Make sure you read the whole thing and the running commentary.
5. Value. Unlike some stocks, your house will seldom become worthless. Barring a catastrophe, your home will retain a major portion of its value, even in the worst of times. So dont freak out about slight fluctuations in the value of your home in any given year. Youll make it up. Housing has lost value only one year out of the last 35. Its more normal to beat inflation by 1 percent to 2 percent.
Provided you put 100% down. Leverage also works on the way down. It is entirely possible to lose far more than 100% in a leveraged real estate transaction.
I've mentioned this before. Assuming that markets are efficient, the mortgage interest rate reduction is a subsidy to the mortgage lending industry, not to the mortgage borrower. Home prices adjust upwards in response to such subsidies, allowing lenders to lend more money, and thus earn more profits.
Zillow says my neighbor was $2.32m Feb 07 and $1.68m Feb 08. Losing $73 per hour 24x7 for a year has got to get your attention. I bring this up because what is happening now are declines that no amount of appreciation can ever recover. When the NAR shill says; "Youll make it up." She's wrong.
mort_fin, I think the point goes like this: I purchased my house in 1996 for 107,000. At the height of the bubble my house would have sold for 375,000. Now, do the math on the percentage off from peak and then calculate what the return percentage is.
That's a great one, Tanta! This one has to come in 2nd, or 3rd... sheesh there's a lot of competition!
“Bear [Stearns] executives also believe the market for collateralised debt obligations, which is dormant, will eventually come back, though the instruments will probably have a new acronym to make them more palatable.”
From Zac's monorail link:
"But since then, passengers have been hard to come by. Instead of the forecast 54,000 customers, the monorail is attracting barely 21,000 users a day."
I guess it all boils down to: you can't force people to ride the rail.
Kind of speaks to the inevitability of...things economic.
ipodius - you are hammering at an important point, but hitting your thumb. It all depends upon the timeframe used for the average gain calculation. If you assume the world stops now, a home purchased in 96 still looks like a good deal. Im betting if you do that calculation in two years, it wont look quite so good. And it could theoretically look like crap in 5 years. In 10 years, it might look ok again. Who knows. The point is, if you are looking for a long term return, why shoot yourself in the foot by starting potentially 20% in the hole your first two years? If you are so convinced about the long term sensibility of investing in housing, why not wait until prices have bottomed before jumping in? Makes no sense at all to buy now no matter what you assume about long term average returns, unless of course you think this is the bottom. And in that case, well, I cant help you. What's happening now is more a reason to try to cash out some of those gains, rather than a reason to buy.
Three tranches of debt were used to pay for the monorail. Lower tiers of $49m and $149m are plain vanilla risk-bearing notes held by public and private investors. But the biggest chunk, $450m of "senior" debt, carries the name of Nevada's department of business and industry and is insured by Ambac, a monoline insurer that is one of the US's biggest financial guarantors.
At the end of January, the credit-rating agency Moody's declared that barring an unexpected surge in passengers, the monorail will be unable to keep up repayments on its loans beyond 2010. Although the bonds' insured status gives them a blue-chip AAA rating, Moody's downgraded their underlying risk of default to a junk status, Caa2 - the third lowest level on its scale.
At the height of the bubble my house would have sold for 375,000. Now, do the math on the percentage off from peak and then calculate what the return percentage is.
ipodius | 02.16.08 - 3:28 pm | #
Did you sell at the height of the market? No? Too bad. Keep holding - it'll go back up.
Did you buy in '04, '05, '06, or '07? If you did, you bought high and will sell low.
Marus, 1996. I said that in my original post. And ALL investment calculations depend on the timeframe. So it is equally absurd to use the top of the bubble as an example, as the correction that is happening now.
What this means is that if you bought in the last couple of years, it's not that you WON'T see a return, it will just take longer. Just like all those financial instruments aren't worth NOTHING, but time will tell exactly what.
ipod - if you're calculating the return on an investment, you'd better be capitalizing all the related expenses. Mortgage interest, property taxes, upgrades, repairs, maintenance, etc. If you want to be really honest, also calculate the expense of the time you spent (wasted?) performing all those activities. Add a couple more billable hours for doing the calculations.
Rob Dawg your first comment missed the entire point of this piece. You have fatally confused the concept of equity and asset value and ignored the differences between leveraging a stock investment and leveraging a house.
Ignoring for the moment the discount for rent the key factors in buying/investing in a house are the carrying costs against the appreciation. As long as you can afford the former by and large the loan is not callable unlike say stock bought on margin. All parties to the loan agree that the real value is in the current use, people typically will not just walk away from an occupied house because their equity position is negative. This again is unlike a stock holding.
I see a lot of misreads in commenting on housing by ignoring this simple difference between other investments and housing, you can't sleep under a stock portfolio. The discount for rent and the tax advantages of owner-occupancy make this investment unlike any other, trying to reduce that to return on investment in percentage terms, or projecting that people will react to low to negative equity as they would to a stock tanking is a think a profound psychological mistake.
Bruce Webb - "people typically will not just walk away from an occupied house because their equity position is negative. "
I agree that this is something you used to be able to assume, but the current times are anything but typical, and thus, the behaviors that will result dont have to appear anything like those of the past.
furthermore, only an idiot with a negative position who is about to see that negative get larger and larger, would sit and hold. This is the attitude that the early downside buyers of the NASDAQ bubble, and it proved a painful lesson to them. Some of those same folks probably ended up speccing on housing and unless they are completely morons, they might well be thinking about cutting their losses this time around.
Most of you are neglecting amortization. Buying a home and selling 2 years later was always, except for 2003-2006, a bad deal. The advantage of owning is only realized in anormal market when you stay in the house 10 years or more and is best when you stay at least 20 years. I like the fact that every month when I write a mortgage check a few hundred goes to pay down my principal. By the time I sell, even if the appreciation in 20 years is only 50%, I'll still walk away with well over $ 200k on a $40 k down payment. That seems good to me. And my mortgage + taxes are less than the rent on a comparable house.
Bruce Webb says; All parties to the loan agree that the real value is in the current use, people typically will not just walk away from an occupied house because their equity position is negative.
I certainly agree that's the way it used to be. Indeed all the loan loss models were structured entirely upon those premises. How's that working out? DQs, rate of DQs, severity, ratio of incurable NODs are all just off the historic charts. Nevermind that there isn't even much employment softness that even those serverities were including. You are fighting the last war Bruce. People are walking.
geoff- Sometimes when a stock goes down, the right thing to do is buy more. Certainly not always, but on occasion it is. The trick of course is knowing when.
Although I think the bursting of the bubble has a long way to go to reach bottom, I do think that one should be cautious about saying that this is not the time to buy.
Each unit must be evaluated on its own merits. If the price is an appropriate multiple to income (say 2.8), the (long-term fixed) total carrying costs are below or equivalent to renting, and the price per square foot is at or below comparables over a 20 year period (in real terms), you have to pull the trigger regardless of the wider market's trends. This is the difference between a value investor and a momentum investor.
I'm closing in about 10 days on a unit that is historically undervalued even though I am certain the market has a long way to hit bottom. I'm able to do this because in an illiquid market there is a lot of fear, and I'm able to transact at a future anticipated value, rather than at a present market value.
So careful with the "don't buy now" argument. Don't buy housing index options now, is probably more appropriate.
Inflation won't save them this time. They all have ARMs and a plurality of those of the most recent vintages are tied to the LIBOR so even Ben can't save them.
The discount for rent and the tax advantages of owner-occupancy make this investment unlike any other, trying to reduce that to return on investment in percentage terms, or projecting that people will react to low to negative equity as they would to a stock tanking is a think a profound psychological mistake.
Except that current rent/buy ratios are clearly out of wack right now and eliminate said benefits. I have done the calculations in my area. Even if I pay 20% down and subtract out both the tax savings and the contribution to the principal, the carrying costs for a typical house in my area is 33% more than what I pay for rent. Furthermore, this is only comparing homes of similar quality, and does not include land (the place I rent has significantly more acreage than the homes I priced).
Oh yeah. I live in rural CNY. That is one of those areas that didn't have a housing bubble (hah).
Allen, AOC - I know what you guys are saying - that might work ok soon for stocks. We've discussed this on other threads. I'm guessing most folks aren't going to buy additional houses now to make up for losses, esp seeing as it will be much harder to finance even if they chose that route. my specific reference is comparing nasd bubble w housing bubble. both huge anamolies which make historical comps misleading
geoff-No. I'm not going to buy another house. We rented out a house we owned once when we went overseas. Not something I have any interest in doing again. OTOH, whenever a stock I follow goes down a lot, I instinctively take a look at it.
I think people need to recharge the batteries in their irony detectors.
Or figure out how to put the flat end against that little spring thing.
Besides the depreciating asset that grows in market value, I like the part about all you have to do being spending some undisclosed amount of cash dollars per year to repair and maintain the "investment." How many people spent $100,000 on those homes purchased in 1996 in order to sell for a profit in 2006?
The great thing about stocks is that while you can't sleep under them, you don't have to keep adding another bathroom to them.
I think that the mistake...to think of the house as an investment and not just an asset.
I realize that this is what got out of whack, but my mortage (including insurance and taxes) is about $600 less than market value rent on an equivalent place here. Of course when the young ipodius stumbled into buying the house on the elderpodius' advice, he was making a whole lot less and that was really stretching his budget.
Of course now my housing expense is only a minimal part of the budget. But when you rent you still have expenses, so the key here is to think about what you are paying over market for equivalent rent as the real expense. You are also not in control of moving, so that has to be factored in. Then, how much are you willing to pay extra to pick out your own kitchen, have the privlidge of adding a bath, and being about to cook a nice, stinky fish without complaints.
Then, how much are you willing to pay extra to pick out your own kitchen, have the privlidge of adding a bath, and being about to cook a nice, stinky fish without complaints.
These arguments just fall on deaf ears to the savvy renter.
I rent a farmhouse on 10 acres with a good number of apple trees in back (make my own cider). Lease allows me to do significant work on the land (planting garden, etc...) if I wanted to. Happy with the house layout, so no desire to do any remodeling even if I could. Plus, I have an extremely responsive property manager that does whatever repairs that need to be done so I don't have to. And the landlord has no desire for me to go anywhere and keeps me happy.
There is absolutely nothing that buying has to offer me for an extra $300 a month in carrying costs (or a PITI which is $900 more than my rent). Especially when I would be trading what I have now for a postage stamp of a lawn.
That' great Walker, but some of us don't have those options for where we live to close to family, what we do for a living etc.
When evaluation property decisions, I built a spreadsheet (sans pig, unfortunately) where all I had to do was plug in the property value and it projected out the returns on the property versus the historic returns on other investments. It took into account rent, tax credits, insurance, and normal expenses. So the bottom line was, after equivalent rent, if I took the rest of the cash each month and put it into any of these other investments, what would the return be?
