patrick.net

All bears are not equal. Some (Teddy) are more reasonable than others (Polar). I like Teddy bears better.

I heard that bear paws is a delicacy.

Food is probably the best investment you can make. Once you eat it, it becomes a part of you.

I do hope that much of it comes out though... or I will be 300 pound in no time...

And you are not already 300 pounds?

Very funny.

Glad you saw it that way. My weak attempt at being humorous.

You are quite humorous. :)

Then I wished I had a finance, or even better, math double major, since then I could create my own market models.

See http://tinyurl.com/bclev

Hubris begets nemesis. Always.

Pip pip,
prat

Jason Says:
Our actions are generally driven by fear and the desire to survive, then greed and the desire to be better off then our peers. Put simply, the desire to live long and prosper drives much of our actions. Knowing our motivations, how is it that we are not able to predict the future?

I think it's because as soon you have figured out how other people are going to behave, you can bet against the whole thing and make money. Plus, there will be folks who will now bet against you.

So, what is my advice, Harm? Well, my advice is to get a real estate license. Hey, I’ve read several people on this very website make fun of how easy and cheap it is. C’mon, it’s home-study and open-book tests! Well, if it’s so easy, why don’t you do it?

There is no longer a market for RE agents....there are NO buyers and too many agents.

Buy a house to live in it. I keep saying that, and I wonder if anyone hears me. Buy a house to live in it. Think of your house as a capital savings account. Build equity, minimize expenses. As you live in your house, invest in real estate, not to live in but to convert from a liability (an expense) into an asset (income). If you start at age 40 and buy 1 rent house a year (20% down, 15-year note), then stop at age 50, when you’re 65 you will have free and clear title to ownership of 10 rent properties, and enjoy a passive revenue stream of over $60,000 a year. And you still have your house which you live in that has long since been paid for. You’re sitting on total equity + appreciation, in addition to enjoying a passive revenue stream.

That’s real estate, sports fans.

Thanks for the pep talk....will come in handy after the market corrects.

ScottC says:
If you start at age 40 and buy 1 rent house a year (20% down, 15-year note), then stop at age 50, when you’re 65 you will have free and clear title to ownership of 10 rent properties, and enjoy a passive revenue stream of over $60,000 a year.

Ok, let's see.
A modest rental house in a ok neighbourhood = $700,000.
20% down payment = $140,000 cash (+ closing costs, but screw that)
Mortgage payment = 15yr fixed @ 5.9% for $540,000 = $55,776 p.a.
Property Tax @ 1.25% = $8,750 p.a.
Lost Interest Income on $140,000 @ 4.6% = $6,440 p.a.
Maintenance = $0 because we buy only well built houses
Total Outlay per year = $70,966

That sounds great, dude.
Now if I only knew how to come up with the $140,000 per year to be able to play that game, and how to find a tenant who's going to pay me $6,000 rent per month so I can break even. :-)

I'm sure the math works better in Texas, though.

Katie Says:
I believe prices are at a top and had the nerve to put my house on the market.
If they are higher next year I will be bummed.

Yeah.
Either your buyer pays big bucks for the mortgage for the next 30 years and will not be able to spend money that would have created jobs for your kids.
Or, the guy defaults and someone's gotta foot the bill for that. My guess: your children, this way or another.
Or, inflation will eat your gains (which would have been your children's only way out of that rathole).

I'd be bummed too if I'd be stealing from my own children.

But congratulations on your decision, and good luck with the sale.

Girgl,

you shouldn't include the forgone interest because that is only needed for justifying your purchase, not a post-purchase cashflow-sensitive item (what is spent is already spent). Your other calculations are valid. it comes down to $64,526 per year, $5,377 a month. Wait, you need to pay tax on rental income!

OK, the cumulative interest for the first year at 5.9% for 540K is 25,308, and only that amount can be deduced against your income, any rental income above that needs to be taxed. (That only applies to your second home, not your 3rd, 4th, nth home).

So, now, in order to achieve an after-tax cashflow of $64,526, after deducting interest of 25,308, assuming 30% marginal tax rate, you will need $81,333.

Anyone out there who wants to pay me $6,777 monthly rent for a $700K home? Anyone? Hello?

I’m sure the math works better in Texas, though.

But, donchaknow?, everything's bigger in texas.

