patrick.net

@Boston Transplant,

As EBGuy stated, be very careful when doing direct comparisons between aggregate data (macro) and specific instances (micro). The trick is matching the house you're trying to compare to the method for aggregation -- that is, whatever their "averaging" to. The HSBC is far too macro to do a very specific comparison. I was using it merely to defend my statement that by and large ownership is historically always more expensive than renting, from as a purely financial analysis.

One thing you left out in your comparison equation was holding-cost risk for ownership. You need to discount the risk such that renting is lower risk-reward and ownership is higher risk-reward, because owning an asset called a house is not risk free, and is more risky than renting. Similarly, you forfeit capital gains in excess of risk-free returns by renting. (As we discussed in the last thread, you could also carefully engineer a portfolio in which you invest your saved-PITI over rent that roughly mimics the return and volatility of housing prices. Good luck with that.)

Let me use my own apartment in downtown Boston as an example (if I may be so bold).

Rent = $2400/month

Sale price = $700,000 (my estimate)

P+I = $4200/mo (approximate 30 fixed, neglects downpayment)
T = $600/mo property tax - $1200/mo interest deduction
I = $200/month

PITI = $3600

Ratio = 1.6

I can then comparing this to the historical values for Boston from your HSBC chart?

HelloKitty,

I agree with your analyses, including the Prop 13 one. Note to everyone, this is *not* going to turn into YAP13T (yet another prop13 thread) ...

The real rent yields in the inverted own-to-rent areas are very low, or even negative in some cases (like rural Indiana). The reason is these areas, even though rents are higher than ownership costs, are afflicted with regionally depressed incomes and a regional inflation phenomena (these areas fail to inflate along with the rest of the country, effectively weakening their purchasing power compared to ours).

As to rental yields, this implies much larger scales of operations to create profitability, because many things are priced nationally, not regionally. And thus the higher rents as a factor rental property ownership being comparatively more expensive (even while it is absolutely less expensive).

And residential rental businesses don't scale well, as a general rule of thumb. It is possible to do it in certain areas like big cities, but there is no way to pull it off in rural Indiana -- it's not worth the cost of scale and you'll never be able to attract quality management for what you'd be able to pay them to run the business. Of course, never say never. Someone could ostensibly create a "Wal-mart of rentals" business and spread it across Wal-mart country.

If someone here has a couple billion sitting around they're looking to put to work, I'll even volunteer to move somewhere like Evansville to head the thing up. $2bn ought to be a reasonable seed round.

$2bn ought to be a reasonable seed round.

Can't you buy like the whole state for $4B?

No, the big race track is kinda pricey. But that's kind of the point. You'd have to buy a reasonable chunk of the housing stock to gain enough market power to make such an operation worth while at scale. But like I said, Wal-mart did it in retail when no one thought such was practical. Never say never.

Randy H Says:

> I cite my data here. The last time FAB and I had this argument
> he failed to produce contrary data. That ownership is more
> expensive than renting in equilibrium is widely accepted and
> well established. FAB may be implementing his own form
> of hedonics.

Then EBGuy Says:

> Haven’t we already been around this mulberry bush a couple
> of times? Randy’s HSBC data is aggregate for an area.
> FAB is talking about like to like comparisons (renting the
> SAME house versus buying it). Both are useful for showing
> how out of wack the market is.

I forgot that we debated this data set before and I now agree with Randy that the multiple of renting in the Tenderloin vs. buying on Nob Hill or renting in Shoreview vs, buying in San Mateo Park or renting in North Fair Oaks vs. Buying in Emerald Hills will be well above 1.0

Since there is no accurate source of “average” or “median” home rents HSBC “utilized the HUD’s rent-data for two bedroom units (AKA Apartments), we also needed to adjust for the fact that the median house has three bedrooms, according to the Census. To account for this, we raised the level of all rents by 30%.”

P.S. I just went to the link and the HSBC data includes a lot more than just PITI in the “cost” of owning that push the multiple even higher…

When will the market rebound?,'’ Toll said at a conference in Las Vegas today. “Who knows? The Shadow knows. I have no idea.

Unreal!

As somebody who grew up in a resource town that has been shrinking since the early 80s, I can tell you that when things go bad, and lock boxes sprout on a lot of working class houses, devastation is wreaked on the valuations of all the housing stock in the area.

Anyone care to agree or disagree?

I see a lot of working class housing pain on the way, that would seem to be a bad thing for housing in general - check your local market in two years, maybe Toll will have disappeared by then, like "The Shadow".

