Seems like things have been slow

[no_such_reality]

If it’s mewing, it’s not dead…

[blahblahblah]

A person who owns real estate had a bigger stake in it and therefore took care of it accordingly. So there is a reason why there is respect for home-ownership.

Let’s see what kind of respect all of these Duh-merican “homeowners” with 100% financing have for their property when their payments double as their neg-am pick-a-pay loans reset.

[Anonymous]

Don’t worry what others think about your renting.

Two and a half years ago, our good friends told us not to buy, that prices in La Jolla were too high.

They rented their home for five years before buying. He’s a cardiologist.

Their friends, whom they introduced us to that night, rented for three (or seven) years before buying. He’s a dentist.

The informal BBQ was on the beach at the La Jolla Beach and Tennis Club.

Lesson — don’t buy when it’s too high; rent, instead, and spend your savings later.

[Anonymous]

The “renters are losers” meme is designed to program you to be a good little mortgage/property-tax paying, Home Depot/Lowe’s purchasing consumatron.

Well said!

[Diego Mamani]

Of course things are slow!
Remember the last boom? It ended in 1989-90 (analogous to 2005-06 today), and prices dropped for many years until 1996. If you wanted to buy at the bottom then, you had to be patient, as in six-years-patient! Prices dropped very slowly in the early 90s, even though we lost many jobs in the aerospace and related industries.

No one knows how long the decline will last this time. It could be only two years, or 10 years, or more. Also bear in mind that a lot of the housing depreciation will be in real (inflation-adjusted) dollars.

Prices are very sticky on the way down, and I’m convinced that houses will remain overpriced for years. It think it’s smart to rent for at least the next couple of years. Rent is cheaper than you think. As an example: my wife and I almost bought a $900K house in 2005 after a job relocation. A house with an identical floorplan is for sale today, listed at $845K after many reductions, and still doesn’t sell! And this house for sale now has much better upgrades (flooring, landscaping, etc.) than the one we almost bought.

I figure, the $50K+ I would have paid (lost) for the “pride of homeownership” will pay for almost 2 years of my rent. It’s as if I’m renting for free. Besides, I’m convinced that that house can easily lose another $50K within the next 12 months. The way I see it, more free rent for me!

[renterclint]

The stable environment comes from the parents, not the box that the parents live in…

CONCHO, I whole-heartedly agree with that.  When I said "same stable environment", I should probably have put an emphasis on "same".   We were quite content with our current rental, but now through no control of our own, we must move.  Rentals are thin in my kids school district, and now we're moving into a much smaller (albeit cheaper) rental 4 houses down the street.  And this new rental is a long-time rental property… very out-dated.  I don't care much, but my stay-at-home wife has to live in it all day long.  Truth is, we're lucky it came up when it did.  If it did not, we would be moving school districts.  A lot of people don't mind moving their kids around a lot ,"kids are resilient" they say.  Different strokes… I personally do mind and I do not think my view of that is particularly unique.  In addition to the "paint & improve the way you want" thing about home ownership, it is especially nice to know if you want your family to stay put, they can. 

All the points people have made here about the advantages of renting are valid.  I especially like Diego Mamani's example of 2 years of free rent – very good.  I also do not buy into the "renters are losers meme".  I'm not even sure what a "meme" is:) 

I would just like to point out (maybe the obvious) that there are some nice advantages to owning the "box" you live in beside the tangible financial reasons.  Unfortunately at this time in San Diego, those ownership advantages clearly come at a very high price.

[Chris Scoreboard Johnston]

Chris Johnston

I find this whole mention of inflation adjusted dollars a little odd. It is a valid economic discussion, but not of much use on real life applications. I live my life in dollars today. I cannot to burger king and offer them $3.50 for a whopper because the $4.50 price is nominal dollars and I want to pay in real dollars. I think that whole school of thought was brought to the forefront by economists who never made any money off of their predictions, but needed to sound smart.

There are people in here, 4plex to name one of the top of my head, that seem to have a very good handle on the inflationary nature of this economic cycle. However, for the average person, I do not feel any real dollar decline in RE would mean anything, they need nominal declines to afford housing. Of course if we got spiraling wage inflation, it might make sense, but we are far from that.

It is almost impossible to set up assets in a perfect way to take into account the effect of inflation on the dollars value. Real estate is in nominal dollars. It will not help anyone one bit if the real value of RE drops, and there wages stay flat, which is generally what is happening now. The afforadability issue will still be the same.

One further thought on this. The studies that I have done comparing real rates to housing historically, would suggest that housing prices will not drop based on their current relationship to real rates, they actually would rise if they do what they have historically done. It is almost impossible for me to believe that could happen, but it is what my research has told me. Of course that is based on the CPI, which seems to be a joke as far as what it tells us inflation is currently.

[ibjames]

I like your post Concho, it’s hard to get past that mentality though. It is a great feeling to have a place done just the way you like it. The tree in the front yard you planted etc. etc.

