patrick.net

Notice what housing did from 1965 to 1980. Then just as with equities, when interest rates came down, all hell broke loose. By the way, the Dow chart is some kind of log scale, because the dow went from 800 or so in '82 to over 10,000 in 2007

The numbers I mention for the Dow come from the past 100 years. That seems like a fairly good track record.

But let me use an analogy I enjoy using when it comes to houses versus stocks.

I invested quite a bit in 2007- or at about the same time that the stock market started a drastic nosedive. Many people were absolutely scared out of their skulls and sold and thus lost years worth of accumulated profits. I on the other hand stayed in and continued investing. By 2009 the value I had initially invested was down close to 50%. That was when the DOW was down to around 6,500. Fast-forward to 2011 and the same stocks are now up over 50%. In other words not only has everything I invested jumped back to where it was in 2007, but its also gained about 10% on top of that.

Use the same analogy for real estate. Assume you bought in 2007. You would have- like me- bought at the peak of the market. But unlike me, your investment is still losing value and probably won't be coming back to where it was for who knows? Years? Even in the bubbliest markets like the Bay Area housing is at best- in the doldrums. In other parts of the country the values are still falling.

Hence if we were to take these 2 different things, remove the names ( houses and stocks), given the above real-life scenario, what in turn wound up being a better investment? What has performed better? Its that simple.

edvard2 says

What has performed better? Its that simple.

Yes, that is simple. One data point and a conclusion. No offense, but that's a worthless conclusion. Analogy: I know a guy who bought 200 dollars worth of lottery tickets, and one of them paid off for $10,000. Therefore you're a fool if you don't put $200 dollars into lottery tickets as often as possible.

I'm not trying to say that investing in the stock market is in any way comparable to investing in lottery tickets. But your logic is comparable to this.

The stock market made (very roughly) a 10 fold increase, if you bought when it was down in the 1930s and held to the 1960s, then it had another approximate 10 fold increase from the early 1980s to 2000. Really, there are 2 twenty year periods 1940 - 1960 and 1980 - 2000 or so when it did fantastic. The rest of the time, total crap shoot.

It is very possible, based on history that in the not so distant future, a buyer of stocks won't see the market back to their price for a good 10 to twenty years. But I have no clue, maybe stocks will be up a lot before that happens. This is not a recommendation one way or the other.

I'm not saying stocks aren't a good investment, but they aren't the no brainer you paint them to be.

Another chart, also log scale, but larger with more detail

http://stockcharts.com/freecharts/historical/djia1900.html

marcus says

Yes, that is simple. One data point and a conclusion. No offense, but that's a worthless conclusion. Analogy: I know a guy who bought 200 dollars worth of lottery tickets, and one of them paid off for $10,000. Therefore you're a fool if you don't put $200 dollars into lottery tickets as often as possible.

Not really. As mentioned, over the long term ( those 2 words being crucial here) stocks deliver a 7-8% annual return. But I'll use your betting analogy. If you went to gamble 8% of the money you bet every single time would it be worth it to you? Of course you would.

The advantage of the stock market is that plainly put- it represents anything and everything we buy, use, and interact with. At any given time- even in the worst of times- any number of companies are making money. A LOT of money. In recessions some companies do very well. Those same companies might do not as well in good times. And vice-versa. The returns I mention are for the overall market. That doesn't mean you put all your bets on a few companies and spin the wheel. It means you put down money on as widely a dispersed spread of companies as possible because all together those combined investments- both those that are losing and winning- will over time gain 7-8% over the long term. And no- that doesn't mean looking at recent history and making a judgment that stocks are lousy. They have been lousy before and people probably had the same attitude. The above is for the 30-40 year window- or as long as the typical American works before they retire and thus need a stable income afterwards.

Anyway, all of this is bare-basics economic advice and any financial planner or economist will likely repeat the exact same thing.

edvard2 says

The above is for the 30-40 year window

that correlates with the baby boom aging from ~25 to ~65.

Troy says

edvard2 says

The above is for the 30-40 year window

that correlates with the baby boom aging from ~25 to ~65.

