What Are Reasonable Home Prices?
Several readers suggested a topic on acceptable home prices. “I’m curious as to what people feel are reasonable home prices, you know, at what price range would they jump in (and do they expect to see those prices)? I’m sure west coast folk would consider much higher prices reasonable than I would in the Philly `burbs (and much, MUCH higher than a midwestern dweller would). But I struggle with what I think is reasonable (because I’m ultra-conservative and frugal [not cheap).”
“I’m particularly interested in the following categories: 1) condos (non-luxury); 2) townhouses (non-luxury); 3) starter SFH.”
One replied, “I don’t expect prices to go back to 1999 prices, houses were probably undervalued then, and there’s been a lot of inflation since then. 2002 prices would be fair value.”
“Then again, the sheeple have pushed this thing so far that a mass foreclosures are practically inevitable. So maybe 1999 prices will return.”
One was brief, “I don’t care so much about the absolute price, but I’m looking for 1997 valuations (on annual rents) or lower.”
One had a formula, “I’d say 10x annual rents is a pretty reasonable valuation, it also corrects for the differential between Philly burbs and Urban San Fran. You probably should adjust that valuation for specific cases that are more unique (for example, the homeowners tax credit in DC probably means that a DC home will be worth a slight premium to other markets based on rents).”
Another looks at percentage terms, “IMHO the realtor who said a while back a 15-20% decline was probably reasonable may not be too far off. The problem is greed. If a 600K house drops 20% to 480K, so many speculators would jump back in the market and new ones would enter you would have the same bidding wars you had a year ago. I am amazed that so many people have so little concept of risk as evidenced by the number of speculators and flippers still buying properties everyday.”
Another countered, “I think it may be more accurate to say that people will want to jump in. I think that there won’t be enough people with the means and credit standing to be able to buy all the property that likely will tumble.”
“If it were true that they would have jumped on based on greed, then why would they not have done it before 2002-3?”
One reader concurs, “I agree, there are not many qualified buyers remaining that can buy at these prices and interest rate. The remaining first time buyers would need the low down ARM loans. If the interest rate goes up to 7% that knocks out alot more potential buyers because of these high prices. Thanks to a high speculation market alot of people got pushed out from being able to buy. The speculators won’t be able to sell to the first time home buyer or the locals. The greater fool can’t even buy.”
“The flippers will not jump in again if the prices go down to 2002 /2003 levels because so many of them will lose money going down.”
One notes buyer anxiety, “There may be some speculator activity but I think normal market psychology will take over. People usually do not buy into a falling market. They buy in a rising one and sell on the downturn.’
One couple looks at historic measures. “My wife and I are looking for a return to the mean. I don’t know if it’s a 25% or a 60% decline. What we want to see is a rent to price ratio that is within the historic average and an affordability index back to what it was for the past 100 years before this bubble.”
Five more also look at rents. “5-10% premium to own over rent. I have got a long way to go, my rental is currently 71% more expensive to own than rent.”
“Should actually be cheaper to own than rent, why else would rentals exist?”
“I’m no RE shill, but I can see paying more to own the place you live in, as even modest rent inflation will take care of this descrepancy soon enough. (But of course, the 300% differential between renting and owning my current rental is completely ridiculous).”
“Exactly, when I bought my first house it was much cheaper to own than rent. BUT I had to prove that I was a good with my finances and responsible enough to make the payments AND have the money to also keep up the property for the bank. The gatekeepers were very strict back then and your reward for jumping the hoops was lower monthly housing costs, in the form of PITI vs. rent.”
“In my case with this forumula, prices need to drop by 75%. Renting at $2000, Purchase at about $1M.”
When I took RE finance, we calculated buying prices using formulas to determine the present value of all inputs and outputs, AND to include an inflation adjusted return of say, 6%. When considering rents to purchase though, I also look at post-bubble employment prospects. Many areas of Arizona, for example, are developed with retirees in mind, not commuters. Those retirees aren’t here, so I wouldn’t buy in some areas at any cost.
At a 10% discount rate, everything is worthless in 10 years.
Why would anyone have kids?
Kids are an inflation-adjusted asset.
“Kids are an inflation-adjusted asset.”
Please elucidate.
Just my opinion, and I don’t have kids, but they are not assets, only a personal choice to have more likenesses of yourself (and mate) in the future. Unless you enslave them, they are not assets. But slavery is outlawed. I would guess you can consider kids emotional assets. They can enrich your life. They don’t make you financially richer.
They don’t make you financially richer
I take it your parents aren’t living with you and that you’re not sending them a monthly “stippend?” For such children, they are truly a financial asset to the parents!
My parents passed away years ago. I was making only enough money to support me and my girlfriend when the surviving one of them died in 2000. Humor is lost here.
Teach them to trade and they can help you out financially. I remember near the top recently that I was anguishing over some positions that I had that had had huge runups and was trying to decide what to do with them. Our son came down and had a look and asked me why not just sell them. I could always buy them back a little later. Of course I knew that but it’s different when you’re in the heat of the market. I think that saved me about ten grand.
A lot of wishful thinking is going on by people who don’t currently own their own home. Although I wish them well, I doubt that prices will retreat to 1998-1999 levels, although, of course, the remote possibility of that happening does exist. Prices will probably retreat 20-25 percent, overall.
25% only takes us back to ‘04 prices, still inflated. They’ll go lower.
Agree. My thinking is 2001. Wishful thinking would be 2000.
I would be extremely happy with 25%, that would be a 200K drop in price.
A friend of mine is a manager of Bank of American. They did a study and figured (this was 6 months ago when rates were lower) that:
If you are earning $100,000 a year, with a fixed interest rate and 20% down-the maximum amount of house you shold purchase is $300,000.00.
That barely get you a 700 Sq. Ft. 1 bedroom condo in Glendale, CA .
Yes, what do you think means as interest rates climb and incomes are stagnant?
Sounds like the old “3 times your income” rule-of-thumb that I always heard.
The median income in Marin County is about $95K. The cheapest house on the market is a total tear down in the boondocks for $290K. There is no decent house anywhere here for under $500K.
The median income in Marin County is about $95K.
Specifically…for joint return median income, 2004 information (most recent information available).
http://www.marinij.com/marin/ci_3887341
BayQT~
Silverback: I could not disagree more with what you are saying. Yes prices were undervalued before all this started, but now as usual we have overshot the mark (equalibrium) because every johnnyt scrub nuts wanted in on the action. So we will do so on the way down as well. It works both ways.
Calling for any percentage drop is a little too vague, and it all depends on things like inflation and health of the economy. I’m sticking with the fundamentals. When buying is at about the same price as renting is when we are approximately back to fundamentals, which is where housing prices will stabilize. Give or take. There is an emotional benefit to buying, balanced with a risk liability in terms of maintainance and capitial investment, as well as a hassle liability to buying–when you want to sell your place and move for instance. So buying may settle for a little bit above the rental rate, or a little below, depending on the state of the economy and general market psychology over the coming 1-2 years.
Everyone is saying 1-2 years, which is luckily how much time I have bought with the wife. Do you think it will happen that quickly?
Who knows, but at that point we’ll have a much clearer view of the situation. Things seems to be happening fairly quickly– it might be even sooner than that if interest rates keep going up at a steady clip. Two years is a commonly chosen time point I think because that’s when most of the current ARMs will be resetting, and without a strong economy + strong inflation the market will be flooded with foreclosures.
hehe… you have a good woman.
That’s how much time I bought. It has been a difficult sale. Up until this year the housing bubble was much more theory than data, now with the ballooning inventories, decreased sales and rising foreclosures I find mself on more than one occasion saying “See, thats what I was talking about”. Now I worry that there will be a right time to buy and she won’t because of the carnage.
I’m in the same boat as you. I have bought myself time by extending the lease out an additional 18mos on the house we’re renting in SD right now. All of last year, I was shaky ground because all I offer my wife were my theories on what was going on all the while, her coworkers (who make much less $ than we do) were touting real estate and buying houses with I/Os. You can imagine the conversations when she told them what I thought about housing in SoCal and SD in particular.
Same exact boat here, we should start a club in Socal. OT I have been thinking about putting a sticker on my car advertising the Housing bubble. It would probably get vandalized, but I have insurance. Anybody having the same thoughts or ideas?
I have not done it yet, because it seems that the media is catching on. It has not happened with the local paper yet( San Diego Union Tribune) I will give them another week. If a story is not printed I will begin to write letters to call them out.
Yeah, My sticker says “Honk if you think the Housing Bubble Blows!”
I’d like to see a thread about what these BUMBBLE Stickers would read. How about:
1) Got Bubble?
2) My REALTOR was an honor student at XX Middle School — Now S/He’s unemployed
3) POP GOES THE BUBBLE! (thehousingbubbleblog.com)
4) Lowballers have more fun!
5) If you can read this, your home is too close to a bubble area
anyone?
LOL #4 & #5 were pretty good
For my bumper sticker i was thinking to go with
“Boycott the Housing Bubble”
I will put one on my car in SD. I am holding a 30 year fixed at the moment (21 more to go) but I am hoping this bubble thing sorts itself out soon. Our 2/2 is getting cramped!
Nominal or Real?
I don’t think it will get there in nominal terms.
I absolutely think we will get there in Real terms.
at 2002 prices you’re in a massive recession
some areas are touching 04 now
S Boston,Cape Cod
I often hear people say that, even on this blog. Let’s review:
$449800: 485 sq ft condo near my house. (Source: Craigslist)
That’s $2900 / mo for a mortgage (100% fixed rate mortgage)
Comparable property rents for ~$1050 (source: Craigslist)
Note that I’m picking a good 1br at that price, which is presumably comparable, based on amenities offered. Cheap ones go for much less - $800 or so.
