing the rise of London home prices, in particular, should take note.

During the bubble of the late 1980s, London prices topped out at 5.8 times average earnings, according to Nationwide, after which they savagely reverted to the mean and beyond, bottoming out at 2.6 times.

On the eve of the credit crunch, this multiple hit an even more ridiculous 7.2 times, but the subsequent correction only ever brought it as low as 5.4 times earnings – roughly the 1988 peak – before it started growing again.

Comparing London prices with the US cities that had the biggest housing bubbles, LSL Property Services Acadametrics index shows London prices rising roughly fourfold since 1995, or threefold in dollars.

@thomaswong.1986 says

Shiller does not measure avg but tracks the same individual resell of homes.

You clearly don't understand what "average" means if you argue that a composite index doesn't track average house prices. It can't do anything else.

thomaswong.1986 says

During the bubble of the late 1980s, London prices topped out at 5.8 times average earnings, according to Nationwide, after which they savagely reverted to the mean and beyond, bottoming out at 2.6 times.

On the eve of the credit crunch, this multiple hit an even more ridiculous 7.2 times, but the subsequent correction only ever brought it as low as 5.4 times earnings – roughly the 1988 peak – before it started growing again.

Right, it crashed, but didn't revert to the previous mean. It could crash again and not revert to the mean again. It could take a 100 years to revert to the mean. If you look at the Chase-Schiller graph in the Wikipedia article you reference, you can see it took about a 60 years for house prices to go back to their 1890 values in real terms. In the intervening years, real prices were either above or below the mean for extended periods of time. And, they've only touched it again once. So, what use is that mean? That's my point.

JFP says

@thomaswong.1986 says

Shiller does not measure avg but tracks the same individual resell of homes.

You clearly don't understand what "average" means if you argue that a composite index doesn't track average house prices. It can't do anything else.

Averages or not, we can see from past history prices barely outpace inflation.

robertoaribas says

Ok, with real rents even today in phoenix paying 5% to 7% after expenses, if you take his pessimistic assumption that both the house price and the rent, over the long term, increase with inflation, housing is still an unmatchably fantastic investment.

Dr. Shiller owns a house, by the way.

I own a home as well.. but that isnt going to be my meal ticket during my retirement. It is wrong for many reasons to start calling homes as an investment. ill-liquid and un-diversified concentration. Many gambled wrongly and lost both their investment and home. Today, those who stashed their excess cash into real investments are doing much better. An index fund in top 100 companies paying cash dividends will do very well over the long run vs RE prices.

Shiller did well with both books he published- Irrational Exuberance edition 1 and 2... and most likely he haggled over price knowing far better what prices normally fall back to.

SFace says

. The best index funds over the last 30 years are in fact REIT index funds which invest in real estate.

commercial real estate.. fine with me. Its not some residential SFH as investments.

SFace says

Besides that fact, unless under very specific curcumstance, owning a home in the long term is never the wrong choice. I know, all my elderly neighbors are millioniares.

Of course owning a home is a good idea... but that has been perverted and abused by parties who have a vested interest in seeing inflated prices. what would you say about your SF neighbors back in prior decades as prices in SF were much more reasonable ? But lets sober up, those vintage homes in SF are not what one would call worth million dollar homes. The world has gone nuts.. thats all!

SFace says

how the hell do you count equity build but totally ignore the housing dividend?

there is no housing dividend, its my cost of living, keeping it low. Equity is nothing more than 'intangible' right to borrow more. Yes, my real assets are doing fine, and I will be much better off with my investment than some homeowner sitting in some fabled $1M bubble home.

SFace says

That doesn't even consider leverage, financing and tax advantage of real estate collateral

what are your tax advantages on selling your home below your purchase prices..
no capital losses on Residential homes allowed.

homes have become a obscene hustle of our times fueled by pimps and realtors.

JFP says

Right, it crashed, but didn't revert to the previous mean. It could crash
again and not revert to the mean again. It could take a 100 years to revert to
the mean. If you look at the Chase-Schiller graph in the Wikipedia article you
reference, you can see it took about a 60 years for house prices to go back to
their 1890 values in real terms. In the intervening years, real prices were
either above or below the mean for extended periods of time. And, they've only
touched it again once. So, what use is that mean? That's my point.

Precisely right, and something you should really think about Thomas. After all, your lord and liege, Robert Shiller has admitted as much.

