‘Getting Rich’ From The ‘Cash Cow’ A ‘Sign Of The Times’
Some readers suggested a topic surround some recently published books. “I used to like David Bach when he was teaching stuff that actually made sense (eg., save regularly, don’t spend more than you earn, automate your savings so you don’t miss the money, stay out of debt). I guess he has tossed that aside to support a greedy industry.”
Here’s a Bach related article: ” Renting is not the route to wealth. In fact, statistics from the Federal Reserve indicate it’s a good way to stay broke. ‘The argument is that it’s cheaper to rent. That’s the whole argument, and it’s simply not true,’ Bach said. ‘As long as you’re alive you have to live somewhere. The question is, will you pay someone else to live there, and make that person rich, or will you pay yourself to live there and make yourself rich?’”
One reader said, “I read that (SF Chronicle editorial) this morning and was completely disgusted. Then I decided maybe I should just move away from the Bay Area because it’s obvious that people here have gone insane.”
Another replied, “What I find strange about that article is that it was written by someone whose ‘beat’ is real estate and, theoretically, should know better. There doesn’t seem to be one iota of concern about what could happen if the market turns (or, hell, if it just goes flat and the ‘bank’ is no longer open). And all the stuff about how she’s glad her mother was able to pursue painting, travel to Europe, etc., rather than work and save. This article is a real sign of the times.”
“‘You me beat to posting that article from the SF Chronicle. I also had the ‘unbelievable’ reaction. That article shows the whole mentality of most people have changed from being debt averse to debt-wealth. This will not end well. I also just got a copy of Jim Talbotts new book.”
From a report on Talbots outlook. “When John Talbott gazes into his crystal ball to discern the future of America’s housing market, it isn’t a pretty picture he sees. ‘I don’t want to be a Chicken Little,’ he says, ‘but it’s gonna be bad for housing.’”
“A former visiting scholar at UCLA’s Anderson School, Talbott views the housing market as a house of cards on the verge of collapse. He predicts rising interest rates and plummeting property values, followed by widespread foreclosures that will not only affect the real estate industry, but almost every aspect of the economy. ‘It’s already started,’ says Talbott. ‘We’ve had 20 years of up, up, up with real estate. This spring will be brutal.’”
“Talbott regards the latest data on the Bay Area housing market as mounting evidence for his prediction: rising interest rates, decreasing appreciation, 10 straight months of declining sales and, in January, the lowest number of sales in five years.”
“The problem, he says, is that home prices are way overvalued. As evidence, he points to the growing discrepancy between Bay Area home prices and rents, an indicator commonly used by economists to determine a property’s true value. RealFacts puts the average Bay Area apartment rent in the fourth quarter at $1,324; DataQuick calculates that the typical home buyer in December committed to a $2,867 mortgage payment.”
“‘It paints a very scary picture,’ Talbott says. ‘Something has economic value because it has cash flow. If you discount for general inflation and go back 120 years in history, you’ll discover that, in real terms, housing prices were relatively flat until 1997, then (they) shot up about 70 percent.’”
“To buy these overvalued homes, he says, many consumers overextend themselves financially by borrowing more from banks. They end up paying an inordinately high percentage of their monthly income on mortgages. In Los Angeles, he points out, the average new homeowners, usually a young couple, are spending 55 percent of their monthly income on a mortgage payment.”
“Banks are lending more, he says, because they are sticking to their old qualifying formula of computing the ratio of the loan applicant’s salary to the mortgage payment. They’re doing this, he said, without adjusting for inflation. ‘So the banks are using the same stupid formula. They convince these young couples to borrow a million-dollar note that they’re never gonna get out from under.’”
“To make matters worse, Talbott says, an increasing number of borrowers are taking out variable-rate and interest-only loans. Half of all Bay Area home buyers used interest-only loans to make their purchases last year. With so much of their income already relegated to their mortgage payment, says Talbott, even a small rise in interest rates will push many to, and beyond, their limit.”
“People should protect themselves, Talbott says, by divesting themselves of any investments in real estate. They should sell their vacation homes. They should get out of any variable-rate or interest-only loans. They might even consider selling their primary residence, investing that money in something other than real estate, and renting for awhile. ‘And after this mess,’ he says, ‘cash will be king.’”
‘Renting is not the route to wealth.’
Who ever said it was? But overpaying for a roof and walls isn’t either. And from Lloyds SFC piece:
‘Now, I saw that our flexibility, creativity and cultural privileges were in part due to the reality of late 20th century coastal California real estate’
Just made a coffee run and heard some more bs on the radio why realtors are so great. They claim they get a lot higher price than a fsbo. Well that may be true because the fsbo probably doesn’t know the shady appraisor in town for that inflated appraisal. “Tear Down” that wall to the MLS and we might have another story
There was a study done, 1-2 yrs ago I think, where they looked at homes sold by realtors for their clients (sold price and days on market) and compared that to when realtors sold their own home. I don’t remember the specifics but something like when they sold their own homes the house was on the market 10% longer and got 3% more for the house (and I think they factored in commissions). They were willing to hold out longer for more money when the house belonged to them - not a wise move in this market to be sure.