“Nessuna soluzione . . . nessun problema!„

Again- the average return of 7-8% is from 100 years of average returns. I think this topic all boils down to cold math. Real estate- over the past 100 years- has returned 3-4% annually, again over the long term. Stocks have returned 7-8% over that same period. If some folks want to believe that suddenly we're going to break that 100 year pattern then so be it.

The problem with comparing them is you have basically random entry points.

Both RE and Stocks are bubble prone. Buy at the peak and you get burned. Timing, timing, timing is more important than asset class.

"Real estate is unique in that it's a tangible asset,"

Huh? So are commodities (gold, silver, platinum, palladium). Heck some might want to invest in precious stones (diamonds, rubies, saffires, emeralds). If someone really has money they might try artwork but I personally would never do that. Of course there are those that like the big "toys". Ever see an auto auction? High end cars can go for tens of thousands. A fair amount of items can be an asset. But should a true asset require maintenance?

"it's a hedge against inflation, and it earns a return."

It's a hedge against inflation if the value of it keeps up. Certainly you agree that not all land is equal. An acre of land in the Bay Area is worth more than in Montana, a parking spot in Manhattan can probably go for more than a house in Detroit etc. Earning a return implies that values always go up.

There is a difference between the value of the land and a value of a building.

"The richest and smartest investors in the world are buying American real estate right now."

But investors aren't always the richest people in the world. Certainly if an individual can find good tenants that pay on time and there are no significant issues with maintenance then it can be good.

But as time goes on the idea of physically having a place...having THEIR own place becomes nullified.

What specifically ties someone to a given area? Communications have not been limited to a area in maybe 20 years. Email, voice over ip, wifi etc. Fed Ex and UPS will deliver nearly anything to anywhere. Shopping online can yield almost anything (some states even booze and tobacco :-D) Plenty of people live in cities and rent and it is fine for them.

If someone wants a house that's fine but too many thought that their homes were instant gold mines and didn't think it though. Speculation can lead to saturation and we've seen that with every bubble.

edvard2 says

Not really. As mentioned, over the long term ( those 2 words being crucial here)

You made an inference based on one single extremely short term example (4 years?). The article does an analysis based on a long term period of 30 years which includes a 20 year period in which the stock market went up well more that 10 fold.

I don't know whether long term returns can always be expected to be in the 7 to 8% range. We happen to have had 2 extremely massive rallies in the past century. Maybe we can expect the same in the next century. I just don't know. But I am pretty darned sure there will be secular bear markets.

In some peoples lives, 18 years is a significant length of time. From 1965 - 1982 the stock market went nowhere and home values more than doubled.

My point: we really don't know which will do better in the next 20 years. Flip a coin.

mdovell says

What specifically ties someone to a given area?

It is their neighbors. Techies wanna live among the gifted hyper-performing children of like-minded Tiger Parents of Grade Grubbers in the Cupertino School District. People with "alternative lifestyles" seem to favor parts of the Bay Area over places like, say, the Red-State-Fox-News Bubba Belt.
Wealthy Asians who have the means to come here covet Fortress Communities in the cities along the Left Coast.

edvard2 says

And thus why houses and real estate are not and should not be considered investments anyway. You want investments? Invest in stocks. You want something to live in and store your crap? Buy a house.

best investment is opening a business, or if one isn't able to than it is stocks. housing is a pure consumption like food and car. part of daily expenses.

@edvard: I'm going to assume you saw this quote (below). If you did you understand everything I had to say on the subject. The articles reasoning, and even a 100 year average to me means very little.

marcus says

In some peoples lives, 18 years is a significant length of time. From 1965 - 1982 the stock market went nowhere and home values more than doubled.

My point: we really don't know which will do better in the next 20 years. Flip a coin.

I will be investing in the stock market. It's just that my gut opinion is that in this particular next 20 year period is probably a little more likely to look like 1965 - 1985 than it is to look like 1985 - 2005. Although it is 100% certain to be different from either period.

Some of you are not getting it. Account for inflation? Inflation is accounted for. The $ values are the actual dollar values today for both the house and the stock portfolio. Its really simple. Both cost what they cost then and cost what they cost now. Stocks clearly won. I own my house and at time I really wish I didnt. Always $$$ flying out of my pockets.

There have been a great number of articles showing that stocks are clearly a better investment than housing, and that housing has essentially a real (not nominal) return of slightly under 0% when you take into account taxes and expenses.