After seeing the numbers, it gives you a perspective as to "how much extra will I pay to...". And there is nothing wrong with renting at all. It's a perfectly great decision. But someone has to own the properties for you to rent, and someone has to run cash positive in order for them to want to do it.
there's also the issue of diversification. If your house is your only asset, that's not a good idea. But I'm just not comfortable being all in stocks either. I feel better having some stocks, a house, some CDs, some foreign currencies, etc. While recently, house and stocks have gone down together, in general they are poorly correlated (like in 2000-2002)
Comparing investment in shares of stock to an "investment" in a house is ridiculous. I put that second investment in quotes because an owner occupied house is not an investment, it's an expense -- a big expense. It's an expense the same way that renting is an expense. The thing is, over the long haul (10 or 15 years), you will probably realize a profit in a house whereas after 10 or 15 years of renting you will realize 10 or 15 years of rent receipts -- nothing more. I also think it's hilarious that renters think that only home owners pay for property taxes, insurance and maintenance. What do you think your rent is covering? Do you think that renting is the only economic activity that is not covered by market forces?
That's true aheadofthecurve. Basically the house is just an inflation hedge with a slight return over time, perhaps a percent or two depending on how you can take advantage of market dynamics. For a lot of people, there's also a sort of "forced savings" aspect to it...that was until the whole HELOC thing became popular.
My only input about housing is that you have to live somewhere, so what you are talking about is not all these costs...it's all these costs minus market rent. And that's market rent for where you want to live.
No, no, no! Buying a house is an investment. It's just that people are so bad about their investing decisions. Very few will look at the costs, risks, etc. rigorously (as ipodius seems to have) and most will focus on where they want to live. If you believe that buy low/sell high is the way to gains, then you should be looking at the bottom of your price range; most look towards the top. If you believe that buy high sell higher is the way to go: then you probably are pissed off at the declining market right now.
Rob Dawg writes:
Losing money in the Tech Bubble didn't require you to write a mortgage check, insurance check, property tax check, utilities every month.
How about needing a new furnace and a new roof? My property tax check is about 1 percent of my assessed value; less than that if you go by Zillow, but still a big bite for me--$2200 a year.
Tanta: The great thing about stocks is that while you can't sleep under them, you don't have to keep adding another bathroom to them.
And your stocks won't lose value when somebody turns the stock next door into a rental and gets six college student rugby players as tenants. The biggest risk in "investing" in a house is the fact that you can't control the neighborhood, or the "housing market."
I suppose if your housing investment is in some kind of million-dollar gated community with a view of the ocean, the neighborhood risk is a lot less than it is for me, in an urban setting, but my situation is probably more typical. The house next door is on the market right now and we're biting our nails wondering what's gonna happen to it.
ipodius Then, how much are you willing to pay extra to pick out your own kitchen, have the privlidge of adding a bath, and being about to cook a nice, stinky fish without complaints.
If the fish stinks, throw it out. You wouldn't eat stinky chicken.
A house is likely a better "investment" than an apartment, but it's a risky sort of thing if your whole retirement plan consists of selling and downsizing after the kids move out.
EngineerJim: "The thing is, over the long haul (10 or 15 years), you will probably realize a profit in a house whereas after 10 or 15 years of renting you will realize 10 or 15 years of rent receipts -- nothing more."
Actually, in addition to my rent receipts, I'll also have an extra 50k or so compared to the hypothetical owner... that's all the money I didn't spend on maintenance and property taxes. (In Toronto, comparing a rental apt to a condo). Engineer Jim's claim that "renters pay for property taxes and upkeep" is ridiculous... renters pay RENT. Yes, some of that rent is in turn used to pay property taxes and so on, but so what? That's not my problem. I'm looking at 1000 in rent vs a 1500 mortgage + 500 in maintenance fees + 200 in property taxes..... there had better be a hell of a lot of appreciation to make me forgo the money I'm saving by renting.
I have NO interest in remodelling kitchens, etc. The ability to do that to owned accomodation means nothing to me. The stove works? Good, I'm happy. (And BTW, the list of rules in a condo is long and onerous). I do have an interest in being able to easily try life in different neighborhoods or even different cities... so it's renting for me.
Of course those things are your problem, because the rent is based on expenses, property apprectiaton, and profit. Your landlord is there to make money, and you're helping him do it. If the cost of those things goes up, so does your rent. I don't own rental property to lose money and current tenants won't pay the rent, someone else will. Vacancy time has already been figured into that too.
One part that you and others ignore is, however, that when I move to cut back on working and my income shrinks, I will have no housing expense except for taxes and slight upkeep. Taxes in my area are around 3k a year. What can you rent for 3k a year?
John Stark:
Alas, even the freshest halibut wafts a lovely sea smell from the broiler
My problem is with those who tell everyone to buy or tell everyone not to buy. There are so many factors including how long you expect to stay, the local market, your family situation, etc. It's not one size fits all.
Engineer Jim
"Right now the property tax in California is nominally 1%. If the state increases that to 1.5%, do you not think rents will go up?"
Not for me.
My landlord collects 1850 from e me every month.
She pay mortgage on a loan of 365K + opportunity cost on 100K (downpayment).
I dont know the interest rate. Even if it 6% (2005 purchase) she more than my rent in PITI (+ opportunity cost os 100K)
She also pays 250 HOA.
Last year I extended the lease with out rent increase.
This year I plan on agreeing $50 increase for an option of month to month lease.
Any increase of more than that , I will find a equivalent condo/home (1200+ sq ft, 4 BR 2 BA) in about three months and with in 5 miles of my residence.
Now tell me how can I pay for the increase in the property tax.
"Right now the property tax in California is nominally 1%. If the state increases that to 1.5%, do you not think rents will go up?
EngineerJim | 02.16.08 - 6:00 pm | #
No they wont because you can't borrow money from a bank to pay for rent. Rents are tied to income in a much more fundamental way than mortgage debt. Rents are determined to a greater extent than supply and demand and input costs by simply what people can afford to pay. Sorry but if you were hoping renters to come to the rescue of all of you underwater homedebtors you're going to be sorry I think. Unless wages for J6P triples that is. Then you're golden.
IMO housing isn't so much an investment as a forced savings account. Unfortunately, a lot that has worked in housing's favor for the last 50 years will now work against it.
Strike 1: Boomer demographics going negative. Strike 2: Inflation no longer working in homeowner's favor. Strike 3: Mortgage rates have nowhere to go but up.
If you're buying a home you can easily afford, will stay in a long time, and expecting no return from -- more power to you. Otherwise, YOU'RE OUT!!!
Ask 98% of homeowners who put 10-20% down what their biggest investment is and they will answer - their home. Of course it's shelter and should be the primary function, but most people view their home purchase as a significant investment.
Separately renters are not immune from supply and demand economics. Rent can go up or drop. If supply is tight and CA raises property taxes, yes, doctor, you will be paying the landlord's extra tax bill.
And one last note on owning RE vs. stocks. All points previous are valid and well done. One not posted: if I own RE and not stocks at least I'm not exposed to the risks of the moron (s) running the company that might make disastrous decisions to run the company, and stock, into the ground.
tj & the bear: "Prop. 13 not only fixed rates at 1%, it changed the state constitution to require a supermajority to raise taxes. Not going to happen."
California has a deficit of $14B -- and that was a few months ago, now its probably a lot more. The governator says he will cut spending by 10%. Yeah, right. There won't be any cuts in spending. There will be tax increases. The legislature will figure some underhanded way of increasing property taxes. Never say never.
El: "Ask 98% of homeowners who put 10-20% down what their biggest investment is and they will answer - their home. Of course it's shelter and should be the primary function, but most people view their home purchase as a significant investment"
That's true in California, I don't know if that's the case everywhere in the country. Also, that's a fairly recent phenomenon (last 30 years).
Generous lease terms or not, renting means deferring to someone about your living space. I hated that, which was why we bought our house in our mid-twenties.
$14B is only the beginning. Sales & use tax receipts were down 9.7% YOY in January; we'll be lucky if the deficit isn't $40B this year.
That said, it'll take an act of God to get tax increases past the Republican minority in the state Legislature. Their power stems from the supermajority provisions of prop. 13, and they won't approve ANY tax increase until the Democrats agree to spending cuts that (frankly) will never happen.
trying to reduce that to return on investment in percentage terms, or projecting that people will react to low to negative equity as they would to a stock tanking is a think a profound psychological mistake.
Thinking that they won't react to substantial negative equity is profound psychological mistake. Do you know how long it will take the average American family to recover from a 200K loss? Their whole lifetime.
The thing to remember about a house as an investment is that the dividends are paid in kind, and are consumed completely. If you buy a stock, you can reinvest the dividends in that stock, or another stock or spend them. A house IS a productive asset in that what it produces is HOUSING. But unless you're renting out rooms, you consume those dividends. Using more leverage with stocks means that you have more earnings. If you buy a more expensive house, instead of having more dividends to spend as you please, you simply consume more housing.
i KNow what a exceutive level option grant is, and a debt offering for a buyback program, but this dividend thing you guys are talking about has thrown me for a loop.
$14B is only the beginning. Sales & use tax receipts were down 9.7% YOY in January; we'll be lucky if the deficit isn't $40B this year.
That said, it'll take an act of God to get tax increases past the Republican minority in the state Legislature. Their power stems from the supermajority provisions of prop. 13, and they won't approve ANY tax increase until the Democrats agree to spending cuts that (frankly) will never happen.
Rob Dawg, wanna chime in here?
I'll have another ripping post tomorrow covering this and the LATimes coverage and Dan Walters and my take. As you know I've been way out in front of the California budget crisis having called this timing and action both 6 and 10 weeks ago before anyone in the MSM had a clue. The PANYNJ bond failure has got California running scared in the expert corridors. The shame is there are maybe 6 electeds smart enough to have felt the iceberg.
For the nice CR crowd short version: facing a $14.5b structural deficit the state cut $1b in spending and authorized the maxing out of some old debt authority for another $3.5b under the old assumptions. Yep $14.5b = $4.5b in budgetland. And no, this doesn't take into account the 9.7% drop in sales tax revenues. Nor does anyone want to talk to me yet about the Dec 10th property tax results. So, California is starting the 08-09 budget in august with a planned $22b overspend and a likely $25b revenue shortfall. The Democrats love it. They can blame Da Governator and likely will attack Prop 13 using the "crisis" as the excuse.
TJ&B disagree on the "problem" of the minority Republicans in the State Houses. Like Tanta said about an earlier problem "I'm not sure there is a solution."
EngineerJim writes:
Darren: "Yes, some of that rent is in turn used to pay property taxes and so on, but so what? That's not my problem."
Right now the property tax in California is nominally 1%. If the state increases that to 1.5%, do you not think rents will go up?
EngineerJim | 02.16.08 - 6:00 pm | #
Lol then don't you think the cost of owning a home goes up!?! You seriously can't be this stupid. The cost to own a home vs. rent is out of whack no matter how you slice it. The cost is way out of line compared historically. The cost of a home if you are planning to rent is 100x-120x rent. I pay $1325 for a 2br/1.5bath in SoCal. For me to buy a condo of similar size I am looking at $300k. Oh, then you have to add taxes, mello roos, HOA fees, maintenance, etc. A home you live in is not an investment. An investment is a second home or rental.
As for Cali's financial crisis. I am in the center of it near San Diego. The I-5 is under construction, SD city has water mains bursting weekly whenever I watch the news, and one look at the report everyone quotes shows that a lot of expenses are crazy. Look at how much we spend on medical, it's fucking nuts.
dryfly writes:
I think I got the point--solvency is a movie, not a snapshot, in the insurance context, and you don't necessarily have to wait to the end to know how it's going to come out, and act accordingly.
