Real Estate in a “Normal” Market

[barnaby33]

If it doesnt you can always send your lender a little Jingle Mail love letter.

Now thats not very Gary Watts of you. You should have stuck with the first sentence by itself, it only goes up! That way all of new guys calculations pan out. Adjusted for inflation the stock market, in the form of index funds, beats housing every single time. Maybe there are a couple of periods in the last 10 years when that isn’t so, but generally housing is a lousy investment. It is however a great way to keep the sun and wind off of you.

Josh

[temeculaguy]

The math is good and that is why people buy homes when they pay 2k in rent and can buy for 400k or under, find an example and it will probably sell. That example isn’t easy to find in S.D.

When the typical 2k rental sells between 600k and 800k, you get websites like this.

I’ll riddle you one better. I am looking at rentals right now for an October move in. I can buy a place that rents for about 1700-2000 in the 300-345 range for new construction. Talk about a nail biter. I keep running the numbers and it’s a wash, wait till those fundamentals hit S.D. next year and see how short you fingernails get because I’m down to bloody nubs.

[temeculaguy]

The math is good and that is why people buy homes when they pay 2k in rent and can buy for 400k or under, find an example and it will probably sell. That example isn’t easy to find in S.D.

When the typical 2k rental sells between 600k and 800k, you get websites like this.

I’ll riddle you one better. I am looking at rentals right now for an October move in. I can buy a place that rents for about 1700-2000 in the 300-345 range for new construction. Talk about a nail biter. I keep running the numbers and it’s a wash, wait till those fundamentals hit S.D. next year and see how short you fingernails get because I’m down to bloody nubs.

[temeculaguy]

The math is good and that is why people buy homes when they pay 2k in rent and can buy for 400k or under, find an example and it will probably sell. That example isn’t easy to find in S.D.

When the typical 2k rental sells between 600k and 800k, you get websites like this.

I’ll riddle you one better. I am looking at rentals right now for an October move in. I can buy a place that rents for about 1700-2000 in the 300-345 range for new construction. Talk about a nail biter. I keep running the numbers and it’s a wash, wait till those fundamentals hit S.D. next year and see how short you fingernails get because I’m down to bloody nubs.

[lendingbubblecontinues]

keep renting dude! what is one more year? just think what 300-345 might bring NEXT October (a fucking mansion by comparison)….look at how fast the ship appears to be sinking in just the last 30 days…a year is an eternity in this market meltdown

[lendingbubblecontinues]

keep renting dude! what is one more year? just think what 300-345 might bring NEXT October (a fucking mansion by comparison)….look at how fast the ship appears to be sinking in just the last 30 days…a year is an eternity in this market meltdown

[lendingbubblecontinues]

keep renting dude! what is one more year? just think what 300-345 might bring NEXT October (a fucking mansion by comparison)….look at how fast the ship appears to be sinking in just the last 30 days…a year is an eternity in this market meltdown

[NotCranky]

In a hypothertical situation of a “normal market” the return for being an owner can’t be justified or maligned entirely by crunching numbers relative to the early years of a mortgage. If there were no such thing as abnormal appreciation and depreciation you would have look at value added over many years. That is the conservative way to look at it.

In a continuously “normal” world, home ownership would not be for mobile types, but for those that want to put down roots. Those later years of “renting from the bank” and eventual”free and clear” ownership are gravy.

The return on owner occupied housing is what you gain versus being a renter over the same time frame. For better or worse the real world provides more extreme risk reward scenarios.

I have never thought that Piggingtonian’s hated RE as an asset class. People here are too smart about money to do that.

[NotCranky]

In a hypothertical situation of a “normal market” the return for being an owner can’t be justified or maligned entirely by crunching numbers relative to the early years of a mortgage. If there were no such thing as abnormal appreciation and depreciation you would have look at value added over many years. That is the conservative way to look at it.

In a continuously “normal” world, home ownership would not be for mobile types, but for those that want to put down roots. Those later years of “renting from the bank” and eventual”free and clear” ownership are gravy.

The return on owner occupied housing is what you gain versus being a renter over the same time frame. For better or worse the real world provides more extreme risk reward scenarios.

I have never thought that Piggingtonian’s hated RE as an asset class. People here are too smart about money to do that.

[NotCranky]

In a hypothertical situation of a “normal market” the return for being an owner can’t be justified or maligned entirely by crunching numbers relative to the early years of a mortgage. If there were no such thing as abnormal appreciation and depreciation you would have look at value added over many years. That is the conservative way to look at it.

In a continuously “normal” world, home ownership would not be for mobile types, but for those that want to put down roots. Those later years of “renting from the bank” and eventual”free and clear” ownership are gravy.

