San Diego Housing Bubble News and Analysis

Love that example, esp. the 10% part :) Where can I earn 10%? Sign me up!

Two problems, where do you get a 29 yr loan and will you still be able to get a 6.5% fixed rate loan in a year?

Well, La Jolla Renter wanted to keep things simple, hence the 29 year mortgage and the constant mortgage rate. One could do a much more sophisticated calculation and probably arrive at the same ballpark figure in the end. I think simple is good.

However, my comment would be that, although the example above looks good in theory, in practice couple B would probably just spend their extra $600/month on useless junk, thus invalidating the whole theory. Pretty cynical view, I know.

While simple is good its not accurate. More likely B pays 7% and the actual savings is 470/month which invested with a 5% average return is $390K or 7% avg return is $570K. Of course B also enjoys paying approx $1000 per year in taxes.

Love that example, esp. the 10% part :) Where can I earn 10%? Sign me up!

It's called a mutual fund. For instance FDIVX has returned about 15.5% YTD ;-) There are funds out there that are pretty safe and are performing over 10%/yr.

Lovely example, very simple, very direct succinct manner. One reason many folks don't buy RE bubble theory is because most folks out there want a single paragraph executive summary or bottom line on what they should do (buy/rent).

Folks saying that the person B will get the mortgage at higher rates (7%) are at odds with the bonds market. The chances of Fed lowering rates lower next year (as recession kicks in) are higher than Fed raising rates next year. Long term rates shouldn't change by 50bp in a year though as I don't expect the Fed to change interest rates by a lot within the next year. So folks, person B most probably will be paying same 6.5% if not less, next year.

I accept the 10% return rate is slightly aggressive for average investor. But theoretically, SP500 or a well diversified portfolio will return from 8-10% in 30 years and this is historically correct. Problem is that an average Joe wouldn't be disciplined enough to save these $600 for 30 years. It is also unlikely that he will have a well diversified portfolio. However, if I had to do this, I would simply choose SP500 or one of those target funds (30 year target).

Daniel, I agree that most people would spend the savings and not invest it. However, there's something to be said about lifestyle. Living is about enjoying life and having what you want.

Was just talking to a friend earlier about his very subject. Today, $3,000/mo would rent a nice house in La Jolla or buy a mediocre house in Mira Mesa (Interest only, taxes and HOA). Why not enjoy where you live and let the owner subsidize your lifestyle? Or you can live in a rental house in Mira Mesa (same as you would buy) for $2,000/month then use the extra money to buy a Porsche. Then wait until the cost of buying is the same or lower than renting.

Even if you don't save the money from renting, you still come out ahead lifestyle wise.

Live your lifestyle that also allows you to retire and not have to live in a van down by the river. So many young people are not preparing for their old age. I work with a guy that told me the other day he will just have to work until he falls over dead. He didn't prepare enough when he was younger. He's 55 now. He had a major setback about eight years ago, getting laid off from a job he'd worked at for fifteen years. The company laid him off and then offered him his job back at $20k less per year. He looked for other work, but couldn't find much. Anyway, he finally got back into a good job, but had used up savings to stay afloat in the tight years. And he lost a lot in the market a few years back. Anyway, scary picture. Most people don't think that they will get laid off, get sick or anything. They aren't planning for those things. Just paying for the Porsche, the house, vacations.....

Good thread. Very thought provoking.

FDIVX has a very good return in the last year. However, the other years don't look so hot. This fund just had one good year after 5 mediocre years. 3 yr and 5 yr returns are 20.98 and 17.18%, giving us a little over 6% annually over 3 years, and 3.5% annually for the 5 year return.

There are funds which earn a high return, but typically that good fortune lasts for only one or two years. We never know ahead of time which fund will have that good fortune to outrun the pack. It's impossible to know in advance which fund will earn 10% next year.

We can't assume a 10% return on our money when we make calculations about alternate returns. I think 5% - 7% is more realistic, although even 7% is high in today's bloated stock price environment.