It’s little different for SFR - $700k for a 3br ($4900 mort.), but only $2200 to rent (”new appliances, granite countertops”)
So, please explain again how housing prices are only going to fall 20%? Just curious what reasoning you’re using. What, um, numbers, you are using. Really. Just curious.
Did you just pull that 20-25 percent range out of your @ss?
Anyone that’s traded the markets in the last decade knows that markets can have a mind of their own.
There was a very interesting article in a UK paper last weekend that blamed the big synchronous drops in markets around the world on Japan withdrawing liquidity. For a very long time, there was the very profitable Yen carry trade where you could borrow for nothing and loan it out at a profit. And Japan started unwinding that right before the mini-crash.
Now with the carry trade, you essentially had free money so of course players are going to leverage up as much as they can over time. Until things reverse. If there is a global withdrawal of liquidity by Europe, Japan and the US, then things are going down. Perhaps proportionally to the amount of liquidity withdrawn. One huge problem is that there are derivatives based on the carry trade and noone knows how much is involved there. So central bankers will step on the gas if things start heading downhill too fast.
As with stocks, I don’t think that you can say with any certainty how far the decline goes as it is dependent on
what the central bankers do. We could have something
that causes a liquidity meltup similar to what happened
after 9/11. Or central bankers could be really, really
serious about getting commodity prices down and drag
down speculation for a few years. Just as we’ve had a
great stock market cyclical bull since Fall 2003. We could
turn and have a cyclical bear for a few years.
I believe that we are in a secular bear that was first called
by Bob Brinker back in January 2000 and that we’ve been
(and maybe still are) in from the trough in 2003. We could
be moving into a cyclical bear now. But we’ll just have to keep an eye on liquidity to see if that’s really the case. If it is, then it’s going to be very painful. Will Ben Bernanke be up to the political heat if that happens? If it does, it’s not going to be much fun being the next president.
As far as the economy goes, it’s pretty hot in techland from where I sit. It was funny to note that Dell is going to hire a lot more support folks stateside - they’ve been getting killed in the customer support side for their home division for a few years. Apple was apparently going to expand in India in a big way but suddenly terminated their support staff and apparently is going to hire in the US.
On the bear boards, you know that the market is bullish
when all of the bears are crowing about how well they are
doing and bearish when the bears are all in misery and going long. In bull markets, everyone is happy as the net
overall money supply is increasing. In a bear market, both
bears and bulls lose out as the declining money supply makes for a much tougher game for all concerned.
I’m wondering if it will be the same with housing.
The historic norm (from about 1900 to the early 80s) was about 3 times the median income (currently $60,000). Sanity is going to impose itself, like it or not, so we could well see a return to the norm or something close.
I would say X times the median income for the median home, where X is the average for an area over a time in which there has been no significant change in employment or population trends.
In metro areas of the country, X is ~3. Historically San Diego has paid a premium, and our average X is ~8. During boom periods we get up to about 9, and busts are about 7. Right now we’re over 11, which is the highest ratio ever recorded, and makes San Diego one of the least affordable places to live.
I’d say if your area drops below its historic average, and it’s cheaper to own than rent, buy.
Thanks for the info!!!!
150 x rent = price
always has ,always will
93-96 was in that range
I know there has been a premium here, but for the life of me I don’t understand why. Yes its kind of nice here, but having lived many places in this great country, so are lots of other places too..
/scratches his head
The question is will they continue to simply trust the babysitter who states on the application that she make just over $10,000 to purchase that $1,000,000 home (of course with no money down) without verifying the income?
When rates were 12%, the standard formula was 2and1/2 to 3x income. Does this not adjust when interest costs are less.
I have owned rentals for 25years and, absent a short window in the late 90’s, I have never seen owning costs break even with rent (assuming 20% down and fixed rate) let alone less.
Multifamily housing may be different but other factors make this investment less attractive to me.
“When rates were 12%, the standard formula was 2and1/2 to 3x income. Does this not adjust when interest costs are less.”
No, that ratio has been pretty stable over time regardless of fluctuations in interest rates. As with everything else about economic statistics, there is a certain amount of variation on short time scales, but it’s clear that the last 5-10 years have been abnormal from a historical perspective, at least as far back as accurate house-price information is available. The rent-ratio rule that some people cite is a variation of the same rule—historically, on average, the percentage of income devoted to rent doesn’t vary greatly over time. Which is all just a way of saying that most of the housing has to be affordable to most of the people.
There’s still a few Greater Fools out there: Foreclosure Investors Reap Gains
Such conditions are attractive to investors such as Michael Termine, who previously has owned a bar, worked in construction and tried acting.
“I’ve always wanted to do the real estate thing,” says the father of two young children. “I just didn’t know how.”
Last year, he bought home-study materials from Foreclosures.com, including six compact discs, for about $400. Then he flew to California in November to take an intensive three-day course.
So far, he says, he has used home equity lines of credit to purchase four homes in foreclosure. He has sold two of them, he says, clearing about $160,000 in profit. Though he expects some transactions to be less lucrative, Termine predicts he can easily earn a six-figure annual income. One sign of his confidence: He bought himself an $82,000 red Porsche Carrera late last year.
Damn. Meant to close that tag
Way to invest your money wisely, car is now worth 60K. If I was a millionaire with an empty nest maybe. 80K could have gone a long way towards tuition, or weddings(if he is lucky enough to have a daughter).
For clarification, over a million liquid.
What is liquid in your opinion? Cold hard cash?
That or 6 month CD’s that rotate, or anything that can keep up with a reasonable inflation rate.
I am definetly not even close now, and it is hard to imagine. Still young, and have a lot to learn.
If a 600K house drops 20% to 480K, so many speculators would jump back in the market and new ones would enter you would have the same bidding wars you had a year ago.
Never happened in any previous crash. Speculators are jumping into RE with a simplistic expectation of ‘guaranteed’ significant appreciation - take that away, and they’ll run for the hills.
Speculators have already “moved-on” or are trying to. I doubt most will jump back in; just as I doubt most ordinary buyers will jump in near the bottom. They will be afraid that prices will continue to fall. It will take a rally to get most people back in the market.
The astute ones will be buying when no one else wants to. Just like any market.
Not me ~ I’ll jump in if and when it’s truly feasible for me. If the market dips from there, ok. My plan is to buy a place and stay put until my son puts me in a retirement home many, MANY years from now. I’m not looking to buy to make quick money - I’m looking for a home to raise my child in. I feel like the greedy have taken that dream from me.
Assuming that a good part of the price declines are due to rising interest rates, is it not a “false economy” to wait? Especially if you plan to stay put?
If I’m staying put, I can refinance if necessary. And were it feasible for me to buy now, I would. But prices are still too high for me. If they drop and rates go up to the point where the monthly payment remains the same as it is now, then buying is still not going to be possible for me. It really all depends on where prices go.
As well as interest rates. That is what will be extremely interesting in my eyes. If the housing market tanks, what does the fed do? Do they start dropping interest rates, and will that have an affect on the long term bond rates? I am very interested to see what happens. Any thoughts?
Have no idea what will happen with rates, but here are a few scenarios re: prices/rates. I’m assuming a 30-year fixed rate. The payment does not include taxes, but shouldn’t taxes be lower on lower-priced homes? Also, this is mortgage amounts only - I didn’t include downpayment. Because I’m conservative (and would want to avoid PMI), I’d like to put down 20%. Of course with a lower priced home, that’s a smaller dent out of my savings.
1) $200,000 mortgage at 6.5% = $1264/month
2) $180,000 mortgage at 6.75% = $1167/month
3) $160,000 mortgage at 7% = $1064/month
4) $140,000 mortgage at 7.25% = $955/month
Remember it is wise to keep 6 months worth of reserves, for your peice of mind, and to be prepared for the worst case scenario. I know it sounds sounds tough. Here in SD I am planning on putting 10% down. I can get a first mortgage at 417K for around 6.25% 30 yr fixed if I time it right now. Then I will take out a second for the difference at around 7.75%. Due to the rocky industries that my wife and I work in we will have 6 months to a year worth of reserves on hand in rotating 6 month CD’s.
I see no evidence from any statement or action that the fed is concerned with the best interest of homeowners. They wouldn’t have created this bubble if they were. I think they are first interested in the finance industry, and then the corporations, and then that’s it. Personally, I’m betting on a strong dollar, low inflation, and everthing else collapsing around it–that is, correcting. I may be wrong, but that’s where I am, literally, putting my money.
I hope you are right. The next fed meeting will tell us a lot. If they pause, then IMHO the housing market has raised there eyebrows. If they bump it another .25% your statement is that much closer to becoming true.
In that case a 50% drop would not be unrealistic here in San Diego.
Waiting in SD-
Out of sheer curiosity where have you seen that you can get a second at 7.75%. In todays market. Not trying to be flip I’m just curious
If you shop around you should be able to find it, that was the par rate for excellent credit over (740) and a loan amount over 50K. I have not checked in a week though, it could be higher maybe 8% now. This is for a purchase, not a refi.
I will check on Monday for you, if you are interested.
No need, I just remembered to check bankrate.com. Like I said I was just curious. I was looking for something like that for a client.
