Inflation in 2017 so far: 0.0%

[gzz]

Raw Data: Inflation Has Been Running at 0% All Year

This supports what I have been saying here for a while, that interest rates in the USA are anomalously high compared to other rich developed countries.

The most likely course of rates in the next few years is a bumpy and gradual decrease.

This means, for housing:

(1) payments for new buyers do not go up, even as prices go up

(2) current owners can refi at even lower rates, further decreasing the already low incentive to ever sell

(3) the return on bonds for new capital, one of the major alternative investments to real estate, will go even lower*

*(falling rates of course increase the value of existing bonds, so for bond buyers who do not hold to maturity, bonds will also be a good investment)

(4) income growth has been faster than inflation, and the general deflation in physical and digital goods leaves more money for scarce positional goods, specifically more money for both rent and buying residential real estate

[gzz]

I purchased a condo in OB a bit less than a year ago.

My down payment + renovation expense (including carry costs when it was vacant) was about $100,000.

At this point, I think it is worth about $130,000 more than I paid for it. So my cash-on-cash return is more than 100% in one year.

Some of this large return is me getting lucky on a below-market condo in ugly but easy to fix condition. And I am not including the value of my labor. Still, I could have purchased just about any condo in San Diego last year and had a return of at least 50% and quite likely 100%.

I ended up renting it to someone I like about 5% below market (now about 10% below market), but even this low rent is about 3k more per year than mortgage/tax/HOA, so the free cash flow return is 3%.

But if you include the part of my monthly cost that goes to principal, then the return on rent without even factoring in appreciation is more like 8%.

In summary, San Diego real estate is an excellent investment, even if you assume 0% appreciation in prices. And of course we will go up more than 0% a year.

[gzz]

I think inflation even at 0% is overstated.

For middle class people, new cell phones, PCs, and car payments are major expenses.

Inflation figures have never tried to capture tech improvements.

But these days the biggest changes to cell phones, PCs, and cars is they last so much longer.

The average age of cars in the US fleet keeps going up, reflecting just how long cars last now.

Likewise, in 2013 it would be pretty bad to have a 2010 cell phone. The battery would be in bad shape and it would be badly out of date. But in 2017, I’d be just fine with a 2014 cell phone.

The useful life of a PC these days I now consider to average about six years, and I am a power user.

The thing that used to fail the most on PCs was the hard drive. But now I use SSDs, which last a very long time with no moving parts.

In 2007, I would consider a new $600 cell phone every 2 years and new $1500 PC every 3 years to be typical for power users who care about these things. So that is $800 a year on these things, ($960 in current dollars).

Now it is a new $800 phone every three years and a new $1300 PC every 6 years, so that is about $480 a year. Almost exactly half of my prior pattern, which I think reflected other techie power users too.

Cord-cutting and Netflix seems to be also cutting entertainment expenses. And wow, TVs just keep getting cheaper and cheaper. For the same specs, seems like 25% decline in price per year is typical.

[bewildering]

[quote=gzz]I think inflation even at 0% is overstated.

For middle class people, new cell phones, PCs, and car payments are major expenses.
[/quote]

I disagree. All of the items you mention are choices.

We pay childcare and preschool costs that go up at least 2.5% per year. These costs are not a choice, we have to put our kids somewhere while we work. Also, we will have to pay for extended care when they go to school. And college costs rise every year.

My healthcare costs are going up at least 3% per year. This is through work but still is part of reimbursement.

We own a house (thankfully), but our friends just rented a place for $4100/month. That is substantially higher than a few years ago.

[gogogosandiego]

I’ve been saying this for years, Inflation is overstated. Cars are a great example. Yes, they cost more. But they get better MPG. They break down less. They routinely come with 10 year warranties or free service. They are safer so we are less likely to get hurt or killed in an accident. Front and rear cameras, NAV, etc.

[zk]

.

[gzz]

I agree that childcare rent and medical are inflating. I am not a doctor or nanny and that won’t change. But I can buy rental real estate. People are shifting their money into rent medical and childcare and out of the deflating areas. Which is actually most of the stock market.

I bet most childcare workers are also spending their growing wages mostly on rising rents.

[moneymaker]

Most everything is inflating, can’t hardly buy a fast food combo(large) for less than $10 bucks now a days. Anyone eaten at a McDonalds lately? The interest on my house is about the only thing going down in a steady fashion these days. I for one am going to start eating at home more and anyone that raises the bill on me will be getting a phone call. Union Tribune tried that and after calling I got it for less than I was paying before.

[FlyerInHi]

Material consumer goods are cheaper. Services are more expensive.
Food is also cheaper.

Rents are more because landlord can ask for more In popular areas. It feels like it’s due for a correction if/when a recession hits. However, I believe the top tier metros are strong because they are attracting population and I don’t see this trend reversing.

In Vegas, Blackstone bought 2/2 typical garden style apartment complex for $229k per unit, more than can you buy nicer condos. More than I paid for condos in San Diego. Crazy. But there’s a lot of money chasing real estate.

Buyers pay $269M for 4 Las Vegas apartment complexes

[ucodegen]

[quote=FlyerInHi]Material consumer goods are cheaper. Services are more expensive.
Food is also cheaper.

