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The Housing Bubble
Examining the home price boom and its effect on owners, lenders, regulators, realtors and the economy as a whole.
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Name:Ben Jones
Location:Northern Arizona, United States
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predictions for the balance of the year
22151 -1to 2% from may 1 2014 to may 1 2015
from April 23rd…
Comment by IE LANDLORD KING
2014-04-23 17:00:09
My rental homes are getting me on average 18-22% annual returns :} on rent …
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Comment by Ben Jones
2014-04-23 17:26:33
‘My rental homes are getting me…’
That’s checked easily enough. Where, what did you pay and when and what are the rents? BTW, it probably would have been better to sell, but it’s too late now.
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If values are dropping, but you get a 20% ROI, is it better to sell now or keep a 20% ROI cash flow? Think about it Ben.
That’d be great if there were 20% ROI but we all know you’re cash-flow negative.
You’re out of options.
You must confusing me with IE Landlord King. But you do seem easily confused.
‘is it better to sell now or keep a 20% ROI cash flow’
That’s the thing: I don’t think he is getting 20%.
And the longer he waits to sell, the larger his eventual losses will get.
This is one of the drawbacks of taking out leveraged, nondiversified portfolios of high-risk assets, like California real estate. They pay handsomely so long as prices are going up, but leverage works both ways.
Whac, if he is obtaining rents that provide 18-22% cash flow, there are no losses. He is not a seller. Why would he ever sell, since he recovers 100% of his investment in 5 years?
is he talking about 20% cash flow on his down payment or on the purchase price… Big distinction there. Clearly you can see the flaw in logic if he is talking about return on cash invested.
“…is he talking about 20% cash flow on his down payment or on the purchase price… Big distinction there.”
No joke! With sufficient leverage, the ROI on a downpayment can go over 100% negative in a heartbeat with only a small percentage loss on the purchase price.
I think you mean with a drop in rental income. You don’t lose anything on your cash flow ROI with a drop in the asset value. That only happens if you sell. That is my point for everyone today: Why would you ever sell when you make a 20% ROI from the rent?
Never.
Your cap rates are negative.
predictions for the balance of the year
Sacramento: 0% to 5% gain in values thru 12/31/2014. The Zillow median sales price is $217,300 today.
http://www.zillow.com/local-info/CA-Sacramento/r_20288/
Here is the link. Check back on Dec. 31.
And the reality?
Collapsing Housing demand continues to ravage evaporating ROI.
We will see HA.
I will check back with you on 12/31/2014.
A lot of HBB people told me I was a fool to buy houses in
2008-2009-2010
yet I am cash flowing at a 7-10% ROI, paying down the debt each month and the appreciation is exceeds 100% of my invested capital in less than 5 years.
Good thing I did not listen to you then, either.
And you still paid a 250% premium for a depreciating asset.
If only I had a nickel for every time you wrote
“And you still paid a 250% premium for a depreciating asset”
Oh, wait, I have about $1,000 for every time you said that! HA, Ha, ha, ……….too funny. All from my housing investments.
Jingle, you are making me laugh! You can’t calculate ROI as net rents vs. your cash deposit and ignore the entire borrowed amount of the purchase price. Sounds like your ROI is less than 1%. That’s not a business, it’s a hobby.
Are your loans guaranteed by a government program for principle residences?
And it’s a painful reality for you.
Blue, we have been thru this before.
I have about $350,000 invested and after all my expenses and payment of the loan interest, I receive almost $30,000/year in income. That is an 8.5% return annually on my invested dollars. Curiously, I have not raised rents because I don’t believe in raising rents on residents in place, but when they turnover, the income will increase about 25% with a 5% increase in the rent.
That does not include the $510,000 in appreciation, BTW, over a 5 year average life of the investments.
Buying housing at the bottom in 2008-2010 has been the best investment of my lifetime.
If any of your BS is actually reality, you’ve left out one truth.
You overpaid by 250%.
Strange it is that your story changed once again.
You’ve never substantiated this fantasy.