The wisdom of selling a house as a FSBO requires consideration of a lot of factors. OT, The guy who owned a multi behind one of mine tried it ~ 2 years ago when it should have been a breeze, IF he had done the least little bit to make the house and yard look good, but he couldn’t or wouldn’t put on his buyer eyes and he is a cheap lying SOB. He finally went with a broker and sold it a year ago. I got involved when I saw it was for sale by his broker and called to find out if the boundary survey I had done -and informed him about- was disclosed by him (about 1/3 of his back yard was mine). It wasn’t. That was fun sending letters and faxes to his broker advising him of his client’s deception and some legal threats to put them in their place prior to the sale going through. Word to the wise….. ALWAYS have a boundary survey done of your property and record it in the city records. You never know what your neighbor may try to get away with!
Many factors here. If a realtor holds out with a client house, it may end up not selling during the contract time or even at all. That can be a disaster. If things don’t go through for the realtor then they have only themselves to blame and they are still realtors. This looks like it mirrors the difference in risk for the two transactions.
Actually, when I run the numbers for a nonbubbled market, renting is MORE expensive then buying if one excludes payments to principle.
And even in a bubbled market, if you assume you are going to be in the same place >15 years (IMO, an unrealistic assumption) and you assume that rents continue to go up at 3%/year (IMO realistic), it is cheaper to buy in the >15 year horizon, as buying is a great inflation hedge. (Especially in CA where Prop13 caps property tax increases at 2%/year).
With unrealistic assumptions, all conclusions are possible…
Would you say buying is a great deflation hedge? Because the last time overvaluation reached current levels in SoCal, deflation governed housing price changes over the next six years.
You have obviously never had the pleasure of being upside down on a house. That being said, I would probably buy if I lived in a less bubbly market if I had a long time horizon.
Deb,
Home prices have generally gone up since 1945, but sixty years of steady inflation does not equate to guaranteed permanent inflation, especially at the end of a mania. (Refer to Japanese home price changes since 1990 for contrary evidence).
I think there is probably no simple answer to “is owning the route to wealth?”. But one thing I’m certain about is if you buy around the peaks, you might never be able to sell at better price ( inflation adjusted) again in your life time. Even in CA and NY, many homes have never reached the peaks of the previous bubble.
Owning a home in that case pretty much locks in your cash in a non-performing investment. It’s even worse than spending it on education or something that enhances your life. There are too many people living as slaves of their homes and dreaming of being rich when they retire. The problem is they don’t have many healthy years left to enjoy the money when they can finally spend it.
nick youre a moron or a real estate broker
I don’t understand why more people don’t “get it” that an I/O loan is effectivly the same as renting. Their (fractional) ownership share, that is the amont of the purchase contract that they have satisfied does not change once cent. Thus at the end of the I/O period, they still “own” nothing. They do have an option to buy at the earlier (and soon to be higher) price, and they do have some control over change in market value in the home (ohhh, can they borrow against negative appreciation?) , but that’s it.
Bach and like have been fraudulent by omission in that little aspect of how things work.
I was just looking at my mortgage statement this morning: 3 years, 4 months (sept ‘06)- That’s how long it will be since I’ve purchased my home until I pass the 33% paid-off mark. I’ve only been a little whle and I am *anxious* to get this thing paid off (2015 at this rate). Most of the world must think I am some sort of freak to think that’s a good thing.
Dang, I’m grumpy this morning.
Amen, this omission pisses me off to no end - the pundits seem to act like “everyone will be fine with a little belt tightening, and eat out less often…”, etc. This totally ingnores the fact that the reseting loan payments are going to slaughter a lot of people if house prices flatten.
A family member *just* bought an overpriced place in Sacramento with an I/O ARM (and can barely afford the teaser payment), and my parents told me “well at least they’re building equity…” *sigh* most people really don’t get it…
You can lead a horse to water but you can’t make him drink. I have strong-armed a relative or two when it comes to these type of decisions because I know I will be the one supporting them in their old age.
Carol Lloyd is doing pretty well at keeping up abreast of the real estate news, but here’s all one needs to know about her wisdom: She bought a house in San Francisco in June, 2005. And if the first sentence of the column referenced in the original post is correct, she’s already taken out a HELOC which she is using to the fullest.
Oops, here is the link.
She suffers from the same affliction that sometimes grips Mrs. DeepInTheHeartOf… Deciding that her circumstances, because she wishes so hard, are exempt from the harsh reality of a world that doesn’t give a f***.
Hmmm.. Posted reply, but didn’t see it post.
“In Los Angeles, he points out, the average new homeowners, usually a young couple, are spending 55 percent of their monthly income on a mortgage payment.”
In CA: 8% fica, 9% state tax, 28% fed tax, and 55% for your mortgage. Gee, this leaves exactly 0% to cover everything else.
Everything else comes out of the 20% YOY appreciation!
In CA: 8% fica, 9% state tax, 28% fed tax, 55% for your mortgage and…
10% HELOC draw.