While pursuing a masters in mfg I took a class on 'running the firm in crisis'... offered by a guy who had done more than a few turnarounds.
The key consideration on how quickly firms of all types find themselves 'operationally insolvent' is based on how quickly 'future liabilities' become 'immediate cash obligations' matched to how quickly their incoming cashflow evaporates.
He would say is quite possible to operate in an insolvent state indefinitely via rollover until some event forces immediate cash reconciliation of the insolvent accounts.
That would explain your bank-plane and insurance-train crash analogies pretty well... banks lose cashflow almost instantly in a crisis & have to reconcile now... not so true with insurers.
However in the case of the monolines... I'm not so sure they behave like typical insurers. They could quite easily see very rapid decline in cashflow at the same time they see their liability claims become immediate & large... in effect a 'plane crash' scenario with downgrade or regulator intervention playing the role of mountain.
dryfly | 02.16.08 - 1:25 pm | #
Don't these monolines lose their cashflow once they lose their AAA status? Isn't that the problem? Once they can't make any more deals they lose their income stream (munis pay up front, but corp pays continuously I though). If they have to start dishing out cash, while having no cash come in doesn't that instantly screw them once debits exceeds their cash balance? I know friends who quit their jobs because they hated it and would say they would rather work at McDonalds than keep their old job, they end up not working at McDonalds for an interim job and thus have 0 cash flow and then lose their cell phone and car.
Home prices will continue to weaken,'' the 81-year-old former Fed chief said.When a bubble breaks, you go to primordial fear.''
Anonymous | 02.16.08 - 11:08 pm | #
In that regard it's like the stock market -- there's only two emotions -- fear and greed.
ERIK: "Don't these monolines lose their cashflow once they lose their AAA status? Isn't that the problem? Once they can't make any more deals they lose their income stream (munis pay up front, but corp pays continuously I though). If they have to start dishing out cash, while having no cash come in doesn't that instantly screw them once debits exceeds their cash balance?"
The monolines will lose their ability to write new muni bond business (some muni bond business at a lower rating may still be available but it's minor). However, none of that impacts the existing contracts. The existing muni bond insurance buyers already paid premiums (although this only gets booked as earnings over time), and the periodical payments from structured products will still be received (if they don't receive that, that's fine with the monolines since those are the underpriced insurance contracts that monolines would rather do away with).
So if no new business is written, big companies like MBIA and Ambac will still receive close to $1 billion every year. The insurance business is a "weird" business (can you think of any other business where you can earn $1 billion even if you do nothing?)
What new business will help with is increasing the existing capital. If they can write new muni bond business, all the profits from that can be used to offset greater losses in the future. Without new business, the monolines will only have the existing capital (around $15 billion for MBIA and Ambac--for both muni and structured product liabilities).
Bond insurance is a very complicated and weird business. As Steve Vanellii of GaveKal once said, this is the ultimate mark to model business. You can be insolvent 20 years before you are bankrupt! Everything is based on theoretical losses that may or may not materialize.
Nobody mentions OER, the proxy for the cost of housing in the CPI number that is one of the 2 tabs for calculating inflation (unlike the EU)...so this important reminder from Tanta about the maintenance costs associated with this RE investment is important...(as important to remember as those deductions for SS being made to contribute to all contributors --not just your self-interested little ass that thinks it can do better investing it.).
The cost of housing includes not only those mortgage payments, those insurance payments on the mortgage, the insurance on the house, the municipal taxes...but the goddamn roof too.
So of course the OER needs to be constructed, compiled --invented, to measure the tip of the ice berg...last time I looked something like 25% of the consumer's purse is what the officials pencil in...which seems a tad low even for those folks putting in a second laundry room.
Some may be over-looking the work (what?) required in owning a house, but it is not helped by the government that compiles a stat based on what a house might rent for. A year's supply of inventory should be driving rents down...in line with house prices, but don't expect that to show up in the construct OER. So much depends on a moderated, not moderate, inflation figure.
In the long run, the best asset in my opinion is stocks. The 2nd best is real estate. Stocks have a long-run nominal return around 10% and real estate is around 8% (but this all depends on specifics, time period, region, etc). The return on all assets will likely be lower in the next few decades than the last few (say 4%-6% for real estate and 6% to 8% for stocks).
So, it's hard for anyone here to argue that real estate will do poorly in the long run. Unless we go into a massive deflationary depression/recession (like Japan) or someone buys right at the top, I think real estate will outperform most other assets over the next few decades. I would even bet that real estate will outpeform the presently hot commodities and gold over the next 20 years (last time I bet on something on a Saturday, it was Ambac so don't bet your life savings on this ).
Since Canada and USA are likely to have increasing population, along with positive GDP growth over the next few decades, real estate should be fine. Real estate is more likely to be a problem in Europe, and will likely be even better in Asia (assuming Asia doesn't fall apart--this is more of a risk than any of the commodity or China-to-da-moon bulls believe).
One of the things that a lot of people forget is that a big chunk of the value of real estate is the land. If you are in a municipal area, the land price will likely go up (again, I'm assuming we don't enter a Japanese-style or Great Depression-type situation).
Renting should generally be less expensive than real estate... I'm just a newbie but the way I look at things, perhaps the best thing to do is:
Don't know what you're disagreeing with -- I didn't call the Republican minority a problem, and I certainly don't consider them one. Heck, they're the only ones keeping California from completely going off the deep end. The Democrats in the legislature are so far to the left that Hillary probably has more in common with William Buckley.
Sivaram: "In the long run, the best asset in my opinion is stocks. The 2nd best is real estate."
I assume by investing in stocks you mean investing long in a diversified portfolio of value stocks? In other words you are not talking about timing the market, placing options, shorting stocks and all the rest of the crap that is bantered about every day on CNBC "Fast Money".
"Fast Money" may be the one worthwhile show on CNBC. They often recommend shorting stocks; I remember one guy stating "short MBIA" as a final trade back in late November when the stock was in the 30's.
It's my understanding that Fast Money is their most popular market-oriented show.
ipodius: "Of course those things are your problem, because the rent is based on expenses, property apprectiaton, and profit."
Look, those things affect the supply curve of rental housing in the long run. In the short run, the supply of rental housing is fairly inelastic (which means rent is largely determined by demand). You have a rental property, you're going to rent it for what you can get rather than letting it sit empty.
ipodius: "If the cost of those things goes up, so does your rent."
Not if there's another empty place down the street where the owner would rather swallow the property tax than let his place sit empty.
Ipoidus: "One part that you and others ignore is, however, that when I move to cut back on working and my income shrinks, I will have no housing expense except for taxes and slight upkeep. Taxes in my area are around 3k a year. What can you rent for 3k a year?"
Wrong question. The right question is "what can you rent for 3k plus whatever income you can earn with 300k?" (or whatever the market value of a house is). And by the way, I know plenty of homeowners, they're always talking about new roofs and so on... upkeep isn't "slight"
Had an REO auction today in Oakland. Properties went for about 50% off peak prices (compared final auction price to previous SOLDs on MLS). Many of the props were in more outlying Bay Area.
50% off of peak? That's about what fair mkt value is (as I've been saying since 2004 and seeing this whole thing develop).
As I said in a previous post, I use 40% off as a baseline when considering a home purchase. Or go back to 2000 - 2001 prices. Whichever.
The metric seems to be a useful one for this local mkt.
Although it often creeps into my mind all the other alarming crosscurrents for the US that make any simple metric about buying a house here completely irrelevant:
US sloth an complacency
Peak Oil/energy shortages
Lack of US Innovation
Vapid pop culture distractions, obsessions
Debt - from Fed Gov all the way down to consumer
Global wage arbitrage
Chindia kicking our fat and complacent American asses
Many more
Of course, I guess we still have a big military machine and lots of the bombs. That seems to be one of the few US advantages at this point.
Congressional hearings on baseball/steroids?!?! Who gives a flying f^&k?
How about a hearing to impeach, convict, and publically execute key memebers of the Bush/Cheney crime syndicate?!?
Sheesh - talk about inane, pointless bullshit that too many Americans are enraptured in. At this point, we seem globally toast.
The US is collectively like trust fund babies wantonly burning through the bequeathed family fortune.
tj & the bear,
Well "Fast Money" sounds to me like fast taking which sounds like a used car salesman. Don't know if you remember Louis Rukeyser's "Wall Street Week" that was on Friday nights for many years. I don't think Rukeyser even believed in Technical Analysis. He just believed in fundamentals. He was totally different than today's wild man Jim Cramer.
"IMO housing isn't so much an investment as a forced savings account."
Exactly, TJ. Bingo, right on the money. For those without the discipline to save, owning a home ain't such a bad idea vs. renting.
Once you've bought, though, look out. The expenses really pile up. Upkeep, maintenance, taxes, a lawn mower, flowers to plant every year, caulking, sealant, window washing, a new roof, two new water heaters, another furnace, additional insulation, power saws, 22 house calls from the plumber, new gutters and downspouts, new window shutters, repave the driveway, another lawn mower, trees, snow blowers, tools, paint, another lawn mower, carpet cleaning, etc., etc., etc. Trust me, homeowners (and I'm one), have NO IDEA how much they've blown over the years.
So, add up everything that was spent annually, add the downpayment not paid to buy the house in the first place, sock it away in an index fund (or the investment vehicle of your choice), and DON'T BE SURPRISED is it turns out that I've got a pile of cash worth a good bit more than your paid-off house.
ENGINEER JIM: "I assume by investing in stocks you mean investing long in a diversified portfolio of value stocks? In other words you are not talking about timing the market, placing options, shorting stocks and all the rest of the crap that is bantered about every day on CNBC "Fast Money"."
I'm just a newbie and don't know what the hell I'm doing so it's all just an opinion. The 10% long-run return for stocks is for the market (i.e. diversified basket of stocks). Basically if you were a passive investor who did not pick stocks, you would beat all other asset classes. But this is assuming that the other asset investments are also passive (i.e. you are not a real estate expert who can pick extremely undervalued assets; or a commodity investor who knows supply & demand pretty well; etc).
I personally don't care if someone is into short-term strategies like shorting, momentum investing, etc. If someone can do it successfully they should pursue that. I personally am trying to become a contrarian investor, with heavy influence from value investing. But my track record is terrible so far (Ambac was a big bet and a huge dissapointment so far--especially since I did my homework).
As Benjamin Graham, the father of value investing, and Warren Buffett have said many times, 90% of the people should be passive investors while 10% may but suited for stock picking. I'm still trying to figure out if I fall into the 10% or the 90%
ENGINEER JIM: "Well "Fast Money" sounds to me like fast taking which sounds like a used car salesman. Don't know if you remember Louis Rukeyser's "Wall Street Week" that was on Friday nights for many years. I don't think Rukeyser even believed in Technical Analysis. He just believed in fundamentals. He was totally different than today's wild man Jim Cramer."
I think for someone who is short-term-oriented, Jim Cramer is fine. He does keep warning people to do their homework. Most of his bets are short term and anyone who follows him will know very quickly. Jim Cramer supposedly has a good track when he was running his hedge fund. But his longer term record is questionable. He was pumping tech stocks right into the bust... and he is now pushing whatever is hot these days (commodities, emerging markets, etc).
Generally, the short-term investors dominate during the latter stages of the bull market. This was the case back in the late 90's and is the case now. The market has a cruel way of seperating the good from the rest during a market corrections.
