No. I am an engineer who minored in finance.
My father owns a real estate brokerage though. His outlook is notably rosier, but it has to be :).
No. I am an engineer who minored in finance.
My father owns a real estate brokerage though. His outlook is notably rosier, but it has to be :).
The local bishop wrote:
So are you saying that you think Boston, DC, San Diego and other high priced areas wont drop much in price ?
No.
Californian wrote:
I like your assessments in general, but a 50% decline in home prices on a nationwide level is so far from the realm of reality that it is laughable. Even in local markets (i.e. New York, Chicago, LA, San Francisco) there is no precedent for anything to close to 50% declines in nominal home prices. The only areas where you could see a 50% deline would be within certain tiers of homes in affluent communities (i.e. homes priced over $3MM in Atherton or Malibu).
i'm more or less with cgaites. it may be true that the 50% decline is in "real" terms rather than nominal terms as s/he later says.
i felt the need to respond to californian to make one small, but potentially important, point. while there is no precedent for anything close to 50% declines in home prices on a wide scale (say, an entire metropolitan area), with the exception of traumatic economic events such as a factory or base closing, i don't think you can rely on such history when predicting what will happen to housing prices in the near future. there has also never been a period of such incredible, rapid increases in home values without a similar increase in either rents or incomes.
think of it this way, around 2002, the median price for a home in city X was, say, $150,000. in july 2005, it had risen to, say, $500,000. there is no way that the economic fundamentals supported that rise. the historic rate of growth would have supported a 5%-7% annual rise at best. so let's be generous and say 10% annual growth. $150 to $165 from '02 to '03, $165 to $182 from '03 to '04, $182 to $200 from '04 to '05 and $200 to $220 from '05 to '06.
as you can see from these made up but not unrealistic numbers, a 50% nominal drop in prices from july '05 prices would get us back to the historical norms.
i don't see why that is "laughable." i don't have a crystal ball, but i'd be shocked if prices don't decline by 20%+ in nominal terms in the hottest markets (from the peak, which was probably 8-10 months ago; this has already happened in many parts of florida).
finally, keep in mind that if inflation averages 3% over the next five years, stagnant prices mean a real decline of approximately 15%. so a nominal decline of 20% plus a real decline of 15% is starting to get pretty close to 50%. i just don't see why anyone would buy right now.
wineturtle wrote:
The local bishop wrote:So are you saying that you think Boston, DC, San Diego and other high priced areas wont drop much in price ?
No.
the wording of this question leaves your answer ambiguous, wineturtle. allow me to rephrase. do you think that the average or median prices of homes in san diego, boston and DC (or any of the three) will drop much (say, more than 5% in nominal terms) from the peak average or median prices?
A couple of points for you and cgaites.
1) The recent run-up in home prices is not unprecedented. From 1976-80, the median U.S. home price rose 85%. Compare that to a national increase of 51% from 2001-2005. Obviously inflation was much higher in the late 1970s than the early part of this decade, but even factoring inflation, the recent boom is not much stronger than that of the late 70s. Despite the worst recession in 50 years in the early 80s that occured after that boom, national home prices did not decline in nominal terms and fell less than 10% in real terms.
2) Why do you two use outrageous examples of local markets to emphasize your points? One of you mentioned a 200-300% increase in home prices. The other used an example of a home rising from $150K in '02 to $500K in '05. The Office of Federal Housing Enterprise Oversight releases a quarterly report on housing prices in 275 U.S. markets. At the height of the housing peak in QIII '05, in not a single market did the medium home even increase 150% for the preceeding 5 year period. Miami area rose 133%. 110% increase in San Diego. 113% in DC. 140% in Austin. 107% in Vegas. 135% in LA 130-145% in a bunch of hot California & Florida markets. Please find me these markets where home prices were increasing 200 or 300%.
the difference between that recession and the next one is debt and the amount of it. When coupled with rising energy costs/possible shortages things can get really depressing when you think of the ramifications. if we go into a recession foreign reserves will unload the dollar and our currency will be worth next to nothing. Hyperinflation is almost all but certain. Even a small burst in the lending bubble (which is all the housing bubble really is) could send us tail spinning, which would start the chain reaction. After about two years of hell our dollar will be worthless, unemployment will rage around 15% or more, crime will increase, China will get more of our oil because we won't be able to pay for it and our military may not be able to stop it. we're screwed royally although there is some hope in a few industries and technologies. but they are small and underinvested.