It’s interesting watching all of these people now try to be the one who ‘called’ the bubble bursting - they want to be relevant in the next few years. I think that desire to ‘call it first’ will drive the media to hype the bursting this year. That said, its nice to see these things in print!
The Economist called it in spring 2003 with 13 pages of articles backing up their argument. They’re clearly the first major publication to “call it”.
Robert Prechter predicted in his book “At the Crest of the Tidal Wave” published in 1995 predicted that the stock market was going to crash and that RE would also crash. He was early on his timing, but he has been saying since 1978 that the stock market would first have the biggest bull market in many years (meaning over 100 years) and that it would be followed by a correspondingly huge crash that would also involve a crash in real estate. The stock market crash is at the top of a bear market rally with the worst to come, and the RE crash is just beginning.
However, his publications are not what I would call major publications.
The latecomers to the prognostication party have to state their message more vociferously than the visionaries (Robert Shiller, Ed Leamer, Dean Baker, The Economist, the IMF, etc) to obscure the perception that they are irrelevant.
In today’s Reno Gazette Journal, the largest local realty company (Dickson) took out a full-page ad in the front page section, and the topic of the ad was “why there is no bubble in Reno”. This is not denial, this is lying; they know better.
Their despiration is palpable. We went out to look at a few houses this weekend with a BUYER’s agent. Many homes reduced in price, or on the market for 150-200 days. New HBs undercutting their former customers by $50K-$60K. This is getting interesting!
Talbot actually indeed did call it early. He’s no new comer.
There is nothing new under the sun.
For the new readers check out this cartoon from 1875.
http://en.wikipedia.org/wiki/Image:The_Way_to_Grow_Poor%2C_The_Way_to_Grow_Rich_–_Currier_%26_Ives_1875.jpg
Cash will be king think about it one of the few undervalued asset classes is cash.
My prediction is that this time next year, Mr. Talbot will be a guest on all the Sunday morning news programs. All will ask him how he was so darn perceptive to see what so many other “experts” failed to see immediately before the crash.
I wish we had a good public survey on whether there is or is not a housing bubble. From what I feel I think the public has got no clue what is going on. I hate to say it but I do believe we are a minority on this issue. A lot of people are making money and don’t want to come back to reality.
A lot of people are making money and don’t want to come back to reality.
Don’t you mean “A lot of people think they’re making money and don’t want to come back to reality”?
The public survey would only have a hope of validity if it were taken from an INFORMED public. Those who are renting or own and are just going about their daily lives (like my landlord) have no idea what is going on and if there is a report on the news or in the paper, they just tune it out because they are not interested or think it doesn’t apply to them.
In the last few years I’ve learned that the desire to be informed about the world around you is quickly disappearing.
Wait for the wake up call, and then the light will dawn on Marblehead.
“From what I feel I think the public has got no clue what is going on.”
We are in an odd situation of being of more average income while living in a very well to do town. (I just liked the historic homes…who knew?) My husband is an engineer and works w/people with a blue collar grasp on things. THEY know what’s going on. I’m home with the wives of the more well to do and they are Clueless!
They probably have more of a cushion when there is a downturn. Perhaps that’s why they’re not paying as close attention. But really when I talk of these things they don’t know what I’m talking about. The difference in conversations going on at h’s work and the coffeeshop here in town is quite startling.
OT:
I realize that this is a housing bubble blog but there are some very striking similarities between the housing bubble and peak oil.
Respected economists and independent experts being dismissed like Cassandra of Greek mythology.
John Q Public wanting the party to never end.
The gov’t wanting the party to never end.
The industry wanting the party to go on forever.
For the people who understand the future scenarios see it is as very depressing.
BP’s retired chief geologist (36 years experience), Chevron and Matt Simmons energy investment banker are the reputable voices sounding warnings.
Just like Chris Thornberg, Shiller and Baker have been on the housing bubble.
The Federal government has directed the Southern California Association of Governments to work on post cheap and easy (peak production)oil planning. See the SCAG website next week when the powerpoints are posted.
One of the experts actually shared a quote from this blog, wrong timing is not wrong, or as Chris Thornberg has said, I don’t know where this bubble is going next, it is kind of like a crazy person, you can’t predict what a crazy person will do next.
One of the experts mentioned one of the mantra’s of peak oil as better to sell too early rather than too late. Similar to my situation in the housing bubble.
Back to the regular programming.
‘As long as you’re alive you have to live somewhere. The question is, will you pay someone else to live there, and make that person rich, or will you pay yourself to live there and make yourself rich?’
I will pay someone else 2/3 what it costs them for PITI, maintenance, the gardener, and the rec club membership, thank you.
Yeah, my landlord isn’t getting rich off of what I’m paying for my loft.
Mine isn’t either. In fact I feel sorry for him.
Here is a prediction which you likely are reading here for the first time (the thought just occurred to me!):
The next few years will likely be one of the most costly to the aggregate US housing stock in terms of depreciation (physical deterioration) over the course of economic history, thanks to a housing stock which is much larger than needed (e.g., 14K vacant homes in PHX).