Can’t you buy like the whole state for $4B?

I know you're being sarcastic, but that's a bit Kali-centric of you. I'm not an expert, and I know Indiana has had hard economic times, but it is the home of two very large medical corporations, Eli Lilly (market cap around $58bil) and Guidant (market cap around $180bil, now part of BSC).

Skibum,

So... what... $8B then?

I grew up in Montana, and in the late 80's and early 90's there were a bunch of Californian's moving there, and it pissed the locals off to no end when they'd come in and drive housing prices up by 10-20%. Or buy two houses and build a huge eyesore of a house.

I wonder where the 2000 'wave' went, and I wonder where the 2007-2010 'wave' is going to go? (Pissing off the locals in the progress, of course.)

I know you’re being sarcastic, but that’s a bit Kali-centric of you.

I apologize if I offended any folks from the mid-west. The only excuse I can offer is that my bosses (one for home & one for work) don't let me get out much.

Oh, my comment on the whole GOOG valuation thread:

Go to

http://www.smartmoney.com/pricecheck/index.cfm?story=worksheet

and put in GOOG.

This puts Google at about the correct valuation, but that is assuming 33% profit growth for the next 5 years. I personally do not find that unreasonable, considering they have a huge portion of the market for internet advertising and consumers and advertisers are still moving to the Internet.

I would buy GOOG if it ever dropped to 300, but that looks unlikely.

SFBB,
We had a thread a while back called "Equity Locusts" addressing this issue. Maybe HARM can direct you to the proper link. I doubt there will be any upcoming "wave" as the wave depends on actually having equity. Those Kalifornians are stuck in their McMansions in the Central Valley HELOC'ed up the arse.

MtViewRenter,
I wasn't offended personally - I'm not even from the midwest...

Jimbo,
33% annual growth seems a bit optimistic, doesn't it? Did you catch CNBC last night (Fast Money, I think) with their cheesy NCAA-like tourney for publicly traded corporations? They had EMC "beating" GOOG in a head-to-head - all their talking heads have a consensus that GOOG is overvalued and due for a dip. I wouldn't argue with that personally.

I don't think so. Google has grow faster than that in the recent past, and while they have to slow down a bit as they grow larger, Internet advertising growth is expected to grow about that fast and Google should be able to at least hold their own.

On the other hand, these projected increases depend on advertisers going where the "eyeballs" are. More and more people are spending their time online, instead of in front of the TV set and advertising money hasn't followed suit.

Google could also have their lunch eaten by a new upstart, but this seems less and less likely.

Jimbo,
You forget about one thing - the advertisers are large corps subject to market-wide forces like potential recession or a dip in the stock market - there goes the ad money. If the economy hums along through this year, I might buy your prediction, but if not, I doubt GOOG will grow at 33% while the Dow or NASDAQ stay flat or go in the other direction. As a result of their success, they are now nearly just as intertwined with the rest of the economy as other large corps.

HelloKitty,

I remember that after the realty bubble popped in Texas, they raised the property tax to 3% to cover short fall for the local schools and amenities etc. I am wondering how they did that.

Here is a thought re: prop 13. When things get really ugly here in CA, local property taxes will take a BIG hit, because the current prop 13 lets homeowners argue for re-assessment temporarily if their home value falls below what they bought it for. While we generally agree that the posher neighborhoods are going to retain their value better, there are far more bland neighborhoods, particularly those on the fringe of BA that are currently selling for at least $500K-700K, IMHO they can easily fall 30% or more.

I once heard that about 1/4 of the homes in older BA neighborhoods are entirely paid off and have a ridiculously low tax base. I sort of believe that just by randomly spying on my neighbors on zillow, out of a sample size of about 20, 4 of them pay less than 1000 a year on property tax for a home valued at $1.xM. In essence, we have the classic 80/20 situation - 20% newcomers that paid $1.xM in the last few years are carrying 80% of the load of the property tax for the neighborhood.

Such a model works fine in good years, at least these 20% morons feel pretty good about the "appreciation". What if the market turns sour and they cannot afford the payment, let alone the property tax?

In my zip code, there are already 146 tax liens, and based on the amount owed, they are most likely the new kids on the block (old timers are unlikely to run up thousands of property tax bill in 2 years). I am not sure how this will play out eventually when 20% of these newcomers eventually cannot shoulder 80% of the load, I wonder if prop 13 is still a political taboo in such a situation.