And I say that with a deep reverence for Prof. Wagoner (http://tinyurl.com/cqhoa)

It was like watching Ross Perot give lectures on differential equations.

Cheers,
prat

Darn, people are cheap here in the Bay Area. All I am seeing is the most renters are willing to pay is $1,600 monthly on a $700,000 home.

Any financial genius out there who'd like to show me how to breakeven? I will pay, I swear.

Interesting article about the observation that distracting people makes them less able to see through false arguments:
http://www.investorsinsight.com/otb_va.aspx?EditionID=225

Now, does that mean the ultimate reason for the housing bubble is that we're building and using more and more distracting technology?
Dude. I think I must drop my Blackberry in the trash can.

I wrote:
I’m sure the math works better in Texas, though.

Oops. Let me clarify to prevent misunderstanding. I meant:
I’m sure the math works better in Texas because of the relatively lower real estate prices.

Owneroccupier Says:
you shouldn’t include the forgone interest because that is only needed for justifying your purchase, not a post-purchase cashflow-sensitive item (what is spent is already spent).

Wait. I don't understand. What about the $536.66 interest that now cease to show up on my account every month as soon as I put the $140,000 into the house?!
I'm not sure why this would not be a cash flow negative.

Thanks for the info on the tax situation!

Market is efficient almost by definition.

Market is efficient if you try to define it. :)

ScottC Says:
It’s all about money. You’re either working for money and paying expenses, and making money work for you and accumulating assets. The market is going to go up or down either way, in the short-run, but that’s why real estate investment is only for the long-term. At the end of the race, would you rather be running on the inside track or the outside?

You're absolutely right. However, these days, prices have gotten so out of whack that society as a whole is now effectively cut off from building wealth in this way because buying these assets now will lose you money for a long time to come, either through declining prices or through negative cash flow.

In other words: All the wealth that was to be built through real estate from 2000 to 2020 has been built already. Buying into the market today will build you wealth in the long run as it always has, but you will also slowly pay off someone else's gains that they realized in 2005.

Will you be able to build wealth more effectively with another instrument that does not require you to pay off 2005's real estate excesses? I do think so.

The excesses will either be wound down quickly with probably rather dramatic consequences, or slowly, which will prolong the timeframe in which we'll all be cut off from this usually rather safe and easy way to build wealth.

Girgl,

when you are weighing buying vs renting, then you should take into considerations of cashflow generated in both decisions (I am not going to dwelve into DCF because it is too assumption-sensitive).

You start with one colume called buy, and list all the cashflow there and a colume named rent, and list all the cashflow associated, and then compare one against another.

However, when you have decided to buy, you simply look at the cashflow associated with purchase. Forgone interest is a concept of opportunity cost, not a cashflow. The forgone interest shows up as a positive cashflow item under the "rent" scenario, and since you decide not to rent, that entire colume is tossed outta the window.

H.Z., thanks for the explanation of DCF!
You write:
The GDP grows at about 3% so to match a reasonable stock market return you need 21,000 net rent.

Am I right in assuming that since the current interest rates are still relatively low, these figures will change a lot when interest rates go up by a percentage point?

Now back to the example:
Let's say we get $2,000 per month in rent, makes $24,000 p.a.
Property tax is 1.25% or $8,750 p.a., which takes us down to $15,250.
What is a realistic number for maintenance? Does the figure include depreciation (i.e. the cash you'll have to have when you need to renovate the property 20 years down the line to maintain it's value)?

ScottC,

Thanks for responding to my questions about exclusive buyer's vs. seller's agents. Though I am not looking to buy anytime soon, it'll be nice to have this information when the time comes.

I know that you were being tongue-in-cheek when you said to go get a real estate license. Actually, I believe you may have something here. In about 5-6 years, when all the speculators & flippers who didn't get out early have long gone belly up (along with many an overleveraged FTB), rents are generating positive cash flow even in Cali, and Time magazine is running a cover story called "Real Estate: Why It's Never Coming Back!", THEN will be the time to start RE investing in a big way.

I think Girgl sadi it best:
"these days, prices have gotten so out of whack that society as a whole is now effectively cut off from building wealth in this way because buying these assets now will lose you money for a long time to come, either through declining prices or through negative cash flow."

"In other words: All the wealth that was to be built through real estate from 2000 to 2020 has been built already. Buying into the market today will build you wealth in the long run as it always has, but you will also slowly pay off someone else’s gains that they realized in 2005."