I have friends who are fairly new homeowners, who told me: "Man! Actually buying the place is just the start of the expenses!" All this stuff about 'slight upkeep' sounds like whistling past the graveyard to me.
My friends seem happy though: they are home improvement buffs (and they're in Canada, no housing bubble up here). That's an undeniable value to ownership if you care about being able to paint the bathroom lavender and have a stove model of your choice. I don't care about that stuff in the slightest - I have other things I'd rather think about. I do get tired of being sneered at for being a renter though.
LOL -- yes, home maintenance does add up over the years. It least in southern Calif we don't have to worry about snow or lawns. It doesn't make sense to have a lawn because we basically live in a desert and have a water shortage.
Sivaram:
"I think for someone who is short-term-oriented, Jim Cramer is fine. He does keep warning people to do their homework."
I'll have to admit, Cramer did warn about the solar stocks in November. He said take money off the table. So I did and he was right. Those stocks have gone down a lot since then. Of course so has everything else, so maybe he wasn't such a genius there.
The thing is, you can be right about something and still have the stock languish for years. Like solar for example. It seems to me that since we are reaching peak oil, solar technology is a good investment. However those stocks could go up and down for years before they finally pay off.
The only thing I can say about investing in stocks is don't be emotional and don't be greedy. Don't sell all of your holdings in a stock just because something bad happens. Also if you have a reasonable gain, sell some of it. You might not get the maximum possible gain, but so what.
SoCal is the same as Arizona. It's a semi-arid region. The other thing is there is usually only 10 feet between houses (5ft to the lot line) so there's no room for a lawn. Generally people just have hardscape, rock gardens, planters, etc. But no lawns. Lawns are a midwest thing where they have rain.
I live in an interesting building in Chicago. It's got two high rises, share the pool, deck, gym, maintenance guys etc.
One side went condo two years ago. The other is still a rental unit.
The cost comparison isn't (...a comparison.) Renting is nearly half the cost of owning. To make the owning side 'pencil' you have to add a huge appreciation adjustment (Less sale commissions.) That's clearly a leap of faith since no past increases are 'for sure.'
I think people who believe renting is not cheaper need to look at what their appreciation assumption is and run the numbers. Do not go by what those popular real estate books tell you.
And no, if someone is holding the paper on your rental unit, they do NOT have to make money on it. They can lose their keester.
Flying over Phoenix/Scottsdale and you just don't see the greenery you have in SoCal. I live in the Hollywood Hills among the trees, and it feels like I'm not even in the city sometimes.
I see a lot of misreads in commenting on housing by ignoring this simple difference between other investments and housing, you can't sleep under a stock portfolio.
Well yes you can actually. You can take the dividends (or interest in the case of bonds) and rent a place. A much nicer place probably.
Looks like you don't understand what yield is.
Ignoring for the moment the discount for rent the key factors in buying/investing in a house are the carrying costs against the appreciation
You're assuming appreciation a priori, which is the fatal fallacy of bubbles.
The key factor for any investment is carrying charges against income, which for housing means rent.
The above posters don't have a grip of even the most basic concepts of investing.
When you fly into San Diego Lindbergh field you realize how semi-arid this area is. There really isn't much natural vegetation. It's all been planted and irrigated.
When you fly into San Diego Lindbergh field you realize how semi-arid this area is. There really isn't much natural vegetation. It's all been planted and irrigated.
EngineerJim | 02.17.08 - 1:37 am | #
Well, the present 'natural' state isn't representative either. There used to be oak trees and meadows, but slow growing and drought tolerant. Really easy to destroy. There are an amazing number of species that look like dead brown or gray sticks in the dry season.
Instead, what is really catching the attention of Goldman Sachs now is the outlook for agricultural prices. Or as Jeff Currie, head of commodities research at the US bank, says with disarming cheer: We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.
The problem with Cramer is not that he hasn't made some correct predictions. Of course he has. If you make as many predictions as he does every single day, some are bound to be correct.
venn: "I think people who believe renting is not cheaper need to look at what their appreciation assumption is and run the numbers."
Exactly. Why does a house appreciate? First ask: why does it have value? a) you can live in it b) you can remodel it to suit your needs. (a) can be had by renting, (b) can't. (to some people b matters, to others not). So house prices should be a function of
- rents (actually, future expected rents)
- interest rates
- a 'remodelling allowed' premium
- minus property taxes and upkeep-which are included in rent and should not be double counted).
As yogurt points out, to this fundamental value is sometimes added "expectations of appreciation", which quickly become a self-fulfilling prophecy - for a little while - even if they are unjustified. That's how you spell b-u-b-b-l-e.
"And no, if someone is holding the paper on your rental unit, they do NOT have to make money on it. They can lose their keester."
DAVID WALKER THE CHIEF COMPTROLLER FOR THE GAO RESIGNED (fired) for his speaking out on the hirrible mess we are in. watch the vidoes. Very enlightening
2016 the demographics of the boomers cashing out will be in full swing.
So the question becomes this: Have the BRICs become wealthy enough to take equities off our hands?
If this happens, then this bear market will be an amazing buying opportunity.
If not, this will be a long and painful buyers market in equities.
2016 is also around the time when the majority of the current boomlet cohort will be out of university and looking at housing. It also might be a couple of years into the housing appreciation cycle.
If you own a home that you live in, you are essentially a property investor that rents to yourself. Almost all the financial dynamics apply except that you can't deduct the depreciation. So if you want to calculate your ROI, whether it be theoretical or actual, use the property investment approach.
That stated, the bubble drove property investment returns into the ground in many markets. Take the SF Bay area for example. You can rent a $1M home for about $3K/month. It's a horrible investment unless you assume significant price appreciation.
liberal: "But Prop 13 is the source of California's problems, because it just shovels money into the pockets of landowners in return for doing nothing."
The purpose of Prop 13 was to protect people on fixed incomes from being taxed out of their homes by ever increasing property taxes. In my opinion that was a good thing.
Prop 13 has been a mixed bag, but it is a political 3rd rail like social security so we are stuck with it.
Back when Conan was first running, Warren Buffett basically got himself kicked off of the Governator's team of advisers when he suggested that Prop 13 be changed. Buffett's Prop. 13 comments cause stir
Even during the current zenith of the perpetual California state budget crisis, there will not be a serious attempt to raise rates or even close the loopholes.
Yeah, Warren Buffett was using the example of a house he owned in Laguna Beach where his property taxes were low. He thought they should be higher. Of course what he's forgetting is that he is way beyond everyone else in wealth. His net worth is what $45B? That's 45000 million. He's 45000 times more wealthy than a person who might be considered merely prosperous (a person with $1M in net worth). Speak for your self Warrren!
Warren's point wasn't really that taxes should be raised per se
it was more that he is paying LESS in tax on his multimillion dollar Laguna Beach home than he is on his modest cheap Omaha home.
and also that he was paying less on his home than many first time homebuyers in California.
To me, Prop 13 would be fine, if it was used ONLY FOR OWNER OCCUPIED homes.
the idea that a corporation can set up a trust and then transfer title of the property to another owner through the trust without revaluing the tax basis is rediculous at best.
EngineerJim:
The purpose of Prop 13 was to protect people on fixed incomes from being taxed out of their homes by ever increasing property taxes. In my opinion that was a good thing.
That might have been the propaganda, and it might even have been a major result, but it's not the purpose. If that were the purpose, it would be exactly like the Senior Citizen Homestead discount on my father's property, and not apply to all property regardless of owner.
The simple fact is that when median prices in San Diego are $650K, and median prices in Indianapolis are $150K, you are being paid a pretty penny to move to Indy. Retirees in California have missed the single biggest moneymaking opportunity of their life.
"And there is nothing wrong with renting at all. It's a perfectly great decision. But someone has to own the properties for you to rent, and someone has to run cash positive in order for them to want to do it."
That's all.
Make sure you read the whole thing and the running commentary.
5. Value. Unlike some stocks, your house will seldom become worthless. Barring a catastrophe, your home will retain a major portion of its value, even in the worst of times. So dont freak out about slight fluctuations in the value of your home in any given year. Youll make it up. Housing has lost value only one year out of the last 35. Its more normal to beat inflation by 1 percent to 2 percent.
Provided you put 100% down. Leverage also works on the way down. It is entirely possible to lose far more than 100% in a leveraged real estate transaction.
but Rob Dawg "Home prices only go up"
dropped in only 1 year of the last 35!? Why that means there's about a 97% chance that my house will go up this year! That's great news!
OT: Monoline meets monorail in Las Vegas with Ambac holding the bag:
How Las Vegas transport gamble turned into a one-track ride to ruin |
Business |
The Guardian
I've mentioned this before. Assuming that markets are efficient, the mortgage interest rate reduction is a subsidy to the mortgage lending industry, not to the mortgage borrower. Home prices adjust upwards in response to such subsidies, allowing lenders to lend more money, and thus earn more profits.
Zillow says my neighbor was $2.32m Feb 07 and $1.68m Feb 08. Losing $73 per hour 24x7 for a year has got to get your attention. I bring this up because what is happening now are declines that no amount of appreciation can ever recover. When the NAR shill says; "Youll make it up." She's wrong.
mort_fin, I think the point goes like this: I purchased my house in 1996 for 107,000. At the height of the bubble my house would have sold for 375,000. Now, do the math on the percentage off from peak and then calculate what the return percentage is.
That's a great one, Tanta! This one has to come in 2nd, or 3rd... sheesh there's a lot of competition!
“Bear [Stearns] executives also believe the market for collateralised debt obligations, which is dormant, will eventually come back, though the instruments will probably have a new acronym to make them more palatable.”
From Zac's monorail link:
"But since then, passengers have been hard to come by. Instead of the forecast 54,000 customers, the monorail is attracting barely 21,000 users a day."
I guess it all boils down to: you can't force people to ride the rail.
Kind of speaks to the inevitability of...things economic.
ipodius - you are hammering at an important point, but hitting your thumb. It all depends upon the timeframe used for the average gain calculation. If you assume the world stops now, a home purchased in 96 still looks like a good deal. Im betting if you do that calculation in two years, it wont look quite so good. And it could theoretically look like crap in 5 years. In 10 years, it might look ok again. Who knows. The point is, if you are looking for a long term return, why shoot yourself in the foot by starting potentially 20% in the hole your first two years? If you are so convinced about the long term sensibility of investing in housing, why not wait until prices have bottomed before jumping in? Makes no sense at all to buy now no matter what you assume about long term average returns, unless of course you think this is the bottom. And in that case, well, I cant help you. What's happening now is more a reason to try to cash out some of those gains, rather than a reason to buy.
From the last thread, I suggest the name
"Bush Loans" for the LFKAJ.
How about three or five years in a row of losses/
So, what happens when we have ruined real estate an asset for the masses?
I guess we move back to stocks.
Bonds are looking mighty shaky now too.
Geez. Do our modern managers of money have to ruin everything?
Sure seems like it.
Someday this war's gonna end...
Three tranches of debt were used to pay for the monorail. Lower tiers of $49m and $149m are plain vanilla risk-bearing notes held by public and private investors. But the biggest chunk, $450m of "senior" debt, carries the name of Nevada's department of business and industry and is insured by Ambac, a monoline insurer that is one of the US's biggest financial guarantors.