This makes sense since houses produce nothing, but they require maintenance, still deteriorate, and eventually need to be torn down and replaced.

As far as the demand curve for housing goes, I suspect now that Baby Boomers are retiring and have zero savings, they will keep the market flooded for the next 30 years.

mdovell says

It's a hedge against inflation if the value of it keeps up. Certainly you agree that not all land is equal. An acre of land in the Bay Area is worth more than in Montana, a parking spot in Manhattan can probably go for more than a house in Detroit etc. Earning a return implies that values always go up.

The BA has experienced irrational behavior in RE. Even during our best decades of rational tech booms back in the 80s prices didnt skyrocket has they have in the past 10 years.

Per last Sundays 60minute piece, the depressed areas of mid-america, have the potential of yielding the equivalent of two Saudi Arabia overall oil deposits. Natural gas deposits have made mega millionaires in very depressed areas.

Leasing rights are getting 100K-400K per month up to $2M.. yes PER MONTH.. thats beats any ego prickhead at Google several times over...

http://www.cbsnews.com/video/watch/?id=7372850n&tag=cbsnewsMainColumnArea.6

http://money.cnn.com/2010/10/06/news/economy/penn_community/index.htm

TOWANDA, Pa. (CNNMoney.com) -- In the hills of northeast Pennsylvania, the boom in natural gas production turned mechanic Chris Sutton into a millionaire practically overnight.

Sutton recently leased his 154 acres of land on the Marcellus Shale to Talisman Energy for a $900,000 up front check, plus a 20% cut of the revenue of the natural gas extracted from his land.

Sybrib says

Wealthy Asians who have the means to come here covet Fortress Communities in the cities along the Left Coast.

They are all Johnny come lately, and they came after the real boom has already passed behind us. These same people who dont have a passion compared to the prior decade workers will sink us further down. They are more interested in striking it rich than making a difference. See it every day!

Dan8267 says

As far as the demand curve for housing goes, I suspect now that Baby Boomers are retiring and have zero savings, they will keep the market flooded for the next 30 years.

I agree, but you are exaggerating this substantially. Boomers have to live somewhere, either they downsize, or they sell and rent (affecting rental demand which in turn affects prices). The curve that is affected is the spread between medium/higher end homes versus smaller entry level types of homes.

In other words, if you are in a small home looking to upgrade a few years out, things are looking very good for you.

Buy small, sell large (especially the McMansion).

TimC says

Stocks clearly won.

Yes. You have a firm grasp of one window of the past. This kind of thinking is the reason why there is often big demand at "the top."

I don't understand the point of this discussion at all. Why would you compare your residence to the stock market? That is a poor comparison. Your home isn't an investment, it's shelter.

You can do a rent vs. buy comparison to see what makes sense. Those calculations have been discussed to death here, so no need to go into it again.

Or you can compare an investment property vs. the stock market. But if you do, you HAVE to take into account the positive cash flow from the rental(s). The appreciation is usually a secondary concern--the cash flow is what's important.

tatupu70 says

I don't understand the point of this discussion at all. Why would you compare your residence to the stock market? That is a poor comparison. Your home isn't an investment, it's shelter.

When you buy, you buy the sticks and you also get the land use rights in the title. These are the actual investment component of a home purchase.

Plus since houses are immobile (i.e. location monopoly with no substitute good), labor-intensive, and rather durable, their replacement value can actually appreciate faster than their wearing out depreciates them. This depends on the construction, climate, maintenance, and regional economics of course.

So even a non-investment property has an "asset value" and thus is an investment aside from the housing service the home provides as a durable good.

It's perfectly proper to try to analyze the rent vs. buy thing, since housing is nearly everyone's dominant life expense.

Tough to live a modern life without it!

marcus says

Yes. You have a firm grasp of one window of the past. This kind of thinking is the reason why there is often big demand at "the top."

Like I said. If some of you think you're smarter than the bulk of economists and think that the last few years represents the future of the stock market and that the last 100+ years means nothing then go for it- invest in houses, rocks, and stamp collections.

edvard2 says

If some of you think you're smarter than the bulk of economists

Only smart enough to understand what it is that I don't know. 27 years of Nikkei shown here. But the rally that preceded this was extremely impressive. For most humans who invest, time frames of 10, 20 or 30 years, and sometimes even shorter time frames like 5 to 10 years can be very important.

