patrick.net

also, i truly don't care what any of you do with your money - i'm just interested in the theory/strategy behind the moves. i would REALLY like to know about the risk mitigations...

landtof If 100% cash paid. 24k in annual rent vs. 400K house is about 6% yield. Less property tax, insurance and maintenance, the net yield is closer to 4%. Then there is the benefit of cash flow through tax deferral of depreciation and ability to pretax expense. An equilvalent investment may need to return 6% to be comparable from a cash flow perspective. With an average mortgage, it depends on interest rate. A 320K mortgage @4.625%, interest, tax and insurance is around 1800, with tax benefits, ITI may be as low as 1400. that's a 7200 return on 80000 investment, A ROI of 9%. Leverage increase margins. It really depends on a lot of other factors including tax bracket, AGI, and other passive income. If paid in full. Income will be net rent less interest, tax, insurance and deduction, direct expense and the non cash expense like depreciation. With investment properties, you do want to account for a margin of safety but rents are pretty stable. For the most part, the best yields are also the worst place so I don't overweigh yields. When I read financial statements of a REIT, I start with cash flow, balance sheet than income/loss. Cash flow in rental property is the key metric. Most renters are renters because majority of them are check to check and are really stuck. If they can get a loan, they will surely buy in this environment. The big drawback is housing is not very liquid currently. It is hard to undo a transaction. That is essentially why most people put down as little as possible to secure the best rates. If you invest for cash flow, the capital will take care of itself. As rob points out there are risks involved and that is why it is not a good idea to go "all in", but there are plenty of rewards as well.

SF ace says

If 100% cash paid. 24k in annual rent vs. 400K house is about 6% yield. Less property tax, insurance and maintenance, the net yield is closer to 4%. Then there is the benefit of cash flow through tax deferral of depreciation and ability to pretax expense. An equilvalent investment may need to return 6% to be comparable from a cash flow perspective. With an average mortgage, it depends on interest rate. A 320K mortgage @4.625%, interest, tax and insurance is around 1800, with tax benefits, ITI may be as low as 1400. that’s a 7200 return on 80000 investment, A ROI of 9%. Leverage increase margins. It really depends on a lot of other factors including tax bracket, AGI, and other passive income.

you're basing almost every positive on tax benefits. need to investigate further. at face value, the perspective doesn't entice on it's own (without the tax code loopholes), and still appears to leave little room for error, like a major price adjustment. SF ace says violently disagree that renters of 3/2 homes in decent neighborhoods are stuck.

Most renters are renters because majority of them are check to check and are really stuck

More mice taking the bait. Tax credits and false consumer confidence. We will see how the story holds up next month.

I always like to see three data points before I call a trend.

I agree---there will be a few months of weak housing numbers. The government $8K certainly pulled ahead some demand. The question is really--what will happen 6 months from now?

I think the answer to that depends on what other government actions are put in place to prop the market up further. Without additional incentives or delaying tactics the trend should be clear.

tatupu70 says

thomas.wong1986 says

Lucky for the car buyer, you will never hear that from car salesman. Its first come first served.

Not sure what you mean about first come, first served [. . .] if you are offering less than sticker, then the car dealer can always say that he has another customer interested and decline your offer. You can either raise your offer or walk away–just like you can with a house.

Actually, cars are not like houses in this scenario. There's always 5 more Dodge Watermelons in Sensible Silver coming on the trailer tomorrow, so bidding wars do not happen on a dealer lot. You can't have bidding wars on an item that is mass produced and instantly available in multiple quantities. A dealership'll take any reasonable offer, and usually pad the backend on the payments and financing to make up the differeance--not to mentinon screwing you on the trade-in for good measure. Believe me, car salesmen *are* first come, first served, as they are trained not to let you off the lot without buying. Like used-home salesmen, car salesmen have their own tricks and games, but bidding wars is not one of them. Tenouncetrout says

There was big Tropical landscape culture here, with old growth. It was for a reason many of these houses were built before Air conditioning, so the Royal Poinciana, Black Olive Trees, Boogan Villa on the side of the house, and general Yard and Roof Canopy kept these houses cool in the summer. Probably lost now, is land scape crews that were custom to Sofl local plants, and knew how to care for them. For ten years the way they’ve dealt with them was with a chain saw and wood chipper.