I’ve posted proof many times. You just don’t like it, so you refuse to acknowledge it.
I’d like to see a thread on asset allocation as I’m going through a long overdue rebalancing of my retirement and taxable accounts.
With interest rates at generational lows, I find setting the bond allocation of my retirement accounts to be a real challenge.
might as well do MLP’s - i beg Vangaurd when the ask
mlp fund and emerging market bond w low fees
“I find setting the bond allocation of my retirement accounts to be a real challenge.”
Keep the duration short (e.g. less than 6 years) and the quality high (highly-rated U.S. corporate bonds or better) and you will be just fine.
I agree with that W-A-B.
On the other hand, if you like to gamble with your finances, you can make money on days like today when a flight-to-quality move is underway, with a longer-duration high quality bond portfolio. Gold should do well today, too.
The comments on shorter durations and higher credit quality are noted. I’m past the stage of gambling with my finances by pursuing short term trades and strategies.
One of the most valuable lessons I learned in grad school (I was in my mid 40’s at the time) was “don’t play full court basketball with guys who are 15-20 years younger than you.”
Similarly, at this point in my life (56yrs) I’ve come to realize that as an small individual investor I’m over matched by the dominant participants in the market place. My only chance of beating LeBron James on the basketball court is if he laughs so hard he pisses himself. But I digress.
Back on point, asset allocation and the role of bonds/fixed income in a multi-asset portfolio, I’m having difficulty wrapping my head it when interest rates are so low.
For me, index mutual funds and ETFs are the investment vehicles of choice. I’ll leave the more complex methods and strategies to the professional investor class. So that leaves Asset Allocation as the area where I spend most of my attention.
I’ve come to where I believe an asset mix of 65% to 70% equities and the balance in cash/fixed income is a good place to be.
Let’s suppose I am 41 years old (like back in 2000) and we are seeing a record high on the stock indices (or near record).
Alternative assets to stocks. Back in 2000 Series I bonds looked good. In 2014 they look wimpy. Precious metals looked great in 2000. Those two asset classes were what everyone hated and were certain are for “loosers.”
Right now I don’t really see an alternative to being mostly in stock mutual funds. metals prices are not rock bottom. I figure $600 for gold would be rock bottom. Series I bond fixed rates are only 0.2%.
If you have long term treasuries, they appear worth hanging onto still, just for the income.
Something’s going to give…so cash and short term treasuries - T-Bills are probably what you have to put up with, combined with keeping a job, staying debt free.
Build up 50% more cash reserves the next three years - that should be your goal. Because big market cycle changes in one or more asset classes will develop, the longer this stasis is, the more likely a big market reversal will occur.
Good advice Bill. It is always good to have a cash reserve.
My strongest preference is for cash flow. 7-10% ROI on my invested equity in real estate is very satisfying.
The 4-5% dividends on my VDIGX is great too.
All that cash flow is piling up waiting for more buying opportunities.
JM, how much of a cash reserve would you feel safe with before investing in more real estate? Yes you did well by buying the crash in 2009 and 2010, but I don’t know if there are going to be any good buying opportunities like that in the future.
And I know I keep harping on this, but at some point, house condition is going to become an issue, especially since it’s the houses at the low end of the price range that are being bought. There is only so much bening neglect that a house can tolerate before needing major systems repair.
The home neglect in the houses snapped up in Phoenix in 2012 made it all not worthwhile as a renter. I prefer well maintained places, which are from large corporate-owned apartment rental firms.
Equity is fine for now. Not high end but has all the amenities I like. Mark Taylor Apartments are more upscale and have garages in many places.
You cannot find a “Mark Taylor” equivalent house rental in Phoenix for even twice the price you would pay rent as a Mark Taylor renter.
Unfortunately, I don’t see the same in DC. Yes, there are Pretty Young Things moving into the shiny towers. But there are a lot of semi-lucky ducks too, and they can’t afford it. They have to compete for the existing units in slightly run-down commercial complexes built 1960-1980. Add into this mix roommates providing 2-3 incomes per unit and government cheese like Grandma’s SS, Section 8, and military allowances, and you get LL’s who can get away with endless rent increases.