Poway,
Actually the 3 year and 5 year return numbers that you quoted are annualized already i.e. FDIVX on average has returned 17% per year for the last 5 years for a cummulative return of close to double the original investment 5 years ago. Now I know why you maybe so bearish about stocks :).If you kept applying the same math, while searching for mutual funds for your retirement, you would always be seeing that most funds end up returning less than the 5.5% CDs (just kidding).

5 year returns in a bull market does not a 30 year return make!

The long term average return for the S&P 500 falls somewhere around 10.4%. Adjusted for "average" inflation, you'd get something around 7% for a real return, which is the rate most sites recommend using for retirement planning.

People need to remember how long the long term is. 1 year is really really short in the stock market. Even 5 years isn't long enough to expect averages to work out. This example is a perfect case of where you can use this sort of averaging. It's over a long timeframe, and utilizes dollar cost averaging, which minimizes the risk of short term fluctuations.

There are plenty of funds that average over 10% in the long term. Here are some example (they're all averaging over 10% over the last 10 years, which include one of the biggest crash in history after 1929):
FSLBX - average 14.5% over 21 years
VGHCX - average 19.3% over 22 years
FSPHX - average 17% over 25 years
ACRNX - average 16.3% over 36 years
FLISX - average 16.2% over 22 years

I can go on and on but you can find the same list from your brokerage's fund screener.

The statistics that are quoted for returns in the stock market are from the same people that sell mutual funds. Your after-tax, after-inflation returns are likely to be much less than is quoted from the mutual fund advertising.

Your real rate of return is more likely to look like 7% than 10% of anything. A complete market cycle should be from the years 1966 to 2000.

Another thing to remember is that this period has a preponderance of years when oil or energy was cheap and the US manufacturing base was not competing with China or India. Future returns in US markets are likely to be lower than the last 4 decades of the American Century.

That's three million dollars short.

And Couple C, being renting regulars, decides to ride it out. They bank the $18,000 a year to start knowing rent goes up 5% a year or less over the long term.

In year ten, they buy the same house, still for $650,000 because inflation and incomes are starting to get back in line.

They take a 30 year loan at 6.5%, put down $150,000 from their savings, still having over $400,000 left. Kick back with their $3160 monthly payment knowing they've got it in the bank. Bank the extra $600 a month like Couple B.

Twenty years later, they get tired of hearing their friends couple A and couple B brag about almost being paid off, so they take $362,000 out of their investments now at $3,364,000 and pay off their house and realize they have three million left to retire and play with.

gold_dredger,
If you want to apply taxes and inflation then apply it to all investments. Still, you will see that stocks beat gold, real estate, bonds, CDs, etc in the last 40 years (I accepted the convenient start window of 1966 that you chose when gold started to rally). Also, in those 40 years, the US economy has weathered an energy crisis or oil imbargo,rampant inflation,few blown up recessions, terrorist attacks, a fierce industrial competitor like Japan (similar to China now) and it wasn't really the smooth ride that you paint it to be.

qcomer, thanks for the correction, but it doesn't change my mind about the low chances of beating the general market. That's why I switched to index funds in the late 90's. For example, These are the returns for your fund:
2006
2005 17.23%
2004 19.66%
2003 42.38%
2002 - 9.37%
2001 -12.99%
2000 -8.96%

With its heavy concentration in consumer goods and financials, 2007 is likely to be a year of losses again.

I don't have tine to check all of AN's funds, so I picked the highest returning, VGHCX. Again, it had some very good years, and some bad years. In 2001 and 2002 its return was -7%, and -11%. Then 3 years of good returns, 26%, 10%, 15%. What will it be next year? With 91% of holdings in health, the Democrats could put a serious dent in its earnings.

I am aware there are funds with extraordinary returns for one year, two years, or even 3 years. But two important points must be remembered:

1) no fund can consistently beat the general stock market (although Bill Miller came close with almost 2 decades), and

2) although each year, by definition of average, many funds beat the average, we *never know in advance* which funds they will be

PS, if you noticed, all the funds I listed average well over 10% for over 20 years. So, yes, there will be years where it went down, but there are also years where it went up. That's why you take a average over a long period of time, like 20+ years. I don't know what you're trying to about it going down in 2000-2002 but so did the index funds and the index itself.