When asked why certain areas have appreciated better than the long term average for 20-30-40+ years, Shiller responded that it wont always be that way because (and I shit you not on this) - they will eventually build new cities

http://www.project-syndicate.org/commentary/the-myth-of--superstar-cities-

While Shiller is probably right, think about the time scales we are talking about here. He cites Washington DC (built circa 1790) as one of these places, which apparently is working as a pressure relief valve to prevent runaway prices in Baltimore, Philly, NYC, etc. As he says, "New cities are constantly ripening like so many cherries on a tree, drawing people away from older, original cities." While this is all very good and comforting to some economist thinking on a multi-century scale, it does little for those of us who are debating whether to rent or buy in 2013.

So I want you to think of that the next time you post that (now hopelessly outdated) graph of yours Thomas. In the year 2067, when they finish building "Pelosi, CA" right in the middle of the bay, finally relieving the allure and specialness of the peninsula, all the lines on your chart will converge at 1.4 million dollars, and you can then triumphantly exclaim "SEE I TOLD YOU SO".

Yet, that will be of little comfort to people who passed when the chart was at 600K, renting for the years 2013-2067 all terrified that Thomas' apocalyptic predictions of sudden mean reversion will come true.

thomaswong.1986 says

JFP says

@thomaswong.1986 says

Shiller does not measure avg but tracks the same individual resell of homes.

You clearly don't understand what "average" means if you argue that a composite index doesn't track average house prices. It can't do anything else.

Averages or not, we can see from past history prices barely outpace inflation.

Right now, any investment that "barely outpaces inflation" is a good investment. Moreover, it's clear that rents track inflation also, so you might as well capture some of the gains for yourself.

CDon says

So I want you to think of that the next time you post that (now hopelessly outdated) graph of yours Thomas. In the year 2067, when they finish building "Pelosi, CA" right in the middle of the bay, finally relieving the allure and specialness of the peninsula, all the lines on your chart will converge at 1.4 million dollars, and you can then triumphantly exclaim "SEE I TOLD YOU SO".

Yet, that will be of little comfort to people who passed when the chart was at 600K, renting for the years 2013-2067 all terrified that Thomas' apocalyptic predictions of sudden mean reversion will come true.

Thank you for underlining my point. Trying to base your individual decision on the long-term path of a composite index is a waste of time. Your local market can diverge drastically (in either direction) during your entire lifetime from the long-term.

Somewhere around Detroit, I bet there is another Thomas Wong predicting huge appreciation in house prices, because they have to "revert to the mean" sometime, and get back to the long-term average.

JFP says

thomaswong.1986 says

JFP says

@thomaswong.1986 says

Shiller does not measure avg but tracks the same individual resell of homes.

You clearly don't understand what "average" means if you argue that a composite index doesn't track average house prices. It can't do anything else.

Averages or not, we can see from past history prices barely outpace inflation.

Right now, any investment that "barely outpaces inflation" is a good investment. Moreover, it's clear that rents track inflation also, so you might as well capture some of the gains for yourself.

That's not necessarily true, you have to factor in risk and leverage into your investment decision. If you have to take on loans and the risk of negative equity and the consequences of your leverage coming crashing down on you if the investment goes south, then the risk/reward does not look that great at all and you are better off with an investment that does not require leverage/margin. It's all about poker odds. Of course you can hope to live rent free and squat and walk away or for yet another government bailout program to prop up housing in case it doesn't work out and those odds these days - sadly - have to be factored into the decision as well ;)

robertoaribas says

Dr. Shiller owns a house, by the way.

He regularly states there are good reasons to buy a house, like societal comfort and a met need for autonomy(delusional as it might be.) There are also places where buying a house makes sense. If I could some how get my income in another area, I'd likely buy a house. The math would get really comforting.

CDon says

Yet, that will be of little comfort to people who passed when the chart was at 600K, renting for the years 2013-2067

I find your points thoughtful and helpful. I'm more concerned about the allure of thinking, "The time is now! I'm going to miss out!" That drives sales.

For me it's a budget issue. Buying a house where I want to live doesn't fit my budget. In other words, I can't afford it. The supposed benefits of owning a house would have to happen in a place I don't want to live. So I'd spend years of my life living in a place I don't like. What's that worth?

I'm happy with my net worth. It keeps growing. Faster and faster. You know, exponential-like. I saw a CBS News report on "average" net worth which is a ridiculous number to even consider given wealth disparity. I have a higher net worth than even that ridiculous number. I'd love to see a mean net worth. I bet it's nearly negative for the U.S.A.

http://finance.yahoo.com/news/70-3-trillion-us-household-161702663.html

http://www.cbsnews.com/8301-505144_162-57588237/u.s-regains-wealth-from-recession-but-not-equally/

All I can find are the helfpul articles showing that the "average American" has not recovered net worth losses from the recession. I contend that the "average american" has no net worth.

