patrick.net

Eman says

I understand your point about “timing the market” although most of us will try myself included. 😅

I assume most of the interest rate timing is arbitraged out of the market already. When interest rates are 7%, people with cash may buy houses for cash instead of parking their cash in 4% bonds or in speculative stocks or commodities. With today's general inflation rates, a house offers a decent hedge.

Another thing to consider is that a 7% mortgage rate is excellent when compared to general inflation.

Rubicon says

“7. Yes, of course inventory matters also but, haven't we agreed that inventory is low because people do not want to give up that sweet sweet low rate?”

No. This makes zero sense:
When a seller sells a house he is traditionally a buyer also.

You sell one: +1 to inventory
And you buy one: -1 to inventory
Net inventory doesn’t move.

Inventory increases if more people die or due to massive unemployment or due to builders building a lot more.

More activity does increase inventory. During that matched sell/move/buy scenario, there's a month or two when the house you are exiting is for sale and the house you are buying is also for sale. If the average person stays in a house for 7 years and the average house is on the market for a month that means 1 month out of every 84 months the house is on the market --> 1.2% of all houses are for sale at any given time. If people stay in houses for 10 years, that drops to 0.8% of houses for sale at any given time.

The numerator of that equation (months on market) also swings the numbers; if houses sit on market for months at a time, inventory will be seen as high. I've been watching the $1MM to $3MM houses in Florida for a few years. There, asking prices have been dropping as these behemoths sit vacant for many months; some, even years!

I'm wondering if home ownership (verses renting) will follow the model of many other aspects of life over the last hundred years: mass production and specialization. In the most obvious example: We no longer grow our own food. Instead, a small number enormous farms with highly specialized equipment efficiently perform the task and have freed up 95% of the country's population to do other things.

In the case of real-estate, the specialization would take the form of more rentals and fewer owner-occupied houses.

I'm seeing more and more homeowners who are incapable of maintaining their own home (other than getting on the phone and paying someone else at great expense). If not for the (seemingly) ever-increasing price of real-estate in this area, owning a home would be much more costly than renting and letting a professional manage the maintenance more efficiently. I dated a woman who owned a dozen rentals and managed another twenty for other people. She spoke Chinese and Spanish and had a slew of personal contacts to fix or maintain at 1/2 cost just about anything related to properties.

The reason I mention activity (which I also mean transactions) is because churn helps the economy.

SunnyvaleCA says

Another thing to consider is that a 7% mortgage rate is excellent when compared to general inflation.

Honestly it's just an average interest rate. I think many of us are 60 or under. We got spoiled.



It stings to see them go up so much, but most of all our adult lives they've been historically low. This is why I don't get some of the doom and gloom. It will pause housing inflation to an extent but there are just too many other factors. NOT BUILDING being the biggest where I'm at. Houses last days in my town still unless they're shit holes. Anyone building in town, 4 homes over the last 3 years, is moving from another home that they sold. Inventory can't increase unless it's in another town or city.

GNL says

Question: is it better to buy when rates are high or when they're low?

@GNL If you can pay cash, it's way better imho to buy when rates are high.

Then:

1. You personally don't have to pay those high rates.
2. The house price you pay will be lower because high rates push prices down.
3. When rates eventually fall, you should have increased equity from the falling rates pushing prices up.

Patrick says

1. You personally don't have to pay those high rates.

This is true, but I'd still get a loan and save all the other cash for other opportunities and still have a roof over my head.
Patrick says

2. The house price you pay will be lower because high rates push prices down.

I don't think it will in many markets. You median home price in most of flyover country is probably $250-300k. It hits the expensive markets waaaaay worse than most of the country. Going from a 3.5% to 7.5% isn't all that big of a deal on a $300k home. And if they're not building new ones, there will be no downward pressure.
Patrick says

3. When rates eventually fall, you should have increased equity from the falling rates pushing prices up.

And this is when you get a HELOC or cash out refi and pay yourself with other people's money (banks). Obviously don't be a moron and leverage yourself to the gills, but if the payment goes down because interest rates do give yourself a tax free paycheck of $20k or whatever your equity is. That's what investors do. They then roll it into another cash flowing property or flip.

This why owning is so important in my opinion. Every 10 years you have an opportunity to cash out refi and your house pays you tax free money. You can't do that renting. I don't even care about the rent to own comparison at my stage in life. If you're going to be there 10 years, buy it. Principle is savings and it will almost certainly appreciate. Just don't go overboard buying more house than you need. Or some hipster area.