Poway,

Nobody ever said anything about beating index funds and I don't think indexing vs not indexing was ever a question. The original point you raised was that 10% average return over long term is not realistic in markets and actually 5-7% is more realistic. Most of the other posters here corrected you by pointing to 20-30 year performance of S&P500 and many other funds that have been able to return more than 10% annually. A balanced portoflio has returned 10% or more over 30 years and has beaten gold,commodities,bonds,etc during this time.

I realize that some funds return over 10%, but the difficulty lies in picking it ahead of time. For example, can you name the funds which will return over 10% next year?

I realize that some funds return over 10%, but the difficulty lies in picking it ahead of time. For example, can you name the funds which will return over 10% next year?

PS, why are you asking us to pick a fund that will perform in the short term now. Weren't you emphasizing long term when you say funds can't average more than 10%? Also, no one can tell the future. If we could, we wouldn't be here. We'd be retired already. Of course past performance doesn't not guaranty future's earning. However, it give you a good idea of the possibility. Especially when they average over 10% for over 20 years. It's not easy to average over 10% over 20 years. The whole point is long term, isn't it. If you're talking short term, then you're talking about timing the market. No one can time the market consistently. If they could, the secret would leaked out and everyone else can too.

I realize that some funds return over 10%, but the difficulty lies in picking it ahead of time. For example, can you name the funds which will return over 10% next year? And since no one can do so, we cannot assume that rate of return. We can only assume a rate of return that we ourselves are able to achieve, or what the market as a whole can achieve.

I think what everyone is saying here is that it is impossible to predict the future. The best you can do when determining a potential fund to invest in is to conduct extensive due diligence. Look at the tenure of the portfolio manager, what is the risk of the portfolio? i.e. standard deviation & beta vs. benchmark, what is the annualized rate of return vs. the appropriate benchmark? What are the internal fees and are they enough to outperform the fund's benchmark? The idea is to invest in funds that have low correlation to one another so that you are capturing as much Alpha as possible to offset any underperforming asset classes. If you feel one asset class' funds can never beat it's benchmark than buy the index or employ a core/satellite strategy utilising index funds as your core holding and add high alpha active managers to beat the index. Make sure to conduct due diligence on any index funds as well. There are many issues with index funds for example, many funds have significant tracking error, many have high internal expenses and many do not report the trading costs within the funds.

According to Duke University research, over the long term, the S&P 500 has a total return of 1%/month. With a CAGR of 12.7%.

Basically what is different now, from a historical perspective, is the incredibly low dividend rate. Before the 1990s, the Dow had a dividend rate that ranged from 3-18% a year.

The Duke Article

The point of this post was simply to point out the opportunity loss of buying too soon.

I was surprised at some of the pessimistic comments knocking the use of a 10% return, which I think is very reasonable.

The history of real-estate cycles is okay to predict the future but the history of stock indexes (10%) is not???

Poway, I am 80% cash in my portfolio right now as well, but I do not use the 20 year average of CD rates to calculate FV.

I am sticking to 10%.

I dont think 10% is unrealistic if you stay 100% invested in the stock market for 30 years. What I think is unrealistic is staying 100% invested in the stock market for 30 years. Most people will start diversifying toward more stable investments once they reach their mid-50's.

So that mean if you start investing in your mid 20s, you can stay 100% invested in the stock market for 30 years and still be able to diversify when you hit your mid 50s. Starting to invest in your mid 20s is not that far fetched.

Agreed but this thread was about mid-30's couples buying a house in a non-bubble atmosphere which most people shouldnt do until they are well settled in a career and a community they want to live in for at least 10 years. Most homebuyers are 30 or older around here.

Sorry, I forgot the mid-30's reference is from the OP. I'm in my mid-20's and have been investing for awhile now. I would think that most first time home buyers' age is getting younger. Maybe because it's due to the bubble, but I know many mid-20's who bought their first home already. In a non bubble area, rent should cover mortgage cost, so if your income can support the mortgage payment, I don't see why you would not just buy and rent it out when you're ready to move again.