At the end of January, the credit-rating agency Moody's declared that barring an unexpected surge in passengers, the monorail will be unable to keep up repayments on its loans beyond 2010. Although the bonds' insured status gives them a blue-chip AAA rating, Moody's downgraded their underlying risk of default to a junk status, Caa2 - the third lowest level on its scale.
At the height of the bubble my house would have sold for 375,000. Now, do the math on the percentage off from peak and then calculate what the return percentage is.
ipodius | 02.16.08 - 3:28 pm | #
Did you sell at the height of the market? No? Too bad. Keep holding - it'll go back up.
Did you buy in '04, '05, '06, or '07? If you did, you bought high and will sell low.
Marus, 1996. I said that in my original post. And ALL investment calculations depend on the timeframe. So it is equally absurd to use the top of the bubble as an example, as the correction that is happening now.
What this means is that if you bought in the last couple of years, it's not that you WON'T see a return, it will just take longer. Just like all those financial instruments aren't worth NOTHING, but time will tell exactly what.
ipod - if you're calculating the return on an investment, you'd better be capitalizing all the related expenses. Mortgage interest, property taxes, upgrades, repairs, maintenance, etc. If you want to be really honest, also calculate the expense of the time you spent (wasted?) performing all those activities. Add a couple more billable hours for doing the calculations.
I think people need to recharge the batteries in their irony detectors.
Rob Dawg your first comment missed the entire point of this piece. You have fatally confused the concept of equity and asset value and ignored the differences between leveraging a stock investment and leveraging a house.
Ignoring for the moment the discount for rent the key factors in buying/investing in a house are the carrying costs against the appreciation. As long as you can afford the former by and large the loan is not callable unlike say stock bought on margin. All parties to the loan agree that the real value is in the current use, people typically will not just walk away from an occupied house because their equity position is negative. This again is unlike a stock holding.
I see a lot of misreads in commenting on housing by ignoring this simple difference between other investments and housing, you can't sleep under a stock portfolio. The discount for rent and the tax advantages of owner-occupancy make this investment unlike any other, trying to reduce that to return on investment in percentage terms, or projecting that people will react to low to negative equity as they would to a stock tanking is a think a profound psychological mistake.
Bruce Webb - "people typically will not just walk away from an occupied house because their equity position is negative. "
I agree that this is something you used to be able to assume, but the current times are anything but typical, and thus, the behaviors that will result dont have to appear anything like those of the past.
furthermore, only an idiot with a negative position who is about to see that negative get larger and larger, would sit and hold. This is the attitude that the early downside buyers of the NASDAQ bubble, and it proved a painful lesson to them. Some of those same folks probably ended up speccing on housing and unless they are completely morons, they might well be thinking about cutting their losses this time around.
Most of you are neglecting amortization. Buying a home and selling 2 years later was always, except for 2003-2006, a bad deal. The advantage of owning is only realized in anormal market when you stay in the house 10 years or more and is best when you stay at least 20 years. I like the fact that every month when I write a mortgage check a few hundred goes to pay down my principal. By the time I sell, even if the appreciation in 20 years is only 50%, I'll still walk away with well over $ 200k on a $40 k down payment. That seems good to me. And my mortgage + taxes are less than the rent on a comparable house.
Bruce Webb says; All parties to the loan agree that the real value is in the current use, people typically will not just walk away from an occupied house because their equity position is negative.
I certainly agree that's the way it used to be. Indeed all the loan loss models were structured entirely upon those premises. How's that working out? DQs, rate of DQs, severity, ratio of incurable NODs are all just off the historic charts. Nevermind that there isn't even much employment softness that even those serverities were including. You are fighting the last war Bruce. People are walking.
geoff- Sometimes when a stock goes down, the right thing to do is buy more. Certainly not always, but on occasion it is. The trick of course is knowing when.
Geoff, with a long enough horizon, even specs can leg it through till inflation saves the bacon;-}
Now, on the other hand, if you can't keep paying, yeah, your done.
A lot of folks are definitely done, now we just have to watch the resets kill them off, one by one.
I have to try and keep from getting ready to drop down into my bunker.
The news just keeps getting worse and worse. I guess we should all just stop worrying and be happy!!!
Pennies from Heaven-`1930's
Dollars from Ben- 2010's
Someday this war's gonna end...
The worth of your house is a matter of opinion. The debt is fact.
Although I think the bursting of the bubble has a long way to go to reach bottom, I do think that one should be cautious about saying that this is not the time to buy.
Each unit must be evaluated on its own merits. If the price is an appropriate multiple to income (say 2.8), the (long-term fixed) total carrying costs are below or equivalent to renting, and the price per square foot is at or below comparables over a 20 year period (in real terms), you have to pull the trigger regardless of the wider market's trends. This is the difference between a value investor and a momentum investor.
I'm closing in about 10 days on a unit that is historically undervalued even though I am certain the market has a long way to hit bottom. I'm able to do this because in an illiquid market there is a lot of fear, and I'm able to transact at a future anticipated value, rather than at a present market value.
So careful with the "don't buy now" argument. Don't buy housing index options now, is probably more appropriate.
Inflation won't save them this time. They all have ARMs and a plurality of those of the most recent vintages are tied to the LIBOR so even Ben can't save them.
The discount for rent and the tax advantages of owner-occupancy make this investment unlike any other, trying to reduce that to return on investment in percentage terms, or projecting that people will react to low to negative equity as they would to a stock tanking is a think a profound psychological mistake.
Except that current rent/buy ratios are clearly out of wack right now and eliminate said benefits. I have done the calculations in my area. Even if I pay 20% down and subtract out both the tax savings and the contribution to the principal, the carrying costs for a typical house in my area is 33% more than what I pay for rent. Furthermore, this is only comparing homes of similar quality, and does not include land (the place I rent has significantly more acreage than the homes I priced).
Oh yeah. I live in rural CNY. That is one of those areas that didn't have a housing bubble (hah).
Allen, AOC - I know what you guys are saying - that might work ok soon for stocks. We've discussed this on other threads. I'm guessing most folks aren't going to buy additional houses now to make up for losses, esp seeing as it will be much harder to finance even if they chose that route. my specific reference is comparing nasd bubble w housing bubble. both huge anamolies which make historical comps misleading
Losing money in the Tech Bubble didn't require you to write a mortgage check, insurance check, property tax check, utilities every month.
geoff-No. I'm not going to buy another house. We rented out a house we owned once when we went overseas. Not something I have any interest in doing again. OTOH, whenever a stock I follow goes down a lot, I instinctively take a look at it.
I think people need to recharge the batteries in their irony detectors.
Or figure out how to put the flat end against that little spring thing.
Besides the depreciating asset that grows in market value, I like the part about all you have to do being spending some undisclosed amount of cash dollars per year to repair and maintain the "investment." How many people spent $100,000 on those homes purchased in 1996 in order to sell for a profit in 2006?
The great thing about stocks is that while you can't sleep under them, you don't have to keep adding another bathroom to them.
"The great thing about stocks is that while you can't sleep under them, you don't have to keep adding another bathroom to them."
Unless you take the term POS stock literally.
OT, but the New York Times has a nice article on the monolines:
A Split-Up Of Insurers Of Bonds Considered - NY Times
I think that the mistake...to think of the house as an investment and not just an asset.
I realize that this is what got out of whack, but my mortage (including insurance and taxes) is about $600 less than market value rent on an equivalent place here. Of course when the young ipodius stumbled into buying the house on the elderpodius' advice, he was making a whole lot less and that was really stretching his budget.
Of course now my housing expense is only a minimal part of the budget. But when you rent you still have expenses, so the key here is to think about what you are paying over market for equivalent rent as the real expense. You are also not in control of moving, so that has to be factored in. Then, how much are you willing to pay extra to pick out your own kitchen, have the privlidge of adding a bath, and being about to cook a nice, stinky fish without complaints.
Jan: "I do think that one should be cautious about saying that this is not the time to buy."
I do think that one should be cautious about saying that this is the time to buy.
Modified to reflect reality.
Then, how much are you willing to pay extra to pick out your own kitchen, have the privlidge of adding a bath, and being about to cook a nice, stinky fish without complaints.
These arguments just fall on deaf ears to the savvy renter.
I rent a farmhouse on 10 acres with a good number of apple trees in back (make my own cider). Lease allows me to do significant work on the land (planting garden, etc...) if I wanted to. Happy with the house layout, so no desire to do any remodeling even if I could. Plus, I have an extremely responsive property manager that does whatever repairs that need to be done so I don't have to. And the landlord has no desire for me to go anywhere and keeps me happy.
There is absolutely nothing that buying has to offer me for an extra $300 a month in carrying costs (or a PITI which is $900 more than my rent). Especially when I would be trading what I have now for a postage stamp of a lawn.
Walker-Sound like you have a good deal. You live near Ithaca, right?
That' great Walker, but some of us don't have those options for where we live to close to family, what we do for a living etc.
When evaluation property decisions, I built a spreadsheet (sans pig, unfortunately) where all I had to do was plug in the property value and it projected out the returns on the property versus the historic returns on other investments. It took into account rent, tax credits, insurance, and normal expenses. So the bottom line was, after equivalent rent, if I took the rest of the cash each month and put it into any of these other investments, what would the return be?
After seeing the numbers, it gives you a perspective as to "how much extra will I pay to...". And there is nothing wrong with renting at all. It's a perfectly great decision. But someone has to own the properties for you to rent, and someone has to run cash positive in order for them to want to do it.
there's also the issue of diversification. If your house is your only asset, that's not a good idea. But I'm just not comfortable being all in stocks either. I feel better having some stocks, a house, some CDs, some foreign currencies, etc. While recently, house and stocks have gone down together, in general they are poorly correlated (like in 2000-2002)
Comparing investment in shares of stock to an "investment" in a house is ridiculous. I put that second investment in quotes because an owner occupied house is not an investment, it's an expense -- a big expense. It's an expense the same way that renting is an expense. The thing is, over the long haul (10 or 15 years), you will probably realize a profit in a house whereas after 10 or 15 years of renting you will realize 10 or 15 years of rent receipts -- nothing more. I also think it's hilarious that renters think that only home owners pay for property taxes, insurance and maintenance. What do you think your rent is covering? Do you think that renting is the only economic activity that is not covered by market forces?
That's true aheadofthecurve. Basically the house is just an inflation hedge with a slight return over time, perhaps a percent or two depending on how you can take advantage of market dynamics. For a lot of people, there's also a sort of "forced savings" aspect to it...that was until the whole HELOC thing became popular.
My only input about housing is that you have to live somewhere, so what you are talking about is not all these costs...it's all these costs minus market rent. And that's market rent for where you want to live.
No, no, no! Buying a house is an investment. It's just that people are so bad about their investing decisions. Very few will look at the costs, risks, etc. rigorously (as ipodius seems to have) and most will focus on where they want to live. If you believe that buy low/sell high is the way to gains, then you should be looking at the bottom of your price range; most look towards the top. If you believe that buy high sell higher is the way to go: then you probably are pissed off at the declining market right now.
To some of us, a house is a home.
Rob Dawg writes:
Losing money in the Tech Bubble didn't require you to write a mortgage check, insurance check, property tax check, utilities every month.
How about needing a new furnace and a new roof? My property tax check is about 1 percent of my assessed value; less than that if you go by Zillow, but still a big bite for me--$2200 a year.
