patrick.net

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So I want you to think of that the next time you post that (now hopelessly outdated) graph of yours Thomas.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.

CDon says

@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.

your chart is correct.. and only shows that we are still in a bubble. I know of no rational market which will leap in a matter of 40% in such of short period of time.. it took the SFBA some 15 years from 1980 to mid 1990s to double in price and that was under better circumstances plus high inflation rates compared to today.

that being said we find affordability index is now

SF and SM 17% down from 24%
SC 24% down from 32%

http://www.car.org/marketdata/data/haitraditional/

.
.
.
.Lets face facts.. the govt has stepped into the market back in 2009 to prop prices up...lower rates and modiciations.
.The market was not allowed to correct by itself..and the media has been all to willing to play along, except a few like below. You are actually spending 1/10 of your life keeping the homeowner afloat and in their house who over bid and over borrowed without any regard to normal long term pricing of homes.. Your were good enough to pay higher taxes so the homeowner keeps his home. You should be thrilled with all this.

.
http://www.jiCOb49vVVM

swebb says

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.

it is a common benchmark regarding lenders.. as borrowers income to cover the debt repayment.
else defaults would skyrocket with absence of good governance and proper risk management.

swebb says

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,

London is London as Berlin Tokyo and other major cities go humming along.. since they
are Political/Economic centers of powers.. The rich live as they have always lived since the Shogunate
and Lords of the Manor. SFBA is as they say -- is different.. things change overnight, jobs are created and lost at the turn of a dime. It is impossible to predict for anyone their long term plans staying in the Bay Area.. today, if you
save flexible skills and bought a home at a very low cost, you might survive "the Jungle". Why else as
so many leaving because the stress over the rat race.

jvolstad says

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.

factor in some 1.5% property tax.. or what can you do with 40-45K other than pay for property taxes. the people who are spending that much have a loose screw in their heads. I dont have the the link but Stanford provides a shit load of loans to staff to buy homes near campus. Must be several 100 Million by now in Loan Receivables.

Universities Pile on Faculty Perks as Student Costs Grow

http://www.businessweek.com/news/2013-03-12/universities-pile-on-faculty-perks-as-student-costs-grow

Congress is taking a look at such payments following disclosures that Jacob Lew, the new U.S. Treasury secretary, received a $685,000 bonus when he left New York University and had $1.5 million in housing loans from the school.

Harvard and Stanford universities also offer real-estate loans with sweet terms, records show. While the amounts are small relative to university budgets, the perks insulate faculty and administrators from the costs upsetting many middle-class families, said Jonathan Robe, a research fellow at the Center for College Affordability and Productivity in Washington.

BLOG: Florida International's B-School Dean Faces a Faculty Revolt
“It certainly gives the public a clear example of how out of touch some universities are,” Robe said. “Parents will think, ‘Here I am scraping by, raiding my retirement plan to pay for college. Why are they making me do this just to enrich these executives?’"

Congress and President Barack Obama have been pushing colleges to control tuition and other costs, which can exceed $60,000 a year at a private school. In a weak job market, students are struggling to pay off $1 trillion in education loans.

A 0.166 acre lot with a crappy, albeit large, house is barely worth $250,000. Only a fool would pay $3 million for it.

What exactly is the breakdown between the "value of the house" and the "value of the land"?

Mark D says

Worst photochop job ever!

That guy's face isn't even the same race as his arms.

JFP says

If the house cost $500 square foot, then it would cost ~$1,000,000 to build. Add in any loan costs, etc, and you can see how they go to that price, but it's still out of whack with the rest of the neighborhood.

If they paid $500/sqft they are almost as great a fool as the fool who bought that place.

/?p=1230048

As I outlined in my own thread (above) my family recently completed a complete tear down and rebuild of a similarly sized home in San Jose, less than 25 miles from this place. Once all was said and done I calculated the cost of the rebuild between $215/sqft for the portion over the original foundation and $259/sqft of the portion over the new foundation.