Why is this a problem? When the dust settles on the bubble, we will find ourselves with more housing than we can collectively live in, or afford to maintain. Many of the vacant homes will end up as rentals, and cash-strapped owner-landlords will not have near the same level of interest in maintaining the value of their properties as an owner-occupant would. (I am already seeing this in the place we rent — looks like the roof is falling apart, and the owner seems to not care; I would have had it repaired by now as owner-occupant).
Can anyone provide similar figures for SD to the 14K for PHX reported here recently? (I know the number is high, thanks to those darkened windows in the downtown condo towers…)
I agree. It’s amazing how fast houses and buildings will deteriorate when they aren’t receiving routine maintenance. Many of the newer homes I see are built very poorly and should deteriorate at an accelerated pace.
Check out this great article on the issues with long-lived housing stock:
http://www.nytimes.com/2006/03/05/magazine/305glaeser.1.html
If Phoenix is overbuilt, then it may be decades before it depreciates, which means a long, agonizing adjustment. According to the above, Detroit’s long lived housing stock doesn’t disappear, which means a long period of cheap housing.
I read this article a few days ago, and was one of the best articles I have read in some time.
The article does not say, but I wonder if his research takes into account the demographic effects of the end of rent control in the mid-90s (which were quite noticeable in Somerville). Also a big change in Cambridge and Somerville in the late 80s was the completion of the Red Line subway extension, bringing yuppification out to the areas around the new stations.
instead of a prediction, just check how they are handling this in the Netherlands:
housing corporations here get huge government subsidies for demolishing ‘depreciating properties’ (that is housing that would be considered luxurious just 10 years ago) and replacing them with fewer and far more expensive homes. They do this with thousands of rental homes at a time. This creates a shortage and sure drives prices up because it eliminates the cheap housing stock. The people who were renting the homes are not able to pay for the new ones, so they get huge subsidies as well.
As you can see, the Dutch are much more clever in handling these situations than the US
When rents are covering
When rents are covering less than 1/2 of the mortgage and the market has gone flat (to declining), the renter is getting richer and the LL is getting poorer. Have PITI on them.
a little ot -
finally. a significant increase of listings and open houses here in culver city this morning. lots of them have been reduced, with 3 sfr’s under 600k asking.
Alert Alert ;
NEWS FROM CRASHWATCH :
Terrorism threat just went to a 4 year low
Flipperism threat just went to a all time high
“I read that (SF Chronicle editorial) this morning and was completely disgusted. Then I decided maybe I should just move away from the Bay Area because it’s obvious that people here have gone insane.”
Is this new information?
I put 50% down on a overpriced turkey last year ,( just needed a place to live ). Might be lucy if I have a $1 equity when everthing is said and done
Let me see if I understand this right? I can rent for $1300/mo. or I can buy for $3000/mo. That’s a $36,000 mortgage payment so of which might go to principle. In a 25% tax bracket I’ll be able to write off $9000 against my taxible income; but wait, without that payment I can write off $9500 and not pay a dime in interest. Therefore, I have to exceed my $9500 standard deduction (married) before I can itemize any further deductions. The way I see it is $1300 + $900 would be close to a break even point between renting and buying. This even gets better when I throw in property taxes, insurance, building maintenance, gardening, etc.
You remind us of one of the many reasons why it is folly for low-income buyers to get in to a home through the I/O Option ARM window. After subtracting the opportunity cost of a generous standard deduction for low-income taxpayers, the mortgage deduction offers little benefit. It is the wealthy who reap the spoils from this Federal tax shelter.
gardening u lazy bstrd
“Banks are lending more, he says, because they are sticking to their old qualifying formula of computing the ratio of the loan applicant’s salary to the mortgage payment. They’re doing this, he said, without adjusting for inflation. ‘So the banks are using the same stupid formula. They convince these young couples to borrow a million-dollar note that they’re never gonna get out from under.’”
This is so scary — the old formula (maybe a 30-40% limit on the loan payment as a share of income) assumed a 30-yr-fixed, and that inflation would make the payment shrink as a percentage of income over time. But now we have people getting with payments at 55% of income in a slow-growth environment where deflation is a real concern, with resets soon to drive the payments even higher. Sounds like a perfect storm…
I had a discussion about this 2 years ago with a well known RE broker on a Dutch forum. He thought it would be perfectly fine if people would spend 75-80% of their income on housing. According to him there was lots of room for further price increases (we are now around 30-40% of income for housing in NL, which because of tax structure etc. is the limit except for very wealthy people).
I’m sure he was serious, many of these people are totally disconnected from reality.
“They should get out of any variable-rate or interest-only loans”
I saw a Ditech commercial while at the gym yesterday, basically sending out the message that it’s time to come in and change to a fixed rate mortgage. Of course their refinancing business needs a shot in the arm, but more importantly I think it’s an indicator of the public waking up to the fact that their mortgage payments are soon to go through the roof.
Hey people. I havent posted here in several months due to being busy but I have been keeping an eye on the RE market.