WookieMan says

And this is when you get a HELOC or cash out refi and pay yourself with other people's money (banks).

If you are taking this HELOC from your residence, it is not "other people's money." It is a loan you have to pay back with interest, and for most of the country that interest is not deductible because of today's high standard deduction. No different buying that new truck with HELOC than financing it through Ford Motor Credit.

HeadSet says

WookieMan says

And this is when you get a HELOC or cash out refi and pay yourself with other people's money (banks).

If you are taking this HELOC from your residence, it is not "other people's money." It is a loan you have to pay back with interest, and for most of the country that interest is not deductible because of today's high standard deduction. No different buying that new truck with HELOC than financing it through Ford Motor Credit.

If taking a HELOC for investment, it's assumed the new investment will produce enough income to repay the HELOC. Now you have 2 investments (RE) and you didn't have to come up with any cash. 2 REs going up $20k is better than only 1 RE going up $20k.

This is why I've been making fun of @Rubicon when he said he didn't care if he lost equity if/when RE goes down. Laughable because in the next breath he talks about using equity in his RE to purchase more RE. This is but one reason I think he is a chest pounder. @Wookieman and @Eman are better to listen to.

If you can save by renting, you should rent. If it's cheaper to buy, you should buy. The calculation is not very hard, but there can be a lot of details:

https://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

Basically, compare the rent to the current interest rate. Rent and interest are the same kind of thing. If the rent for a house is not in line with the interest payment on what the house would cost to buy, something is wrong - and there is an opportunity.

The stock market has almost always been a better bet than housing, though not leveraged. That's OK, because leverage is dangerous.

“I’ve seen more people fail because of liquor and leverage — leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” - Warren Buffett

Rubicon says

“This is why I've been making fun of Rubicon when he said he didn't care if he lost equity if/when RE goes down. “

You don’t lose equity just because your house price goes down. That’s like noob/rookie level. Homeowners don’t treat their house like a stock and sell shortly after they buy. Do you own a house? Do you tell you friends: my Zillow value went dont a % point. They’d laugh at you. Have you ever heard someone writing off an unrealized loss on a house?

In most cases you make money in RE if you hold on for the long run. Believe me kiddo, nobody is going to go for your “I lost equity BS statements”. Just wake up, stop renting, get yourself a house and forget the noise. No reason to overthink this and make the same noob comment over and over again.

I'm not a RE investor and I do own a mortgage. But again you missed the point. I'm pretty sure you said you shouldn't be too concerned if your investment doesn't produce enough to pay the loan even. We are unquestionably in a unique time when it comes to RE though. The government is out of control and causing all kinds of problems. I do believe most of these problems all tie together. And you keep going back and forth between homeowner and investor when I'm debating the investor position. Yes, even though I'm not an investor. LOL

Patrick says

“I’ve seen more people fail because of liquor and leverage — leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” - Warren Buffett

Depends how you invest the money saved by renting and not buying. I'd at least put it in a 60% stock / 40% bond fund.

.

Rubicon says

“More activity does increase inventory.”

More activity gives you more choice. It means more for sales signs. It’s a good thing but it doesn’t move the active inventory number higher. I don’t care if there is a month or two delay in selling and buying. Often, you purchase while you haven’t sold your house yet.

Taking one off the market and adding one doesn’t increase inventory, no matter how you spin it.

Right from the NARs website: "NAR’s reported inventory indicates the number of properties marked as “active” on the market, as well as pending sales. When a seller lists a property, it becomes counted as inventory. When it goes under contract, it becomes a pending sale. Inventory is calculated monthly by taking a count of the number of active listings and pending sales on the last day of the month."
https://www.nar.realtor/blogs/economists-outlook/inventory-and-months-supply

So, more For Sale signs means more inventory, assuming more For Sale signs doesn't also mean a reduction of time the house is listed for sale. More For Sale signs on the last day of the month is, by NARs specific calculation of the figure, more inventory. Even if you purchase a house before selling your existing, that house you purchased was counted as "Inventory" before the sale went through. I think we're merely arguing at the definition of "Inventory," but without further information, I'll side with the NAR with respect to the common meaning of that word in real estate.