TPB, I am a native Floridian and this makes me teary for a Land Remembered. Don't forget some of the worlds most beautiful beaches from St. Petersburg up to Mobile, AL that are also going to be lost--in Pensacola, the sand would squeak when you walked on it, so powdery fine it was. I've been looking at moving back to south or central Florida, but the scenario you describe is what I see getting worse and worse every year I visit friends back there. The houses get cheaper both in price and "remodels". Many of my favorite neighborhoods have lost their character.

tatupu70 says

The question is really–what will happen 6 months from now?

The next leg down will become even more obvious?

Interesting article about many buyers being unable to close in time to get the credit. I don't think this will result in a waive of cancellations because unless the buyers included a contingency in their contract in that they would only close if they got the tax credit, they will lose their deposit if they walk.

http://www.northjersey.com/realestate/97366859_It_s_crunch_time_to_qualify_for_tax_credit.html

inflection point says

More mice taking the bait. Tax credits and false consumer confidence. We will see how the story holds up next month.

Keep in mind C/S is 3 month smoothed, so "April" numbers reflect sales in feb/march/april. If there is a double dip due to expiring tax credit + expiring Fed purchase of MBS, it will not show in full until the July report, which will reflect sales in may/june/july.

There clearly was a "pull-forward" of demand effect of the tax credit, given how sales plunged after April, so it would surprise me if the upward trend holds in the overall C/S index. But if the overall index does go to a new low, I doubt it will be a whole lot lower.

What I find most interesting is the disconnect between the different market segments. Prebubble they tracked each other well. Post bubble more expensive market segments are still being stubborn, with about a 25% disconnect.

San Francisco is up big time showing a 2.2% gain between March and April and increasing the one year gain to 18%.

Again, C-S's own non-adjusted numbers don't show that.

Low Tier is up 12% YOY and down 1% YTD, and down .3% for the month.
Middle Tier is up 11% YOY and even YTD, and up 1.1% for the month.
High Tier is up 10.7% YOY and up 2.6% YTD, up 2.5% for the month.

SF's "big time" gain is only evident in the upper tier, which currently starts at $600,000.

Philistine says

Actually, cars are not like houses in this scenario. There’s always 5 more Dodge Watermelons in Sensible Silver coming on the trailer tomorrow, so bidding wars do not happen on a dealer lot. You can’t have bidding wars on an item that is mass produced and instantly available in multiple quantities

In most cases I agree, but keep in mind there are many new car models that sell for over list price. Dealers add a surcharge because they are in high demand. In any event, it was a mediocre analogy at best, just meant to show that real estate agents behave exactly like other salespeople...

Tenouncetrout says

.... I guess I’m saying the Charm and local identity sold South Florida. Charm that took years of cultivation to achieve. It’s gone, people are more emotionally detached from probably not just my town, but I suspect most towns, that have gone through the bubble cycle.

tenouncetrout, That's the same things I see too. City people are detached. This includes Americans in general more and more with respect to the USA. Sure, momentum keeps them in place but uprooting takes a long time. I'll go out on a limb here and extend my Silicon Valley is Detroit hypothesis to USA is Detroit. If you think about what happened to Detroit then you'll be able to apply it to the USA. I haven't done the macro analysis of these theories but common sense tells me its true. Sure, some people still do very well in Detroit. A very important theme of this thread is cheer leaders who are wrong. The LV RE agent was. The "cheerful" leaders who say "print more money, spend our way to happiness" are. And people who thing the USA is not Detroit are probably wrong too. The reality I see from the people I know is the USA will not survive a few more years of this recession/whatever its called. In my neighborhood at least, prices fell and now look to start to accelerate downward. I heard of one house which was $264K and just taken back by the bank for $104K. Nobody is waiting in line to buy it. In contrast, a house which was $220K was listed on res.net for $150K and looks like it did sell 4-5 months ago. So, I guess we won't know until Nov timeframe. My hunch, however, and what the elders tell me is now is the time to store. Not buy.

landtof says

you’re basing almost every positive on tax benefits.