I just read Talbott’s new book “Sell Now” also and it is very well written and insightfull, if also very scary on what the future holds for the American economy in the near future due to this craziness and irresponsibility we call the housing bubble.
What really makes you think is what will happen to these people who are surviving or at least making ends meet off of thier increasing home equity, what will become of California’s economy? this really makes you think. I had a though the other day that people are so used to home just going up that they believe this is a certainty. Now, ask them what will you do if prices go down 10-30%?Of course they will say this is not possible, but what if they do?
This reminds me of what Robert Shiller said on that real estate show last year on CNBC where he pointed out that So. Cal. RE prices crashed in the early 90’s. After one of the RE guys said this was due to job losses in the defense industry, Shiller just said”but it happened”. It really doesnt matter why it happens, only that to me the math of this whole so called housing boom does not add up and when it ends it will be very bad and lives in So. Cal. as well as other areas will change for a long time, scary stuff huh?
One more thing. A question I would like to pose to every body. We all know that prices in California have pretty much stopped going up lately if not even going down slightly and inventory has exploded. Still I listen to several RE radio shows on the weekend (97.1 in LA). They all say real estate is forecasted to appreciate 10-15% in So. Cal. this year. Here is my question(2 parts)-1)How can they make this eroneous statement? and 2)how come no one calls the on it?
Any how, be good all and good luck.
1)How can they make this eroneous statement?
The First Amendment of the United States Constitution.
and 2)how come no one calls the on it?
The pervasive psychology of homeownership.
very scary on what the future holds for the American economy in the near future
Military spending is up. Housing the troops should be profitable. Any apartments for sale in Iraq?
My two cents? Okay…
The only thing one knows for certain about a forecast is that it will be wrong. A forecast, at best, is an estimate of an unknown future event. We won’t know if prices will rise or fall and by what magnitude until the data is in. (ex ante vs. ex post, as they say in the high falutin’ financial textbooks I read in grad school. Loosely translated, ex ante is going in, and ex post is the actual after the fact).
How can they make this erroneous statement? Two part answer - first, we won’t know if it’s erroneous until the data is in, and second, it’s a self-serving statement.
How come no one calls them on it? Well, you just did, CrazyintheOC
. But you called them here on this blog where you’re preaching to the choir, rather than to a more mainstream audience.
The cardinal rule of being a good liar is to tell your mark what they want to hear. In the larger, mainstream audience people want to hear that values are still going up. That may be why you’re not hearing them called out on this point in the mainstream.
Prices could rise by 10-15%. (and monkeys could fly out of your… )
In all the analysis of buying vs renting I read people NEVER factor in the monthly cost of DEpreciation. If the selling price of a home FALLS by $12000 in a year, shouldn’t one ADD $1000/month for DEpreciation?
Since I think it is very likely prices will be falling for the next few years, at least in the most bubbly markets, this should be considered when discussing the costs of buying vs renting.
Dean Baker factored depreciation in his rent vs. buy calculator. Of course, many people criticize the calculator because it always comes up with the conclusion to rent, unless one puts in very unrealistic numbers.
“If the selling price of a home FALLS by $12000 in a year, shouldn’t one ADD $1000/month for DEpreciation?”
No, more. You forgot that homes generally depreciate to the ground unless $$$ is sunk into maintenance costs.
His assumptions are ludicrous!
#1) Few landlords raise rent 5% a year, ever year.
#2) Where the hell can anyone find a house for 200K? Something that was 200K in 2003 (when the Fed study he quotes was done) is light years ago at today’s prices - as that 200K home would be 100 to 150% higher (400 to 500K) right now.
I’m so sick of all these arguements people like him are making. It’s not only irresponsible, it’s downright immoral in my opinion……..
>>>>>>>
The price/rent ratio in his example is about 11:1. Where I live in San Francisco it’s about 35:1. As you said, “good luck”!
The best RE perma bull argument is to build a time machine go back to 2001 and buy RE then you will be rich (for now) just like them.
That is exactly the folly in trying to “time” any market. No one has acrystal ball or a time machine. You will never be 100% right no matter what you do. Fear of being wrong causes paralysis. Just use common sense and don’t overextend.
Agreed market timing is best left to the pros.
I wouldn’t sell and rent on my primary residence solely for the purposes of cashing in on the bubble.
However if one’s career requires mobility then prudent action requires at some point divesting of RE. I think that long distance landlording is a bad idea.
The real trick will be to load up on RE when it cashflows and offload the excess RE when it is wildly overvalued, keeping the primary residence with very high LTV ratios.
I have sold my primary residence, and now rent. Cashing in on the (Australian, I sold in 2004) bubble was a factor, but not the biggest factor.
Due to specific pension fund issues which would take too long to explain here, I know for certain that I won’t be working with my current employer past mid-2010. Barring an absolute economic catastrophe I won’t need to work at all, and due to health reasons I am very likely to want to move away from my current location.