Tanta:
The great thing about stocks is that while you can't sleep under them, you don't have to keep adding another bathroom to them.
And your stocks won't lose value when somebody turns the stock next door into a rental and gets six college student rugby players as tenants. The biggest risk in "investing" in a house is the fact that you can't control the neighborhood, or the "housing market."
I suppose if your housing investment is in some kind of million-dollar gated community with a view of the ocean, the neighborhood risk is a lot less than it is for me, in an urban setting, but my situation is probably more typical. The house next door is on the market right now and we're biting our nails wondering what's gonna happen to it.
ipodius
Then, how much are you willing to pay extra to pick out your own kitchen, have the privlidge of adding a bath, and being about to cook a nice, stinky fish without complaints.
If the fish stinks, throw it out. You wouldn't eat stinky chicken.
A house is likely a better "investment" than an apartment, but it's a risky sort of thing if your whole retirement plan consists of selling and downsizing after the kids move out.
EngineerJim: "The thing is, over the long haul (10 or 15 years), you will probably realize a profit in a house whereas after 10 or 15 years of renting you will realize 10 or 15 years of rent receipts -- nothing more."
Actually, in addition to my rent receipts, I'll also have an extra 50k or so compared to the hypothetical owner... that's all the money I didn't spend on maintenance and property taxes. (In Toronto, comparing a rental apt to a condo). Engineer Jim's claim that "renters pay for property taxes and upkeep" is ridiculous... renters pay RENT. Yes, some of that rent is in turn used to pay property taxes and so on, but so what? That's not my problem. I'm looking at 1000 in rent vs a 1500 mortgage + 500 in maintenance fees + 200 in property taxes..... there had better be a hell of a lot of appreciation to make me forgo the money I'm saving by renting.
I have NO interest in remodelling kitchens, etc. The ability to do that to owned accomodation means nothing to me. The stove works? Good, I'm happy. (And BTW, the list of rules in a condo is long and onerous). I do have an interest in being able to easily try life in different neighborhoods or even different cities... so it's renting for me.
"My asset is a pain in the ass..." dryfly says after spending the afternoon trying to get a basement bathroom unremuddled & working again.
Darren: "Yes, some of that rent is in turn used to pay property taxes and so on, but so what? That's not my problem."
Right now the property tax in California is nominally 1%. If the state increases that to 1.5%, do you not think rents will go up?
To some of us, a house is a home.
To some of us, a rented house is a home...plus extra money to save or invest!
Darren:
Of course those things are your problem, because the rent is based on expenses, property apprectiaton, and profit. Your landlord is there to make money, and you're helping him do it. If the cost of those things goes up, so does your rent. I don't own rental property to lose money and current tenants won't pay the rent, someone else will. Vacancy time has already been figured into that too.
One part that you and others ignore is, however, that when I move to cut back on working and my income shrinks, I will have no housing expense except for taxes and slight upkeep. Taxes in my area are around 3k a year. What can you rent for 3k a year?
John Stark:
Alas, even the freshest halibut wafts a lovely sea smell from the broiler
If the state increases that to 1.5%, do you not think rents will go up?
Rents are dropping in my area.
Its pretty simple math...for me.
Own a home and retire in 20-25 years. Rent a nicer home and retire in 7-15 years.
My problem is with those who tell everyone to buy or tell everyone not to buy. There are so many factors including how long you expect to stay, the local market, your family situation, etc. It's not one size fits all.
Engineer Jim
"Right now the property tax in California is nominally 1%. If the state increases that to 1.5%, do you not think rents will go up?"
Not for me.
My landlord collects 1850 from e me every month.
She pay mortgage on a loan of 365K + opportunity cost on 100K (downpayment).
I dont know the interest rate. Even if it 6% (2005 purchase) she more than my rent in PITI (+ opportunity cost os 100K)
She also pays 250 HOA.
Last year I extended the lease with out rent increase.
This year I plan on agreeing $50 increase for an option of month to month lease.
Any increase of more than that , I will find a equivalent condo/home (1200+ sq ft, 4 BR 2 BA) in about three months and with in 5 miles of my residence.
Now tell me how can I pay for the increase in the property tax.
"Right now the property tax in California is nominally 1%. If the state increases that to 1.5%, do you not think rents will go up?
EngineerJim | 02.16.08 - 6:00 pm | #
No they wont because you can't borrow money from a bank to pay for rent. Rents are tied to income in a much more fundamental way than mortgage debt. Rents are determined to a greater extent than supply and demand and input costs by simply what people can afford to pay. Sorry but if you were hoping renters to come to the rescue of all of you underwater homedebtors you're going to be sorry I think. Unless wages for J6P triples that is. Then you're golden.
I am now, and forever will be......
IMO housing isn't so much an investment as a forced savings account. Unfortunately, a lot that has worked in housing's favor for the last 50 years will now work against it.
Strike 1: Boomer demographics going negative.
Strike 2: Inflation no longer working in homeowner's favor.
Strike 3: Mortgage rates have nowhere to go but up.
If you're buying a home you can easily afford, will stay in a long time, and expecting no return from -- more power to you. Otherwise, YOU'RE OUT!!!
Prop. 13 not only fixed rates at 1%, it changed the state constitution to require a supermajority to raise taxes. Not going to happen.
Ask 98% of homeowners who put 10-20% down what their biggest investment is and they will answer - their home. Of course it's shelter and should be the primary function, but most people view their home purchase as a significant investment.
Separately renters are not immune from supply and demand economics. Rent can go up or drop. If supply is tight and CA raises property taxes, yes, doctor, you will be paying the landlord's extra tax bill.
And one last note on owning RE vs. stocks. All points previous are valid and well done. One not posted: if I own RE and not stocks at least I'm not exposed to the risks of the moron (s) running the company that might make disastrous decisions to run the company, and stock, into the ground.
tj & the bear: "Prop. 13 not only fixed rates at 1%, it changed the state constitution to require a supermajority to raise taxes. Not going to happen."
California has a deficit of $14B -- and that was a few months ago, now its probably a lot more. The governator says he will cut spending by 10%. Yeah, right. There won't be any cuts in spending. There will be tax increases. The legislature will figure some underhanded way of increasing property taxes. Never say never.
Not very smart to jump on the roller coater on the way down. It goes fast, then.
El: "Ask 98% of homeowners who put 10-20% down what their biggest investment is and they will answer - their home. Of course it's shelter and should be the primary function, but most people view their home purchase as a significant investment"
That's true in California, I don't know if that's the case everywhere in the country. Also, that's a fairly recent phenomenon (last 30 years).
Generous lease terms or not, renting means deferring to someone about your living space. I hated that, which was why we bought our house in our mid-twenties.
EngineerJim,
$14B is only the beginning. Sales & use tax receipts were down 9.7% YOY in January; we'll be lucky if the deficit isn't $40B this year.
That said, it'll take an act of God to get tax increases past the Republican minority in the state Legislature. Their power stems from the supermajority provisions of prop. 13, and they won't approve ANY tax increase until the Democrats agree to spending cuts that (frankly) will never happen.
Rob Dawg, wanna chime in here?
trying to reduce that to return on investment in percentage terms, or projecting that people will react to low to negative equity as they would to a stock tanking is a think a profound psychological mistake.
Thinking that they won't react to substantial negative equity is profound psychological mistake. Do you know how long it will take the average American family to recover from a 200K loss? Their whole lifetime.
The thing to remember about a house as an investment is that the dividends are paid in kind, and are consumed completely. If you buy a stock, you can reinvest the dividends in that stock, or another stock or spend them. A house IS a productive asset in that what it produces is HOUSING. But unless you're renting out rooms, you consume those dividends. Using more leverage with stocks means that you have more earnings. If you buy a more expensive house, instead of having more dividends to spend as you please, you simply consume more housing.
Sounds like everyone is happy with their decision to own, to rent, to live under a freeway overpass, whatever.
What's funny is how many commenters think their way of living is superior to those who have chosen otherwise.
What's a dividend?
i KNow what a exceutive level option grant is, and a debt offering for a buyback program, but this dividend thing you guys are talking about has thrown me for a loop.
tj & the bear writes:
EngineerJim,
$14B is only the beginning. Sales & use tax receipts were down 9.7% YOY in January; we'll be lucky if the deficit isn't $40B this year.
That said, it'll take an act of God to get tax increases past the Republican minority in the state Legislature. Their power stems from the supermajority provisions of prop. 13, and they won't approve ANY tax increase until the Democrats agree to spending cuts that (frankly) will never happen.
Rob Dawg, wanna chime in here?
I'll have another ripping post tomorrow covering this and the LATimes coverage and Dan Walters and my take. As you know I've been way out in front of the California budget crisis having called this timing and action both 6 and 10 weeks ago before anyone in the MSM had a clue. The PANYNJ bond failure has got California running scared in the expert corridors. The shame is there are maybe 6 electeds smart enough to have felt the iceberg.
For the nice CR crowd short version: facing a $14.5b structural deficit the state cut $1b in spending and authorized the maxing out of some old debt authority for another $3.5b under the old assumptions. Yep $14.5b = $4.5b in budgetland. And no, this doesn't take into account the 9.7% drop in sales tax revenues. Nor does anyone want to talk to me yet about the Dec 10th property tax results. So, California is starting the 08-09 budget in august with a planned $22b overspend and a likely $25b revenue shortfall. The Democrats love it. They can blame Da Governator and likely will attack Prop 13 using the "crisis" as the excuse.
TJ&B disagree on the "problem" of the minority Republicans in the State Houses. Like Tanta said about an earlier problem "I'm not sure there is a solution."
EngineerJim writes:
Darren: "Yes, some of that rent is in turn used to pay property taxes and so on, but so what? That's not my problem."
Right now the property tax in California is nominally 1%. If the state increases that to 1.5%, do you not think rents will go up?
EngineerJim | 02.16.08 - 6:00 pm | #
Lol then don't you think the cost of owning a home goes up!?! You seriously can't be this stupid. The cost to own a home vs. rent is out of whack no matter how you slice it. The cost is way out of line compared historically. The cost of a home if you are planning to rent is 100x-120x rent. I pay $1325 for a 2br/1.5bath in SoCal. For me to buy a condo of similar size I am looking at $300k. Oh, then you have to add taxes, mello roos, HOA fees, maintenance, etc. A home you live in is not an investment. An investment is a second home or rental.
As for Cali's financial crisis. I am in the center of it near San Diego. The I-5 is under construction, SD city has water mains bursting weekly whenever I watch the news, and one look at the report everyone quotes shows that a lot of expenses are crazy. Look at how much we spend on medical, it's fucking nuts.
dryfly writes:
I think I got the point--solvency is a movie, not a snapshot, in the insurance context, and you don't necessarily have to wait to the end to know how it's going to come out, and act accordingly.
While pursuing a masters in mfg I took a class on 'running the firm in crisis'... offered by a guy who had done more than a few turnarounds.
The key consideration on how quickly firms of all types find themselves 'operationally insolvent' is based on how quickly 'future liabilities' become 'immediate cash obligations' matched to how quickly their incoming cashflow evaporates.
He would say is quite possible to operate in an insolvent state indefinitely via rollover until some event forces immediate cash reconciliation of the insolvent accounts.
That would explain your bank-plane and insurance-train crash analogies pretty well... banks lose cashflow almost instantly in a crisis & have to reconcile now... not so true with insurers.