Apologies to Randy if this becomes another YATPOP13.

I am not sure how this will play out eventually when 20% of these newcomers eventually cannot shoulder 80% of the load, I wonder if prop 13 is still a political taboo in such a situation.

It will always be taboo because the #1 voting block is always senior citizens.

40 years from now, the people bitching about prop 13 will be defending it to the death!

40 years from now, the people bitching about prop 13 will be defending it to the death!

Yeah, and who would blame them (us)???

Rental yield in BA is very difficult to assess, because most rental SFHs (until recently) are just pieces of crap that get almost no maintenance. If they were to be listed on the market, they would be sold "as-is" and only considered for its land value.

My wife and I looked up and down the west valley for rental when we were considering bubble-sitting about 4 years ago (yeah, I called the top way too early). The problem was, there were almost no decent rental stock in the areas we care about.

The rent-vs-own formula didn't become meaningful until a couple of year ago when the FBs are forced to rent their recently updated homes for cash flow. Now we are seeing a lot more *comparables*. You can look at a house and say, ah, if I were to buy this house today, how much would it go for. Before that, you would look at a rental home and say, WTF, what kind of idiot will buy this piece of crap?

This home, for example, gives a good comparable between rent and own. 1/2 acre land, completely updated, near Saratoga downtown, Saratoga school district, is about worth easily over $1.5M (just for that 1/2 acre land!) but currently is asking for rent of $3400. Zillow has it for $1.2M because zestimate doesn't know jack about homes without recent transaction record. Based on the fact that this home's tax assessment value is only about $100Ks, it must have been owned by an old timer.

http://sfbay.craigslist.org/sby/apa/293517910.html

If I didn't have a home, had enough cash to buy, I'd be thrilled to rent this house for a few years. What a steal.

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/03/15/BUGK4OLR5F16.DTL

Real estate agents say that sales are down in part because there simply aren't enough homes for sale and the usual increase in listings that comes with spring has yet to start.

The lack of inventory is evident in a weekly printout the San Francisco Association of Realtors puts together of all the homes for sale in the city that are open for agents to tour. By the middle of this month the packet typically starts to grow, as new homes hit the market, said Rick Turley, president of Coldwell Banker's San Francisco-Peninsula division.

"There were 28 pages of property tours in San Francisco when we would have expected 40 pages," Turley said. "Pages are shrinking at a time in which they should be going the other direction."

Is that Realtors making stuff up?

Or are listings not that strong? I would've thought there'd be more by now. It's way past superbowl sunday...

eburbed,

the realtors are not exactly lying on this, I've been wondering myself, why is that there are so few listings compared to Mar, 06?

I've been keeping track of Santa Clara County inventory since 5/18/05. This is what my data shows for sfh/condos (using mlslistings.com):

3/15/07 4257
3/15/06 3682
5/18/05 3606

I can't speak to other counties since I haven't been tracking those areas.

The housing tracker also shows decent gains in inventory. So I am not sure what OO means here. The inventory number is increasing. Maybe it is increasing more in fringe areas, and in the fortress it hasn't gone up by much.

For example Evergreen is over 300 already (compared to 200 last year), but Cupertino it is still around 70. It used to be 60 at this time of the last year.

Tossing in the Keys:

Cautiously, I pull back blinds to steal a peek at my neighbor across the street who seems to be making unusual amount of noise for a weeknight.

I see him jumping around out in front of his house like a loon. Apparently, word has it, he bought a nice, big house with an exotic ARM. He's clearly agitated.

I grab a chocolate chip cookie and munch into it. Half the cookie crumbles onto my shirt and the rest tumbles haphazardly onto the floor, but I am too utterly transfixed by the theatrics to move. I cannot take my eyes off the lunatic hopping around and swearing in his front yard. I can hear my own breathing quicken.

I brush the crumbs off my shirt, sniffle, and reach for the Hi-C fruit punch, quaffing down a big gulp. I wipe the red punch mustache off my face with the sleeve of my shirt and sniffle again as I pull back the blinds even further to get a better gander at the fiasco unfolding on the driveway, across the street.

My Boomer neighbor shouts something indeciperable, tells his girlfriend, "I'm finished, I'm broke...F this sh-t! I can't afford this sh-t anymore. Get off your lazy ass and YOU get a job...You're nothin' but a taker...a moocher!"