Here's some of the articles pointing out that "net worth highest ever" idea

http://www.nytimes.com/2013/06/07/business/economy/us-households-finances-regain-lost-ground.html?_r=0

http://www.stlouisfed.org/publications/pub_assets/pdf/itb/2013/In-the-Balance-issue-4.pdf

$10890 median net worth!!!!!according to calculations by Edward N. Wolff, an economics professor at New York University. (He bases this estimate on 2010 Federal Reserve data, which he has updated for Sunday Business according to changes in relevant market indexes.) Tell that to your elderly neighbors.
http://www.cnbc.com/id/100803102

FunTime says

I find your points thoughtful and helpful. I'm more concerned about the allure of thinking, "The time is now! I'm going to miss out!" That drives sales.

For me it's a budget issue. Buying a house where I want to live doesn't fit my budget. In other words, I can't afford it. The supposed benefits of owning a house would have to happen in a place I don't want to live. So I'd spend years of my life living in a place I don't like. What's that worth?

I'm happy with my net worth. It keeps growing. Faster and faster. You know, exponential-like. I saw a CBS News report on "average" net worth which is a ridiculous number to even consider given wealth disparity. I have a higher net worth than even that ridiculous number. I'd love to see a mean net worth. I bet it's nearly negative for the U.S.A.

You are totally right in this comment.

Personally, the only real-estate investment I have is my primary residence, and even that ties up more of my money than I"m really comfortable with. Personally, I wouldn't buy a house in Palo Alto right now. There's too little inventory and too many buyers. That's why I put insanity in the title of this thread.

Sobering. So tell me again why there is financial importance to buying a house in the United States? A country where 6x% own. I don't get it. Emotional importance, symbolic importance, status importance, I get. I face those all the times as a renter, because people think I'm stupid. I just tell them I grew up poor hoping it helps them feel better.

http://blogs.reuters.com/felix-salmon/2012/06/12/chart-of-the-day-median-net-worth-1962-2010/

FunTime says

I'd love to see a mean net worth.

Oops, meant "median" net worth. Hopefully you were able to interpret my not-so-careful writing done while reading a bunch of articles about means and medians.

donjumpsuit says

If inflation blew up, rents would not rise, unless incomes rose

I think the point is that incomes will rise too.

tatupu70 says

I think the point is that incomes will rise too.

So a wage/price spiral up? Not likely.

SFace says

Buying means you fixed your most imporant living expense, shelter.

I get that but just don't think it works out that way. People who buy houses spend more and more variably on houses than renters. That's part of the reason it's such a big part of the U.S. economy. First spend most of what you have on a house, then spend the rest making it look and feel like your success.

House maintenance is underappreciated and most people completely lose track of what they've spent by the time they sell. When they sell they focus good and hard on the number they paid blocking out all the other costs and interest. It works really well!

JodyChunder says

So a wage/price spiral up? Not likely.

I agree for the short term. But over the next 30 years? Hard to say.

SFace says

If you don't compete for it, that is a personal choice, but not a winning choice. Life is about competing and it will get more competitive, guaranteed.

Yeah, I'm concerned about that since I'm making a very unpopular choice. How do I measure "winning?" I can't think of a reason not to measure winning by net worth. I could be wrong, but seem on track for a decent net worth by the time I retire. I don't know how to get there by buying a house.

I'm just hoping I do as well in this competition as all the other ones in which I've participated.

FunTime says

SFace
says

Buying means you fixed your most imporant living expense, shelter.

I get that but just don't think it works out that way. People who buy houses
spend more and more variably on houses than renters.

So true. I spend so much less on my rental house than my friends who own. They are constantly redoing roofs, plumbing, adding bathrooms, renovating kitchens, blah blah. And the ones who aren't doing that have homes that are not as nice as our rental.

Then there's the issue that most buyers move every 5-7 years, and there's hefty transaction costs associated with that.

tatupu70 says

I agree for the short term. But over the next 30 years? Hard to say.

That's fair.

Look at it this way: 2043's gonna be better than 1943 no matter how you slice it.

dublin hillz says

The question is whether adults will be willing to live like college students in those cities and their suburbs that are concentrated around employement centers. While singles may find that such living arrangements are no big deal, the ratio of those willing to live with others ought to go down for couples and even more so when families have kids as it becomes very difficult if outright impossible for multiple families to live under one roof. Regarding multi-generation households, in more collectivist cultures such as asians and eropeans, that could work but anglo americans are likely to resist.

If the alternative is having no where to live, they will do it. We've already seen it with kids moving back home after college. In my day, that was the definition of loser. Now, it's commonplace.

Professor,
Please consider taking down that self incriminating post. You just never know how that confession may be used for some nefarious purpose in the future.

robertoaribas says

If they drop, I'm really going to have to start drinking more wine...