Real estate is a horrible investment and anyone who says different can't do math.
What good is "investing" in real estate if it is your primary residence? Even if the house appraises for twice what you bought it for, guess what - every other damn house in your area doubled in price too. So there is no real increase in wealth there. You sell your house for a 100% gain and then buy another house that has appreciated by 100%. Net real gain in wealth for you? Zero, zilch, nada. And that's not counting the interest you pay to the bank on the mortgage, the property taxes you have to pay, all the maintenance costs that ownership entails etc etc....
The only way to make real-estate an actual investment is to buy a property and rent it out. Then the renters pay for your property with your money. THAT works. Trouble is, most people don't do this. They mortgage the primary residence and when its value goes up, they "feel" rich even though they are not, take out a heloc, buy depreciating toys with it, and then cry when the bill comes due vis-a-vis rising interest rates or their own retirement whereby they have no equity in the home.
What you should really do if you want to invest in real-estate is get a fixed-rate mortgage, and not interest only. Then you rent the place out and you stay put renting your own little apartment so you have less cash outlay every month. After several years, sell the investment property, take the equity built through others money plus any appreciation that may occur and THEN buy yourself a house to live in.
Most Americans think they can get rich by owning a home. They think its just the "thing to do" once you graduate college and get a job. Its bullshit. You sell your financial future down the river by pouring your money into a primary residence and thinking you are actually getting rich. You aren't. The bank will CHARGE YOU to get your OWN MONEY back out of the house for a heloc or reverse mortgage. How nice of them! Wake up.
If my house declined by 50% I would still have $400,000 in untapped equity.
What do Americans make HERE(finished goods, beyond food) that they can export at a profit to the rest of the world?
Houses? Storefronts? Shopping malls?
True, but if you carry that on to retirement (if your home's value hasn't decreased) you can then realize the appreciation in your home. Most people can downsize their living arrangements and tap some of their home's value increase.
hayward102 wrote:
True, but if you carry that on to retirement (if your home's value hasn't decreased) you can then realize the appreciation in your home. Most people can downsize their living arrangements and tap some of their home's value increase.
If you downsize and stay in the same area of the country, then yes I agree. However, the equity realized through this method has been received through an exceptionally poor rate of return above inflation (real return on investment). Real-estate historically has avereged only 2% above inflation, and the bank charged you 6,7,8% on your mortgage. Sure you get equity back out by downsizing upon retirement, but you'd be MILES ahead by putting the money you'd otherwise spend on a mortgage into some other investment vehicle like an ETF. You'd receive market returns on the ETF, which are historically about 6% above inflation and you wouldn't have to pay a bank interest payment in the meantime. Nevermind the fact that if you move from Ohio to California for retirement, you can downsize and still not receive equity due to the grossly overpriced real-estate in parts of this country.
So to summarize, even in the best-case scenerio of downsizing and receiving part of your equity, you still have the negative real return on an "investment" that didn't beat inflation AT ALL due to your interest rates on the mortgage! The only one winning here is the bank, not the retiree.
with respect to your second point, you are correct that no broad market has seen the types of increases that i used in my basic example, but there are certainly many areas that have seen such appreciation. check out some of these properties:
http://ocfliptrack.blogspot.com/the current listing prices are meaningless, but there are usually at least two previous sale prices. the difference between the two is often quite large.
also, although i may be guilty of using exagerrated numbers when considering broader markets, the basic point remains: there is little reason to believe that price increases not supported by changes to underlying fundamentals, primarily rents and incomes, will hold up. i think the historical real increases in home values have been in the 3-4% range, perhaps a bit lower or higher. so annual increases of 10% for 5 years gets you very far in front of the expected prices. i don't know why anyone would be surprised by a price correction back to what prices would be now if they'd increased at a modest clip of around 5-6% over the last 5 years.
with respect to your first point, i appreciate you mentioning the obvious - the tremendous inflation at the time. using this calculator,
http://www.westegg.com/inflation/infl.cgi, i find that $100 in 1975 inflated to nearly $150 in 1980. if prices went up 85% in that time period, that would mean a $100 house turns into a $185 house. but the "real" increase would be only $150 to $185, or 23%. an annual rate of approximately 5%. not far from historical norms. and as you point out, after this period of unusual rising, prices stagnated or fell.
in contrast, entering $100 from 2001 to 2005 (the last year of the calculator), you find that the inflationary increase is only from $100 to $108. so nearly all of the increase in real estate values in recent years have been "real."
bottom line, as i said before, i'd be shocked if housing prices don't fall in a meaningful way in the formerly hot markets.