I laugh because as I say this, I am renting and the amount of liquid cash in my bank account continues to grow, and I’m in a forum complaining.

Perhaps shock therapy for me and the Mrs?

[surveyor]

inflation vs. housing price

One further thought on this. The studies that I have done comparing real rates to housing historically, would suggest that housing prices will not drop based on their current relationship to real rates, they actually would rise if they do what they have historically done. It is almost impossible for me to believe that could happen, but it is what my research has told me. Of course that is based on the CPI, which seems to be a joke as far as what it tells us inflation is currently.

I have thought that same exact thing and I thought it strange that while there is a general consensus on this board that inflation will rise, gold will rise, but yet many believe that housing prices will go down 50%. It has been pointed out many times that housing prices track inflation, but inflation has been going up, not down (especially when you consider the amount of money being printed by the feds).

In my calculations, when I apply a rate of inflation towards housing prices and calculate a 50% drop over six years, housing prices will hold up at least moderately well (my test case $400k house lost 20k over 6 years, which is not a whole lot). I’m probably missing something in my calculations, but it seemed like an interesting case to see how the years pan out and how that calculation fares.

But who knows what will happen in the future…

[no_such_reality]

I find this whole mention of inflation adjusted dollars a little odd.

Okay, let’s put it in perspective.

In 1990, if you told you’re neighbors you owed $400,000 on your house, they understood how big that was.

Today, if you told you’re neighbors you owed $400,000 on your house, they think you’re damn lucky.

[renterclint]

Chris, very well put.

I am also skeptical of the practical impact of a real $$ decline in housing. It does not seem terribly helpful. When it came time for the annual salary/raise negotiation with my employers, I do not ever recall them putting my % wage increase in inflation-adjusted terms! I do believe inflation has an impact on wage increases, but that is an in-direct, delayed impact at best – IMO – but I’m no economist.

-C

[no_such_reality]

When it came time for the annual salary/raise negotiation with my employers, I do not ever recall them putting my % wage increase in inflation-adjusted terms!

For good reason, the vast majority of the work force got a raise that was on par with inflation or maybe 1% over inflation.

[Diego Mamani]

“I live my life in dollars today. I cannot to burger king and offer them $3.50 for a whopper because the $4.50 price is nominal dollars and I want to pay in real dollars.”

Real dollars make sense when making intertemporal comparisons. Today, $4.50 nominal dollars are exactly the same thing as $4.50 real (2007) dollars. Therefore, it makes no sense to distinguish one from the other if all I care about is the present.

OTOH, suppose that back in 1980 Burger King offered to give you a free burger a day for life, but in reality they gave you $0.99 coupons. If a burger cost $0.99 in 1980, that’s fine then, but what would happen as time passes by and burgers become more “expensive” in nominal terms? By 2007 the $0.99 coupon would cover less than a quarter of the cost of a $4.50 burger. Won’t you feel ripped off if the original offer had been a free burger for life?

To compare 1980 to 2007 we need real, or constant, dollars. Otherwise, we are comparing apples to oranges. If inflation is, say, 3% annual, after five years that’s 15.9% (compounded). Therefore, if a house was $900K in 2005, and still is $900K in 2010, then we say that the house in 2010 is actually 16% cheaper in real terms, even if the nominal price is the same.

Why? Because $900K can buy 15% less burgers (or shirts, cars, movie tickets, etc) in 2010 than in 2005. As we saw in the previous bubble burst, price drops will be in both nominal and real terms, the latter being of course a larger drop.

The point to remember is that money itself is not what maters. If we doubled all prices and all wages, etc., from one day to the next, nothing would change, right? Of course not. What matters is what I can buy with that money, not the dollar amount itself.

[Anonymous]

Why high inflation = low housing prices.

High inflation requires high discount rates by the Federal Reserve to tamp down inflation. When that happens, few/no loans are made: banks have to pay 15-20% to depositors, but how many individuals can afford to take out a loan at 20-25%, especially when many of them had a foreclosure during the ’07-’10 housing crash?

Thus, demand for homes drops off a cliff. Eventually, that results in lower prices.

High inflation is certainly compatible with low asset prices; just look at the Dow or S&P 500 performance and P/Es in the ’70s and early ’80s.

[(former)FormerSanDiegan]

jg –

Longer-term changes in rates do not move inversely to prices. Look at Rich’s analysis. Rates dropped precipitously during the early 90’s as housing prices also dropped. Not the opposite.
http://voiceofsandiego.org/articles/2006/11/18/toscano/964return.txt

Also, ask the previous generation what happened to home prices when rates increased from the 6% range in the 60’s to the high teens in the early 80’s.

Any negative correlation of rates and home prices appears to be a short-term phenomenon. This is easy to explain because your payment is higher when rates go up, causing you to be able to spend fewer $ on a house. However, the longer term effect of inflation reducing the purchasing power of a $ appears to overwhelm the short-term effect over longer (5-10 year) time periods. This is a bit harder to grasp but appears to be what has happened historically.

[Author]

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