What if it doesn’t collapse?

[sdrealtor]

Matt,
Saying housing only averages the same rate of return as inflation completely ignores the impact of leverage. The returns on housing have historically been so great because of the leverage and tax benefits associated with that leverage.

sdr

[patientrenter]

sdr, leverage only increases the return as long as lenders agree to charge less (after tax) than the rate of (after tax) increase in home prices. This ‘free money’ may be less free in the future, unless government guarantees, explicit or implicit, are further extended to insure the lenders against loss. Lenders have been supplying most of the money, and taking most of the risks. They may eventually get smarter.

Patient renter in OC

[patientrenter]

sdr, leverage only increases the return as long as lenders agree to charge less (after tax) than the rate of (after tax) increase in home prices. This ‘free money’ may be less free in the future, unless government guarantees, explicit or implicit, are further extended to insure the lenders against loss. Lenders have been supplying most of the money, and taking most of the risks. They may eventually get smarter.

Patient renter in OC

[patientrenter]

sdr, leverage only increases the return as long as lenders agree to charge less (after tax) than the rate of (after tax) increase in home prices. This ‘free money’ may be less free in the future, unless government guarantees, explicit or implicit, are further extended to insure the lenders against loss. Lenders have been supplying most of the money, and taking most of the risks. They may eventually get smarter.

Patient renter in OC

[NotCranky]

The returns on housing have historically been so great because of the levera”ge and tax benefits associated with that leverage.”

sdr, Thanks for reminding me. I am recalling the last ten years and what those little down payments did since 1997.

From Patient,
“sdr, leverage only increases the return as long as lenders agree to charge less (after tax) than the rate of (after tax) increase in home prices.”

Patient Renter, If I understand you the paragraph below applies, if I don’t perhaps you could explain?

Interest rates don’t affect the appreciation outcome in an isolated fashion like that. As long as your fixed mortgage and costs are near ,at or less than what you would be paying for rent all appreciation and the tax benefits are gains regardless of the rate on the mortgage. As time goes by the mortgage(fixed) generally becomes progressively cheaper than rent ,principal gets paid down, appreciation at some rate is applied and viola the miracle of home ownership is in full gear.All these benefits can be aquired with no or little capital. Of course if the real market value is depreciating you are losing money and suffering opportunity costs as the wealth goes up in smoke, but any savings against rent and taxes,again regardless of the rate, off sets the depreciation.

Disclaimer: I am not saying anyone is throwing away money by renting right now.

[NotCranky]

The returns on housing have historically been so great because of the levera”ge and tax benefits associated with that leverage.”

sdr, Thanks for reminding me. I am recalling the last ten years and what those little down payments did since 1997.

From Patient,
“sdr, leverage only increases the return as long as lenders agree to charge less (after tax) than the rate of (after tax) increase in home prices.”

Patient Renter, If I understand you the paragraph below applies, if I don’t perhaps you could explain?

Interest rates don’t affect the appreciation outcome in an isolated fashion like that. As long as your fixed mortgage and costs are near ,at or less than what you would be paying for rent all appreciation and the tax benefits are gains regardless of the rate on the mortgage. As time goes by the mortgage(fixed) generally becomes progressively cheaper than rent ,principal gets paid down, appreciation at some rate is applied and viola the miracle of home ownership is in full gear.All these benefits can be aquired with no or little capital. Of course if the real market value is depreciating you are losing money and suffering opportunity costs as the wealth goes up in smoke, but any savings against rent and taxes,again regardless of the rate, off sets the depreciation.

Disclaimer: I am not saying anyone is throwing away money by renting right now.

[NotCranky]

The returns on housing have historically been so great because of the levera”ge and tax benefits associated with that leverage.”

sdr, Thanks for reminding me. I am recalling the last ten years and what those little down payments did since 1997.

From Patient,
“sdr, leverage only increases the return as long as lenders agree to charge less (after tax) than the rate of (after tax) increase in home prices.”