Scott, I think you were right on the money about viewing your house as a forced savings and/or long-term investment vehicle and not using exotic loan products just to "get into the market". Unfortunately, right now any new buyer, no matter how conservative s/he may be, is competing in a three-ring credit mania circus at historically uber-high valuations. I do not want my REAL hard-earned money and good credit rating competing directly against some idiot's no-doc interst-only monopoly money. Again WE ARE NOT IN A NORMAL MARKET.

Anyhow, thanks for your advice and for giving us a unique "insider" perspective on the RE game. Btw, I hope your current clients don't dump you just because you were honest on the appraisals. Pretty screwed deal right now for honest appraisers.

I do not want my REAL hard-earned money and good credit rating competing directly against some idiot’s no-doc interest-only monopoly money.

Case in point:
"Home Buyers often faced by overstretching income"
presstelegram.com/news/ci_3209850

Newlyweds Darcy and Matt Woodworth have tried to balance the financial pressures of homeownership with their eagerness to own.

"Lynn Edmonds and his wife, Sebnem, could barely wait to sign on the dotted line back in May when they committed themselves to pay $796,000 for a three-floor townhouse under construction in Alexandria's Cameron Station.

But since May, the sales prices for the development have fallen -- and units like the one the Edmonds bought are now being sold for $699,900. The Edmonds are facing the prospect of a $100,000 loss in value before they even walk through the front door.

"We blithely stepped into the contract, thinking it would hold its value -- but that's not the case," said Edmonds, 46, a program analyst and Air Force veteran. "I feel so stupid putting myself into it. It's real estate -- I knew on a theoretical basis that it might go up and it might go down, but now I know it on a practical level."

Read the rest at

http://www.washingtonpost.com/wp-dyn/content/article/2005/11/10/AR2005111002241.html

"Homes are investments"

Personally, I'm not sure if homes are actually "assets" or simply long-term expenses that hold value. I think people's memories are rather short to the prospect that double-digit appreciation will not be a long-term historical certainty.

The way I see it, an $800K home over 20 years (20% down, 6% fixed) costs the buyer $1.1M in principal and interest. Adding on taxes, and a modest amount of improvements, you'd have to sell the home for around $1.7M in 20 years to break even. (I left out insurance costs) Meanwhile, all that cash is parked in a home, which may be invested far better elsewhere, especially if your home needs frequent repairs (or someone demands constant remodeling)

Of course, if we can expect the stratospheric appreciation to continue for years to come, then homes are truly amazing money machines. I don't buy this assertion, and fear many people will have little to show for dumping all their savings into shelter.

"...you’d have to sell the home for around $1.7M in 20 years to break even."

I should add that I figured in a conservative (and historical) long-term annual appreciation of 4%.

from the links section on this site
http://cbs4denver.com/business/finance_story_318154036.html

"There's no need for the alarm bells to go off; median prices are just going to come down off very high highs. We're talking about a gain of 12.5 percent that was expected this year to come down to more of about a 5 percent gain in terms of median home price appreciation. So, (there's) more of a leveling off. You have to keep things in perspective here, coming off very high high highs.

"If you are looking to buy, it's still a good time to buy because rates, while they have been edging up, are still low, a little over 6 percent and, if you wait, rates are going to be higher and you could price yourself out of the market. It's a good time to buy now, too, because sellers are getting a little anxious, winter is coming up, it's a very slow season and sellers may we more inclined to give you a better price, certainly better than what was going on in the summertime."

This is what really gets me....how could these people be allowed to make statements like this? It should be illegal! It's like peddaling snake oil! This lady is stating that RE is not even slowing, but going to normal appreciation rates and she won't even try to say that it is a buyers market, just that it's balanced....what balance? look around, noone is buying! For sale signs scattered all over the country! Then she goes on saying "Now is a good time to buy"...........why, so the sellers can save themselves at the buyers expense? So these realtors can actually make a sale? Ofcourse they are lowering their asking prices.....and no, it's definitely not a good time to buy! I can't stand when these people make these desperate attempts to convince people to buy when they know damn well themselves that it is the WRONG thing to do! These are the REAL trolls!

perhaps we will reach the still point, where buyers refrain from buying, and sellers cannot sell.

I thought we have already.

Well that is better than what Toll predicted, that our children will pay $4 million. But still, perhaps there will be a correction.

