patrick.net

My Future-ometer is my only clock that is never right, not even twice a day.

Between the real estate collapse, the loss of many Hummers from the portfolio, and the pending inflation with currency reset, it's probably time to take that Walmart greeter's vest out of mothballs.

This time it really is different. The great reset will make sure of that. I think the goal is to simply make it more and more difficult to purchase a home for most people. Remember, you'll own nothing and be happy.

Look at this joke of a website...http://housingbubble.blog/?p=5726&source=patrick.net

He's been predicting a crash forever. He won't even allow any kind of serious debate. I got banned simply because I said I was going to take the stance that he is wrong and has been wrong for a long time now. He banned me. What a joke.

I’m a real estate investor and flipper in the Bay Area. I live in the trenches. IMO, today’s real estate prices are ridiculous. I’m not smart enough to know when the housing market will drop/crash and how bad it would be. One thing I see is that paying today’s housing prices would make one an indentured servitude on the property taxes alone.

Patrick says

BayArea says

The regret runs deep I’m sure.

Lol, what? I retired 10 years early by renting.

Not you specifically Patrick… I’m just pointing out how much missed equity there was by renters over the last decade.

I rented a small 2bd house in San Carlos for 5yrs. The landlord made $500-600k in home equity during the time I was renting his home. That stung.

BayArea says

The landlord made $500-600k in home equity during the time I was renting his home. That stung.

Realized gains, minus upkeep and taxes, adjusted for inflation?

BayArea says

The landlord made $500-600k in home equity during the time I was renting his home. That stung.

It really depends on the time frame. I bought my shack in early 2004 and am up about 3.3x in those 18 years. But the S&P 500 is up about 4x during that time. Many things to consider when comparing the two. I'm guessing the house was a better "investment," but not but much. One problem with selling the house is that you wind up with an enormous capital gain all in one year — not good with progressive capital gains rates and extra addons in taxes in that bonanza year.

SunnyvaleCA says

BayArea says

The landlord made $500-600k in home equity during the time I was renting his home. That stung.

It really depends on the time frame. I bought my shack in early 2004 and am up about 3.3x in those 18 years. But the S&P 500 is up about 4x during that time. Many things to consider when comparing the two. I'm guessing the house was a better "investment," but not but much. One problem with selling the house is that you wind up with an enormous capital gain all in one year — not good with progressive capital gains rates and extra addons in taxes in that bonanza year.

Did you buy your house in full in the same way you bought your SP500 shares in full? Or do we need to adjust your 3.3x figure?

Most people put down 20% or less for a 5x or more lever.

Things keeping prices up:

1. Lack of supply
2. Demand (from both traditional household buyers and wealthy investors)
3. Stock market gains could easily be converted into real estate investment (in other words stock market has been like a printing press That went into overdrive since the 2008 housing crash and this inflation in stocks could and has propped up housing prices to a degree.
4. Cost of borrowing is near or lower than real inflation (partly due to low rates, partly due to endless money printing, and partly due to stock price rises which is another form of money printing).
5. In most places even the ridiculously high prices are not out of line with ridiculously high rent, but all real estate is local and therefore either local economy and salaries must justify the price or in some cases wealth from outside the community can push up prices in high demand areas. Unless salaries, wealth or rents go down, people will continue buying houses and keep prices elevated.
6. Immigrants push up housing demand, and there is no sign of slowing immigration, rather the opposite is likely, more legal and illegal immigrants.
7. Older people can’t afford price decreases as much of their wealth is in property, they often have places of power in governments and will do all they can to keep prices high.

PeopleUnited says

1. Lack of supply

Supply versus inventory - synonymous?

Yesterday's SJ Mercury News:

https://www.mercurynews.com/2022/03/15/photos-this-basic-sunnyvale-home-sold-for-close-to-3-million-800000-over-asking/?source=patrick.net

About $30k/yr in property taxes.

Your friendly neighborhood public employee unions thank you.

BayArea says

I also enjoyed reading all the perma-bear content on here then and now. The regret runs deep I’m sure.

Common Sense is not perma-bear: It's Common Sense.

Common Sense is to be willing to pay a reasonable ownership premium for the privilege of "ownership".

What is the point of the privilege of ownership? A measure of control and some stability over our living situation. We're not at the mercy of the whim of a landlord who may not renew the lease. We can predict our future payments with fixed rate mortgages and Proposition 13. These are worth paying a reasonable ownership premium, I suppose. The ownership premiums for recent buyers here in the Cool And Hip (and Smug) Bay Area are not reasonable. Just ask E-man who is an expert on this topic.