The return on owner occupied housing is what you gain versus being a renter over the same time frame. For better or worse the real world provides more extreme risk reward scenarios.

I have never thought that Piggingtonian’s hated RE as an asset class. People here are too smart about money to do that.

[Dukehorn]

Its an odd post, why are you asking people to bash you? I think you know that you’ve generated a strawman argument when you talk about a “normal” market in California.

My realistic scenario is that I’ve owned two homes before (in Texas and in DC) and the market out here is absolutely crazy in comparison. I rent a place for 2400 (a 3/2). A 2/2 in the same complex just sold for over 600,000 and the HOAs have gone up to $500/month. Please do the math there and tell me why I would buy in the current market.

[Dukehorn]

Its an odd post, why are you asking people to bash you? I think you know that you’ve generated a strawman argument when you talk about a “normal” market in California.

My realistic scenario is that I’ve owned two homes before (in Texas and in DC) and the market out here is absolutely crazy in comparison. I rent a place for 2400 (a 3/2). A 2/2 in the same complex just sold for over 600,000 and the HOAs have gone up to $500/month. Please do the math there and tell me why I would buy in the current market.

[Dukehorn]

Its an odd post, why are you asking people to bash you? I think you know that you’ve generated a strawman argument when you talk about a “normal” market in California.

My realistic scenario is that I’ve owned two homes before (in Texas and in DC) and the market out here is absolutely crazy in comparison. I rent a place for 2400 (a 3/2). A 2/2 in the same complex just sold for over 600,000 and the HOAs have gone up to $500/month. Please do the math there and tell me why I would buy in the current market.

[ucodegen]

@Fearful

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns.

Actually it does increase the rate of return, but he did not calculate the rate of return right because he was using different comparison types. It also does increase the risk associated with those returns. In fact risk and rate of return go hand in hand. On a more risky asset, you will always expect better returns. What this points to is the difference in ROI and ROE. ROI = Return On Investment. ROE = Return On Equity. In the scenario, The equity is the price of the house, the investment is your down payment and the sum of monthly payments (discounted by time). In the scenario above, if the purchase was cash (no mortgage), the results would roughly be
ROE = 4%
ROI = 4%

With the mortgage as described, the numbers end up being:
ROE = 4%
ROI = 20% because only the down was the invested capital considered. The monthly payment was omitted, which is also invested capital.

There is one problem here. The amount for payments on the mortgage are offset against the rent it displaces. The comparison shown is not appropriate for this scenario. You want to compare return on the $80,000 when invested (rent scenario) vs the gain in owning the house (buy scenario). Doing this, you can balance out the monthly rent vs mortgage payment. You would have to get 20% or better return on $80,000 to make renting match buying. Less than 20% return on $80,000 would mean buying is better, greater than 20% return means renting is better (of course not taking into account taxes on gains).

In terms of leverage increasing returns on investment, look into something known as ‘carry trade’ and spreads. Leverage gains you when the growth rate of the asset is higher than the interest rate you are paying on the loan for the asset. If it is the other way around, you are sucking wind.

[ucodegen]

@Fearful

You generally have addressed the three factors correctly, except for this: Leverage does not increase the inherent returns of an investment, but rather increases the risk of those returns.

Actually it does increase the rate of return, but he did not calculate the rate of return right because he was using different comparison types. It also does increase the risk associated with those returns. In fact risk and rate of return go hand in hand. On a more risky asset, you will always expect better returns. What this points to is the difference in ROI and ROE. ROI = Return On Investment. ROE = Return On Equity. In the scenario, The equity is the price of the house, the investment is your down payment and the sum of monthly payments (discounted by time). In the scenario above, if the purchase was cash (no mortgage), the results would roughly be
ROE = 4%
ROI = 4%

With the mortgage as described, the numbers end up being:
ROE = 4%
ROI = 20% because only the down was the invested capital considered. The monthly payment was omitted, which is also invested capital.

There is one problem here. The amount for payments on the mortgage are offset against the rent it displaces. The comparison shown is not appropriate for this scenario. You want to compare return on the $80,000 when invested (rent scenario) vs the gain in owning the house (buy scenario). Doing this, you can balance out the monthly rent vs mortgage payment. You would have to get 20% or better return on $80,000 to make renting match buying. Less than 20% return on $80,000 would mean buying is better, greater than 20% return means renting is better (of course not taking into account taxes on gains).

In terms of leverage increasing returns on investment, look into something known as ‘carry trade’ and spreads. Leverage gains you when the growth rate of the asset is higher than the interest rate you are paying on the loan for the asset. If it is the other way around, you are sucking wind.

[Author]

Posts