It’s very easy to say “chase cheaper rent” but it’s not so simple to do. For a two-bed flat in a 1970 building outside the Beltway, LL’s can charge upwards of $1700/month. It sounds like a lot until you realize that the shiny new tower rents for $2100/month. Want $1450/month?.. Be prepared for a 40-minute bus ride (with transfer), or to live somewhere even slummier. And you would need to move relatively often to keep the rent down.
And as HA says, housing deteriorates, even rental housing. At some point the rentals will need new roofs or systems just like SFH, and that will raise the rents.
“And as HA says, housing deteriorates, even rental housing. At some point the rentals will need new roofs or systems just like SFH, and that will raise the rents.”
That’s the beauty of renting. You flee the neighborhood when crime significantly increases and things go rundown. The loss is the owner’s, not yours. The owners’ fault for bringing in shady people and not screening them.
There is only one thing I love about Section 8 unruly types moving in: They destroy the property of the person willing to accept section 8. I am for property rights but not for those who sanction statism.
HA, You must confusing me with IE Landlord King. But you do seem easily confused.
Good question Oxy. I don’t think I would buy a rental today. No cash flow
I might buy a home in which to live, but it would have to be a screaming deal, probably something to rehab or repair.
My next venture will be building a couple of high end housed on lots I bought from a bank in 2010 at 20% of the original price. High end is selling well.
It is like Bill says, there are no slam dunk investment choices today.
…and Oxy, it is not so much about the “cash reserve” to feel comfortable. It is about the metrics of the investment vehicle. If the metrics make sound financial sense (good cash flow) for the purchase, that is the determining factor.
Stock gains this year might be less than five percent. The years 1990 through 1992 experienced less than 10% gains per year. Back then you could get more than five percent in money market funds. So stocks were no fun. I remember grumbling about my TSP in those days. But positive return and socking away more money meant accumulation. And that is all I hope for the next three years.
Since my annual income cut last year, reality sunk in that my net worth might not do the great leaps like it did nearly every year from 2002 to 2013. It is slower growth for me. Had I kept my consulting, I would expect to cross $2million net worth in a year or two. Now it may take four or five years. Slow growth.
The latest study on rebalancing says it is completely over rated, particularly in a taxable account. You actually defeat yourself by reallocating winning investments into losing (or less successful) investments, and pay taxes to do it.
How long from now will the MSM openly acknowledge U.S. housing price declines?
You mean like this press release?
Fiserv Inc. on Monday estimated that the Sacramento region’s average home price will drop another 2.6 percent by the third quarter of this year after reporting that prices were down on average by 8.1 percent on a year-over-year basis for the third quarter of 2011.
The company, which publishes data from the Case-Shiller Home Price Index, said that Sacramento is experiencing a “double-dip” in prices along with most parts of the country. In some areas such as Buffalo, New York, and Fort Meyers, Florida, however, prices have increased on a year-over-year basis.
The Case-Shiller projects that average U.S. prices will decline another 2.7 percent by the third quarter of 2012, compared to the year-ago period.
____________________
You might want to note that was published in January of 2012. How did that MSM open acknowledgement work out for you?
“You might want to note that was published in January of 2012. How did that MSM open acknowledgement work out for you?”
Nice job cherry picking the date to coincide with the onset of the Fed’s QE3-funded housing market rebubble program.
Now that the program is ending, do you expect rebubble pricing to continue in the absence of artificial support?
Good morning Whac, you were up late last night.
I do not expect “rebubble pricing” to continue. My expectations of the market are that housing prices will do what they usually do: Bounce along with the seasons, some increases, some decreases, but generally a moderately upward trend of 0-5% annually.
I believe the Fed will continue to taper, the economy will continue to percolate and recover and the two will offset each other.
I do know that 85% of the residents in my properties are seriously saving to buy their own home. That seems like a telling statistic. All the young members of my family are in the market to buy homes for themselves in the next few years. Household formation is a powerful factor in the markets.