That is a good plan, I have the same plan here on the west coast. I will not buy a foreclosure though, not even to rent out. I have no interest in bailing the banks out, I would rather bail someone out that unfortunately for them bought at the wrong time. I have confidence that I will have the luxury to be picky.
I’m hoping for a sale where the owner’s lived there all their life like I expect to. IMO those are the ones who will price properly when this market really tanks. They have nothing to lose and only profit to make.
You both might want to rethink that strategy. Especially you eastcoaster. I’m reading your posts and you appear to have your head on properly. You’re right a townhome or a condo is not in your best interest. Being a single mother. All your fee’s need to be fixed. A H.O.A. fee is the last thing you need.
As far as a foreclosure they will always be a better deal for your money than a home that someone has lived in for 30 yr’s especially if it’s a little dirty and you don’t mind getting your hands dirty. Remove all emotion. Act accordingly
Regarding where interest rates go, if other foreign central banks need to raise interest rates to fight inflation, then we will need to as well or else our currency will tank. Take a look at a $USD chart and it looks like a bearish flag right now with a target of 79. If you go back a little further, the previous low was in the 80+ area so there’s the potential for a double-bottom too. But a much weaker dollar could provide for some wage inflation as labor expenses for outsourcing rise to the point where it’s not worth it to outsource.
That has been the biggest problem with global reflation in that US wages haven’t really been part of the reflation. If it were that easy, then we probably could support linear increases in housing prices. No, not parabolic, just linear.
Eastcoaster,
Do you own now? I think it is unreasonable to expect that your first home is one you will want forever. In other words, your first home should not be “your dream home”.
Perhaps your sights are set too high and that is why you believe you can’t afford to buy. In any event, few remain in their home for 30 years. A starter home is just that - a way to get your foot in the door; maybe build some “sweat equity”.
Move up in a few years and keep it as a rental.
I do not own now. I’m not looking for nor do I ever expect to own my “dream home”. I just want a good home to raise my son in. I’m a single mother and have no desire to dabble in the rental market myself.
My sights are not high, believe me. I don’t think wishing for a modest rancher or cape on a modest plot of land in Southeastern PA is shooting too high. Except in the current crazy market.
I consider keeping the old home as a rental a good plan - not “dabbling” in the rental market (sounds too cavalier).
I’m sorry you can’t find something affordable. Keep looking. We moved 7 times in 11 yrs and kept the prior homes as rentals. It has worked out for us. Of course this was b.c. (before children) and we had 2 incomes.
Do you own now? I think it is unreasonable to expect that your first home is one you will want forever. In other words, your first home should not be “your dream home”.
Everyone says that to me too. No disrespect meant VA_Investor. My dream home would cost 10Mil. A crappy 1,000 Sq foot home would cost me 500K. I rent one now for about $1,200 a month. The home I want to own is a 2,000 Sq foot home in a decent older neighborhood. With a small lot 8,000 sqaure foot. Current price around 800K. With dual good incomes coming in I do not think that I am dreaming.
Why buy a starter, when it is going to possibly take 10 years to build any significant equity. I am not going to raise a family in a 1,000 Sqare foor box in a shady neighborhood.
That is what it has come down to in San Diego.
Wow. Don’t know what to say. We had our share a fixer-uppers in our 20’s. waited to have the kid until we were settled - careers, house, etc. almost 10 years.
We worked HARD to find these houses and fix them up. All were undermarket due to cosmetics. Not everyone’s cup of tea, I know. But we saw this as a way to “get ahead”. All we had when we got married was student loans.
I think your story is great. I admire what you’ve done. But you have to understand that life doesn’t always work out this way. You are fortunate that you met and married the right partner in your 20s. I think it’s great that the two of you had a plan and worked hard to get where you are - and that you put off having children until you were secure. Not everyone is this lucky. Divorces happen. Biological clocks tick and, eventually, turn off even if a person’s not completely settled into a lucrative lifestyle. So while it worked out for you, that doesn’t mean it can or should work out for anyone else. Know what I’m saying?
Yea, sorry. Don’t want to seem like a braggart (sp?). I just want to point out that “it” don’t come easy. Good things don’t just fall in your lap.
I do feel for the those who find housing unaffordable - but we felt the same way at one time in our lives. We bought what we could afford - not necessarily what we wanted or the in-laws thought we should have.
You are not coming across that way, no offense taken over here. You earned what you have with hard work and patience. I would like to be able to do the same thing that you have done.
My hunch is that if I buy now and rent the home out later. I would take a significant loss renting it out for numerous years. I know that you have probably learned a lot being a landlord over the years, and I am glad that you share your opinions on this blog. A lot of people have become very well off financially doing the exact same thing you are doing right now. I know it is not easy, and would never try to take anything away from what you have accomplished or gone through.
We Rent,
When we moved to D.C. in 1981 rates were about 17 or 18% and houses were still not cheap. Very expensive IMHO. We could only afford a 1 bedroom condo in a slum. We rented for 2 years while we spent every weekend looking.
VA_Investor,
what is your point?
You almost sound like one of those “… it is always a good time to buy…” no matter the price type of people. In CA ANYTHING you buy will cost you at leat twice comparing to the expense of renting the same place. This is the main point of us who rent right now.
Yeah, the greedy have taken that dream from you. BUT, it sounds like you are pretty settled, and you have a son, so life is generally going okay, so why not rent, and put the difference between rental payments and (mortgate interest + insurance + tax - equity) payments into treasury bonds, and ride it out comfortably as the market corrects, and then buy a much nicer place at the end of it all, rather than a mediocre place that you can barely get by scrimping and saving at some intermediate point on the housing decline?
Actually, buying right now would get me that mediocre place. A mediocre place to me would be a condo or small, bland townhouse - which I could afford currently, but I’d be stretching every cent I have. I know it might seem mediocre to some, but a cute cape code or ranch house would be just perfect for me. Keeps my utilities affordable!
I am planning staying put in my aparment for now and I do have savings building up ~ slowly, but surely.
You assume huge price declines coupled with flat interest rates. Good luck with that. I’ll be a buyer too!
Can always refinance a 12% mortgage down to 7 or 8%. It is tougher to reduce principal on the mortgage. Takes time or cash.
500K Mortgage $5,143.06 at 12%
500K mortgage $3,496 at 7.5%
Would be able to buy a very nice house for 500K with rates that high even in San Diego. Suffer for 5 years or so then refinance.
va_investor, i never can get a handle on whether your are for or against a pop, bust, correction, whatever one might choose to call it. i’m never quite sure if you’re on this blog to assist or taunt…
If interest rates hit 12%, then that $500K house will not be $500K. Credit Illiquidity has a funny way of affecting asset prices.
I am not on any “side”. I believe prices will fall 20% sfd and up to 40% condo. But I also believe rates will rise. I own property but am not too concerned.
I see this as a normal cycle. I truly believe everyone should their home free and clear by retirement. So I do have some bias. We bought places others refused to take on. And we were successful - I don’t want to be attacked for this, but I do want others to know that there IS a house out there for them.
Vain,
You seem to believe that affordability may remain a problem (in SD, for example) if rates are rising in step with price reductions. Let’s take a big “what if?” here and say rates go to 18%. Prices would plunge to the point that I no longer even NEED a loan. I’d likely be able to buy outright. I am not a soothsayer, but your ideas presuppose that people should be paying attention to their howmuchamonth.
In small rate movements, though, I think your points are quite valid, of course.
JWM in SD
“If interest rates hit 12%, then that $500K house will not be $500K. Credit Illiquidity has a funny way of affecting asset prices.”
It would be tough to predict, and it would depend on the timeline. if it happened within the next two years (highly unlikely) it would not be unreasonable IMHO to expect to be able to buy something for 500K that costs over 1 million today. 12% rate would be a little drastic, I am hoping for a rate below 8% in two years….tough for me to predict.
good for you!
I’ll jump in when I find my dream home and can afford to finish paying it off on the income I figure making when I downsize my job. I did find my dream home but there is certainly no way I can afford to pay for it. I made mortgage payments on a cookie cutter house in the last bubble and lost 20%, and I was not comfortable at all in that house. It was boring!
It all depends on the state of the credit bubble. The trend it towards approving based on initial monthly payments. On a debt obligation with a maturity of 30 (or more) years a bank could set the first two years’ monthly payments at $400 on a $10M purchase price. So what if the principle goes up $60k/month, appreciation solves that problem.
Of course, the solution is to declare bankruptcy and get the house for free, then sell it for $5M and you’re rich!
I rarely post on blogs, but as for reasonable prices, as an investor I look for two things.
1) Cap Rate, I like double digits and was getting that when I started, but inventory is killing me right now. So I’m in the high single digits, but thankfully covering.
2) Price of home to target median income, based on market income distribution. Ideally, this should be in the 3 x “typical income” range, any greater and it’s an alarm that people are stretching themselves. This is an approximate.
What I’m seeing in N. California is that with rents can you get a Cap Rate above 5%, so any “investing” is totally based on appreciation. And people are buying 5 - 6 x household income.
These are all based on fixed rate loans, unless you are committed to an area, it’s hard to see how renting is not the way to go.
Question for the group: Excluding housing value, what has happened to average net worth during this boom?
Question for the group: Excluding housing value, what has happened to average net worth during this boom?
http://money.cnn.com/2006/02/23/pf/consumer_fedsurvey/index.htm
A Federal Reserve survey finds slowest increase in Americans’ net worth in over a decade.