I see the misunderstanding on Rubicon. I’ve come across similar people locally and on BiggerPockets. He’s likely a high income earner and buys investment property with his savings, one rental at a time. If he gets equity from appreciation, it’ll help him scale up and buy more rentals at a faster pace. If not, he’ll just hold and buy another one whenever he has enough capital for the next down payment. For this reason, most retail investors only own a handful or less rentals by the time they’re retired. Theres only so much we can save from our W2. There’s no scale.

Real estate is about control and leverage. Control the asset and leverage the debt with bank’s money. If we buy a $10M worth asset and be all-in at $7.5M through value-add and/or appreciation, we can refinance it and essentially have it 100% financed. Take our seed capital and put toward the next project. Rinse and repeat.

If history is any indication, a $10M asset will worth $20M in 15 years and $40M in 30 years. The $2.5M sweat equity has grown to $40M. Scale it and do one building every 3 years, how much would we would in 30 years? How much would the cash flow be then?

One penny, which compounds every day for a month (30 days), will be over $1M. The power of compound interest. The power of control and leverage. Let time do the heavy lifting. It’s like planting a tree. It’s a one time effort while we get to harvest it for the rest of our lives.

SunnyvaleCA says

NAR’s reported inventory

It is all based on the number of full-time and non-vacant (i.e., not AirBnb) homes versus the population.

Are we creating a nation of boarding houses where some working class individual is force to live in a boarding house instead of being able to buy their own cottage or small home ?

There are a lot of empty homes that are second homes and some are vacation homes.

I see a lot of homes going up in Panama City Beach that are AirBnB or vacation homes. Hopefully the growth of these type of homes will slow or stop, and some owners may find it economically better to just rent these homes full-time.

What percentage of the housing starts are for vacation homes or second homes owned by the rich or upper middle class ?

,

My friend sent this to me. $750k for this fixer upper in East San Jose, blue collar working class neighborhood. These houses were selling for $250k during the last downturn. I’m sure someone will buy it.

https://redf.in/0DhS69

Eman says

My friend sent this to me. $750k for this fixer upper in East San Jose, blue collar working class neighborhood.

Its appreciated about 5% annually since 1998. I recall Professor Shiller stating the long term (+50 years) median annual appreciation is 4%.



.

ad says

Eman says

My friend sent this to me. $750k for this fixer upper in East San Jose, blue collar working class neighborhood.

Its appreciated about 5% annually since 1998. I recall Professor Shiller stating the long term (+50 years) median annual appreciation is 4%.



.

@ad,

This is Rubicon’s point about buying and dollar cost averaging as we don’t know where the top and bottom are. For me, as long as the numbers penciled out, I would be a buyer regardless of where we are in the cycle of the housing market be it high or low interest rates. Do you remember if real estate in the Bay Area was expensive in 1998 with 8% or so mortgage rate?

From an owner’s POV, 20% down payment with 5% annual appreciation = 25% ROI given it’s leveraged 5:1. Also, the monthly mortgage payments are fixed for the next 30 years, which means no rent increases.

From an investor’s POV, the ROI is 20% with 25% down payment given it’s leveraged 4:1.

This is why the mom and pop investors are more comfortable with real estate investing. They can understand the numbers more easily.

For my partner and I, we try to use this formula with some scale to own more rentals. The value-add/forced appreciation is where it allows us to recycle our seed capital. That’s all there is to it. It’s not rocket science.

Eman says

That’s all there is to it. It’s not rocket science.

Yes, I see as far as the banks willing to lend money and just require the landlord investor to provide only a 25% down payment.

The landlord increases their portfolio of rentals each with only a 25% down payment (or use of collateral).

Total net income and equity nearly exponentially increase as the size of the landlord's portfolio of rental properties steadily increases.

The closest I'd ever come to this is to use a HELOC to invest in the S&P 500 for at least 7 years and earn an average real annual return (i.e., S&P 500 index fund annual return minus the HELOC interest rate) of around 4%.

That is the closest I'd come as far as earn money off OPM (others people money), or through leverage.

With interest rates likely to decrease by 2024, I'd look into maybe a bond fund like Vanguard Total Stock Market Bond fund or ETF also, such as invest 70% in the bond fund and 30% in the S&P 500. This seems like a safe gamble to make easy money off leverage or borrowed money.
.

“The closest I'd ever come to this is to use a HELOC to invest in the S&P 500 for at least 7 years and earn an average real annual return (i.e., S&P 500 index fund annual return minus the HELOC interest rate) of around 4%.”