Thanks for you opinion.
Dump those shacks while you might find a buyer.
Has the plunge in home loan demand had an effect on transaction flow in your local market?
For the math-challenged, 14 years ago was the year 2000, before the Housing Bubble was sent into overdrive by the mad rush into subprime mortgage lending.
Economy
Demand for Home Loans Plunges
Interest-Rate Spike Puts Mortgages at 14-Year Low
By Nick Timiraos
Updated April 24, 2014 7:34 p.m. ET
Mortgage lending declined to the lowest level in 14 years in the first quarter as homeowners pulled back sharply from refinancing and house hunters showed little appetite for new loans, the latest sign of how rising interest rates have dented the housing recovery.
Lenders originated $235 billion in mortgage loans during the January-March quarter, down 58% from the same period a year ago and down 23% from the fourth quarter of 2013, according to industry newsletter Inside Mortgage Finance.
The decline shows how the mortgage market is experiencing its largest shift in more than a decade as an era of generally falling interest rates that began in 2000 appears to have run its course. The average 30-year fixed-rate mortgage stood at 4.5% last week, up from 3.6% last May, when interest rates shot up in reaction to the Federal Reserve’s initial indication that it might reduce a bond-buying campaign that was, in part, designed to keep a lid on long-term rates like mortgages.
The decline in mortgage lending last quarter stemmed almost entirely from the slide in refinancing. Loans for home purchases were basically flat from a year earlier and down from the fourth quarter.
…
“The decline in mortgage lending last quarter stemmed almost entirely from the slide in refinancing. Loans for home purchases were basically flat from a year earlier and down from the fourth quarter.”
Bummer if you make your money by originating loans.
Bummer if you make your money by selling things to people who pay for them by refinancing their homes and pulling some money out.
Not apparently a bummer yet if you are selling homes (but watch this space).
It’s going to be sheer pleasure.
Whac, are saying we are experiencing year 2000 deja vu and we will soon see “Housing Bubble Overdrive”? Curious.
Will brewing Ukraine tensions disrupt financial markets?
April 25, 2014, 8:21 a.m. EDT
Gold hovers near $1,300 on Ukraine tensions
By William L. Watts and Shawn Langlois, MarketWatch
NEW YORK (MarketWatch) — Gold futures extended gains Friday, setting the stage for a third-consecutive daily rise as tensions between Ukraine and Russia escalated.
Gold for June delivery (GCM4 +0.84%) advanced $9.60, or 0.7%, to $1,300.20 an ounce, while May silver (SIK4 +0.34%) remained off less than a penny at $19.68 an ounce.
Ukrainian Prime Minister Arseny Yatseniuk accused Russia of wanting to start a third world war by occupying Ukraine, news reports said. U.S. President Barack Obama said he would consult Friday with European leaders about the crisis in Ukraine and continued to warn he was prepared to move ahead with more sanctions against Russia.
A day earlier, gold managed to push to its highest level in a week, even as a strong report from Apple AAPL -0.36% helped lure investors back into stocks. Gold ended with strong gains after erasing an earlier slump, rebounding on concerns over Ukraine, analysts said.
“The severe fluctuations in the gold and silver prices were accompanied by high trading volumes on the Comex [on Thursday],” said Carsten Fritsch, commodity strategist at Commerzbank. “Especially in the case of silver, 130,000 futures contracts were traded – twice as many as in the preceding days – which points to speculative and technically-oriented investors. On the other hand, the high volatility could deter physical buyers which would put short-term pressure on prices.”
…
AP News
Global stocks tumble amid Ukraine tensions
By By Joe Mc Donald April 25, 2014
BEIJING (AP) — Global stocks tumbled Friday after tensions over Ukraine mounted and Standard & Poor’s cut Russia’s credit rating, warning of capital flight and risks to investment due to the crisis.
Oil declined but stayed above $101 per barrel amid worries about the possible impact on Russian supplies.