Rents are more because landlord can ask for more In popular areas. It feels like it’s due for a correction if/when a recession hits. However, I believe the top tier metros are strong because they are attracting population and I don’t see this trend reversing.

In Vegas, Blackstone bought 2/2 typical garden style apartment complex for $229k per unit, more than can you buy nicer condos. More than I paid for condos in San Diego. Crazy. But there’s a lot of money chasing real estate.
https://www.reviewjournal.com/business/buyers-pay-269m-for-4-las-vegas-apartment-complexes/%5B/quote%5D

I decided to look at the issue from the opposite direction. What does the financing look like. I took the DiNapoli Capital Partners purchase and ran a rough approx. I assumed all $62mil financed at 4%. Total monthly nut is about $295,997 for 404 units for a per unit average financing cost of about $733. I went online to their online rental office and lowest rent is $1010/month. Approx $300/unit/month avg return on money not yours is not too bad ($121,200/month). Rents there are $1010/mo, $1016/mo, $1037/mo, $1250/mo, $1200/mo. If I assume 10% vacancy, the effective unit cost ends up being $813, still not too bad and it looks like you have more ‘headroom’ for contingencies. Noted that this is a very cursory assessment. NOTE: that this is the newer area of Las Vegas. NOTE: Financing all at 5%, bring monthly total to $332,829 – or $914/unit/month at 10% vacancy, $824/unit/mo if all occupied. This is a bit tighter. I do wonder what they put down, and how it was financed.

The Elysian West purchase is as follows. $508,447/month total financing at 4%, all amount financed. This comes out to $1091/unit/month at 100% occupancy. Rental ranges are; 1/1 at $1085 – $1947, 2/2 goes at $1348 – $1731, 3/2 goes at $1607 – $2050. As you noted, these prices start to move into the actual purchase price for housing. It is also very close to a major freeway. What is interesting is that this one looks like a ‘spec built’ apartment complex. I wonder if the builder is carrying some of the financing cost. I also wonder if the anticipated rents are really going to be seen. A July 2015 Google street view shows that area as empty, no apartment complex

street view

On the other hand the aerial shot shows the complex, but it looks kind of ‘institutional’ and sparse compared to the ‘Palms’. You also have a nearby heavily traffic’d freeway.

aerial

Ok, just freaked myself out. I revisited the aerial map and it shows an empty field there, where I once saw an apartment complex… I suspect that the complex is so new to the point that Google’s map data is inconsistent between servers. Fiddling with ‘toggles’ shows that if you have 3D view on, you don’t see the complex. With 3D view off, you see the complex. I suspect that this complex was ‘spec’ built. It looks kind of ‘institutional’ compared to the ‘Palms’.

Used Google-Earth. Got the complex on imagery date; 5/13/2017 shows complete with more than 10% vacancy(parking lot survey), 9/2/2016 – fairly complete but mostly empty – south covered parking not complete, south units just finishing up, 3/15/2016 shows the complex still under construction, 3/22/2015 shows empty field and grading just starting. Google earth doe show a lot of construction in the area over the period 3/2014 – 3/2016.

Side note: If you set the time to about 8/10/2003 on Google earth, you can see the work that Las Vegas did on dealing with the flash flood control tunnels.

[gzz]

I am not surprised the vegas conplex pencils out just fine. Prices still have a ways up to go.

[FlyerInHi]

How Blacktone and those equity groups work are beyond my pay grade. I just see properties getting snapped up and prices moving up and up.

The economy is doing well and developers are building luxury apartments at the higher end. There is so little supply at the lower levels that if you got a remodeled condo, your can rent it out at a premium within days. Amazing.

I’m not calling bubble yet. But I worry. I don’t think we’ll have a real estate led recession, but an employment led recession will eventually cause a real estate downturn. That’s traditionally how it works. When? How much more will RE prices go? Whatever happened to hyperinflation, debt crisis and skyrocketing rates?

[ucodegen]

[quote=gzz]I am not surprised the vegas conplex pencils out just fine. Prices still have a ways up to go.[/quote]
The first one does(Palm).. but I worry about the second (Elysian). I would need to have an idea on the current ‘actual’ rental rates. This project is so new that I don’t know to what degree they are discounting the rent to get people in. What they charge is so close to actual house financing that I wonder on their pricing and whether it will stand up over the long term, added to the ‘institutional’ look and very close freeway (front door location).

I also wonder about the job situation (type of job more than count).

[SK in CV]

[quote=ucodegen] I assumed all $62mil financed at 4%. [/quote]

Bad assumption. Doesn’t work that way. 4% is reasonable for a SFH. And up to 4 units. Not for anything more than that. Lending for large apartment buildings is often balance sheet lending. 100% debt is rare, even for the most credit worthy. Interest rates vary tremendously between the best and worst, based on relationships and credit worthiness of lender. Most common number I see used lately is 5.5%. Some borrowers could do better. Others can only get higher rates. Most often, rates are not fixed, and loans are 5-7 years.

[Rich Toscano]

V shaped recovery in 3m annualised rate confirms that slump in core #cpi really was transitory. But Fed predictably over-reacted. pic.twitter.com/qp30kNGoLJ

— Capital Economics – US (@CapEconUS) September 14, 2017

[Author]

Posts