By Jeanne Sahadi, CNNMoney.com senior writer
February 27, 2006: 2:39 PM EST
NEW YORK (CNNMoney.com) – Americans’ net worth grew between 2001 and 2004, but not nearly as strongly as it did between 1998 and 2001, according to the Federal Reserve’s triennial Survey of Consumer Finances released Thursday.
The big reason: while household assets increased, debts – particularly mortgage debt — rose considerably more.
Net worth: Median net worth rose 1.5 percent, to $93,100. The median is the point at which half of all households have a higher net worth and half have a lower net worth.
By contrast, between 1998 and 2001, the median net worth increased 10.3 percent.
The increase in net worth in the latest survey was due mostly to an increase in home ownership and an increase in housing prices.
Income: A decline in wages also helped account for the slow growth in net worth.
While the median income rose 1.6 percent, to $43,200, after adjusting for inflation, median wages fell 6.2 percent. Wages make up the largest part of family income.
Despite lower interest rates between 2001 and 2004, families spent more of their incomes paying off their debt.
The growth in income was the slowest since the Fed’s 1992 survey, when median income actually fell.6.7 percent, to $35,100, between 1989 and 1992.
Savings: The percent of families who said they’d saved in the preceding year fell 3.1 percentage points, to 56.1 percent.
Similar to past surveys, 7 percent of families said their spending usually outpaces their income; 16.1 percent said they spend about what they make; 36.1 percent said they save income left over at the end of the year; and 40.8 percent said they save regularly.
Assets: The percentage of families who owned assets rose 1.2 percentage points to 97.9 percent.
The median value of all assets combined rose 10.3 percent to $172,900.
The survey breaks down assets into two categories: financial assets such as stocks and bonds, and non-financial assets such as homes.
The median value of financial assets fell 22.8 percent to $23,000.
Meanwhile, the median value of non-financial assets rose 22.2 percent to $147,800. (See correction below.)
Debt: The share of families with debt rose 1.3 percentage points to 76.4 percent.
Among families with debt of any kind — including mortgages, other loans and credit cards — the median level rose 33.9 percent to $55,300, far greater than the 9.5 percent increase seen between 1998 and 2001.
The median level of mortgage debt increased 27.3 percent to $95,000.
Stock ownership: The percentage of families investing in stocks, directly or indirectly through mutual funds, fell 3.3 percentage points, to 48.6 percent.
It’s the first time the Fed has measured a decline in stock ownership, which had been on the rise since 1989, when the Fed began its first consumer finance survey.
The median value of stock-related holdings also fell, by 33.8 percent to $24,300.
A lot of wishful thinking is going on by people who don’t currently own their own home. Although I wish them well, I doubt that prices will retreat to 1998-1999 levels, although, of course, the remote possibility of that happening does exist. Prices will probably retreat 20-25 percent, overall.
Where is all this money going to come from, I make more on not going near RE right now . the time has passed and no wishfull thinking will change that, like anything you invest in fall under the rule of buy low,sell high and get out. the greed and the false sense of I can’t do wrong is what drives any market (smart money) will do great. (dumb money) will always lose,If anyone thinks this will clear up in a year, well good luck ! a drop is not what you would like it to be. but what the market makes it. No one is buying with lots of for sales signs=market will drop, Sales up selling fast= market up. Sales= tell them what they want to hear, Use your eyes not your ears,
You seem to contradict yourself. I suggest you read your messages before posting them. This is a tough crowd of fairly intelligent people and they don’t incoherent messages full of cliches very well.
That was the point
I’m afraid you didn’t really make a point. Not that I could see.
jwm,
The first paragraph of ld2’s post was a reprint of silverback’s post earlier, which he was contesting. Give him a break.
If the dollar declines steeply, then we may see RE hold up in nominal terms. It is hard to decide “fair” housing prices, but maybe we’ll see house prices fall to a level where 10% of a house value equals the annual rent. In Southern, DE we are far from this. Brand new homes are being rented out by stuck speculators. A home that lists for $450,000, rents for about $1500. I don’t think we’ll see these homes at $180,000. Maybe, we’ll see $300,000, but with rents increasing to 2000. It is clear from a rent/buy cost basis that RE is way overpriced at the DE shore.
To Delaware Beach Man
Actually the dollar has been declining for many years. If any tangible asset will go up due to inflation, it’s not going to be Real Estate. It has already overshot incomes in many places. I say precious metals, water utilities, and agriculture companies are the next bubbles. Gold prices are right now about $270 per ounce in 1980 dollars, which is way below the 1980 price of $850 per ounce. I’m a conservative investor and I have quite a bit of money in municipal bonds and savings bonds. I just started getting into CDs and barely started (just a trickle) buying 10 year notes as a hedge against commodities. I figure interest rates will be above 7% in a couple of years and probably top out at that, then gold will take a hit. So I plan on gradually increasing my new money going into long bonds and notes over the next few years.
You don’t want to be in long bonds as long rates are rising as you take a capital gains hit. You want to be long long
bonds at the interest rate peak and then drink in the capital gains when rates go down.
Agreed. That’s why I just put a trickle of $ into 10 year notes. Let’s say 1/600 of my net worth. That’s it for 2006. for 2007 I may put in 1/60th of my net worth in long term bonds or 10 year notes. Interest rates can peak at 5.25%, which means about now, or they can peak at a higher rate. But my Series I bonds interest will overcome the miniscule note loss. Suppose you buy a 10 year note for 5.25 yield. Then rates go up to 7. But in 6 years rates are down at 4.5%. Then you are doing well.
There’s a very long term chart of long-term bond yields. I remember that the last time I was long long-term bonds was when they were around 7+ or 8+ percent and that was quite a while ago. What would be interesting to see would be a break of the long-term downtrend in long-term rates.
At the moment I’m short long-term bonds and the $USD. Am thinking about adding to the latter.
This is OT or rather a new topic. What businesses will do well as the housing bubble pops? It’s easy to think of the businesses that won’t do well (realtors, mortgage bankers, appliance manufacturers, etc.) but some businesses should be able to profit from this far-reaching downturn. For example, what about moving companies? Well, maybe not the “do-it-all” moving companies but rather U-Haul and equivalents? But I’m stumped that’s all I can think of.
Any other suggestions?
Not trying to be funny, but:
Bankruptcy attorneys
Used car salesmen
BayQT~
Payday loans companies ,with interest rates that even the Mafia would be ashamed to charge, do well in Arizona and are spreading like the latest cancer. I’m sure pawnshops will do well when Joe Realtor has to sell his Rolex for pennies on the dollar. Tough call when even Wal-Mart’s shoppers stay home or defect to target.
I would argue those increases are due more to the “shadow economy” brought about by illegal immigrants. The rise in payday loan places is due, IMO, to the rise in illegals. When I moved out of my home town in rural Missouri ten years ago there were zero illegal immigrants and zero payday loan places. Today, the factories are dominated by illegal immigrants and there are five payday loan places in a town with a population
Repo Men
Bill Collectors
Property Management Companies specializing in R.E.O.’s
Credit Counselors
99-Cent stores
I am hoping small, well run software companies that focus on new technology. But if its anything like the last few downturns we may not survive. Will give it out best shot.
International House of Pancakes. In a declining liquidity market, you either want to be short or in something that
is gaining liquidity even as overall liquidity is shrinking. This
is hard to do but it does happen. A good example is Panera Bread which was going great guns even while the stock markets were imploding.
I’m a first time poster with questions. I have lived in rural Northern Nevada for the last ten years after leaving my home in Reno in “95″; I am now ready to return to Reno. However, I have watched with horror as homes I owned in Reno went from 150K to 350K in my absence, essentially killing my dream of going home. I have been told “equity locusts” are responsible for these increases. Are “equity locusts” speculators or retired Cali folks with pockets full of equity? It seems if they are mostly retired folks then homes will not come down in my home town and I will be destined to live in “buckaroo land” forever. Any thoughts?
My guess…both. Flippers and HELOC’d buyers. If you can wait it out a little longer (minumum, 2 years), I’m sure you will be able to get something in the mid-$200k range if that’s not outside your budget. Just keep your eye on the market and be ready when the time comes to make that move.
BayQT~
Reno seems to be another one of those places that has turned into overflow for the Bay Area equity flood. Give the market some time to let the tide recede. The speculators are just starting to get stuck with properties they can’t really afford and people are only starting to question whether prices are unsupportable.
With just the amount of flipping and home equity ATM-like spending that many homeowners have been engaging in, it’s hard to imagine that you won’t see prices retreat as more people get into financial trouble that they can’t refinance out of. Despite the number of equity rich retirees that may have relocated there and paid absurd prices, it only takes a few homes sold at distressed prices in a neighborhood to reset comps.
Finding a good place to wait while the market sorts itself out over the next few years is what I have chosen to do. Like BayQT said, just keep your eye on the market and keep your money ready when the time comes that buying makes sense again.
(Not investment advice)
I’m looking in North Tampa area (Pasco County) for 2500 sq. foot new construction with nice options - five years ago would have cost $150K - last summer would have cost $350K almost anywhere, if you got picked from a waiting list, and very little resale properties at that level - now I am seeing this size new home (although few options, since most investors just bought the basic options) come down 10% already at builders sites & realtor.com, which is getting flooded with listings (up 60% in last 6 months) of what I would assume are panicked investors or people who got in over their heads. I am targeting $250K since that seems reasonable to me for 2500 feet of home (if it gets past my inspector)
The last words are always I don’t think ( you can take it both ways )
Florida Real Estate Bubble
The 1920’s, in America, were a time of great prosperity. Skilled and educated working Americans had jobs providing numerous fringe benefits, paid vacations and pensions. In addition, automobiles were becoming commonplace for the wealthy and middle class allowing cross country travel. This good fortune set the stage for the Florida real estate bubble.