Patient Renter, If I understand you the paragraph below applies, if I don’t perhaps you could explain?

Interest rates don’t affect the appreciation outcome in an isolated fashion like that. As long as your fixed mortgage and costs are near ,at or less than what you would be paying for rent all appreciation and the tax benefits are gains regardless of the rate on the mortgage. As time goes by the mortgage(fixed) generally becomes progressively cheaper than rent ,principal gets paid down, appreciation at some rate is applied and viola the miracle of home ownership is in full gear.All these benefits can be aquired with no or little capital. Of course if the real market value is depreciating you are losing money and suffering opportunity costs as the wealth goes up in smoke, but any savings against rent and taxes,again regardless of the rate, off sets the depreciation.

Disclaimer: I am not saying anyone is throwing away money by renting right now.

[patientrenter]

Rustico, that’s the right stuff (in your paragraph).

But the point I was really making is that investors supplying money for new home loans may demand a higher return over the next 10-20 years, in comparison to the rate of HPA, than they got over the last 10-20 years. This debacle will show them that they’re the ones providing most of the money and taking most of the risk, something they haven’t really appreciated until now. The only way around that is a lot of ‘sorta dumb’ money not seeing the risk in front of their noses, or at least choosing to ignore it for bigger reasons.

Patient renter in OC

[patientrenter]

Rustico, that’s the right stuff (in your paragraph).

But the point I was really making is that investors supplying money for new home loans may demand a higher return over the next 10-20 years, in comparison to the rate of HPA, than they got over the last 10-20 years. This debacle will show them that they’re the ones providing most of the money and taking most of the risk, something they haven’t really appreciated until now. The only way around that is a lot of ‘sorta dumb’ money not seeing the risk in front of their noses, or at least choosing to ignore it for bigger reasons.

Patient renter in OC

[patientrenter]

Rustico, that’s the right stuff (in your paragraph).

But the point I was really making is that investors supplying money for new home loans may demand a higher return over the next 10-20 years, in comparison to the rate of HPA, than they got over the last 10-20 years. This debacle will show them that they’re the ones providing most of the money and taking most of the risk, something they haven’t really appreciated until now. The only way around that is a lot of ‘sorta dumb’ money not seeing the risk in front of their noses, or at least choosing to ignore it for bigger reasons.

Patient renter in OC

[sdduuuude]

A decent question rb_engineer.

Rich addressed this a long time ago – maybe someone else has the link bookmarked.

Basically, if you believe that the ratio of home prices to wages is too high and has to come down to historical levels, then one of two things (or some of both) must happen: home prices drop or wages increase.

So, if home prices don’t collapse, they will have to remain flat until about 2020 to give wages time to catch up to a reasonable level.

For those who do feel the home price/wages ratio is a little high, but don’t look behind the median graph chart and examine rates, sales/inventory ratio, credit markets, the reliance of employment on the housing market, and other factors that hint at what is to come, this is one of many possible scenarios.

For those who do loook at such forward-looking factors, flat pricing until 2020 isn’t all that likely. Pricing will likely give.

[sdduuuude]

A decent question rb_engineer.

Rich addressed this a long time ago – maybe someone else has the link bookmarked.

Basically, if you believe that the ratio of home prices to wages is too high and has to come down to historical levels, then one of two things (or some of both) must happen: home prices drop or wages increase.

So, if home prices don’t collapse, they will have to remain flat until about 2020 to give wages time to catch up to a reasonable level.

For those who do feel the home price/wages ratio is a little high, but don’t look behind the median graph chart and examine rates, sales/inventory ratio, credit markets, the reliance of employment on the housing market, and other factors that hint at what is to come, this is one of many possible scenarios.

For those who do loook at such forward-looking factors, flat pricing until 2020 isn’t all that likely. Pricing will likely give.

[sdduuuude]

A decent question rb_engineer.

Rich addressed this a long time ago – maybe someone else has the link bookmarked.