I think to myself..."G-d almighty. I thought this clown had his act together and was bringing home some serious bread. I guess he's just another yuppie schmuck living above his means, mooching off his credit card trying to impress his low-class girldfriend."

Dude throws the keys at the house and tears out of his driveway in his
B'mer.

His girlfriend shouts, "F you, you lazy piece of garbage" as she hurls a glass of wine at his car....

I think to myself, "I wonder if, as the housing market continues to crash, similar scenes are being played out all across the land?"

Sheesh...

Stuck,

I somehow remember far more inventory (something around 80 SFH) in Cupertino around Mar-April 06, but my memory may be off. I don't think the inventory is out of whack as of now. We will see what the spring bounce will be like.

Btw, when is the official start of spring bounce? (I mean, if there is a bounce at all)?

I was actually born in Indiana, and I'm not offended, so no worries.

@FAB, no need to get snarky. I was just citing my data source and defending my justification for using it. There are plenty of legitimate criticisms of their methods and sources.

You were the one that authoritatively proclaimed that I had everything backwards by offered up a vague reference to realtor.com as support.

Instead of criticizing my data (which you've thoroughly done for over a year now), show me yours and let me criticize that?

the HSBC data includes a lot more than just PITI in the “cost” of owning that push the multiple even higher…

Like the real value of future debt service? Seems reasonable enough to include the real cost of borrowing...I did so in my bubblizer model.

HelloKitty,

I think there is nothing wrong with someone doing the maths and deciding to foreclose on a non-recourse loan and save his lifestyle, instead of working his butt off for an under-water asset (well, more like a liability). It is just taking advantage of the legal loopholes.

Japanese and Hong Kong borrowers "toughed" it out because if their homes were sold for less what the loan's worth, the banks could still bite their ass with the difference, and the banks most definitely would. So they might as well stay in their home and make the payment instead of losing the home and still making the payment.

Ha Ha, what a non-sequitur. Hooray for south indian food.

Everyone who has contributed to this thread, thank you. I learned a lot today.

Hymie

I think the point is - not to brag. No need to mention your good judgement, because it will be obvious. If anyone brings it up, best to downplay your good luck, and make a self effacing funny comment.

hymie: You can't control what other people feel. If prices drop from the peak, then people who bought at the peak will feel like financial fools. Thanks to Zillow it is also pretty much impossible for them to not know what you paid.

I would advise that you simply not brag about your great price. The temptation will be great, but I say this for three reasons. First, people with even a shred of class would never openly mock their own neighbors. You want to get invited to the block party, right? Second, bragging would make you a magnet for the pent-up frustrations of people who paid too much in the bubble. You think the bulls are annoying now? Wait until they have officially lost. Third, you never know what the market will do in the future--you might end up bragging about the great price you got, and then two years later, another market drop puts you way underwater and some "lucky" punk moves in next door and starts mocking you. :)

Classy behavior tends to be worth the extra effort. But you can always brag on this blog. In a couple of years, patrick.net will have to put up a forum just for gloating... :)

Lol

I ran a thread many months ago suggesting that "bubbleheads" should be gracious and humble when the worm turns, for just these reasons.

I was thoroughly crucified. I think I had only one supportive comment the entire thread.

Maybe this is some kind of indicator in and of itself.

Randy, would an uncontrollable urge to gloat fall under the "jaded" or "bitter" part of Jaded Bitter Renter? :)

The bulls get invited to parties during the market runs because they're enthusiastic optimists who always have a reason why everything is going to turn out great. People like optimists, particularly when they want to agree with them. And everybody loves winning.

The bears will have their day, but you can't brag about being a pessimist. Unless you really do want to live in an isolated cave and socially hibernate, then I figure you can go for the gold and swagger around openly mocking the greedy losers. A bear's reasoning and predictions might be right, but wallowing in economic mayhem seems cruel and antisocial. People get hurt when the market goes down; bulls have the luxury that there are few perceived casualties when the market goes up.

When bears stay classy, they look like knowledgable skeptics when things go badly. That's a lot better than being a gloating sociopath who likes financial decay. And you have to stay friends with the bulls... they throw much better parties. :)

Randy H Says:

> @FAB, no need to get snarky. I was just citing my
> data source and defending my justification for using it.

Sorry if I came off as “snarky”, you might find this hard to believe but you are my favorite poster on this BLOG (I really do disagree with you at times, but you always keep it civil and defend your point)…

> There are plenty of legitimate criticisms of their
> methods and sources.