Starting in 1920, many Americans became enamored by the materialistic and prosperous lifestyle of the time. During this time, the stock market was moving forward at an extremely fast pace. Many investors were becoming quite wealthy. Florida became a hot spot for these newly rich people, who didn’t enjoy the cold. Many whole families took vacations to Florida. It was at this point that tourism started booming and land prices were skyrocketing. Many astute investors took notice and started buying Florida real estate. The population in Florida was growing exponentially and housing couldn’t meet the demand. Florida became the “playground of the rich and famous”. Illegal casinos and drinking parlors became widespread in Miami.
At this point, almost anybody could invest in Florida, even without much money. Credit was plentiful and soon everybody in Florida was either a real estate investor or a real estate agent. In 1922, the Miami Herald became the heaviest newspaper in the world as a result of its humongous real estate advertisements. People in the North heard about the real estate prices “doubling and tripling”, causing a snowball effect. Capital was rapidly pumped into the real estate market. Whole golf communities were developed, such as Temple Terrace. Resorts and retirement communities were developed almost overnight. Mansions were sprawling in every area, as were swimming pools. As always, waterfront property was the most desirable. Florida was seen as a veritable Utopia.
Real estate prices quadrupled in less than one year. An elderly man invested $1,700 in property and by 1925 the property was worth over $300,000! It seemed you could do no wrong by just buying any property in Florida and become a millionaire. By 1925, real estate prices had become so exorbitant that buying land wasn’t affordable any longer. New investors failed to arrive and old investors started to sell. Panic arrived, as it always does, and the real estate market crashed. Prices kept moving downwards as heavily indebted investors tried to sell to avoid bankruptcy. In most cases, no buyers arrived, and the investors were bankrupt from the enormous mortgages.
To make matters even worse, a highly destructive hurricane ravaged South Florida in September 1926. The 125 mile an hour winds eventually turned Palm Beach County into swamp lands. After the storm, a huge tidal wave crashed upon the towns of Belle Glade and Moore Haven. Due to these horrible turn of events, over 13,000 homes were destroyed and 415 people died. Additionally, the arrival of the Mediterranean fruit fly obliterated the large citrus industry. It took years for Florida to fully recover, even through the highly prosperous time from 1925 to 1929. Florida was barely affected in the stock market crash of 1929 and the Great Depression, because of its poor financial state from the start. Market crashes always occur in the same manner. Regardless of the market, the same simple psychological underpinnings are always at work. People who are caught up in a bubble never look back for historical examples. Those who cannot remember the past are condemned to repeat it.”
What are you talking about??? Do you understand where you are posting?? The article you posted is common knowledge here. Your comment at the begnning makes no sense.
It might be “common” knowledge to you, but it really wasn’t to me. Not until I started seeing posts such as the one you’re slamming and started reading further history on the subject.
I don’t see this post as slamming anyone in any way, so why does it irritate you so? If you aren’t interested in the damn post, just move on past it rather than jumping down the poster’s throat.
Let’s just say it would have been polite to cite the article he reprinted verbatim — here is the credit.
“Real estate prices quadrupled in less than one year. An elderly man invested $1,700 in property and by 1925 the property was worth over $300,000!”
This is the only part of the essay that makes me realize that we have not come so far in the cycle. RE is definitely overvalued, but not in the above proportions. Real bubbles are truely insane!
That said, we are clearly in the midst of a correction.
And the best course of action to correct this “overvaluation” would be to discourage further illegal, or even legal immigration.
Of course neither official party has any interest in doing so, as the Demon-rats need the votes and the Repub-lick-cans desire the cheap labor.
I am against illegal aliens, but I don’t see how they are causing real estate prices to skyrocket. I think it’s all pure dumb speculation and wishful thinking pushed by television R.E. shills who make $millions selling books and seminars. While these greedy people were snapping up houses with ARMs and interest only loans, I kept buying short term CDs, savings bonds, gold, platinum, muni bonds, and have trailing stops on my stocks. I’ll survive the financial meltdown that is sure to come.
Actually, I’m not sure if they are illegal immigrants or not, but in North SD County, it seems there has been a tremendous surge of buying by immigrant populations. We’ve been watching the RE market here for a few years (5+) and many (a **very** large majority of recent sales) of the homes which sold have multiple (immigrant) families living in them.
In our old neighborhood, almost all of the homes which sold recently (since about 2003) were sold to immigrants. It went from a very mixed (racially) neighborhood to almost exclusively Latino in just a few short years.
multiple families in a house? There ought to be a law. That’s the thing that trashes the home values in tranquil and safe neighborhoods.
For me, practically no house price is reasonable. Even if they decline here in Bay Area 50%, still way too much. After 50% declines, even if I own in the Oakland Hills, it will still be too much. Even if I own in East San Jose - still way too much. Even if it is in the blue-collar neignborhoods of Newark/Union City, it will still be just way too much. It is an absolute joke here.
Not that I particularly care about owning, though. Mostly my wife is the one who wants it. I completely lost faith in housing, and just ignore it, it doesn’t exist for me. There is no location in the USA where owning is advantageous (before you open your mouth about how cheap the Midwest is, think about no appreciation in those areas).
I’m done with housing.
The bad news is is that is appreciating in the Midwest, because that is where the speculators went. Which causes numerous problems. The one problem that it creates that I really do not like is that people find out there home has gone up in value. They then go down to the bank and begin using their home like an ATM. Which after things revert back to normal they will be upside down in their house.
Well I am looking into moving in the Chicago area and the prices are still going up. Most of the good areas of Chicago are too expensive to afford. So I don’t know how the mid-west is affordable. I think all big cities are really expensive.
Yeah, big cities are expensive regardless of where they are in the US, although much moreso on the coasts or where there’s a vibrant economy (I.E., Chi-town). However, the Midwest does have cheap/affordable places in rural areas, if you don’t mind living in the middle of nowhere. My parents bought a home for my grandparents last year close to their home in rural Missouri and, if I recall correctly, it was a one story, 1,500 sq. ft. house for like $85,000.
Awww, give landedeal2 a break. This *is* common knowledge for, I suspect, the majority of us (participants and non-participants), but there are also new readers who are taking this in as new info. It’s valid to repeat the story…but I don’t quite understand the opening line either.
BayQT~
I suspect he’s a troll because the tone of his first post is strange and incoherent.
Thanks sf,
A troll he could be (Yoda-speak). I didn’t agree with the wishful thinking comment either. But regarding the posting of the Florida boom/bust, I think it was educational for some who weren’t aware of the history.
Don’t get worked up about this, JWM. ( as in, *don’t sweat the small stuff.”) There’s other stuff to get more worked up about. Just breathe.
BayQT~
I’d say a price is reasonable at three times the income of people who have typically owned homes in the area, or if the mortgage payment on a 30 yr amortizing loan with a 20 percent downpayment is 25% of that income.
If housing were not overpriced, I’d pay somewhat more (all in) to own than rent. By all in, I mean including the tax break, not counting the principalo payment (it’s savings), but counting all the other ownership costs (insurance, taxes, common charges for condos). I’d pay a little more because the bulk of your housing cost, the cost of the unit, is locked in when you own.
But I wouldn’t pay much more. And if you aren’t amortizing principal you might as well rent.
Overall, housing costs relative to income is the best measure.
I hear ya, Max. I live (rent) in Dublin, CA…work is a 10 minute drive, city streets. Prices would have to drop a minimum 35% (2002 prices) for me to consider anything here. A 50% drop … I’m all in.
BayQT~
I have no idea why my post landed here. Hmmm..where are my glasses *anyway*.
BayQT~
I agree housing costs as a multiple of income make sense. Now, I happen to really like an area that’s gone at a higher multiple.
But one thought: it used to be the selling price of a home was effectively the rent+20%. In other words, once you scrapped together the down payment, you would expect your mortgage+taxes+insurance to be about the same as a place rented.
Now, do to our longer life spans, I don’t envision us ever getting there again. So what is fair? 2001 prices.
But just as the “fair price” of the Nasdaq was ~2,000 when it bubbled and then dropped to ~1,200 (IIRC), we’ll see an undershoot with housing.
Traditionally, LA and San Diego housing has gone for 7 to 9 times median income. Now its about 12X. Thus, I expect it to bottom at… 6X.
For some reason the reduced cost of information and globalization is making investiment spikes stronger and at a higher frequency. So I honestly expect houses to drop 50% in value in so Cal. I’ll buy in earlier to get a good pick of the inventory, but that’s my best guess.
And I expect this to be like the last time Boston’s prices dropped. Back then, something like 2/3rds of the homes put on the market were pulled off as sellers didn’t want to accept reality. That’s ok. The one’s who did sell helped drop the price 50%.
Neil
Um, how’s that? How do longer lifespans upset the rent vs. buy calculation? Especially given that for many people, their last years aren’t spent in houses they own.
Longer life spans add an extended period of home ownership sans mortgage. Thus, the present value of those future years without a rent payment should be added into the sales price. Also, 1st time buyers are older, with more estabilished incomes and this should prop up the price. 3rd: people are going through one more housing upgrade during their life. Thus, the median home price will be pushed up by a longer life span (assuming they carry forward equity).
Neil
WTF??
N: Longer life spans add an extended period of home ownership sans mortgage. Thus, the present value of those future years without a rent payment should be added into the sales price.