China’s benchmark Shanghai Composite Index dropped 1 percent to 2,036.52 and Hong Kong’s Hang Seng fell 1.4 percent to 22,238.06. Taiwan’s Taiex lost 1.9 percent to 8,774.12. Seoul, India, Singapore and Bangkok also declined.
Tokyo bucked the regional trend. Its Nikkei 225 added 0.2 percent to 14,429.26, rebounding after losing 1 percent a day earlier after talks between Prime Minister Shinzo Abe and President Barack Obama failed to produce a trade agreement.
In Europe, Germany’s Dax fell 0.9 percent to 9,460.39 while France’s (CAC-40) shed 0.5 percent to 4,458.16 in early trading. Russia’s Micex gave up 0.9 percent to 1,288.40.
Markets were on edge after Ukraine launched an operation to drive pro-Russian insurgents out of occupied buildings in the country’s east. Moscow responded by announcing military exercises near Ukraine’s border.
“Escalating tensions in Ukraine only serve to worsen sentiment,” said Desmond Chua of CMC Markets in a report. “As the two nations inch ever closer to war, an outbreak will send investors fleeing to safe havens.”
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Video: Ukraine Tensions Spillover Onto Risk Assets
There has to be a bigger picture than Russia versus Ukraine. What are the central banksters up to? Are there bigger forces out there to counteract the western banks and make stocks out of favor for five years or so? And make gold strong and cash king?
Why do economists blame the weather whenever sales are down? I can see B and M stores and not wanting to drive out to see items on the shelf, but wouldn’t things like mortgages or home sales actually go UP? When it’s 10 degrees outside I am online (like most people under 50) after doing house chores or wrangling the kids. I’ve spent hours and hours looking at everything from mortgages to vacations to cars. During the nice weather I am outside and hanging out with the kids, away from the computer.
I just never understood the whole “it’s the weather” thing, especially since most people don’t fill out mortgage applications outside in the freezing weather.
Want the facts?
It’s not the “weather thing”. People just blew hundreds or thousands on Christmas, so they cannot afford to go house shopping.
Yeah, I realize how ludicrous that sounds. it’s true, though.
what’s the fastest crashing market now?
phx,tampa,las vegas?
DC
Here is Salinas I know of three people that bought rental property in late 2012. Reason was that they had 401K’s that were making next to nothing and didn’t trust the stock market with government manipulation.They were all very will off and just retiring from their private businesses. They were young enough to have to pay some penalty on the withdrawal plus taxes but after buying (two together on a triplex) and allowing for maintenance and they have a ROI of 8% to 10% (all cash deals). The 1% they were getting just wasn’t going to work for them in retirement.
Everybody has different goals, lives in different areas, etc.
Cash flow is king.
Interesting topic for me is how things have changed since 2004 till now on this blog. Initially we were trying to figure out how housing was able to keep going up. How all sane lending practices were being thrown out the window. Some of us talked about renting in such a market while we were trying to rein in others from buying. In 2006, 2007 and into 2008 people kept saying that the market was going to go still higher in the face of common sense. Then crash! Everyone wanted their pound of justification! Everyone just new that property value had to return to a long term trend line and waited patiently for housing to hit rock bottom. No one in their right mind thought that the government and banks would get together and enter into unholy and illegal accounting practices. The MSM said that no one could see it coming but then a funny thing started happening. The MSM started telling us that the market topped in 2006 and that by 2009 or 2010 the market by historical standards should be out of its recession and recovering.
By 2011 to 2012 the market in most places bottomed because of government intervention into the banking industry and the banking industry allowing a large segment of the population to live for free so that they could now use rent money to buy, buy, buy and keep the economy chugging along.
Through all this pessimism has taken over the blog. Name calling, ruddiness, and hostility towards people who bought during the down turn. Now the mime is ‘don’t buy ever, renting is better’! True for some but everyone is in a different set of circumstances and should not follow any herd.