Eman says

I’m a real estate investor and flipper in the Bay Area. I live in the trenches. IMO, today’s real estate prices are ridiculous. I’m not smart enough to know when the housing market will drop/crash and how bad it would be. One thing I see is that paying today’s housing prices would make one an indentured servitude on the property taxes alone.

I suppose a reasonable argument can be made to buy a Timeshare. Privilege of ownership. Stability. A measure of control. Buying at recent prices, with the massive ownership premiums, is like overpaying for a Timeshare. (At least, for the time being, one can get out from under their "Bay Area Timeshare" by selling to a Greater Fool). You think a Bay Area home is not like a Timeshare? Try not paying your Maintenance Fees (property tax) and see what happens.

A reasonable ownership premium is probably a Good Value. A large one is ridiculous Sunk Capital.

B.A.C.A.H. says

I suppose a reasonable argument can be made to buy a Timeshare.

Never met anyone who didnt regret buying a timeshare. The costs dont make sense and the fees kill you. Many times I stay at nice hotels for free due to the travel points/credit card points. But even paying full price is still much cheaper than timeshares + you are not tied to any restrictions or hidden fees.

Timeshares are a racket.

I'd like to tell you I timed the market when I bought my first house a decade ago, but in hindsight it was a combination of luck and persistence.

There are rules of thumb that exist for a reason. Don't spend more than 30% of your monthly income on housing, purchase price should not exceed more than 2.5x your annual salary, etc. These metrics have held true for almost a century, irrespective of rates, inflation, lending policy, etc.

At some point, the price becomes too much, houses stop selling and prices drop. Two things I know to be true. First, the upside of any bubble always carries on far longer than a rational person would expect. Normally 1 to 3 years beyond "saturation", that is to say the point at which above rules are exceeded.

Second, the crash starts slow at first then occurs all at once. Cracks appear, you'll see asking prices start to drop as homes stay listed for months, not days or hours. Then something happens in thw markets that cause credit to contract and bang! Avalanche begins and prices plummet. Happened in 2008 and can (and will) happen again. Spring 2023 is my guess for when the bottom starts to drop out.... but it's just a guess.

Al_Sharpton_for_President says

PeopleUnited says

1. Lack of supply

Supply versus inventory - synonymous?

Inventory tells us who wants to sell. It is part of the equation.

But supply also includes houses that could be sold (are underutilized) and there simply is not enough houses built to meet demand, and if prices drop, demand will only go up, unless people start losing their jobs or dying.

I just don't think anyone really understands how much money is "still" made in the bay area. Apple/FB/etc..
I have friends at Apple/FB who make a good salary (but not great) but make 2-3x salary in stock - per year!
All of these engineers get stock options that are worth FAR more than their salary. We are in a localized housing bubble because of that.
I don't see prices dropping as even far left of center cities fight higher density housing and toe the NIMBY line.
I also think that this war in Eur may keep housing high here also as those tech folks immigrate out of the UKR/RUS etc.
and into the bay area. Plus chi-coms keep pouring in and buying assets in the US for protection.

Even outside of the bay area, prices everywhere are high. That is probably more of an easy money situation leading to higher housing prices.

I heard Moscow RE is a good hedge against RE collapse in the US.

PeopleUnited says

Inventory tells us who wants to sell. It is part of the equation.

But supply also includes houses that could be sold (are underutilized) and there simply is not enough houses built to meet demand, and if prices drop, demand will only go up, unless people start losing their jobs or dying.

Absolutely. But there could be adequate supply, just too many homes in the hands of second, third home buyers, hedge funds buying up RE to rent out, etc.

SunnyvaleCA says

BayArea says

The landlord made $500-600k in home equity during the time I was renting his home. That stung.

It really depends on the time frame. I bought my shack in early 2004 and am up about 3.3x in those 18 years. But the S&P 500 is up about 4x during that time. Many things to consider when comparing the two. I'm guessing the house was a better "investment," but not but much. One problem with selling the house is that you wind up with an enormous capital gain all in one year — not good with progressive capital gains rates and extra addons in taxes in that bonanza year.

Unless you paid cash. If you put 20% down, times that 3.3x by 5 or so. Also, you fixed your housing cost while rent kept going up during this time period.

My little brother got his Sunnyvale home in 2010. I believe it has 4x since. Right timing helps bigly. Sunnyvale, Mountain View and Cupertino have paid huge dividends for those who bought there. Congrats!

krc says

I just don't think anyone really understands how much money is "still" made in the bay area. Apple/FB/etc..
I have friends at Apple/FB who make a good salary (but not great) but make 2-3x salary in stock - per year!
All of these engineers get stock options that are worth FAR more than their salary. We are in a localized housing bubble because of that.
I don't see prices dropping as even far left of center cities fight higher density housing and toe the NIMBY line.
I also think that this war in Eur may keep housing high here also as those tech folks immigrate out of the UKR/RUS etc.
and into the bay area. Plus chi-coms keep pouring in and buying assets in the US for protection.