I don’t want to be a landlord during retirement, so I decided to take the money on offer when I thought prices were high. Like-for-like prices have fallen about 5% in the last 2 years, and seem flat at the moment despite the best efforts of the RE shills in the MSM. I have made about 20% on the sale money, so if things started to inflate quickly I could still get back in for cash :).
i did buy now im rich but now the buble bursts and im richer so what.
“People should protect themselves, Talbott says, by divesting themselves of any investments in real estate. They should sell their vacation homes. They should get out of any variable-rate or interest-only loans. They might even consider selling their primary residence, investing that money in something other than real estate, and renting for awhile. ‘And after this mess,’ he says, ‘cash will be king.’”
This sounds like good advice…IF you bought at or near the top, or IF you want to lock in your “unrealized potential gains” (i.e., paper appreciation). But say I bought in 1997 (20% or more down, 30yr fixed, payment at 28% of monthly gross) and I love my house and I don’t want to move? Unless the market tanks to below what I paid, I won’t “lose” any money. And even if my house is worth (or “valued”) less than what I paid for it, as long as I stay in it, it’ll eventually come back. So I don’t think this advice is necessarily applicable to everyone.
That said, I’m waiting this thing out and building my down, and I’m even looking at vacation homes—because isn’t the bottom of the market (or near it) a better time to purchase real estate of any kind? Seems to me that RE is still a good investment if you’re smart about it, just like the stock market: buy low, sell high; buy and hold for the long term; don’t look for the quick buck; and although there are peaks and valleys, the market always trends upward.
the market always trends upward.
Oh it always go up. Even if we discover lightweight, strong and cheap materials to build future houses, alternative energy that will allow people to live off the grid, and internet solutions that allow people to work from home, people will still be willing to pay $700,000 for a cape 40 year old cod in the D.C. area right?
Housing always goes up…
It sure did when the population bulge (Baby Boomers) were forming families and buying homes 70s through early 90s. It’s very possible that the Boomers have contributed to inflation since their sheer numbers would create a tremendous economic environment, especially in a country with a lot of resources. What happens as they transition into **saving mode**, esp in light of the pension crisis. Let’s not forget global wage arbitrage, which will likely kill wage increases in the US for some time to come.
Just because inflation has been the dominant economic force since the Great Depression, DOES NOT mean inflation is here to stay.
“It’s very possible that the Boomers have contributed to inflation since their sheer numbers would create a tremendous economic environment”
I’ve said for years we have paper tiger immigration laws because the government didn’t want to upset the illegal’s impact on housing.
There are two things that you should rethink.
First, it doesn’t matter WHEN you purchased your home. If you own it today, it will be worth less tomorrow if prices fall. Just because it may be worth more than when you bought it, that doesn’t mean that you aren’t losing money. As you said, buy low and sell high. If you hold your home now, you miss the opportunity to sell it, rent, then purchase another home in a few years for far less. In the end, you will have the same house and also money in the bank.
I think that today’s homeowners are really missing this basic point, that EVERY homeowner is losing wealth as prices fall. It really doesn’t matter when they bought their house.
Second, most people (at least on this board) believe that the market peaked only in the last six months, and that real prices will fall by as much as 30%. We are NOT at the bottom. The advice is NOT to buy now. It is to SELL now.
I didn’t say “go[es]“; I said “trends.” There’s a difference. I even italicized it, to no avail.
How do you figure? If I buy a stock at $5 and it goes to $10, then drops to $2, I haven’t lost money unless I sell at $2. Isn’t that right?
If I’m happy to hold my house and pay it off, never taking advantage of elevated values, why is that perceived to be a bad thing? I look at a house as housing, not a money-making opportunity.
Finally, it’s only worth what someone will pay for it.
“If you discount for general inflation and go back 120 years in history, you’ll discover that, in real terms, housing prices were relatively flat until 1997, then (they) shot up about 70 percent.”
That is what has been so remarkable about the real estate market–record appreciation coupled with relatively low inflation.
As for the Lloyd article–an irrelevant piece of fluff. This blog has bigger fish to fry.
up or down, once everyone agrees it no longer is true- so if everyone starts saying RE will crash, it won’t
The fact that the RE cycle peaked last year is apparent to anyone with half a brain. I was surprised that rising prices continued past 2002. It is not possible to time the market. One can call a peak or a bottom only in hindsight. We can only look to history to guesstimate the duration and degree of these cycles. I am not selling anything. I do, however, have plenty of cash and will be looking for some good deals in the next few years.
I am a boomer (48) and bought my first house at age 22. I am thankful to my (long-term) tenants every month as the mortgage balances drop and drop.
I would agree it is not possible to identify the exact peak or bottom in advance, except by great good luck. But it is possible (and not difficult) to identify “cheap” and “expensive” by relations between incomes, rentals and house prices, as well as of course secondary factors such as the degree of speculation in the market and the looseness or tightness of credit standards for purchasers.
But you have to be prepared to miss the peaks or bottoms by a year or two or more and potentially leave considerable money on the table. You must sell before the peak anyway because liquidity will disappear very quickly (as we are seeing in the inventory numbers) after the emotional peak has passed.