However in the case of the monolines... I'm not so sure they behave like typical insurers. They could quite easily see very rapid decline in cashflow at the same time they see their liability claims become immediate & large... in effect a 'plane crash' scenario with downgrade or regulator intervention playing the role of mountain.
dryfly | 02.16.08 - 1:25 pm | #
Don't these monolines lose their cashflow once they lose their AAA status? Isn't that the problem? Once they can't make any more deals they lose their income stream (munis pay up front, but corp pays continuously I though). If they have to start dishing out cash, while having no cash come in doesn't that instantly screw them once debits exceeds their cash balance? I know friends who quit their jobs because they hated it and would say they would rather work at McDonalds than keep their old job, they end up not working at McDonalds for an interim job and thus have 0 cash flow and then lose their cell phone and car.
Erik: "A home you live in is not an investment."
Erik, That's what I said in my original comment! See further back in the thread.
Here's another candidate for quote of the day....
Home prices will continue to weaken,'' the 81-year-old former Fed chief said.When a bubble breaks, you go to primordial fear.'
Home prices will continue to weaken,'' the 81-year-old former Fed chief said.When a bubble breaks, you go to primordial fear.''
Anonymous | 02.16.08 - 11:08 pm | #
In that regard it's like the stock market -- there's only two emotions -- fear and greed.
ERIK: "Don't these monolines lose their cashflow once they lose their AAA status? Isn't that the problem? Once they can't make any more deals they lose their income stream (munis pay up front, but corp pays continuously I though). If they have to start dishing out cash, while having no cash come in doesn't that instantly screw them once debits exceeds their cash balance?"
The monolines will lose their ability to write new muni bond business (some muni bond business at a lower rating may still be available but it's minor). However, none of that impacts the existing contracts. The existing muni bond insurance buyers already paid premiums (although this only gets booked as earnings over time), and the periodical payments from structured products will still be received (if they don't receive that, that's fine with the monolines since those are the underpriced insurance contracts that monolines would rather do away with).
So if no new business is written, big companies like MBIA and Ambac will still receive close to $1 billion every year. The insurance business is a "weird" business (can you think of any other business where you can earn $1 billion even if you do nothing?)
What new business will help with is increasing the existing capital. If they can write new muni bond business, all the profits from that can be used to offset greater losses in the future. Without new business, the monolines will only have the existing capital (around $15 billion for MBIA and Ambac--for both muni and structured product liabilities).
Bond insurance is a very complicated and weird business. As Steve Vanellii of GaveKal once said, this is the ultimate mark to model business. You can be insolvent 20 years before you are bankrupt! Everything is based on theoretical losses that may or may not materialize.
Nobody mentions OER, the proxy for the cost of housing in the CPI number that is one of the 2 tabs for calculating inflation (unlike the EU)...so this important reminder from Tanta about the maintenance costs associated with this RE investment is important...(as important to remember as those deductions for SS being made to contribute to all contributors --not just your self-interested little ass that thinks it can do better investing it.).
The cost of housing includes not only those mortgage payments, those insurance payments on the mortgage, the insurance on the house, the municipal taxes...but the goddamn roof too.
So of course the OER needs to be constructed, compiled --invented, to measure the tip of the ice berg...last time I looked something like 25% of the consumer's purse is what the officials pencil in...which seems a tad low even for those folks putting in a second laundry room.
Some may be over-looking the work (what?) required in owning a house, but it is not helped by the government that compiles a stat based on what a house might rent for. A year's supply of inventory should be driving rents down...in line with house prices, but don't expect that to show up in the construct OER. So much depends on a moderated, not moderate, inflation figure.
We are not all morons.
I rent for 45% of the price of owning on deep water by the beach in Florida.
I own rental property with great positive cash flow in another state. That's my inflation hedge, and it is not my biggest investment.
Saving thousands of dollars every month which are invested more securely than in real estate to live in. People became suckers...
Getting back on topic...
In the long run, the best asset in my opinion is stocks. The 2nd best is real estate. Stocks have a long-run nominal return around 10% and real estate is around 8% (but this all depends on specifics, time period, region, etc). The return on all assets will likely be lower in the next few decades than the last few (say 4%-6% for real estate and 6% to 8% for stocks).
So, it's hard for anyone here to argue that real estate will do poorly in the long run. Unless we go into a massive deflationary depression/recession (like Japan) or someone buys right at the top, I think real estate will outperform most other assets over the next few decades. I would even bet that real estate will outpeform the presently hot commodities and gold over the next 20 years (last time I bet on something on a Saturday, it was Ambac so don't bet your life savings on this
).
Since Canada and USA are likely to have increasing population, along with positive GDP growth over the next few decades, real estate should be fine. Real estate is more likely to be a problem in Europe, and will likely be even better in Asia (assuming Asia doesn't fall apart--this is more of a risk than any of the commodity or China-to-da-moon bulls believe).
One of the things that a lot of people forget is that a big chunk of the value of real estate is the land. If you are in a municipal area, the land price will likely go up (again, I'm assuming we don't enter a Japanese-style or Great Depression-type situation).
Renting should generally be less expensive than real estate... I'm just a newbie but the way I look at things, perhaps the best thing to do is:
RENT + INVEST in stocks
or
INVEST in real estate
Rob Dawg,
Don't know what you're disagreeing with -- I didn't call the Republican minority a problem, and I certainly don't consider them one. Heck, they're the only ones keeping California from completely going off the deep end. The Democrats in the legislature are so far to the left that Hillary probably has more in common with William Buckley.
Siv,
Japan? HA! We'll be lucky if we get off that easy.
Sivaram: "In the long run, the best asset in my opinion is stocks. The 2nd best is real estate."
I assume by investing in stocks you mean investing long in a diversified portfolio of value stocks? In other words you are not talking about timing the market, placing options, shorting stocks and all the rest of the crap that is bantered about every day on CNBC "Fast Money".
What's funny is how many commenters think their way of living is superior to those who have chosen otherwise.
Not us. We've wanted a place of my own ever since we moved to SoCal, but the prices were insane even before the boom. Sigh.
Damn, meant "our own" of course.
EngineerJim,
"Fast Money" may be the one worthwhile show on CNBC. They often recommend shorting stocks; I remember one guy stating "short MBIA" as a final trade back in late November when the stock was in the 30's.
It's my understanding that Fast Money is their most popular market-oriented show.
ipodius: "Of course those things are your problem, because the rent is based on expenses, property apprectiaton, and profit."
Look, those things affect the supply curve of rental housing in the long run. In the short run, the supply of rental housing is fairly inelastic (which means rent is largely determined by demand). You have a rental property, you're going to rent it for what you can get rather than letting it sit empty.
ipodius: "If the cost of those things goes up, so does your rent."
Not if there's another empty place down the street where the owner would rather swallow the property tax than let his place sit empty.
Ipoidus: "One part that you and others ignore is, however, that when I move to cut back on working and my income shrinks, I will have no housing expense except for taxes and slight upkeep. Taxes in my area are around 3k a year. What can you rent for 3k a year?"
Wrong question. The right question is "what can you rent for 3k plus whatever income you can earn with 300k?" (or whatever the market value of a house is). And by the way, I know plenty of homeowners, they're always talking about new roofs and so on... upkeep isn't "slight"
Had an REO auction today in Oakland. Properties went for about 50% off peak prices (compared final auction price to previous SOLDs on MLS). Many of the props were in more outlying Bay Area.
50% off of peak? That's about what fair mkt value is (as I've been saying since 2004 and seeing this whole thing develop).
As I said in a previous post, I use 40% off as a baseline when considering a home purchase. Or go back to 2000 - 2001 prices. Whichever.
The metric seems to be a useful one for this local mkt.
Although it often creeps into my mind all the other alarming crosscurrents for the US that make any simple metric about buying a house here completely irrelevant:
Of course, I guess we still have a big military machine and lots of the bombs. That seems to be one of the few US advantages at this point.
Congressional hearings on baseball/steroids?!?! Who gives a flying f^&k?
How about a hearing to impeach, convict, and publically execute key memebers of the Bush/Cheney crime syndicate?!?
Sheesh - talk about inane, pointless bullshit that too many Americans are enraptured in. At this point, we seem globally toast.
The US is collectively like trust fund babies wantonly burning through the bequeathed family fortune.
One simple philosophy:
Gimme dat! It's MINE!!! Waaaaaaa!
TJ: "Japan? HA! We'll be lucky if we get off that easy."
We shall see...
tj & the bear,
Well "Fast Money" sounds to me like fast taking which sounds like a used car salesman. Don't know if you remember Louis Rukeyser's "Wall Street Week" that was on Friday nights for many years. I don't think Rukeyser even believed in Technical Analysis. He just believed in fundamentals. He was totally different than today's wild man Jim Cramer.
"IMO housing isn't so much an investment as a forced savings account."
Exactly, TJ. Bingo, right on the money. For those without the discipline to save, owning a home ain't such a bad idea vs. renting.
Once you've bought, though, look out. The expenses really pile up. Upkeep, maintenance, taxes, a lawn mower, flowers to plant every year, caulking, sealant, window washing, a new roof, two new water heaters, another furnace, additional insulation, power saws, 22 house calls from the plumber, new gutters and downspouts, new window shutters, repave the driveway, another lawn mower, trees, snow blowers, tools, paint, another lawn mower, carpet cleaning, etc., etc., etc. Trust me, homeowners (and I'm one), have NO IDEA how much they've blown over the years.
So, add up everything that was spent annually, add the downpayment not paid to buy the house in the first place, sock it away in an index fund (or the investment vehicle of your choice), and DON'T BE SURPRISED is it turns out that I've got a pile of cash worth a good bit more than your paid-off house.
ENGINEER JIM: "I assume by investing in stocks you mean investing long in a diversified portfolio of value stocks? In other words you are not talking about timing the market, placing options, shorting stocks and all the rest of the crap that is bantered about every day on CNBC "Fast Money"."
I'm just a newbie and don't know what the hell I'm doing so it's all just an opinion. The 10% long-run return for stocks is for the market (i.e. diversified basket of stocks). Basically if you were a passive investor who did not pick stocks, you would beat all other asset classes. But this is assuming that the other asset investments are also passive (i.e. you are not a real estate expert who can pick extremely undervalued assets; or a commodity investor who knows supply & demand pretty well; etc).
I personally don't care if someone is into short-term strategies like shorting, momentum investing, etc. If someone can do it successfully they should pursue that. I personally am trying to become a contrarian investor, with heavy influence from value investing. But my track record is terrible so far (Ambac was a big bet and a huge dissapointment so far--especially since I did my homework).
As Benjamin Graham, the father of value investing, and Warren Buffett have said many times, 90% of the people should be passive investors while 10% may but suited for stock picking. I'm still trying to figure out if I fall into the 10% or the 90%
ENGINEER JIM: "Well "Fast Money" sounds to me like fast taking which sounds like a used car salesman. Don't know if you remember Louis Rukeyser's "Wall Street Week" that was on Friday nights for many years. I don't think Rukeyser even believed in Technical Analysis. He just believed in fundamentals. He was totally different than today's wild man Jim Cramer."