Well, yeah! :) I wouldn't touch that "wisdom" with a 10ft pole, while wearing a radiation suit. The idea that homes should somehow cost a fortune, while producing far less of monetary value (rent), is simply nonsense.

Well that is better than what Toll predicted, that our children will pay $4 million.

"Troll Brothers"

allah Says:
"Now is a good time to buy"
This is what really gets me….how could these people be allowed to make statements like this? It should be illegal! It’s like peddaling snake oil!

Hey, they've been right for 10 years.
They've been right through 1998, when median prices in Santa Clara County fell by 15%, and through 2001, when they fell by 25%.
Maybe they're right now. Who knows.

Even then, I'll still be happy to not have sold my freedom. And if I end up poor and on the streets when I'm old - hell, then I'll go depress people's home values with my presence :-)

I just can't stand when these RE types try to make an advertisment promoting real estate look like an informative news article.....especially when they try to scare the public (even now) that they will be priced out forever because of rising rates, if they don't buy now......obviously the prices are falling out of desperation. It's like the mis-information minister declaring that they aren't being attacked when you can clearly see a bunch of tanks behind him while mortars are exploding everywhere!

So, what am am I supposed to do now with this house? It’s a shell. This an older (25 years) 2-story home, brick siding on the first floor and wood siding on the second, but that’s all it is, exterior siding, windows, exterior doors, beams, and concrete. That’s it. No plumbing. No electrical wiring. No sheetrock. No plywood. No anything. How am I supposed to sell that?

Auction it! Flipper has left the building!

Has anyone seen this "cash flow" calculator?
Found on another blog:
http://tinyurl.com/7vq7z

Can anyone explain "cap rate" again?

found elsewhere:

The Nat'l Ass'n of Realtor®s "anti-bubble reports":

http://www.realtor.org/research.nsf/pages/anti-bubblereports

Obviously the source is biased, and statistics are in the eye of the beholder.. But there are some interesting numbers and charts that I haven't seen elsewhere, including a per-market analysis of the common loan types, and average down payments.

There is plenty of marketing-speak in the reports, but also some honesty. Truthfully, more honesty than I would have expected. It doesn't make their analysis or conclusions any more likely to be true, but make of it what you will.

Central point: price-to-income is all out of whack, but it doesn't matter any more because the new metric should be "debt service cost-to-income", which is actually somewhat lower than the historical norm.

They do acknowledge that a sizeable portion (~10%) of borrowers are on thin ice due to their choice of loan product.

I am not sure whether we should trust numbers and statistics anymore. For example, on the subject of "global warming", both sides of the argument appear to have evidences suggesting that the phenomenon is fact or fiction.

Personally, I am not too sure about the existence of "global warming"...

I am not sure whether we should trust numbers and statistics anymore.

I don't trust them, especially if they have been created by someone who has an interest in selling real estate.......but those abundant for-sale signs don't lie.

Central point: price-to-income is all out of whack, but it doesn’t matter any more because the new metric should be “debt service cost-to-income”, which is actually somewhat lower than the historical norm.

Income reports can never be accurate....what about all those off-the-books jobs that noone knows about........there is alot of money changing hands under the table, maybe even more than above the table.

Central point: price-to-income is all out of whack, but it doesn’t matter any more because the new metric should be “debt service cost-to-income”, which is actually somewhat lower than the historical norm.

Not if this “debt service cost-to-income” is inherently unstable. Very low debt severice costs do tend to balloon easily and are very sensitive to interest rate and asset prices themselves.

but those abundant for-sale signs don’t lie.

Well, many for-sale signs mean many people want to sell property. They don't mean that the sellers will accept a lower-than-current-expectations price. Some will have to, but not all. Maybe not even most.

There are many reasons to sell...it's possible that one very large one is the collective sense that a local price peak is upon us (too late). But it says nothing about the sellers' willingness to transact if the opportunity is missed. We just don't know yet.

I'm not arguing against the bubble. But a "bubble" can only be called ipso post facto. In fact, the definition is entirely dependent on the results after the events. If it bursts, it's a bubble. If it sloowly deflates, it's an elongated economic cycle. If it sustains, it's a New Economy®, dude!

But a “bubble” can only be called ipso post facto.

So is "murder"... :)

If the victim does not die, it is not murder!

If the victim does not die, it is not murder!

Exactly. And my pre-cog abilities suck.