That is an interesting point, but note that given a reasonable discount rate, the present value of something that happens 30-50 years in the future will not be very large.
N: Also, 1st time buyers are older, with more estabilished incomes and this should prop up the price.
Doesn’t this contradict your first point? If first-time buyers are older, they have fewer years left to live in the house and thus should pay slightly less for it.
If homebuyers expect to pass on their homes to their children, the whole time-of-death issue may be a wash.
It seems to me that the comments made on this blog have changed in character over the past year or so. And, I will echo a former comment that, in general, the people who contribute to this blog seem very knowledgable, intelligent and articulate.
The change I notice is a shift from almost unanimous agreement that we had a housing bubble that was growing and could not be sustained, although there was some disagreement/frustration with predicting the actual top of the market. Now that we have certainly seen home prices top out in most areas(maybe even as long ago as last summer in some areas), there is a absence of general agreement about what will happen next, as reflected in this thread.
Is it inherently more difficult to predict declining prices than to predict increasing prices? I don’t know the answer, but I’m curious about others’ thoughts. The kind of unpredictable variables that occur to me about why it is very difficult to predict where house prices will go from here are: we don’t know what the Fed will do about interest rates; there is always the possibility of another significant terrorist attack in the US; oil prices seem out of our control; the war in Iraq can start going even more badly than it is now; foreign investors may decide to stop supporting us; the US consumer’s confidence and optimism; employment and wage increases and decreases.
When considering all of these variables (and more), and listening to the so-called economic “experts” who can’t even seem to agree on any of these points, I think about the old Soviet 5-year plans, which were always a joke. How can one predict a market, not to say “control” it, when there are so many unknown and uncontrollable variables?
Thought provoking post. Personally, I don’t think anyone can predict either direction accurately if one of the outlying scenarios you mention were to occur. Most people, including myself, base our prognosis excluding those kinds of events. If one or more of them becomes substantially imminent, then all bets are off regarding which direction asset prices, interest rates and the economy will.
We can only guess on the outcome of all of this. Educated guess…yes….but guess nevertheless The housing bubble has been often described as akin a crazy person. We can say…it’s probable that that person will act crazy. Likely to say inappropriate (crazy) remarks…but likely to defacate in inapproriate places??? One hundred percent likely to suprise…even shock…but to predict thr next step of a crazy person is like trying to predict the results of this bubble. For instance…what if we are unaware of a plan by the Fed to mess with rates if housing falls X%??? We were looking at this thing…saying…Whoa…that’s crazy! What’s likely to happen? As you say, even the experts are having trouble predicting this one. We assume it will take the form of those booms of the past…or as Japan. But we must consider other factors, such as this has been the biggest bubble in history, the internet/information age could accelerate it, war or terrorism might affect it, it seems to be rolling,it’s been a huge credit bubble, what will happen with Fannie Mae and the laws affecting Bush cronies, and God knows what else.
Market timing and predictions are mostly fallacious because of variables such as those you mentioned. After the tech bubble burst, for example, I picked up Harry Dent’s Roaring 2000s book and it all made sense about demographics. he wrote the book and it sold well before the 9/11 massacre. Dent’s prediction of a 30,000 DOW may have come true if it were not for the War on Terror and the Islamic fundies upper hand on this war (they have the upper hand because the price of oil is up very high and it’s having a worldwide effect on equities and commodities). Also Dent underestimated that China and India would also drive up commodities prices and make them more attractive than stocks. fortunately for me, I did not alter my investment direction according to Dent’s way: Tech stocks, health & biotechnology. However Asian stocks really have been doing well per se. For now, I am fortunate to have been in an industry that has prospered in today’s dangerous world and my income affords me to get into less risky investments than Dent’s. My individual stocks portfolio is into value stocks. I put about 20% of my mutual funds into international stocks. 1/5 of my net worth is in government bonds and 5% is in precious metals. I think since no one can predict the future, the next best thing is to look at the linear charts in your personal finance 101 textbook and buy some of each of the investments that did better over time than the long term inflation rate. So it’s why I buy stocks, precious metals, and government bonds.
test
“I consider keeping the old home as a rental a good plan - not “dabbling” in the rental market (sounds too cavalier).”
Years ago we had to rent out our house when we moved. Trusted a rental agency to handle it. Several months later the renter burned the house down when he learned we had a buyer for it. Fortunately insurance paid off. Being a landlord is not what it’s cooked up to be.
Of course no one can accurately predict a market every time - just make their best guess. If they could, they wouldn’t be an economist, they’d simply be very rich. I’m sure just about everyone posting here predicts price declines over the next year(s), I, for instance feel that in LA, a house that sold last August for $1,000,000 would sell this August (if the owner had to sell) for about $750,000. (And I’m not talking about median price - as Deb has repeatedly pointed out, that’s very misleading - I’m talking about the price of an actual individual house.) Still, would I bet my family’s life on it? Of course not. What if prices went up again? They won’t, they can’t, they shouldn’t….but they could. As screenwriter William Goldman once said, “Nobody know anything.”
“nobody know anything.”
But what we do know is that the traditional lubricant of the home market, the 1st time buyer, has been priced out of too many markets. We also know a *huge* fraction of mortgages in the bubble zones were ARMs, option-ARMs, or other loans that have a higher down stream payment. History has shown, that is a recipie for foreclosures.
I wouldn’t bet on August… People need to get into a house for school and sellers know this. My crystal ball says that October will be when prices start to drop. At that time, anyone who speculated in apreciating home values will have to take a good hard look at what they’ve done.
I see a market that is closer to the Nasdaq than the traditional housing market.
And remember, it only takes 4% of the homes in an area being for sale to cause a wholesale collapse in prices.
96% of the people can stick it out… and 4% can ruin the game.
This is an extreme societal version of the “prisoners delima.” What’s that? Where you have two prisoners and if neither snitch, both come out ahead. But if one snitches, they both suffer but its better than being the guy who didn’t snitch (longer prison time… or worse). Well here we have a case where if half of the flippers decide to bail out… it creates a free fall.
I also agree, as others have noted, that any “jumpy” buyers who decide to bail out due to being overleveraged (or seeing they will be when the ARM resets) will only add to this delima.
We cannot predict… but when the fundamentals say “watch out below.” Watch out. Recall the best economists predicted the 2000 Nasdaq crash 3 years before it happened. They’ve only be warning about real estate since the start of 2004.
We cannot predict when nor how far… but we’re in new territory. I think that $1,000,000 home will be $750k by Christmas and $600k in a year. In August? It could well sell for $1,200,000. I make no predictions before the fall. All I know is the inventory will continue to build during the summer. That’s a recipie for a drop.
Neil
Bull! God I wish! The market in LA hasn’t fallen yet! It will. Soon. But not yet. I sold my house in LA for 1.2 mil last Aug. Boy, I sure would like to buy it back for $850K but it’s up for sale for $1.4m.
(no takers btw) but I’m waiting…waiting…waiting for the fall in LA. I wish you were right…but …you’re not.The market here is frozen and stagnant. Hopefully we will have a wonderful fall…in the fall.
Would you be irritating if I posted “Rental Equivalency” 500 times?
Ok, I’ll just do it ten:
Rental Equivalency, Rental Equivalency, Rental Equivalency, Rental Equivalency, Rental Equivalency, Rental Equivalency, Rental Equivalency, Rental Equivalency, Rental Equivalency, Rental Equivalency
Feepness I up your 500 times to 5,000 times.
Rental Equivalency - Equal Quality and no more than a 20% premium to own. Preferably no premium to own but I don’t think that will happen.
I up it by 50,000 times. Rent vs. Buy is the only way to guage over/undervaluation. Income stats are not trustworthy.
Actually AGI is the best way I have seen yet to get to income stats by zip code.
http://www.melissadata.com/lookups/TaxZip.asp?Zip=92648
No, feepness, not irritating, but…how can you predict where rent will go in the next few years?
As someone with no skin in the game, I must say that some of you who are saying that would be buyers are guilty of “wishful thinking” for wanting significant price declines are, IMO, all wet. Periods of excess always lead to periods of need. Housing bubbles always over-correct on the way down. Yes, the bottom might be a ways down the road as the stupid “smarter flippers” will buy on the way down and delay the inevitable crash. There is no way this liquidity bubble can continue to leverage unqualified buyers indefinitely. When they lose their shirts the ride will be over. People will try to buy up foreclosures and flip all the way down. The best way to decide on something is when you are comfortable with the terms and risk, think it through logically, and decide it is the right time and place for you to make your move. No one should be able to tell you when that is - you should feel it in your gut. Too many people are worried about getting rich or what other people think. Do what is right for you and your family and don’t be influenced by what others are doing.
Mort, that is refreshingly sound advice. While cleaning up the other day, I found an old copy of “Home Buying for Dummies.” Here’s what I found in the introduction:
“From time to time, particularl local real estate markets experience rapidly escalating prices. During such times, some prospective buyer literally panic, often with the encouragement from those with vested interests in converting prospective renters into buyers. Escalating housing prices make some renters feel left out of the party. Booming housing prices make it on the front page of the newspaper and onto the local televions news. And golating homeowners clucking over the equity deoesn’t help either.”
The book is copyrighted 2001, and the paragraph ended with this remarkable statement:
“Never in the history of the real estate business have prices risen so high as to price vast numbers of people out of the market.”
Isn’t that quaint? It IS different this time! Which means the downside will probably be just as harsh.