Basically, if you believe that the ratio of home prices to wages is too high and has to come down to historical levels, then one of two things (or some of both) must happen: home prices drop or wages increase.

So, if home prices don’t collapse, they will have to remain flat until about 2020 to give wages time to catch up to a reasonable level.

For those who do feel the home price/wages ratio is a little high, but don’t look behind the median graph chart and examine rates, sales/inventory ratio, credit markets, the reliance of employment on the housing market, and other factors that hint at what is to come, this is one of many possible scenarios.

For those who do loook at such forward-looking factors, flat pricing until 2020 isn’t all that likely. Pricing will likely give.

[cr]

What’s so bad about prices declining? Most people here are either for it or expect it even if they lose some equity. Those avidly against it we tend to drive away, so I am just posing the question: so what if prices fall 50%? They went up 2-300% or more in some places. Even if realistic circumstances could sustain that why wouldn’t we want prices to fall?

Equity isn’t wealth until the house is sold, and that requires someone with MORE money who can afford your house.

In theory buyers, banks, and investors should be fine no matter how low prices go, but skyrocketing defaults leave buyers and lenders facing the consequences of poor business, deception, and outright lying. That’s rough, but if I placed my life savings on red 7 and lost, should the government have to give me my money back?

People are against prices falling because of the sense of entitlement derived from abnormal appreciation. I think people felt like they deserved to be millionaires when their 3br 2ba 1500sq ft house went from $400,000 to $1,000,000 in value, as if they earned it. They didn’t do anything!!

I think “the everyone wants to live here” claim is a cop out. Even the best cities have bad parts where people with money won’t live. SoCal, from SD to Santa Barabara is a great place to live, but there are plenty of equally nice places across the US, and other countries. International money will do a little, but as soon at the values drop they’ll bow out too.

Outside the dollar eqauling the peso, or incomes doubling next year, I can’t think of anything that will sustain these prices.

The past bubbles have overcorrected, and I hope this one does too. After a few years of correction, as suggested we think, it will be a positive. Those who foreclose, may actually be able to afford a house again, and those who are priced out or weren’t foolish enough to get into an overpriced market may too.

In the end, all this will be is a more painful way to have gotten to the historical average increase in prices. The result is people will be able to afford houses with a fixed loan. Now that’s just crazy!

[cr]

What’s so bad about prices declining? Most people here are either for it or expect it even if they lose some equity. Those avidly against it we tend to drive away, so I am just posing the question: so what if prices fall 50%? They went up 2-300% or more in some places. Even if realistic circumstances could sustain that why wouldn’t we want prices to fall?

Equity isn’t wealth until the house is sold, and that requires someone with MORE money who can afford your house.

In theory buyers, banks, and investors should be fine no matter how low prices go, but skyrocketing defaults leave buyers and lenders facing the consequences of poor business, deception, and outright lying. That’s rough, but if I placed my life savings on red 7 and lost, should the government have to give me my money back?

People are against prices falling because of the sense of entitlement derived from abnormal appreciation. I think people felt like they deserved to be millionaires when their 3br 2ba 1500sq ft house went from $400,000 to $1,000,000 in value, as if they earned it. They didn’t do anything!!

I think “the everyone wants to live here” claim is a cop out. Even the best cities have bad parts where people with money won’t live. SoCal, from SD to Santa Barabara is a great place to live, but there are plenty of equally nice places across the US, and other countries. International money will do a little, but as soon at the values drop they’ll bow out too.

Outside the dollar eqauling the peso, or incomes doubling next year, I can’t think of anything that will sustain these prices.

The past bubbles have overcorrected, and I hope this one does too. After a few years of correction, as suggested we think, it will be a positive. Those who foreclose, may actually be able to afford a house again, and those who are priced out or weren’t foolish enough to get into an overpriced market may too.

In the end, all this will be is a more painful way to have gotten to the historical average increase in prices. The result is people will be able to afford houses with a fixed loan. Now that’s just crazy!

[Author]

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