What works for BILA is great for Bill. I like the fact the he has a plan and I wish him well. Would it work for me, no. When I was young I used to get up in the morning and exercise by running two miles, swimming a mile and then doing a half hour of circuit training. Now, I don’t care to swim in a pool where people can pee in the water, I don’t like the smell of the chlorine, and I don’t like putting alcohol drops in my ears to get the water out. I prefer to lift moderately heavy weights for over an hour five days a week with a range of motion to work my vestibular system for balance. If Bill should get to my age in good health he may chose to very his routine more. Bill is an isolationist while I prefer to share my life with family, a wife and kids and have roots in one area that I enjoy rather than a nomadic existence of flying back and forth between locales.
The one thing that I have learned in life is it is to be lived. Those that succeed best are optimists. Fear nothing.
I agree with this. I’m not trying to live a single life and I would give in to actually owning a house but not if I’m going to be ripped off by the hucksters in the REIC colluding to prevent a drop back to where things would be if not for the fraud and crookedness.
My stridency this time comes from the blatant shills and pimps who deny recent and obvious history. Prior to the last fall at least there wasn’t this obvious data point staring you in the face.
I agree with this too. I used to ski 30-40 days a year. I am older now and don’t find it so enjoyable. Coldness has a different feel to me now. I prefer to work out on a cross trainer, garden and manage a rental portfolio.
The housing market changes too. I was a big contributor to the bubble news here in 2005-2007 and worked many hours to get the word out about the fraudsters I saw in action every day. I rented a house in 2006, instead of buying, in a large part due to this blog.
However, housing always recovers. Just like it will go through another down cycle. I post today because the message here is so anti-housing on all fronts. Ben and HA are completely invested in that belief. Yet I have purchased multiple houses during what I believe was the bottom (’08-’10). I have great cash flow, excellent tax benefits, and value appreciation beyond anything I reasonably forecasted. I also live in a nicer home than I ever dreamed of, thanks to some FB’s who bought in 2007 and BofA who financed them. The FB’s walked away and the bank sold to me a 50% of their outstanding loan balance.
Life changes. Opportunities present themselves. Markets go up and down.
I should not be so tough on HA and be so crass with him. I find him rude, offensive and juvenile, but that should not be a factor by which I present my behavior. I apologize and will do better.
A moth goes to the light. A mariner keeps it to one side.
It is not negative to avoid obvious hazards. I boat through water with rocks and shoals. I am optimistic that I will arrive safely at my destination because I do all possible to identify the rocks and go around them.
Investing 4/25/2014 @ 3:10PM 319 views
Is Housing Ringing The Stock Market’s Bell Again?
It is said that they don’t ring a bell at stock market tops.
However, the housing industry has sometimes been quite adept at doing just that. In fact, it has been quite prescient in leading the economy, and thus the stock market, in both directions.
The most obvious tops followed the bursting of real estate bubbles, such as in 1989, which led to the 1990-91 economic recession and 1990 bear market in stocks, and bursting of the housing bubble in 2006, which led to the 2007-2009 ‘great recession’ and bear market.
However, real estate bubbles are rare events.
There were less dramatic instances, like the 20% slowdown in new home sales in 1999, just prior to the stock market top in 2000, and the 30% decline in new home sales in 1980, followed by the 1981-82 recession and bear market.
So, is housing ringing its warning bell again?
…
Interesting notes Whac. I don’t see housing as a big driver of the stock market today. New home construction is below the trend line, yet growing. Used home sales are muted for many reasons (low inventory, rapid appreciation, rigorous lending standards) and the future is uncertain.
I don’t recall the drop in new home sales in 1999, but I do find it interesting, given the bull run in housing for the next 6 years. The stock market drop in 2000 was related to the tech bubble. The resulting 2000-2007 bull run in housing was seeded by the Fed and fertilized by wall street and all the players in between the two (UHSP, fraudsters, mortgage brokers, etc).
It is so hard to compare historical events to current events because they all have their twists and turns. Basically, I see the U.S. continuing to work out of the Great Recession over the next 5-years. Housing and the stock market are likely to just percolate along, business will improve, job growth will continue, but any appreciation will be muted in both markets, tempered by rising interest rates and the Great Taper.