@ad,

In the last decade, I know folks in the Bay Area, who used their HELOC money @ 3%…ish and lent it out at 10-12% through a private mortgage broker and made the spread. The broker charged 1-2%, aka points, for the loan to the borrower. Most of these loans were short-term 6-18 months.

With HELOC at 8%…ish now, it no longer makes sense to take the risk. This puts a liquidity constraint to the real estate market.

Eman says

With HELOC at 8%…ish now, it no longer makes sense to take the risk. This puts a liquidity constraint to the real estate market.

Yes, but there is at least a 4% spread between HELOC rate and the S&P 500 index annual return.

Its free money essentially as there is no collateral or cost basis. Its like winning $20,000 with a $1 lottery ticket for a HELOC with a 2 year term.

I see as some investors like you would want a larger spread than 4%.

.

WookieMan says

Renting is a lose/lose if you need stability. I'm not trying to change your mind. I'm just saying as an owner, it doesn't make sense to me having done both. You do you. Fact is there are cheaper places to own by a long shot outside of CA or even AZ or any West of the Rockies state, CO included.

This. I rented my whole life until last year. I'll NEVER go back. Owning is bomb but I also bought beneath my means in an amazing area and I have lots of cash to do stuff to the house. I get to modify my castle just the way I want it and no one (landlord) can easily take it away from me as long as I pay my fixed payments. Being a landlord's bitch is emasculating.

Eman says

One penny, which compounds every day for a month (30 days), will be over $1M. The power of compound interest. The power of control and leverage. Let time do the heavy lifting. It’s like planting a tree. It’s a one time effort while we get to harvest it for the rest of our lives.

Actually, it's 10 million! But what's an extra zero between friends? :-)

SunnyvaleCA says

Eman says

One penny, which compounds every day for a month (30 days), will be over $1M. The power of compound interest. The power of control and leverage. Let time do the heavy lifting. It’s like planting a tree. It’s a one time effort while we get to harvest it for the rest of our lives.

Actually, it's 10 million! But what's an extra zero between friends? :-)

@SunnyvaleCA,

You’re absolutely correct. You actually took the time to do the math. It seemed outrageous to me when I first heard of this concept too so I also did the math. 🤣

It goes to show the power of compound interest. I’m glad I figured this out early enough and coupled it with the opportunity of the housing crash, which had allowed us to grow our little pile of savings exponentially in a short amount of time.

My wife asked me what would it take for me to go back to a W2. I said at least an 8-figure salary. 7 figures won’t do it. I’m at that point in my life where I realize our time on this earth is finite, and we can’t buy our time back once it’s gone. The pay scale is based on how much we believe our time is worth.

Interesting observation as housing accounts for 33-42% of the CPI. OER = Owners’ Equivalent Rent.

https://x.com/joecarlasare/status/1690715526211817472?s=46&t=5lEEPaezr6Ic-W4Z6huZ5Q

.

Morningstar predicts a 5% rate for 30 year mortgage in 2024. Goldman Sachs predicts 5.9%.

I figure peak prices in early 2022 were based on a locked-in mortgage rate of 4%.

So prices need to drop 20% if the 30 year mortgage rate is 6% based on housing affordability, that is a 10% drop in price for a 1% increase in the 30 year mortgage rate.

The price drop may be 18.2% by discounting for wages and income rising about 6% in 2022 and 3% in 2023.

20% x .94 x .97 = 18.2%

.

https://finance.yahoo.com/news/housing-market-outlook-where-expect-162543246.html

.

Eman says

Interesting observation as housing accounts for 33-42% of the CPI. OER = Owners’ Equivalent Rent.

https://x.com/joecarlasare/status/1690715526211817472?s=46&t=5lEEPaezr6Ic-W4Z6huZ5Q

I notice rent is at same price level as 2022. As housing may stay flat for a few years, while income rises about 2.5% to 3% a year. I am hoping income catches up more to housing.

3 bedroom, 2 bath, 2 car garage townhome about 2 miles from the beach in Panama City Beach rents on average for $2150. Rent was around $1500 back in 2016 for the same type of townhome.

.

.

https://traffic.americanmilitarynews.com/2023/08/us-debt-downgrade-means-mortgages-just-got-more-expensive/

For 30-year rates, however, the most relevant benchmark is the 10-year Treasury yield.

That brings up a quirk of post-pandemic mortgage rates: The gap between 30-year mortgage rates and the 10-year yield is unusually wide.