If they go up, I'll drink more wine to celebrate!

ok, I'll admit it, I just want an excuse to drink more wine!

it would be better to say.. rents stay reasonable and sustainable for the long run.
as we learned for too long of a time, when they go too far up, the invisible hand will correct accordingly downwards.. you dont want to see volatility and unpredictably.

JFP says

So I want you to think of that the next time you post that (now hopelessly
outdated) graph of yours Thomas. In the year 2067, when they finish building
"Pelosi, CA" right in the middle of the bay, finally relieving the allure and
specialness of the peninsula, all the lines on your chart will converge at 1.4
million dollars, and you can then triumphantly exclaim "SEE I TOLD YOU SO".

Yet, that will be of little comfort to people who passed when the chart was
at 600K, renting for the years 2013-2067 all terrified that Thomas' apocalyptic
predictions of sudden mean reversion will come true.

Thank you for underlining my point. Trying to base your individual decision
on the long-term path of a composite index is a waste of time. Your local market
can diverge drastically (in either direction) during your entire lifetime from
the long-term.

@JFP - for what its worth, I found an updated version of Thomas chart. As you can see, its "predictive" value turned out pretty much the way we thought - which is to say, it has no value at all.

http://www.fhfa.gov/default.aspx?Page=86&Area=MSA&AreaID=41940&PurchaseQtr=1991Q1&ValuationQtr=2013Q2&Price=$250,000

In sum, prices bottomed 4 years ago, have risen 40% and are pretty much back at peak prices once again. If I had been acting on Thomas' chart, while I would be somewhat irked by missing out on the appreciation, and the likely 100K of rent paid in the interim - the thing that would absolutely kill me is 4 years have gone by - roughly 1/10 of my useful adult life spent on the sidelines, and I was no closer to my goal than I was before.

This continued reliance on the predictive value of any particular metric - especially one that may not have been proven correct in decades or longer - really irks me. It was nonsense like this that caused my SIL and her family to continue to wait only to recently "wake up" and realize they missed the boat, and they are effectively priced out of where they want to be. Their only real option for buying now is moving to another city altogether - much to the chagrin of the entire extended family.

Sorry to rant here but I have a hard time sitting idly by knowing others may be hurt by this sort of garbage. If there is anyone out there good with charts, I would love to see you update it. Take this data and add it to Thomas chart, just so everyone could see the potentially destructive power of wishful thinking.

Cdon,

I bought my first house without caring the conditions of the RE market nor the economy. The only thing I care about is that I can afford to keep paying the mortgage. IMHO, timing the market is not for ordinary folks like me. Up and down are irrelevant since the mortgage rate (fixed 30 years) doesn't change. No risk of increase like rent. In fact, can always refinance if interest rate drops, and you have a lower mortgage locked in.

Having said that, I timed the purchase of second house using the price trend (not absolute price) provided by Zillow. Bought it in mid 2010.

hanera says

In fact, can always refinance if interest rate drop

facepalm.jpg

JFP says

During the bubble of the late 1980s, London prices topped out at 5.8 times average earnings, according to Nationwide, after which they savagely reverted to the mean and beyond, bottoming out at 2.6 times.

House prices in terms of average earnings is not some uber-metric...it's just a number, and it give a rough sense of the market conditions...but it seems inadequate as a general housing bubble barometer.

First, wouldn't you expect the number to be higher in highly developed, desirable areas (such as London and other world class cities)? Who owns the houses in London? I'd guess that it's skewed toward the wealthier end of the spectrum compared to other places, so already the multiplier will be higher. Also, rich people can afford to spend more (as a percentage) of their income on housing, again this pushes the multiplier higher. Also, as people live longer, their total lifetime income increases even though their annual income may not....This again tends to push the metric higher today compared to the past.

These are just the examples that came to mind, but the bigger point is that I don't see the "earnings multiplier" statistic to be very useful beyond a first order gauge.

JFP says

Right now, any investment that "barely outpaces inflation" is a good investment. Moreover, it's clear that rents track inflation also, so you might as well capture some of the gains for yourself.

Hardly.

My portfolio of diverse stock based mutual funds and a little BRK.B is up 19% in the last year. That's a good investment.

My rainy day cash yields 1.76 percent on the first $25K and 0.110% on the rest. Tracking inflation with the same safety would be a better short-term hedge against job-loss and medical problems but that's not the same thing as being a good investment. Mathematically speaking (I worry, but a cyclical drop of 30% wouldn't really hurt me) I should probably get that into a stock and bond mix which would still do a lot better than inflation.

So what are the property taxes like in PA on a $2.8M house? I guess if you spend that much for a house, it doesn't matter.

http://www.deleonrealty.com/contact-us/ken/

The Realtor looks like a real fruit.