Tax laws change at the whim of Congress. If anything decisions are left without tax impact.

Philistine says

A dealership’ll take any reasonable offer, and usually pad the backend on the payments and financing to make up the differeance–not to mentinon screwing you on the trade-in for good measure. Believe me, car salesmen *are* first come, first served, as they are trained not to let you off the lot without buying. Like used-home salesmen, car salesmen have their own tricks and games, but bidding wars is not one of them.

Dittio! tatupu70 says

In most cases I agree, but keep in mind there are many new car models that sell for over list price. Dealers add a surcharge because they are in high demand. In any event, it was a mediocre analogy at best, just meant to show that real estate agents behave exactly like other salespeople…

A new car has already been marked up for the authorized dealer by the factory. They buy at 15-17K, which you dont see, and sell it at list price 20K. The additional "marketing" surcharges mean very little. New cars purchases are often ordered weeks ahead and not delivered off lot inventory, and therefore any surcharges disappear. No, we been down this road before, REA do NOT behave like other salespeople. Far from it.

maxweber says

I’ll go out on a limb here and extend my Silicon Valley is Detroit hypothesis to USA is Detroit. If you think about what happened to Detroit then you’ll be able to apply it to the USA. I haven’t done the macro analysis of these theories but common sense tells me its true. Sure, some people still do very well in Detroit

You can ask Silicon Valley maverick Oracle founder Larry Ellison and he would agree with you. Dwindling public companies means big changes in the valley http://www.siliconvalley.com/ci_12110548?source=rss_emailed&nclick_check=1 Tucked into the annual Mercury News data-palooza known as the Silicon Valley 150, there's one nugget of information that I think tells us more than all the other lists and numbers about the profound changes in store for this region: The number of public companies in Silicon Valley fell for the eighth consecutive year in 2008, to 261. Forget the inflated dot-com peak of 417 in 2000. It's also below the 315 the valley had in 1994, when the Mercury News started keeping track. This is no longer a simple correction following a period of excess. This is now an unmistakable trend that represents the end of an era defined by a grand partnership between Silicon Valley and Wall Street. That alliance fueled a model for funding innovation that became the envy of the world. And now we have to come up with a new one. Why is this happening? There are several factors at work. The technology industry is maturing, much as Oracle CEO Larry Ellison foresaw several years ago, and that means slower growth rates. To find new sources of revenue, Oracle and many others have gone on acquisition binges, taking numerous ...

LOL! plenty of people "smoking medicine" in SF.

thomas.wong1986 says

A new car has already been marked up for the authorized dealer by the factory. They buy at 15-17K, which you dont see, and sell it at list price 20K. The additional “marketing” surcharges mean very little. New cars purchases are often ordered weeks ahead and not delivered off lot inventory, and therefore any surcharges disappear.

OK--we are headed way off topic here and running quickly into the realm of idiocy, but you completely missed the point of my post. There are cars that are marked up over and above factory markups because they are "hot". Usually new models. RE agents are salespeople. Caveat Emptor. If you let them fool you, shame on you.

http://waysandmeans.house.gov/media/pdf/111/UI_Impact_Chart.pdf

San Fran up 16% last month 18% this month..

I'd like to hears the bears explanation for this.
I suppose it's all due to the tax credit?