Just a few things.

"People with "alternative lifestyles" seem to favor parts of the Bay Area over places like, say, the Red-State-Fox-News Bubba Belt."

In all due respect the country has made pretty big leaps in acceptance of gays. Besides how is it Iowa with marriage legal but yet CA it isn't?

Sexual preference does not indicate political preference. It might be assumed to be to the left but in reality that is not a accurate assumption. The influence of the religious right might have caused that assumption but those organizations have largely faded from political life.

The BA area I just don't understand mostly because of their zig zag patters.
http://www.deptofnumbers.com/asking-prices/california/san-francisco/
in '09 it took a spike upward...and now in '11 the median has increased 14% YTD.
Maybe this is all speculation. It's enough to make your head spin!

I'm sure commodities will drive booms in the future. For example northern Nevada isn't nearly as bad as the Vegas area. Elko county has hardly anyone (45K I think) for a population but it is one of the most heavily mined area in the world for gold. In Hawaii recently it was announced that there might be a massive discovery of rare earth metals
www.reuters.com/article/2011/07/04/us-rareearth-japan-fb-idUSTRE7630U320110704 now I can't picture that much on factories at Hawaii but it's the optimal place. If electronics can be made there it is half way between North America and Asia making it pretty good for distribution.

Troy says

So even a non-investment property has an "asset value" and thus is an investment aside from the housing service the home provides as a durable good

Agreed-- I should have said a home isn't a pure investment.

marcus says

edvard2 says

If some of you think you're smarter than the bulk of economists

Only smart enough to understand what it is that I don't know. 27 years of Nikkei shown here. But the rally that preceded this was extremely impressive. For most humans who invest, time frames of 10, 20 or 30 years, and sometimes even shorter time frames like 5 to 10 years can be very important.

I wonder what the Nikkei's return during that period is with dividends. The number is sort of useless without.

mdovell says

Sexual preference does not indicate political preference. It might be assumed to be to the left but in reality that is not a accurate assumption. The influence of the religious right might have caused that assumption but those organizations have largely faded from political life.

Santa Clara County...

Santa Clara County vote
by party in presidential elections
Year GOP DEM
2008 28.6% 190,039 69.5% 462,241
2004 34.6% 209,094 63.9% 386,100
2000 34.4% 188,750 60.7% 332,490
1996 32.2% 168,291 56.9% 297,639
1992 28.4% 170,870 49.2% 296,265
1988 47.0% 254,442 51.3% 277,810
1984 54.8% 288,638 43.7% 229,865
1980 48.0% 229,048 35.0% 166,995
1976 49.5% 219,188 46.9% 208,023
1972 51.9% 237,334 45.6% 208,506
1968 45.6% 163,446 48.4% 173,511
1964 36.6% 117,420 63.1% 202,249
1960 52.7% 131,735 47.1% 117,667
1956 59.1% 105,657 40.6% 72,528
1952 59.7% 91,940 39.7% 61,035
1948 53.3% 52,982 42.1% 41,905

corntrollio says

I wonder what the Nikkei's return during that period is with dividends. The number is sort of useless without.

Not entirely. You can assume reinvestment if you wish in which case buying at 15000 and selling at 10000 fifteen years later wouldn't be quite as bad as it seems. Dividends would be relatively low, since interest rates were extremely low during this period.

But point taken. This doesn't tell the whole story. It only tells you that there are recent relatively long periods of time in which investing in the nikkei would have been disastrous.

thomas.wong1986 says

Santa Clara County vote
by party in presidential elections

Yeah, and in some of those early years, there was still a substantial amount of land that was still orchards and other agricultural land. In the middle years, it was still when there was such thing as a moderate Republican (compare to the Republicans that used to be in the Northeast, are Olympia Snowe and Susan Collins the only ones left in the Senate? Well, okay, theoretically Brown.). Also, you can't forget that both Nixon and Reagan were Californians. But I'm not really sure why this is relevant or why we're even talking about it.

marcus says

Boomers have to live somewhere, either they downsize, or they sell and rent

That's exactly what they will do. However, all that downsizing will greatly affect the market because everything is based on margins today. A slight change in supply or demand can cause large price swings. And use prolific use of leverage amplifies this effect.