Until 2004, owning a home as an investment only beat inflation by 0.2 to 0.7% per year when you compared 100+ year trend. You get 0.7% if you track the pricing to 2004 and probably even worse than inflation if you only track the pricing to 1996.
I’d rather put my money in stocks in the industries I’m more familiar with. Even index funds that put money in all the top 100 or 500 companies outperform inflation by a much wider margin.
goleta,
You are not factoring in the rent received and the leverage in contemplating the returns. Other people are paying off/ have paid off a few million in mortgage debt. Since I have no job, I qualify as a “real estate professional” for IRS purposes and there is no phase-out of real estate writeoffs.
I am not talking about “my home” rather my rentals. That said, owning my home and my second home “free and clear” are benefits of paying a tax-favored mortgage. I don’t care if some say it is merely forced savings and I could do better investing the money elsewhere and renting at a lower cost. I have other investments but is very important to me mentally to have my homes paid for.
(Since I have no job, I qualify as a “real estate professional” for IRS purposes and there is no phase-out of real estate writeoffs.)
I assume that’s because of your rentals?
Yes, the number of rentals allows me to meet the (if I recall properly) 12 or 15 hrs per week “working” on RE to qualify for the phaseout exception. There was a time period after 1986 when we were phased-out and then the “real estate professional” exception came into play around 1994. We actually got audited on it the first year. The IRS tried to deny 150K in writeoffs. They took 6 of our properties and examined every single item and receipt. We ended up owing $240 dollars.
va_investor
I did my calculation when I sold my previous home in NJ 9 years ago. Even though I sold the home I owned for 3 1/2 year with 18% gain ( probably close to break-even with inflation during that time) , the return from my 25% down-payment was less than 15%/year when everything but inflation factored in . The rent did cover property tax and mortgage payments. But the only reason it was profitable is I bought it at the bottom. The original owner bought it new in late 80’s and sold it to me at 35% loss, not including loss in inflation.
Now fast forward to the current pricing. With 0% down and a 30-year fixed rate mortgage, PITI is close to 4 times of rent in Santa Barbara and other SoCal towns.
Maybe 2 to 3 times in VA? How can you be profitable owning those homes? I don’t think you can do that until the prices fall 75%.
I’d say 15% per year was far and away above inflation. The entire argument/discussion re: rentals is how long you intend to hold. In my area (Northern Virginia) there was only a brief window in the late 90’s where a 20% downpayment resulted in positive cash-flow.
Our plan, hatched in the early to mid 80’s was to accumulate a sufficient number of properties such that, once paid for, would provide a hefty stream of income in retirement- either from net rent or owner financing.
Being a novice flipper is like comparing apples to oranges. We bought a lot of property at the last “peak” in 1988 and 1989. Yes, we were underwater for a number of years but lived to tell about it.
I fully expect prices to drop. The unknown for long-term buyers is future interest rates. The “numbers” didn’t work too well 20 years ago -but they are working just fine now.
I guess the answer to your question is that I am long-term and have 1031′d into any replacement properties and have bought all my property under-market. It takes effort. But, I lost major $$$ in the stock market - so I’d rather stick with something I know something about.
BTW - I have not put “new money” in the RE market since 2002.
Buying a house to live in and eventually pay-off is vastly different from owning income property.
From the Wells Fargo web site: Wells Fargo Home Mortgage is giving you an exclusive opportunity to see David Bach in person. His dynamic, 1-hour presentation will change the way you think about your home — and your financial future.
Get sound, actionable advice on:
The 5 reasons why homeowners build wealth (and why renters don’t!)
The 6 easy shortcuts to buying your first home
The 4 strategies for becoming a millionaire homeowner
The 5 ways to protect yourself from a real estate bubble
The 2 steps to automate your home savings plan — and why
David Bach speaking events, hosted by Wells Fargo Home Mortgage.
See David in person during his 14-city tour during March and April.
that sounds good; there will be millions of people to sue this guy for his bad advice
Today, I was watching a local real estate showcase program. The were pushing one house at 649K as “below market - this is your chance of instant equity.” Still can’t get my head around that one…….
Iff market prices were in proper proportion to rental income cash flow, it would be better to own than to rent, given the reality that we live in an inflationary fiat-money economy that puts anyone who intends ever to retire in the position that an effective inflation hedge for living costs is an absolute necessity. Since housing is the largest single-commodity component of a retiree’s cost of living, and about the only one whose cost can be fixed in advance, it is the most important for which to put the hedge in place.
A good friend who is financially sophisticated often asks why, if I am so convinced that real estate is going to crash and we are going to enter a deflationary condition, I do not sell my home and rent. While there are several additional minor reasons*, the most important is that we cannot be certain that there will not be a future hyperinflation, and if there is, the negative impact of not having at least one’s housing costs hedged will be so great that the potential gain from selling now and buying back in cheaper after the crash just isn’t worth it (in our area homes are only 50% overpriced, not 200-300% as in the real bubble areas). If homes weren’t overpriced at all, the hedge would be all the more compelling. (In fact, home prices even in a completely sane market are probably always somewhat elevated by their value as an inflation hedge.)