UnitedSocialistStatesofAmerica says

What do you want data for?
Every time I post reference links you and your buddy Numbograph choose to completely IGNORE them and prefer to move on to ANOTHER topic. Which is why I think it was VERY apropo for you to choose a SILLY GOOSE as your icon.
PS: Munch on THIS awhile MF: 14 Scary Facts About The The US Real Estate Nightmare

A link to an opinion piece is NOT data. (note I capitalized that because I know you like that)

toothfairy says

San Fran up 16% last month 18% this month..

I’d like to hears the bears explanation for this.
I suppose it’s all due to the tax credit?

Rich people are still RICH.. and in fact, smart rich people probably doubled /tripled their wealth since the March 2009 stock market lows. All this buying is coming from the investor/wealthy class. I don't know a single working class american that has bought a home in the past 2 years... They are all scared to death to dip their toes in the water.. and rightfully so.

The wealthy are just gambling on housing.. They might be right... they might be wrong. It won't change their lifestyles either way... If you have 100 million in the bank and you gamble on some million dollar properties and they all go underwater... You'll be fine.

It's the average americans that can't afford homes... Wealthy areas will probably rebound for now.. But if you are in the market for a "starter" home you'd be pretty stupid to buy in this market.

Are their any statistics on first time home buyers... that compares their incomes to the purchase prices? That would be a more accurate representation of what's really going on in this housing market.

^ wut he said : )

But if the methodology of C-S is flawed, why would you believe the month-to-month to be accurate? It seems like you believe it to be accurate just because it fits your view of the situation. And you conveniently leave out parts of the article that conflict with your view of housing going up nationally.

rmm221 says

All this buying is coming from the investor/wealthy class. I don’t know a single working class american that has bought a home in the past 2 years… They are all scared to death to dip their toes in the water.. and rightfully so.

I have to disagree with you on this one from my personal experience. I know of several working class people who bought within the past year in the BA. They viewed the low mortgage rates as making it a time to buy.

The low mortage rates and low prices (lol, by comparison to the bubble peak) make buying attractive. At least they know they are not buying at the top.

I am sure people buying at the peak thought they were doing the right thing too.

thomas.wong1986 says

landtof says

you’re basing almost every positive on tax benefits.

Tax laws change at the whim of Congress. If anything decisions are left without tax impact.

Here's a recent history of major tax changes for non-entities. Corporate tax changes quite a bit but personal income tax have not changed that much over 30 years. 1981 Reagan tax cut. Lowered tax rate and introduced accelerated depreciation. 1986 tax reform act. lowered tax rates 1990's. tax brackets raised. Pre-tax programs started, effectively lowering tax rates. 1997. introduced earned income credit, negative tax for low income family with kids. 2001. Bush tax cuts, lowered bracket to current levels. preferential treatment to qualified dividends As you can see, our government has basically given: *Accelerated depreciation *hosts of pre-tax like 401K, 529plans, pretax health, depedant care and commute. *earned income tax credit *generally lowered tax bracket across the board *preferential treatment of certain class of income. *new credits like monster SUV (qualified by weight) then hybrids, now energy efficient window, water heater and doors. our governement over the last 30 years took: *raised the tax bracket occasionally. *let the tax bracket and phase-in and limitations lag. Based on this history, tax laws change, but they almost always change to the benefit at the federal level. I don't think we need to worry about our goverment taking away. If so, the 2001 bush tax cut is the obvious one to reverse.

I just don't see any price rise. Here's craigslist average asking price data, collected every day for about four years. OK, it's an average and it's the whole Bay Area with all kinds of housing lumped together, but there's just no real rise visible.

The gap in 2008 was when craigslist changed format and my scraper broke for a while.

Let's just hope its not a repeat of 1992 or 1993

UnitedSocialistStatesofAmerica says

Shame on YOU for trying to argue that fooling clients is an integral and acceptable part of a salesperson’s job and that the ’shame’ of being RIPPED-OFF should justifiably always fall on the innocent BUYER and NOT on the person doing the MISREPRESENTATION. No wonder your country is COLLAPSING.