I don’t see any value in using data that is correlated, but not really comparable to come up with a ratio when it is possible to dig a little deeper and find numbers that is really comparable (say comparing the PITI payment when you bought your home on the Peninsula with the rent someone was paying on the same street, or even better looking at the rent for a 2br condo next to an identical condo that sold the same complex). The HSBC ratios for rent to own are about as accurate as taking the average cost to “buy” a car in the SF area (that includes some of the top selling luxury car dealers in the nation) and the average cost to “rent” a car at SFO (that includes a lot of stripped down American cars) to come up with the ratio (why not use the cost to “buy” the Buick with velour interior with the cost to “rent” an identical model?).

> You were the one that authoritatively proclaimed that
> I had everything backwards by offered up a vague
> reference to realtor.com as support.

I talk to young analysts in the rust belt almost every day and not a week goes buy when the super low cost to “buy” a home comes up. Just last week I was talking to a guy in Michigan who “bought” a home with a lower PITI payment than a friend is paying to “rent” a garage in Russian Hill… The realtor.com reference was vague, but even I was surprised to find over 200 homes in Flint, MI under $10K (that would have a monthly PITI of under $50). If you pick any city in the rust belt and look for the cost to rent I’m betting that you can find lots of similar homes for sale on Realtor.com that will have a PITI payment lower than the rents…

I just re-read where Randy wrote:

> There are many reasons that holding-cost of ownership
> (we usually abbreviate as PITI, but also includes a risk
> factor) is usually about 50%-70% higher than renting,
> and some factors are cultural and differ among countries.

I missed Randy’s comment about a “risk factor” since when I talk PITI it is just the P, the I, the T and the I (when you add in all the actual costs like CapX maint., time to deal with the home and the opportunity cost of not getting a cash on cash return on your money the ratio of own vs. rent will always be over 1.0…

@Michael Holliday,

Was that an account of an actual event or a piece of creative writing? Either way, very entertaining (but even better if it was real).

HelloKitty Says:

> I remember they used to do what is called a ‘loan reset’

And also mentioned some other terms that we have not heard in a while…

Since it sounds like HelloKitty (can we call you “HK”) has a lot more residential lending experience than I do I’m wondering if she knows if DPOs (Discounted Pay Offs) or CDs (Cram Downs) were common in the world of residential lending…

Back in the early 90’s a lot of smart Commercial Borrowers did real well gaming the system knowing that the government would not let a bank have many non performing loans on their books and they would have to sell them at a discount. The Borrowers would just stop paying on their loans knowing that the group that bought their non performing loans for $0.75 on the dollar planning to foreclose would be happy to do a DPO for $0.80 on the dollar the day after they took over the pool…

I never really understood the legal support for the cram down, but every now and then we would have a Borrower go in to BK to stop the foreclosure and the court would make us lower (aka cram down) the loan amount so the Borrower could start making payments again (they never gave us any support, just a court order making us lower a loan form say $9mm to $6mm)…

Michael Holliday Says:

> His girlfriend shouts, “F you, you lazy piece of garbage”
> as she hurls a glass of wine at his car….

And brings back fond memories of the dysfunctional but always entertaining white trash neighbors in my past…

Is it just me, or are the news links boring now? It was neat watching the stuff pop up almost over night, but now they're rushing to repeat themselves again and again about the sub-prime mortgages.

Somebody wake me up when they catch the first whiff of Alt-A going down.

FAB

Thanks for the comment. I consider FAB one of Patrick's most knowledgeable regulars, and a rare chance for many of us to learn about the innards of the industry. I have encouraged him in the past, and again now, to author some articles here of his own. They would be well received, I'm certain. For anyone who hasn't read here regularly for the past year or two, FAB does know of what he speaks regarding the mechanics of real estate, even if one disagrees with some of his related opinions. And he has a top-tier MBA, so he's quite capable of crunching numbers and rendering analysis. Many times he and I debate something like the HSBC data, only to find out we aren't really disagreeing -- like in this case.

But I'd recommend that anyone who might be thinking of making a bona fide living of real estate investment, try your best to get to know him. Over a year ago I was arguing about "how to get rich" with a guy who was superficially invoking Warren Buffet (who FAB has met, by the way, I think more than once). I still maintain that "getting rich" is only practically accomplished for most people by following FAB's father's example, not by worshiping someone else's riches. And if I was in RE, I'd still rather buy in as a partner of FAB's business than put all my money into Warren's fund.