I suspect that most baby boomers will not start renting. Rather, they will take one of the three courses:

1. Sell the big house, buy a small one or a condo. After all, the kids are all gone.
2. Take a reverse mortgage and use it for retirement. Live in the house until you run out of equity or die. Then let the bank take the house.
3. Sell the house and move into an assisted living facility.
4. Sell the house and move in with one of the kids. I think this will happen more than people expect.

APOCALYPSEFUCK is Tony Manero says

Tulips are a lousy investment.

But flowers are pretty and they smell nice.

thomas.wong1986 says

Santa Clara County...

Santa Clara County vote
by party in presidential elections

One county in CA is not indicative of the whole country. Like I mentioned before how could marriage be legal in IA and not CA? Most libertarian thought cares nothing about who people marry so it becomes a non issue. NY just made it legal but we have to consider it also means supposedly another 180 million dollars in the states economy over the next three years! A marriage costs about as much as a car so by restricting it technically it is holding back spending.

Dan8267 says

But flowers are pretty and they smell nice.

never got to play that game but I found a spoiler site / walkthrough and found the writing in that game to be amazingly deep and entertaining. Would make an excellent SF movie.

Dan8267 says

I suspect that most baby boomers will not start renting. Rather, they will take one of the three courses:

1. Sell the big house, buy a small one or a condo. After all, the kids are all gone.
2. Take a reverse mortgage and use it for retirement. Live in the house until you run out of equity or die. Then let the bank take the house.
3. Sell the house and move into an assisted living facility.
4. Sell the house and move in with one of the kids. I think this will happen more than people expect.

Except in California, because of Prop 13, where they will die in the house because the property tax is so ridiculously low and then let their children inherit a substantial majority if not all of the lower tax base. Yay, market distortions!

I purchased my investment property in 2006 for $2.5 million dollars. Recently, I’ve had a tremendously high vacancy rate due to the poor economy and it began taking a toll on all my reserves just to maintain the property. I tried to negotiate with my lender (CHASE) for a modification. I went round and round with the bank, submitting documents and so on and in the end, CHASE denied me for a modification. I couldn’t understand why they wouldn’t modify my loan when it was clear that the economy ham-stringed my ability to service the debt. The only thing that CHASE could tell me was that the investor was the one who declined the modification. I asked who the investor was and they would not tell me. It was then that I began to look closer at my original loan and I saw on the Deed of Trust that MERS was listed as the Beneficiary. With all the information about MERS in the news I decided to talk to an attorney. My attorney had an auditing company called Lighthouse Consulting Group review my documents for both a forensic analysis of my original loan documents as well as a Mortgage Securitization Audit. It turned out that my loan was securitized in a trust called “Structured Asset Mortgage Investments II Trust 2005- 8. It was in this trust; there is a pooling and serving agreement, which governs the rules of the REMIC Trust. In my loans pooling and servicing agreement, it said specifically that any loan modified would require a buy-back from the servicer. Now, it was about this time that I began to default on my loan and was looking at ultimately losing my investment property. I was already 6 months in default at this point. The individual I talked to that is an attorney and real estate broker immediately ordered a forensic audit for predatory lending. Commercial properties do not have TILA and RESPA violations. The attorney also ordered a securitization audit to verify if the lender that filed the NOD was actually in proper standing. Both audits reveled several issues about my loan. First, the forensic audit proved that my lender had wrongfully calculated my payment it was overstated by $350 per month. Secondly, the loan itself was an adjustable loan based off the Libor Index, which was dropping, but the loan always adjusted up. This was a major development in a very positive way for me. Then, I had the securitization audit show that my loan was never securitized properly and the note and deed were not even with the same party. My attorney drafted a complaint, outlining everything I have mentioned. As soon as the lender was served, they contacted my attorney and settled without going to court. The settlement I got was a principal balance reduction of $400,000; my interest rate was reduced to 4.5% fixed for 30 years.

Wow, that's such a great story I created a new thread out of it, here:

http://patrick.net/?p=894473