Please don't put words in my mouth. I don't recall using the word integral or acceptable. It just cracks me up that so many here talk about personal responsibility--I guess that resonsibility ends when you try to buy a house.

What is clear is a large amount variability (standard deviation) starting in 2008. Any one have an opinion on that?

I would expect if I lived in Argentina I would have probably learned this as well. The government continues to extend, pretend, and lie. Unfortunately most citizens are oblivious.

If an individuals job relys upon selling something, you are likely not the most objective subject matter expert.

USSA

I agree. There are alot of folks that believe in our leaders and a collective good. They keep their nose to the grind stone and manage their own.

It's really unfortunate that those leaders place personal agendas before the good of the people.

rmm221 says
It’s the average americans that can’t afford homes… Wealthy areas will probably rebound for now.. But if you are in the market for a “starter” home you’d be pretty stupid to buy in this market.
Are their any statistics on first time home buyers… that compares their incomes to the purchase prices? That would be a more accurate representation of what’s really going on in this housing market.

I am an average American I spose. Single male, 33 years old with a $60K annual blue collar job. I am in escrow on my first house. Not really a starter house but needs some TLC. I bought in the Inland Empire reasonably close to where I work and down the street from where I grew up. My mortgage on this 3/2 will be roughly $100 more a month on a 30 year fixed then my single bedroom apartment is costing. In my eyes, that is affordable. 5 other people at my job have purchased in the last 4 months as well.
I see a problem of the "average American" not settling for the average house but rather something well above their buying power. I chose a very simple house in a good area that won't nickle and dime me to death.

@ robertoaribas

Do you see deflation as a scenario? How do you feel about guys like Prechter?

Fireballsocal says

I am an average American I spose. Single male, 33 years old with a $60K annual blue collar job. I am in escrow on my first house

Ok, maybe i was generalizing a bit too much.. But you mentioned some key things that make your purchase different than most. Firstly, you are a SINGLE 33-year-old male... You probably don't care too much about the school district you are buying a home in. It's a better deal after taxes than renting. so it makes sense for you now! Congrats!

Personally, I'm recently married and school districts play a larger role in my decision making. In los angeles, buying a home in a good school district would NEVER fly with $60K income. I've seen awesome homes in crappy school districts.. and then literally blocks away homes are hundreds of thousands more for the same sq footage and amenities... simply because they sit on the different side of a school district border.

I'll consider buying when i have $100K saved to put down on a $500K home... That's the average starter home cost in a good school district. I'm about 1/3 of the way there... If i had the 20% down payment with safety net income in the bank right now.. then my decision to continue renting would be more difficult. It's pretty easy to wait though, all things considered right now.

In my area, I have seen a lot of movement in the lower numbers for first time buyers, but almost nothing in the top and upper-mid level homes for 2nd level homes. People who own at house are not selling to buy a bigger, more expensive house. Anything over 500k is a rarity, as people who don't have to move are not moving. When 10 cheap homes are sold for every expensive one I can see how the numbers are going to go squirly when it comes to median home price. A cheap home in my town/state would be 250k so how does that effect the median home price for the nation?

I've tired of looking for a house in LA. We are looking in the upper-mid tier, which means about $700k+. 2 years ago that meant $800k. Movement, granted, but not as much as in the middle and lower end. I get the impression from our last round of tire kicking that the market has flattened and will not drop any further in our range. What we pay in rent only affords us a $500k mortgage; we'll stick with our palatial apartment with historical details and landlord-maintained gardens.

Both of our jobs are in the West LA area, so there is no way we would move to the suburbs or to Land of the Dirt People and commute 4 hours a day just to afford a bland 1980's tract home or, worse, shoddy new construction.

We're 70% on saving a downpayment. But the cost of living in LA is not worth all the nice weather in the world, so we've determined we'll keep collecting inflated LA salaries and then take our savings to another state where the exchange rate will buy us a house outright.