And lo what would happen to all of those illegals who came to the US to "do the jobs that Americans will not do"? Do you think that they will make a run for the border, or is US poverty a better option than poverty in Mexico?
Good points (mostly), but one question:
WHERE DO YOU WANT US TO LIVE IF WE DON'T OWN A HOUSE?!?! Rents are incredibly expensive in some areas, and that's $ thrown away (for the most part). We all can't live at mom's until we're 30.
So if buying a house is such a crazy idea......where do you want us to live again?
None of this matters. Peak oil is comming. There won't be enough oil to fuel our economy and we will see the collapse of civilization. We are living in the final years of the oil age. By 2025, we will be back in the stone age. Your homes will be worthless. Our system of money will be worthless. Get yourself some cattle, canned food & a shot gun and start a farm in Iowa.
If you get a fixed rate mortgage, you don't have to worry about rent increases. Rent increases in the area I live in have been HUGE. I pay less in "rent" now than I would if I was still renting for the same size place. Sure I have to pay maintence fees that I wouldn't have to if I rented, but I have a lot of other benefits I have that I wouldn't have in an apartment.
Also I can deduct the interest portion of my mortgage. The money that the bank lends to me is really cheap money when you factor that into it.
A portfolio that includes investment in real estate adds to diversity and has higher expected returns than a portfolio of just stocks and bonds.
That should have read higher expected returns for a given level of risk.
And with a real estate, you are leveraged. If the home goes up 3% but you only have 30% down on it, you are doing a lot better than getting a 3% return.
???? wrote:
Good points (mostly), but one question:
WHERE DO YOU WANT US TO LIVE IF WE DON'T OWN A HOUSE?!?! Rents are incredibly expensive in some areas, and that's $ thrown away (for the most part). We all can't live at mom's until we're 30.
So if buying a house is such a crazy idea......where do you want us to live again?
Hey man, renting is always cheaper than a mortgage, assuming its an equity building mortgage (not interest only). Rent a decent but affordable apartment and build wealth by investing your discretionary income. You don't have to live with mom and dad and you don't have to chuck your financial future into the meatgrinder by taking out a mortgage you can barely afford only to live in a place that makes you "feel" like you are successful. Again, the only one succeeding on that transaction in real monetary terms is the bank.
debbie downer wrote:
Hey man, renting is always cheaper than a mortgage, assuming its an equity building mortgage (not interest only). Rent a decent but affordable apartment and build wealth by investing your discretionary income. You don't have to live with mom and dad and you don't have to chuck your financial future into the meatgrinder by taking out a mortgage you can barely afford only to live in a place that makes you "feel" like you are successful. Again, the only one succeeding on that transaction in real monetary terms is the bank.
yes, but what about 10 years from now? if you buy, you fix at least some of your housing costs - HOA dues, property tax and maintenance costs will continue to increase for most people. whereas rents will by and large increase consistently over time. although homeownership costs are higher than rent today, in many if not most cases the reverse will be true after you've owned for 5-10 years or more.
there is an exception to this in areas that have very strong rent control laws.
1) I'll agree with you that no single entire market showed a 200-300% increase in home prices, but there are isolated examples of individual neighborhoods (and they generally weren't the nice ones). As you have pointed out, in many markets home prices have infact more than doubled in the last five years, so though I was exaggerating for effect the point is in some market (but not so much the national market) prices have skyrocketed at an unprecidented rate.
2) The late 70's were at time where the FED had jacked up interest rates to record highs to stop the runaway inflation. These interest rate run-ups caused the recession of the early 80's. Once inflation cooled in the early 80's interest rates were dropped quickly softening the landing of the housing market. Inflation had driven up rents, housing prices and rents met in the middle (85% nominal increase translated into roughly 45% real increase after heavy duty inflation, 10% real decrease gets you halfway back to where you started - a 100% gain can be erased by a 50% decrease). Real wages have never again seen early 70's levels. See my Senerio 1 - Only this time the bubble pops during a period of very low interest rates, not very high.