I think for someone who is short-term-oriented, Jim Cramer is fine. He does keep warning people to do their homework. Most of his bets are short term and anyone who follows him will know very quickly. Jim Cramer supposedly has a good track when he was running his hedge fund. But his longer term record is questionable. He was pumping tech stocks right into the bust... and he is now pushing whatever is hot these days (commodities, emerging markets, etc).
Generally, the short-term investors dominate during the latter stages of the bull market. This was the case back in the late 90's and is the case now. The market has a cruel way of seperating the good from the rest during a market corrections.
winjr: "Once you've bought, though, look out. The expenses really pile up."
I have friends who are fairly new homeowners, who told me: "Man! Actually buying the place is just the start of the expenses!" All this stuff about 'slight upkeep' sounds like whistling past the graveyard to me.
My friends seem happy though: they are home improvement buffs (and they're in Canada, no housing bubble up here). That's an undeniable value to ownership if you care about being able to paint the bathroom lavender and have a stove model of your choice. I don't care about that stuff in the slightest - I have other things I'd rather think about. I do get tired of being sneered at for being a renter though.
winjr,
LOL -- yes, home maintenance does add up over the years. It least in southern Calif we don't have to worry about snow or lawns. It doesn't make sense to have a lawn because we basically live in a desert and have a water shortage.
EngineerJim,
You don't have a lawn? That's Arizona landscaping, not SoCal!
"All this stuff about 'slight upkeep' sounds like whistling past the graveyard to me."
Indeed. In my lifetime I've known only one homeowner whose home upkeep was 'slight'. He lived in an igloo.
Sivaram:
"I think for someone who is short-term-oriented, Jim Cramer is fine. He does keep warning people to do their homework."
I'll have to admit, Cramer did warn about the solar stocks in November. He said take money off the table. So I did and he was right. Those stocks have gone down a lot since then. Of course so has everything else, so maybe he wasn't such a genius there.
The thing is, you can be right about something and still have the stock languish for years. Like solar for example. It seems to me that since we are reaching peak oil, solar technology is a good investment. However those stocks could go up and down for years before they finally pay off.
The only thing I can say about investing in stocks is don't be emotional and don't be greedy. Don't sell all of your holdings in a stock just because something bad happens. Also if you have a reasonable gain, sell some of it. You might not get the maximum possible gain, but so what.
tj & the bear,
SoCal is the same as Arizona. It's a semi-arid region. The other thing is there is usually only 10 feet between houses (5ft to the lot line) so there's no room for a lawn. Generally people just have hardscape, rock gardens, planters, etc. But no lawns. Lawns are a midwest thing where they have rain.
I live in an interesting building in Chicago. It's got two high rises, share the pool, deck, gym, maintenance guys etc.
One side went condo two years ago. The other is still a rental unit.
The cost comparison isn't (...a comparison.) Renting is nearly half the cost of owning. To make the owning side 'pencil' you have to add a huge appreciation adjustment (Less sale commissions.) That's clearly a leap of faith since no past increases are 'for sure.'
I think people who believe renting is not cheaper need to look at what their appreciation assumption is and run the numbers. Do not go by what those popular real estate books tell you.
And no, if someone is holding the paper on your rental unit, they do NOT have to make money on it. They can lose their keester.
EngineerJim,
Not quite the same as Arizona.
Flying over Phoenix/Scottsdale and you just don't see the greenery you have in SoCal. I live in the Hollywood Hills among the trees, and it feels like I'm not even in the city sometimes.
What part of town do you call home?
I see a lot of misreads in commenting on housing by ignoring this simple difference between other investments and housing, you can't sleep under a stock portfolio.
Well yes you can actually. You can take the dividends (or interest in the case of bonds) and rent a place. A much nicer place probably.
Looks like you don't understand what yield is.
Ignoring for the moment the discount for rent the key factors in buying/investing in a house are the carrying costs against the appreciation
You're assuming appreciation a priori, which is the fatal fallacy of bubbles.
The key factor for any investment is carrying charges against income, which for housing means rent.
The above posters don't have a grip of even the most basic concepts of investing.
tj & the bear,
I live in north San Diego county (Carlsbad).
When you fly into San Diego Lindbergh field you realize how semi-arid this area is. There really isn't much natural vegetation. It's all been planted and irrigated.
Zac writes:
OT: Monoline meets monorail in Las Vegas with Ambac holding the bag:
Latest news, comment and reviews from the Guardian |
guardian.co.uk busine...y.marketturmoil
Zac | 02.16.08 - 3:24 pm | #
The ONLY problem with the Las Vegas MonoRail is it DOESN'T run to the airport.
The taxi cab lobby blocked that as it is their bread and butter run.
It was it political decision to make it a failure thanks to the cabbies and their politicians.
It run right by my condo. I see it a hundred times a day go by empty.
When you fly into San Diego Lindbergh field you realize how semi-arid this area is. There really isn't much natural vegetation. It's all been planted and irrigated.
EngineerJim | 02.17.08 - 1:37 am | #
Well, the present 'natural' state isn't representative either. There used to be oak trees and meadows, but slow growing and drought tolerant. Really easy to destroy. There are an amazing number of species that look like dead brown or gray sticks in the dry season.
I'd like to call your attention to:
FT - Insight: The next crisis will be over food
FT.com / Markets / Insight - Insight: The next crisis will be over food
Instead, what is really catching the attention of Goldman Sachs now is the outlook for agricultural prices. Or as Jeff Currie, head of commodities research at the US bank, says with disarming cheer: We think we could go into crisis mode in many commodities sectors in the next 12 to 18 months . . . and I would argue that agriculture is key here.
The problem with Cramer is not that he hasn't made some correct predictions. Of course he has. If you make as many predictions as he does every single day, some are bound to be correct.
venn: "I think people who believe renting is not cheaper need to look at what their appreciation assumption is and run the numbers."
Exactly. Why does a house appreciate? First ask: why does it have value? a) you can live in it b) you can remodel it to suit your needs. (a) can be had by renting, (b) can't. (to some people b matters, to others not). So house prices should be a function of
- rents (actually, future expected rents)
- interest rates
- a 'remodelling allowed' premium
- minus property taxes and upkeep-which are included in rent and should not be double counted).
As yogurt points out, to this fundamental value is sometimes added "expectations of appreciation", which quickly become a self-fulfilling prophecy - for a little while - even if they are unjustified. That's how you spell b-u-b-b-l-e.
"And no, if someone is holding the paper on your rental unit, they do NOT have to make money on it. They can lose their keester."
As many investors are discovering right now.
If you bought in 1996 you are a genius.
If you bought in 2006 you are an idiot.
What if you buy in 2016?
DAVID WALKER THE CHIEF COMPTROLLER FOR THE GAO RESIGNED (fired) for his speaking out on the hirrible mess we are in. watch the vidoes. Very enlightening
Yahoo! 404 - Page Not Found
http://www.youtube.com/watch?v=I-16u9×3tfE
YouTube - US Government Immorality Will Lead to Bankruptcy
AOTC, that is a strawman argument.
What might or might not happen in 2016 is irrelevant.
"IMO housing isn't so much an investment as a forced savings account."
Yes... until the HELOC turned it into an ATM.
Darren wrote, Why does a house appreciate?
The house never appreciates; it always depreciates (unless you invest in upkeep/improvement).
It's the land under the house that appreciates.
Rob Dawg wrote, They can blame Da Governator and likely will attack Prop 13 using the "crisis" as the excuse.
But Prop 13 is the source of California's problems, because it just shovels money into the pockets of landowners in return for doing nothing.
2016 the demographics of the boomers cashing out will be in full swing.
So the question becomes this: Have the BRICs become wealthy enough to take equities off our hands?
If this happens, then this bear market will be an amazing buying opportunity.
If not, this will be a long and painful buyers market in equities.
2016 is also around the time when the majority of the current boomlet cohort will be out of university and looking at housing. It also might be a couple of years into the housing appreciation cycle.
liberal writes:
Rob Dawg wrote, They can blame Da Governator and likely will attack Prop 13 using the "crisis" as the excuse.
But Prop 13 is the source of California's problems, because it just shovels money into the pockets of landowners in return for doing nothing.
You didn't choose "liberal" for nothing. You are so mistaken your comment doesn't rise to the level of being wrong.
If you own a home that you live in, you are essentially a property investor that rents to yourself. Almost all the financial dynamics apply except that you can't deduct the depreciation. So if you want to calculate your ROI, whether it be theoretical or actual, use the property investment approach.
That stated, the bubble drove property investment returns into the ground in many markets. Take the SF Bay area for example. You can rent a $1M home for about $3K/month. It's a horrible investment unless you assume significant price appreciation.
liberal: "But Prop 13 is the source of California's problems, because it just shovels money into the pockets of landowners in return for doing nothing."
The purpose of Prop 13 was to protect people on fixed incomes from being taxed out of their homes by ever increasing property taxes. In my opinion that was a good thing.
Prop 13 has been a mixed bag, but it is a political 3rd rail like social security so we are stuck with it.
Back when Conan was first running, Warren Buffett basically got himself kicked off of the Governator's team of advisers when he suggested that Prop 13 be changed.
Buffett's Prop. 13 comments cause stir
Even during the current zenith of the perpetual California state budget crisis, there will not be a serious attempt to raise rates or even close the loopholes.
Yeah, Warren Buffett was using the example of a house he owned in Laguna Beach where his property taxes were low. He thought they should be higher. Of course what he's forgetting is that he is way beyond everyone else in wealth. His net worth is what $45B? That's 45000 million. He's 45000 times more wealthy than a person who might be considered merely prosperous (a person with $1M in net worth). Speak for your self Warrren!
FYI:
People seem to be confusing "Fast Money" with "Mad Money"
Mad Money is the show with Jim Cramer screaming "boo-yah!"
Fast Money is a show with 4 traders and Dylan Rattigan. It's run kind of like a Fox Sports show. Fast paced and fast talking.
Engineer Jim:
Warren's point wasn't really that taxes should be raised per se
it was more that he is paying LESS in tax on his multimillion dollar Laguna Beach home than he is on his modest cheap Omaha home.
and also that he was paying less on his home than many first time homebuyers in California.
To me, Prop 13 would be fine, if it was used ONLY FOR OWNER OCCUPIED homes.
the idea that a corporation can set up a trust and then transfer title of the property to another owner through the trust without revaluing the tax basis is rediculous at best.
Yearning to Learn: "To me, Prop 13 would be fine, if it was used ONLY FOR OWNER OCCUPIED homes."
Ok, that would be fine. Talk about raising rents, that would do it.
EngineerJim:
The purpose of Prop 13 was to protect people on fixed incomes from being taxed out of their homes by ever increasing property taxes. In my opinion that was a good thing.
That might have been the propaganda, and it might even have been a major result, but it's not the purpose. If that were the purpose, it would be exactly like the Senior Citizen Homestead discount on my father's property, and not apply to all property regardless of owner.
The simple fact is that when median prices in San Diego are $650K, and median prices in Indianapolis are $150K, you are being paid a pretty penny to move to Indy. Retirees in California have missed the single biggest moneymaking opportunity of their life.
"Losing money in the Tech Bubble didn't require you to write a mortgage check, insurance check, property tax check, utilities every month."
Selling your house does note remove the cost of utilities.
"And there is nothing wrong with renting at all. It's a perfectly great decision. But someone has to own the properties for you to rent, and someone has to run cash positive in order for them to want to do it."
Amen. Are the landlords losing money?