Little did they/he/she know at the time that the madness would continue to escalate four more years. I wonder what the author is thinking now?
He’s probably wondering why he’s still getting royalty checks for a book no one could possibly have read - there’s too much simple, sane advice in it about what a healthy market looks like, what a healthy mortgage looks like and how much house you can afford relative to your paycheck. I’ll keep it for the long run.
A few comments on “fair prices” for housing:
1) Prices in the _very_ long term will always be dictated by replacement costs of the assets. In the case of housing, this is a function of land, materials, and labor. Obviously the value of land is very subjective, however you can estimate land value by looking at non-residential housing related uses (agriculture, commercial building rents, etc) and using a reasonable cap rate.
2) Prices in the long term are dictated by incomes. People can only buy what they can truly afford. Stick with the 3x income rule.
3) Prices in the medium term are dictated by rents. As renting becomes cheaper, rents go up and prices go down. Look for parity between rents and total ownership costs (interest, taxes, maintenance, depreciation).
4) Prices in the short term are dictated by supply/demand. This is where you have to become half economist, half psychologist. As Buffet likes to say, the market is a voting machine in the short term and a weighing machine in the long term.
The last three years we saw a frenzy in demand brought about by loose money and frantic speculation. This brought about the massive supply that we are currently seeing, while pushing down demand. In the short term, it is very possible (and likely) to see the price of housing decline well below replacement cost, much like we saw the price of telecom assets (dark fiber, data center space, routing equipment, etc) fall to 10% or less of replacement cost in 2001/2.
My plan is to wait until I see properties trading for 20-30% below replacement cost before stepping in.
5) Be _very_ careful about the quality of the neighborhood when you do buy. While there has been a massive increase in supply of housing over the past 5 yrs, there has not been a corresponding increase in the number of happy, law-abiding families to fill these places. In new developments, you could end up with a wave of less-than desirable neighbors coming in with less than neighborly behavior. This is accelerated by Section 8, which might be used to fill up investor-abandoned properties. While these investor-owned communities are probably going to see the largest price declines, they also have the biggest risk of becoming marginal neighborhoods.
With a couple of (stupid) exceptions, I have never bought anything that I wouldn’t live in myself.
“5) Be _very_ careful about the quality of the neighborhood when you do buy. While there has been a massive increase in supply of housing over the past 5 yrs, there has not been a corresponding increase in the number of happy, law-abiding families to fill these places.”
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Excellent point & advice. The newer neighborhoods have less seasoned buyers. They also have those pesky HOAs which can cause problems (lawsuits, unnecessary fees, special assessments, etc.). They have also been prone to more speculation in recent years.
Lots of funny, complicated answers here !
Its simple. A house is a place to live, so it derives its value from its rent or equivalent rent. First calculate the net income from the house. Take the yearly rent and subtract taxes, upkeep and insurance. Then divide the yearly net income by a reasonable rate of return. According to Shiller and others, houses appreciate at the rate of inflation, so the rate of return will be ex inflation.
Lets use an example. A house rents for $1500 per month. Taxes are $2000 per year. Upkeep is $1500 per year. Net income is $14,500 per year. Lets say we want a return of 8% after inflation. So the house is worth: $14,500/0.08 = $181,250. That incidentally works out to be 10x the yearly rent, which is a rule of thumb for me.
Don’t people pay a lot more for houses ? Sure. And they are outright fools. Sorry to be so harsh, but people need to learn about INVESTING in more than one asset class.
I made a ton of money in stocks this year and last year and the year before and… Everyone chimes about how great their houses are doing, but that is nothing compared to how stocks do when you learn how to invest. I know people that made 30 to 50% in the last year on resource stocks. One guy made $150K on a little less than $350K. You can rent one hell of a house for $150K a year.
My rule of thumb is fair value at 150 times one month’s rent. 200 times is the absolute max you should pay, and only then if you can truly afford the purchase. My next door neighbors last fall paid about 380 times my monthly rent. I haven’t the heart to tell them you could buy condos in the mid-90’s around here for 50-70 times rent - and they languished on the market at that asking price usually over a year.
Rents have risen since considerably since then, yes, but those are the ratios that may well be in store once again.
I guess my point above was that rents change over the medium term as well. The foundation for rents is in asset value, which is dictated by replacement cost. While in some places “they aren’t making any more land”, this is not exactly true, as evidenced by condo building and green/brownfield development.
The escape valve for rising rents is new supply. Developers will invest new capital to increase supply and take advantage of excessive rents, however this is a medium-term type of activity, so looking at current market rents could be misleading.
I think you lost me. Foundation for rent is supply and demand. That’s it. Makes no difference what the replacement cost of the shelter is. I would add that rents are a good measure of value, as they are not subject to leverage or speculation - by the renter. In other words, ability to pay cash is paramount - the lack of or availability cheap, easy money will have no direct impact on rents. Nor do renters sign up for an additional unit and pay the rent while it sits empty, “in case rents go up.” In other words, no artifical demand. The landlord, that’s another story. He speculates, adds supply, well, we know the story.
I would agree that rents may rise, medium term, due to fear of buying. Where I live, there is plenty of rental inventory, so I am predicting only a modest rise.
In the short term the foundation for rent is supply and demand, I agree, however in the medium/long term, the pool of supply is elastic. If a developer sees rents at $10/ft and he can build a new property at $50/ft, that 20% yield looks pretty compelling so he’ll go ahead and add supply. However, if it costs $200/ft to build, then that rent doesn’t look so compelling and he’ll wait for rents to improve as population/wages increase demand for the existing supply.
So my argument is that over the medium/long term, the value of housing is based on rents which themselves are based upon the cost of creating supply.
I just looked at one property that I own and that would represent over a 60% drop in price.
I’d buy it myself at that price.
I’d buy it and the one next to it.
Why stop there I’d buy the next 6 blocks
I’ll second the 3x rule, with 5-6x for certain coastal areas. Given that any action results in an equal and opposite reaction, expect prices to go down to 2x or lower (3-4x coastal) for a while.
People are extremely stupid about investing in real estate. Sorry. Would you buy an investment for $400K that returned $1500 a month ? You’d do the math and figure out that is a 4.5% return. Who the heck would buy that ?
And yet people will BORROW money to buy a house that they could rent for $1500 a month. Because they think it will go up ! The only way that house goes up is if a greater fool than you comes along and buys it for even more, getting an even lower return.
People need to learn to INVEST in businesses and stocks.
Sometimes I think the only reason people invest in real estate is because banks will loan them a pile of money to buy the investment. I don’t think people ever have several hundred thousand dollars with which to invest. They are so busy paying interest on mortgages and credit card.
I’ll tell you this. I rent and I have a portfolio of stocks. About $50K invested paid my rent this year. Now why would I tie up another $350K in a house ? Do people know how much money you can make on $350K invested ? Even in a bad year that is $35K.
Everyone says “you are just throwing your money away renting”. I don’t say anything, but I’m thinking, yeah but I covered my rent AND I made another $80K in addition to my work earnings.
Does anyone see Gates and Buffet and Paul Allen buying bigger houses to make money on them ? The only guy we see doing this is Trump and he has so much debt its ridiculous. I’ll bet $100 that before the bubble is done bursting Trump is BROKE.
Tweedle - You are singing to the choir. I have had discussions ad nauseum in here with people who insist real estate is a “good investment” at current prices. My simple answer is that if you pay cash for a rental property, your return will be less than T-bills, and the toilet in a T-bill never overflowed on poker night. Go figure.
I have a saying that inexperienced investors like the current crop of a$$hats and the ones who were burned before during the last downturn are just glorified property managers for the banks. They hardly qualify as investors.
And BTW, Trump went bust the last time, too. He was, however, in the exceedingly rare position of oweing so much money the banks had to save him. Remember the old saw, owe the bank a billion and it’s the banker’s problem? Think Donald 1990.
We may be at the downside of a RE bubble. However, RE has made more millionares in the US and more in the world’s most wealthiest lists.
It is the best investment for a non expert. To succeed in business and stock market, you do need experise. 90% of all new businesses fail. You can buy a stock and it could go down to zero. But if you buy a house in a “good” location, hold it for 30 years (30 year fixed), you can’t go wrong.
William, I’m not sure what your are trying to say, but I smell baloney. There is no “best investment for a non expert.” Real estate is generally highly leveraged - paid for with borrowed money. When its value rises, fortunes can be made. The inverse correlation is 100%, no more, no less.
Hold property for thirty years and “you can’t go wrong” is highly subjective, depends on location, choice of thirty year interval, and ability to maintain debt service and physical property plant. Anyone who bought where I live, in 1960, with an adjustable rate mortgage, and held for thirty years got an ass-kicking. Oh, I forgot, there were no adjustable rate home mortgages for the masses in those days. Doesn’t matter though, it would still have been a losing proposition, even at a fixed rate.
I am blue in the face from repeating it, but I will say again, housing is a basic human need and involves expense. Always - no free lunch. Buying one’s housing is beneficial in that allows the buyer to pay his future housing expense with today’s dollars - the benefit assumes price inflation. Buying real estate as an investment is no different than any other investment. Buy low and sell high, not the other way around. The End.
I’ll take it one step further. Houses are horrible investments. The value goes up by the rate of inflation. NO MORE. The reason this happens is because there is no lack of land and the inputs to the house go up by the rate of inflation. Once in a while supply gets constrained and house prices go up but once in a while they fall too. Generally you will not get rich with real estate. Stocks beat real estate year after year on a long term basis.