This interval, known to economists as “the spread,” typically runs between 1.5 and 2 percentage points. If the 10-year yield sits at 4%, for example, the 30-year fixed mortgage rate should track close to 6%.

However, the spread has jumped to more than 3 percentage points — the highest level since the darker days of 2009, according to Bankrate research. That means that instead of a 4% yield translating to a 6% mortgage rate, borrowers are paying 7% for 30-year loans.

,

https://sfstandard.com/2023/08/15/over-50000-to-lose-coverage-as-two-home-insurers-exit/

Two more insurance companies will exit the California homeowners market, further narrowing options for people seeking to insure their home or to purchase a house with a mortgage.

AmGUARD Insurance—a subsidiary of Berkshire Hathaway GUARD Insurance Companies—will withdraw its homeowners and personal umbrella programs in California, while Falls Lake Insurance will also end its homeowners program.

Both companies made the announcements in little-noticed filings submitted to the state regulator on July 21.

The two companies are the latest insurers to rush for the exits in California or limit their business in the state during the past year. But unlike heavyweights State Farm and Allstate, which declined to sign new homeowners business in the state, AmGUARD and Falls Lake will drop their existing policyholders.

That will force tens of thousands of California homeowners to seek new coverage at a time when the available options are growing fewer.

True, mortgages are often contingent on insurance coverage, and that just got harder to get.

This seems certain to add downward pressure to house prices in California.

Why are they leaving...fires?

Patrick says

That will force tens of thousands of California homeowners to seek new coverage at a time when the available options are growing fewer.

And that coverage will have very high deductibles. Also, you may see the State of California sell policies of last resort.

HeadSet says

that coverage will have very high deductibles

Yup.

Our earthquake policy has a $30k deductible. Chump Change to techies I suppose.

.

https://www.foxbusiness.com/economy/housing-starts-rise-more-expected-july-despite-rising-mortgage-rates

New U.S. home construction ticked higher in June after declining the previous month, even as the housing market continues to confront headwinds like higher mortgage rates.

Housing starts rose 3.9% last month to an annual rate of 1.45 million units, according to new Commerce Department data released Wednesday. That is slightly above Refinitiv economists' forecast for a pace of 1.44 million units.

.

GNL says

Why are they leaving...fires?

@GNL

https://abcnews.go.com/US/wireStory/california-insurance-market-rattled-withdrawal-major-companies-99855058

Two insurance industry giants have pulled back from California's home insurance marketplace, saying that increasing wildfire risk and soaring construction costs have prompted them to stop writing new policies in the nation's most populous state.

Economists say 30 year mortgage rate could hit 8%. I wonder if the plan is to crash the economy by end of this year and then have a rigged or phony recovery at least 3 months before the November 2024 election.

https://www.marketwatch.com/story/mortgage-rates-could-hit-8-economists-say-citing-a-worrying-sign-not-seen-since-the-great-recession-edf2b4a4

Patrick says

Two insurance industry giants have pulled back from California's home insurance marketplace, saying that increasing wildfire risk and soaring construction costs have prompted them to stop writing new policies in the nation's most populous state.

Darn. I thought they would start offering DEW insurance.

Other people are still out there hustling the real estate market. Hard money loan at 9%.

https://www.linkedin.com/posts/marshall-reddick-real-estate_hardmoney-realestate-hardmoneylender-ugcPost-7095494366013571073-3imo

I paid $890,000 for Home Last Year, Now It’s Worth $600,000

https://www.youtube.com/watch?v=2qYsG8jWy_Y

Rubicon says

Anyone forecasting a RE crash would need to have an idea of how inventory is supposed to skyrocket from todays levels:

What an interesting chart. The bottom of the 1990’s housing market was around 1993-1994. It coincided with the lowest inventory at around 1.5M. Then inventory started to build while prices also climbed gradually. Then in late 1990’s, housing prices started to go ballistic due to the dotcom boom and coupled it with gradually declining inventory.

Then the dotcom bust and 9/11/2001. Housing prices took a little dip, then took off again till 2006-2007, likely due to easy lending (aka NINJA loans), while inventory building. Then the bottom fell out with NINJA loans and housing inventory soared to all time high with distressed sales for a few years…an opportunity once in a lifetime. New construction came to a screeching halt. Home builders have been extremely cautious since.

Now, record low inventory, strict lending requirements for the last 1.5 decades, home builders are not over building, we need massive job losses to create distressed sales.

Eman says

we need massive job losses

Wishing that is Bad Karma