In the bubble areas, though, people have done the opposite of hedging, they’ve taken on such highly leveraged speculative positions that they will be devastated by anything other than hyperinflation.
Although many think that Bernanke will resort to hyperinflation, I don’t think so. His writings indicate that he believes strongly the Fed should run the printing presses just fast enough to keep inflation very slightly positive. But there is always the chance that Congress will take away the Fed’s independence, or a future President will pack the Fed with people of a different ilk.
“in bubble areas, though, people have done the opposite of hedging….”
Yes, there definitely has been a good amount of gambling going on and these people will lose money. I don’t think too many will be “devastated”. It is sort of like the stock market was. Many people got hurt and learned a lesson - few went bankrupt. Business carried on as usual.
New site I saw on TV and they say it’s free. Can anyone try it and vouge for its accuracy?
housevalues.com
Thanks!
oops
It’s housevalues.com
I wonder if it’s similar to zillow.com
The housevalues.com link didn’t work. I just finished Talbot’s book. Well written, time will tell exactly what will come about. I actually left the Bay area because of being priced out from just living there. Our rent was $1150 (2 bd, 1.5 ba 900 sq ft). Buying would have made sense in 2001, but not by 2005. Saw many people who I will say will become stories of classic FBers (if not knowing that term, check http://www.housingbubblecasualty.com). Their incomes were far less than mine, and I couldn’t believe the mortgages these people had taken on. Also, not to mention all of the toys.
And for CA income, don’t forget the 1% tax for State Disability Income), and the prop tax for recent purchasers (about 25% of the average wage, insurance (who knows what percentage - flood, earthquake, fire, etc). Oh yeah, most people haven’t got those, can’t afford it. When the big one comes (either flood in the delta to destroy over 100,000 new McMansions in the Sacto area), or earthquake everywhere, it will be Arnold and George W to the rescue.
Ben, I am very flattered that you used my posting in the first couple of paragraphs of your part. Thanks for such a great blog.
David Bach is a crook … he was dumbed by Morgan Stanley in 2001 for pumping internet stock to high wealth clients. They lost their savings and he lost his job. Now he is pumping RE, due to fact he cant work in Wall Street ever…
Should that be ‘dumped’?
OTOH, given the nature of his book, as you were :).
Should that be ‘dumped’?
OTOH, given his book, meybe it should be ‘dumbed’ :).
Should that be ‘dumped’?
OTOH, given his book, maybe it should be ‘dumbed’ :).
Oops, my bad. Looks like once a comment can’t be called back ‘mid-send’ :o. Can anyone kill the first 2 versions?
This reminds me of what Robert Shiller said on that real estate show last year on CNBC where he pointed out that So. Cal. RE prices crashed in the early 90’s. After one of the RE guys said this was due to job losses in the defense industry, Shiller just said”but it happened”. It really doesnt matter why it happens, only that to me the math of this whole so called housing boom does not add up and when it ends it will be very bad and lives in So. Cal. as well as other areas will change for a long time, scary stuff huh?
======================================================
RE crashed in Northern California too. Prices dropped as much as 40%. We had no Aerospace industry in the Bay Area. It too happened. Our recession was based on shift on tech, deep competition, globalization (yes even back in 1988-92) and industry competition. In 2000 we had, what some called ‘near depression’… over 20% jobs lost, however home prices continued to increase. There was no connection to Job loss and price declines. Interest rates kept the prices increasing.
Interest rates kept the prices increasing
That is the conventional wisdom, but I don’t believe it. I think it’s just a coincidence. The interest rate theory only makes sense insofar as the lowered interest rates make a property, bought with borrowed money, cash-flow positive at a higher purchase price. So the interest rate theory can explain a part of the price increase, but not all of it, and not even most of it in the bubble areas. This housing bubble, like all bubbles, has no rational basis at all, but rather is based on herd psychology. In this case, I think there is a strong element of fear in the equation. Consider all this talk of “being afraid of being left behind”, “real-estate is something secure that you can trust”. And then consider that the population is aging here in the US, and people get more conservative as they get older. (Why do you think we have an all Republican government?) Older people tend to save, in preparation for their retirement. And yet people are doing the opposite. What I think is happening is that Americans and people in other developed countries too (other than the Germans and Japanese) really believe that borrowing money to buy overpriced real-estate is a better way of saving than old-fashioned saving from income. They are wrong, of course. And when they realize they are wrong and that their retirement plans are ruined, they are going to suddenly cut back on spending and the world will be facing a massive demand shortfall (aka recession). The government will deficit spend like crazy to make up the shortfall, just like they did in Japan, so we won’t have price deflation, but we will definitely have massive asset deflation.
I agree; just look at some of the other bubble countries. There are several where a bubble developed despite high interest rates (e.g. New Zealand) or even increasing interest rates.
Housevalues.com has a lot of consumer complaints against it. Some kind of bait and switch thing. Sorry I can’t be more specific (because I flat-out don’t remember) but if you look it up on the internet you should be able to come up with the details.