And by the way, stocks in general do not go to zero. The last time I looked the Dow has generally gone up since its inception. If you can’t pick stocks, buy INDEXES. How hard is that ?
If you want something foolproof, buy Berkshire Hathaway. Run by Warren Buffet, it is pretty hard to beat.
Unfortunately, there is a paucity of real estate data. Most real estate data only date back to the mid 70’s so you can’t really can’t make the generalization that “stocks beat real estate year after year on a long term basis.”
Real estate does not go to zero, but what about all the publicly traded companies that went to zero (the collapse of the NASDAQ since 2000 and all the publicly traded companies that went belly up)?
Again, the list of the most wealthy in the world is full of real estate tycoons. And more millionaires in the US are made through real estate than anything else including stock investors.
In the current over priced real estate market, you can rent a 3 bd house in my area for $2,200, but to own, the total payments (based on 30 year fixed) would be $2,800. If your time horizon is 30 years, you would still be better off buying than renting and sticking the $600 difference in the stock market. In 30 years, you will own the home free and clear and get whatever appreciation occurs. Remember the rent will be increasing every year. Your mortage payments are fixed, RE taxes and insurance will increase. When interest rates fall in the future, you can refinance and reduce your payments below the rent which is always increasing.
Wait a second, how much are the houses going for in your area?
If they are going for 500K your $2800 is not including taxes and insurance.
500K PI is $3,160.
The areas you mentioned have property taxes right?
“NJ, LI, CT, and Westchester Cty”
PITI is around probably around $3,500. Let me know what the values are that you are looking at and we can do some research.
Seriously if you cannot back up your figures you are on the wrong site.
“you can refinance and reduce your payments below the rent which is always increasing.”
You are kidding right? When have rates been historically lower than 6.5% on a thirty year fixed, besides the past couple of years? Take a look at some historical charts.
If you count on being able to refinance a 30 yr fixed at 5% to save your a$$. You my friend would be in trouble. Especially since you would have a foreclosure on your credit report.
Here is a good website for you
http://mortgage-x.com/trends.htm
I’m a traditional guy. Purchase price of $450k. 20% down. 30 year fixed at 6.6%. $500 per month for taxes, insurance. And I did not even assume any mortgage interest deduction.
These are the #s for a current 50 year old, 3 bd, 1 bath starter home. Probably 10% higher in 2005. Rent back in 2005 was probably the same.
And yes, rents will increase over time. Do you think over the next 30 years 30 year fixed will be be below 6.6%. At some point they will be. Perhaps 5, 10, 15, 20 years from now. Remember, the mortgage piece here is fixed. It can go down, but not up like rents. And yes, taxes and insurance will go up.
All I am saying is that, if you have a long term horizon (say 30 years), it is definitely better to own than to rent. Even thought you are paying more to own monthly, you are paying off the mortgage over time. In addition, you will also get the price appreciation. Over a 20-30 year time horizon, you will ride out the cyclical nature of the real estate market.
Currently, If you time horizon is 10 years or less, you should probably only rent. It could take 5-10 years to get back to 2005 price levels.
William, your weak arguments ar totally besides the point and could be refuted by my dog.
30 year time horizon for the average American, you’re kidding, right?
Where do you live? My parents and my friend’s parents who brought their houses in the late 50’s and early 60’s for $25k-$35k sold their houses in early 90’s to mid 90’s for $200k-$250k.
For those that held till 2004-2005 sold for $450k-$500k.
Results are from surburban NJ, LI, CT, and Westchester Cty.
How much could you rent out that house for 450K to 500K back in 04, 05?
What did it rent for back in the mid 90’s?
Take what you could rent it out for being conservative, and multiply that number by 150.
Just taking a guess here, those houses you are refering to that would have sold for 450K to 500K, could probably have been rented out for $2,000 a month correct?
Which means those houses were worth around $300K when they were bought back in 04 and 05.
That is why there is even a website called thehousingbubbleblog.
Thanks for coming out though.
In the current over priced real estate market, you can rent a 3 bd house in my area for $2,200, but to own, the total payments (based on 30 year fixed) would be $2,800. If your time horizon is 30 years, you would still be better off buying than renting…
You know, I don’t disagree with you - except for the fact that the place I rent for $2100/month, is “valued” at over 900K, making a payment of over $6000/month. This is no mansion, believe me.
So many people yapping about Real Estate 1990s advice…
I’m a traditional guy. Purchase price of $450k. 20% down. 30 year fixed at 6.6%. $500 per month for taxes, insurance. And I did not even assume any mortgage interest deduction.
These are the #s for a current 50 year old, 3 bd, 1 bath starter home. Probably 10% higher in 2005. Rent back in 2005 was probably the same.
All I am saying is that, if you have a long term horizon (say 30 years), it is definitely better to own than to rent. Even thought you are paying more to own monthly, you are paying off the mortgage over time. In addition, you will also get the price appreciation. Over a 20-30 year time horizon, you will ride out the cyclical nature of the real estate market.
Currently, If you time horizon is 10 years or less, you should probably only rent. It could take 5-10 years to get back to 2005 price levels.
In theory he is correct especially for houses bought pre-79 in Los Angeles. I know of quite a few equity millionaires. However the ones who make the wealthy lists didn’t do it with houses. It was moreso commercial endeavors.
Not everyone has money to throw around like you do. No - MOST people don’t have money to “invest” as you do. They’re busy just trying to pay their rent and maybe someday being able to afford a house.
Gates, Buffett and Allen may not be buying bigger houses to make money on them but they aren’t selling their current homes to rent either.
Also remember that Buffett bought Clayton Homes a few
years ago (manufactured housing) and has a controlling
interest (80% fully diluted) of MidAmerican Energy
Holdings. Interestingly enough, MidAmerican owns the #2
Real Estate company in the country, HomeServices of
America. In the 2005 Annual Report, Buffett states that
residential real estate is slowing down which means that he
expects HSA to grow in the future.
Disclosure: I’m long Berkshire Hathaway but hold no positions in Microsoft.
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i’ve posted this link before - but here’s my RE Valuation Tool Spreadsheet. It gives you 3 different models to consider. I’d love some more feedback. THANKS!
http://www.files.bz/files/11251/RealEstateValuationMethods.xls
Reasonable = you can buy it on 30% of your income on a traditional 30-year mortgage loan w/20% down. I am certain that SD is double that level as I write, at least as of last summer when homes were still selling. (I don’t really get who is buying this year, but I suspect that many who are buying will discover altogether too soon that they bit off more house than they can purchase over time.)
The one nagging doubt: Will BB succeed in creating enough inflation to ease the repayment burden off recent buyers (and screw those of us who know that a correction will naturally occur otherwise)? I believe he could only do so at the cost of sparking a currency crisis and throwing away the dollar’s international reserve currency status; thus I am banking on a less spectacular level of inflation than the kind that would make bubble fools look smart.
>Reasonable = you can buy it on 30% of your income on a traditional 30-year mortgage loan w/20% down.
But buy exactloy what kind of house???? That’s the question. So this method tells you nothing IMO. Same goes with 2 or 3x income method. Buy exactly what???
Something below the median priced house. If the median income is say 60K, then you are going to need basic, safe housing under 200K. (3×60=180)
This is not to say the median income person should be able to afford the median priced house, not as a first house anyway.
This is not to say the median income person should be able to afford the median priced house, not as a first house anyway.
Grrrrrr…. sorry to vent, but I hate this crap about “starter homes”!!! This mentality assumes house appreciation above investments/saving rates.
The bubble has priced me out for years, and I’m not going to whiz away my savings on some dump once prices cool off, even if I’m a first time buyer.
Will BB succeed in creating enough inflation to ease the repayment burden off recent buyers
No for 2 reasons:
1. Labor has lost its pricing power due to globalization. Thus inflation will make housing even less affordable as available income for housing will drop due to higher energy, etc. prices (already happening) while wages don’t keep up.
2. US is totally dependent on foreign lenders. If those foreign lenders (China, etc) get a whiff that BB is willing to kiss the US$ goodbye, you are going to see an explosion in interest rates which will create even more downward pressure on house prices.
Really the best the Fed can do is try to prevent a global run on the US$ with measured rate increases. The housing bubble is unsalvageable and I think they know this perfectly well.
nice discussion.where i live the median price is 12x median income,2-4 x is acceptable.
I sense some angst in the California group ( I belong to this one, and to DC) about how the correction hasn’t really started there. I track homes in Bethesda (20816), where price reductions are now needed to move the resales. But in Newport Beach (92660), multi-million $ homes still moving within 60 days. I think this reflects that fiscal policy impacts are first seen in Washington and NY, then move west.
Liquidity is still high globally (and interest rates still low), global economic growth is strong (but weakening), and boomers in the peak earning years still have a lot of cash (hence the ’stickiness’ so far). However, things are turning. Last week’s news: LT bonds yields, dollar, and commodities all drop, stock market stalled despite weak job numbers. Is a consensus emerging for a recession within 18 months?
Let’s take a deep breath and enjoy the short term unpredictability of the correction.
PVB, liquidity has been high globally since the Japanese went into their deflation funk in the mid-1990’s.
It has taken increasing liquidity to usher in “normalcy” but in fact it has been quite abnormal with asset bubbles spawning in various asset classes.
The best bet right now is stagflation - though it could be deflation - but certainly not inflation because the latter involves strong economic growth which I don’t think we’ll see going forward.
The most overvalued asset is always the focus of the liquidity retrenchment and this case it’s clearly real-estate, both global resdidential and to an extent global commercial.