Even outside of the bay area, prices everywhere are high. That is probably more of an easy money situation leading to higher housing prices.

Options at FB granted at around May 2018 and later are out of the money.

I’m part of a real estate investing group for 12 years. It’s simply amazing looking back. In 2012, someone on the board predicted the housing market would peak in 2021-2023. 👏 👏 👏

If one knew this info and was willing to bet the farm on it, one would have been quite set now.

PeopleUnited says

there simply is not enough houses built to meet demand

Demand for what?

For housing, or for owning?

According to a ®eal Estate website, the house at 1668 Hummingbird Lane in Sunnyvale would rent for about $4200 per month, but the monthly cost to own about $13,500 per month. It's an ownership premium of about $9k per month or $110k per year.

Al_Sharpton_for_President says

Options at FB granted at around May 2018 and later are out of the money.

Yes.

I was one of those for at tech companies for decades. Lots of hyperbole and BS when discussing it from the sidelines.

Eman says

I’m a real estate investor and flipper in the Bay Area. I live in the trenches. IMO, today’s real estate prices are ridiculous. I’m not smart enough to know when the housing market will drop/crash and how bad it would be. One thing I see is that paying today’s housing prices would make one an indentured servitude on the property taxes alone.

Fed hiked interest rate quarter percent. I was hoping they would hike it a lot more to deal with inflation so we can stabilize everything.

Everything is insane lately.

Fortwaynemobile says

Eman says

I’m a real estate investor and flipper in the Bay Area. I live in the trenches. IMO, today’s real estate prices are ridiculous. I’m not smart enough to know when the housing market will drop/crash and how bad it would be. One thing I see is that paying today’s housing prices would make one an indentured servitude on the property taxes alone.

Fed hiked interest rate quarter percent. I was hoping they would hike it a lot more to deal with inflation so we can stabilize everything.

Everything is insane lately.

The general consensus of the Federal Reserve board is 7 rate hikes this year. There’s no rush for a big hike now as the entire world is unstable at the moment.

BayArea says

I rented a small 2bd house in San Carlos for 5yrs. The landlord made $500-600k in home equity during the time I was renting his home. That stung.

The question is what you would have made in an index fund over that time period.

I know for a fact I've done better in the stock market than I would have in housing.

BayArea says

Did you buy your house in full in the same way you bought your SP500 shares in full? Or do we need to adjust your 3.3x figure?

Most people put down 20% or less for a 5x or more lever.

That's why, after stating the house went up 3.3x and the S&P went up 4.0x I stated that the house was probably the better investment. I had originally written out another paragraph about 20% down creating 5x leverage whereas I would have been buying the S&P every month with the money saved from not paying the mortgage, taxes, upkeep, etc. Plus the mortgage rates are somewhat subsidized by the federal government with Freddie and Fannie.

Actually, I did pay off the house after about 15 years rather than dealing with getting another refinancing. I figured my investment portfolio was 100% stocks and no bonds... not paying on a 4% or 5% mortgage is as good as having a 2% or 3% bond.

An additional consideration with an expensive house is that selling it is all-or-nothing. That's going to be one heck of a capital gain! Here in California capital gains are progressively taxed, so better to spread them out over a few years. I think there's also a 3.8% Obamacare™ tax on large capital gains. Oh.... my stock broker charge $7/trade commission, but I'm pretty sure I can't get the real estate cartel down that low!

Patrick says

BayArea says

I rented a small 2bd house in San Carlos for 5yrs. The landlord made $500-600k in home equity during the time I was renting his home. That stung.

The question is what you would have made in an index fund over that time period.

I know for a fact I've done better in the stock market than I would have in housing.

The ownership premium over rent that recent buyers are paying for mortgage interest and property taxes is money they are neither saving nor investing.

They are not investing it for their retirement nor their kids' college fund.

Nor are they spending it.

They are not spending it for childcare, private K-12 tuition or private lessons.

They are not spending it for Status Symbols like Teslas, and they are not spending it for $6 per gallon gasoline for driving to work.

They are not spending it for vacations.

They are not spending it for food which is going up a lot with inflation.

Nor are they saving it to spend on those things, and they are not saving it for a period of unemployment.

They are spending it, Sunk Capital, pissed away for an excessive ownership premium. Like a Timeshare.

B.A.C.A.H. says

They are not investing it for their kids' college fund.

Does a primary residence count as "net worth" when applying for financial aid? Sinking all your spare money into your house might be the perfect way to look poor to the college.

SunnyvaleCA says

BayArea says

Did you buy your house in full in the same way you bought your SP500 shares in full? Or do we need to adjust your 3.3x figure?

