patrick.net

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.

And my pre-cog abilities suck.

Try to improve them. They come in handy. ;)

What determines the “expectations” price (whether going up or down) is the price that sellers who _close_ accept.

For those sellers who do not close, no coffee for them! Coffee is for closers!

Well there you are, tied to the train tracks of “progress,” and isn’t that a whistle I hear back around the bend?

Heh. Well, yeah. Semantics aside, lots of people could get creamed.

Myself among them, but I don't really think about it that way. It's clear to me that housing is overpriced. I expect a reversion to the mean (however quickly or slowly), and I expect five or ten or more years of net (personal) asset value quiescence.

From an opportunity cost perspective, I expect to get creamed. But that's not tremendously important to me. I optimize for other variables.

What determines the “expectations” price (whether going up or down) is the price that sellers who _close_ accept.

Yes, for the next batch of sellers. What determines the "expectations" price for the current (and growing) batch of sellers, is the price that sellers who _closed_last_quarter_, roughly, accepted.

Anyway, this isn't really a big point I'm trying to make. The big one is: we don't know. Some portion of today's sellers (of non-new units) may only be selling because they think now (last quarter) is the best offer they'll get for years, so they might as well pack up a bit early. We don't know. I don't know. Maybe you do. I don't think so. But we all will, soon enough.

...for perspective, I say this as a one who was a potential seller last summer. I decided that I should either sell around June or wait ten years. I decided to wait. Obviously, not everyone has the flexibility to plan that far ahead, but in this case, I did. I have no idea how unusual I am. But I've heard whisperings...

The first sale of the day on the stock exchange provides a good visual example. Sometimes we’ll see by a gap in a graph where a certain stock opened much below or above any price on the previous trading day.

I thought the official "opening price" is determined using prices within a time period.

f I even suggest the Sacramento market (where I live) could go down 30% around here people still think I’m crazy. Though people who live in the BA don’t seem to find the scenario hard to believe because they don’t live here.
But why is 30% so hard to believe is possible?

Because where we live is a "special" place--where prices never go down. Therefore, that's like money in the bank...let's cash it out! My HELOC is my friend; it would never bite me in the ass.

I've never trolled before, so here goes...

"In 2003, I could have bought a 3,000 sq. ft. Mcmansion in San Jose for only $50k. I didn't because Peter said we were at the top of the housing bubble and I would be a stupid loser to risk it.

Today, that very same Mcmansion was just listed for $65.5 million. I could have retired in opulence, splendor and ennui. Now I've got to flip burgers for a living.

Damn you Peter!"

Just kidding!

How was that troll?

I didn’t because Peter said we were at the top of the housing bubble and I would be a stupid loser to risk it

Huh?

I'm sure MichaelHolliday was just having some fun with the whole "evil twin" thing. Funny though how so many bloggers confuse Peter P with Patrick.

Hey, come to think of it, I've never seen them both post on the same thread before. Could it be.... ?

But why is 30% so hard to believe is possible? The house I live in would have sold in the mid $200k range five years ago and now would probably sell for approx $500K. The house has doubled in value in five years but to suggest a 30% correction is looked at as absurd. Why is that?

Yes...... People always think it can't go down....not here....... It's funny though how people were buying houses at such a high rate that the supply was so tight causing bidding wars to take place..... People would pay unbelievable prices on houses I wouldn't even want to live in if they were priced right. Some people would even buy a house without even looking at it for fear that they might miss out on getting (any) one. Realtors and builders saying that prices will keep going up because there will always be high demand...and don't forget that population is growing like never before........now, everyone is selling and noone is buying! What happened to this growing population that are supposed to keep the inventories tight? Did they all just die in mass suicide?

Now it looks like the exact opposite, this is why I say the bubble had already popped. This time of year most people wouldn't list there house because it show desperation.......but look how many are anyway! There are so many speculators that are trapped in the market (it shows), they were flipping houses back and forth to each other like playing musical chairs, but the music has now stopped! "What do you mean this starter house isn't worth $500k?" Now the psycology is changing and will be more pronounced come spring....and I think the sellers are going to be more desperate this spring when they dragged through the winter without a bite.... at the same time interest rates will be higher which will put even more downward pressure on prices.

I’m sure MichaelHolliday was just having some fun with the whole “evil twin” thing. Funny though how so many bloggers confuse Peter P with Patrick.

Again, P does not stand for "Patrick". P stands for "Peter P".

Huh. Not what this said. I’ll keep looking for it. How does the formula work?

I thought the "open" price is the average of all prices record in the "opening range", which contains prices at which orders are filled at the "open". Perhaps I am mistaken.

Does anyone know?

Look for BA press release tomorrow.

Want to read tomorrow's news today? I can give this predition:

Indicators of market distress are still largely absent.

In the not so distant future, expect to hear:

"Bay Area Housing Prices Up"

"... prices are still up more than 10% from 1995 ..."

If you are not planning to sell it soon, if you really want to own a home and maybe live till you die there, I think it’s still ok to buy a reasonably priced house now.

True. Couple things though...

1) Use 15-YR FRM to determine affordability
2) Do not assume tax deductibility
3) The house must be adequate for at least 10 - 15 years, do not buy a "starter" house

** NOT INVESTMENT ADVICE **

I still remember back in 1980s, when my father was complaining how much he needed to pay the mortgage, that was only $600.

It is not about the amount. It is about valuation.

but you see, everyone is paying very much the same amount of mortgage, so it’s just like part of life

Really? Perhaps every recent homebuyers in a few states are paying that same amount...