Its possible these people could have spent $500/sqft on the construction in the same manner one can spend extra $$$ on a Lexus badged Camary. Spending more does not mean its a better house.

Based on my numbers I'd guess that house cost $700k to build.

Dan8267 says

A 0.166 acre lot with a crappy, albeit large, house is barely worth $250,000. Only a fool would pay $3 million for it.

What exactly is the breakdown between the "value of the house" and the "value of the land"?

I also addressed the issue of BA land costs in the same thread. Land costs swing wildly depending on zoning, location, schools, basically whatever the seller can use to convince the buyer to spend millions more on his lot than a similar lot a short distance away.

Take that same house and stick it in EAST Palo Alto and that $3M suddenly goes to $1M. Still overpriced but a bargain by Bay Area standards

Land or house its whatever the greater fool will pay

New Renter says

If they paid $500/sqft they are almost as great a fool as the fool who bought that place.

/?p=1230048

As I outlined in my own thread (above) my family recently completed a complete tear down and rebuild of a similarly sized home in San Jose, less than 25 miles from this place. Once all was said and done I calculated the cost of the rebuild between $215/sqft for the portion over the original foundation and $259/sqft of the portion over the new foundation.

Its possible these people could have spent $500/sqft on the construction in the same manner one can spend extra $$$ on a Lexus badged Camary. Spending more does not mean its a better house.

Based on my numbers I'd guess that house cost $700k to build.

I upped the number based on the cost of doing business in Palo Alto and some of the interior finished, but you could easily be right. Let's say it cost $750K to build. Unfinished lots (or lots with a teardown) go for at least $1 million, so even at your cost, they are probably in for $1.7 plus carrying costs.

I also have to say that since I started this thread, the price of houses in this neighborhood have gone up by another $250,000, so even the older houses are now selling north of $1.5 million.

New Renter says

I also addressed the issue of BA land costs in the same thread. Land costs swing wildly depending on zoning, location, schools, basically whatever the seller can use to convince the buyer to spend millions more on his lot than a similar lot a short distance away.

Take that same house and stick it in EAST Palo Alto and that $3M suddenly goes to $1M. Still overpriced but a bargain by Bay Area standards

Land or house its whatever the greater fool will pay

There are three things driving the cost of housing in South Palo Alto:
1. Proximity to Google, Apple, Facebook, and the startups founded by their ex-employees
2. The stellar reputation of Gunn High School, particularly among the Asian community
3. Foreign, again particularly Asian, money.

The people buying houses here are very disconnected from the "normal" economy

Dan8267 says

A 0.166 acre lot with a crappy, albeit large, house is barely worth $250,000. Only a fool would pay $3 million for it.

What exactly is the breakdown between the "value of the house" and the "value of the land"?

In South Palo Alto, and unfinished lot is at least $1 million.

thomaswong.1986 says

London is London as Berlin Tokyo and other major cities go humming along.. since they

are Political/Economic centers of powers.. The rich live as they have always lived since the Shogunate

and Lords of the Manor. SFBA is as they say -- is different.. things change overnight, jobs are created and lost at the turn of a dime. It is impossible to predict for anyone their long term plans staying in the Bay Area.. today, if you

save flexible skills and bought a home at a very low cost, you might survive "the Jungle". Why else as

so many leaving because the stress over the rat race.

We are seeing the same thing in SF and the Peninsula that you see in London: the natives are leaving and being replaced by immigrants.

If you JFP says

the natives are leaving and being replaced by immigrants.

Most of the people I grew up with have left for TX, NC, So and central CA. Where do you see the natives you know leaving to?

New Renter says

If you JFP says

the natives are leaving and being replaced by immigrants.

Most of the people I grew up with have left for TX, NC, So and central CA. Where do you see the natives you know leaving to?

That's where most of them go. I see a few moving to Colorado or Idaho.