Most people put down 20% or less for a 5x or more lever.

That's why, after stating the house went up 3.3x and the S&P went up 4.0x I stated that the house was probably the better investment. I had originally written out another paragraph about 20% down creating 5x leverage whereas I would have been buying the S&P every month with the money saved from not paying the mortgage, taxes, upkeep, etc. Plus the mortgage rates are somewhat subsidized by the federal government with Freddie and Fannie.

Actually, I did pay off the house after about 15 years rather than dealing with getting another refinancing. I figured my investment portfolio was 100% stocks and no bonds... not paying on a 4% or 5% mortgage is as good as having a 2% or 3% bond.
...

Stock trading should be done by the individual and always for free. If you must invest in funds for your 401k or otherwise have zero time or knowledge, then choose those funds carefully. Many constantly underperform. It's true that with a house/mortgage you can get much better leverage, but even with stocks you easily get 2:1 which is a good starter leverage as it works both ways. If you get to live in your house that leverage is worth it as you can walk away in the rare event there is a housing bust or other monetary issues and you saved the rent. For investment properties the math is not that rosy imo and highly depends on interest rates. I could pay off the primary residence but at 3% interest I make more money in the market. Now that rates are rising I expect a slowdown, but with these small hikes it will take a while to have any significant effect. At least this year I predict high growth in the double digits fueled by inflation and a run on securing fixed mortgages.

Investing in stocks vs real estate:
Only idiots leave equity in real estate.
You refinance and take all your money back out, as well as tax-free profits as soon as equity is high enough to do so.
Then you re-invest all that money into either more real estate or stocks, if you go with more real estate you repeat this process over and over.

In case you can’t hang in there financially when the market nosedives, just send the keys to the bank, they will eat the loss for you (try that with stocks, lol).

If you rent, 100% of your money is LOST forever, you have to deal with huge annual rent increases and get kicked to the curb when your Lord wants to sell to cash out his huge profit after you paid off his house for him.

JimSpatzenfeld says

If you rent, 100% of your money is LOST forever

But it's less money that I would have lost by owning.

Try the NY Times rent-vs-buy calculator:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?source=patrick.net

Takes leverage into account as well.

So, rates finally go up after 3 years. And will be raised 6 times this year.

https://citizenfreepress.com/breaking/federal-reserve-raises-rates-for-first-time-in-3-years/?source=patrick.net

Nothing a few more million illegals can't cure.

Patrick says

WillyWanker says

I am now living between homes in Spain and Andorra.

That sounds interesting. How are prices and rents compared to here? Do you own or rent there?

Do you have Spanish or other EU citizenship?

I'm currently renting while my main residence is being remodeled to my specifications. I had been hoping to purchase some rental units but I don't think I will be going that route. I lease an 1800 square foot apartment in Barcelona's best street, Paseig de Gracia, for 3000k euros per month. I'm sure I'm paying total gringo prices but it's fully equipped with everything so I just needed my suitcase and carry-on while my stuff is coming in a container later this year. This apartment would probably sell for 2.5M euros so that should give you an idea of what you get if one thought of it as an investment. I have Spanish and Andorran citizenship through descent.

RE Prices in Europe are even more ridiculous than in the US. Higher density and low rates. In Germany their mortgage rate is 1.5%.
Great discounts on Ukrainian Real Estate though.

WillyWanker says

This apartment would probably sell for 2.5M euros so that should give you an idea of what you get if one thought of it as an investment.

This is called cap rate compression. All the money floating out there is looking for a home (yield). All assets are competing for the same pool of money. This is why prime real estate will always command a premium price (low yield/return).

Using the NY calculator is the wrong approach. Palo Alto assets will never trade for the same cap rate as Stockton or Modesto.

Patrick says

Try the NY Times rent-vs-buy calculator:

I can't tell, does NYTimes include the SALT caps these days?

EBGuy says

Patrick says

Try the NY Times rent-vs-buy calculator:

I can't tell, does NYTimes include the SALT caps these days?

No. They handle taxes by just a marginal tax rate box. I'm not really sure how its used (i.e. is it used just for computing cap gains upon the sale, or possibly on other calculations?)

They have separate fields for property tax, and the 250k cap gains deduction. But no SALT or other tax specifics.

IMO tax implications are a very underrated / underutilized factor when comparing investments. They can significantly alter the "which is better" calculus, and especially on RE where you tend to have massive cap gains in a single year, making you an "evil rich fuck who needs to pay their damn fair share of taxes" for that 1 year. Of course, sometimes those cap gains are really just 30 years of 3% annual inflation, looking impressive, but little growth in real value, but youre still an evil rich fuck for the year.