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cooperthedogParticipant
“In God We Trust. Everyone Else Bring Data”
This is a great mantra, unfortunately many of the posts in this thread either resort to name calling or improper analysis of the data (or a lack of understanding of statistics).
First off, calling anyone a liar is irresponsible. If you really think it was Mr. Gin’s intent to deceive the public, then provide proof. Otherwise, agree to disagree respectfully. Economic/market forecasting is extremely difficult, and countless professionals from the fed chairman to small business owners are humbled regulary. This does not mean that they are lying, deceitful, or overtly biased.
The previous post by “kristinejm”, discussing forecasting models is spot on. It is obvious that “powayseller” disagrees with Mr. Gin’s model, yet s/he proffers an alternative that relies on one data point:
“Sales prices are down 10-20% or MORE! My friend who’s a
realtor told me his buyer just got a house for $480K, that
the seller had paid $540K, so the seller had to bring
$60K to closing.”A convincing anecdote, caps and exclamation point to backup the veracity. Any hot stock tips while were at it?
masayako proposes 2 “honest” questions:
Paraphrased, the first chastises Mr. Gin for not stating that prices will drop significantly, while saying prices in areas have dropped 15%. This is like an securities analyst stating the overall stock market will not decline significantly, while a critic challenges that by citing certain stocks or sectors are already down 10-15%. The overall market analysis is never going to be congruent with all sectors, and labeling someone a liar due to this is in very poor form. The question in itself is valid (i.e. Mr. Gin, how does your model account for significant pockets for weakness in the market, and will this eventually spread to all sectors, etc.).
The second multiple choice question is just asanine, and masayako’s analysis is very biased. To claim to not have called one a liar, but merely asked if one is a liar, yet offering the accused two alternatives (bias or ignorance) is a loaded question. Mr. masayako, I think its fair to ask, are you ignorant, uneducated, or both?
In this thread their is discussion of the median price data as “useless”, yet another member “JohnHokkanen” sites hard data regarding the dramatically increasing inventory & sales slowdown at the high-end of the market (an excellent post, with very reasonable conclusions). Since the median is derived from splitting the population at the midpoint, and inventory data at the high-end is much higher (and sales, presumably much lower), it would mean than more houses in the lower price ranges are selling, which would skew the median DOWN, not up.
Also, granularity of data is important. It is akin to stock market averages. If the Dow or SP500 is up, that gives a good approximation of the overall market, yet various sectors will have there on averages and medians that may be inverse of the overall market. This filters down to an individual stock, which is can vary wildly. A correlation can be made to the housing market. JohnHokkanen’s approach of housing “sector” analysis by neighborhood (or by condo vs. SFR, or what have you), is a great way to increase the granularity for decision making, yet, as he notes, the median is still a valid and useful overall indicator (especially when viewed in a longer timeframe). Also, another correlation to the equities markets can be noted in housing inventory to future housing prices, similar to the bid-ask on a security. The more inventory/supply at the ask, with a weakening bid signals declining prices in the future.
In essence there is alot of data, and numerous ways to intepret it. I think almost everyone on this board would agree that the hard data points to flat or decreasing market prices overall, the degree & timeline is up for debate, and no one on this thread, including Mr. Gin, said otherwise.
The botton line: Put up or shut up.
I assume that the posters on this board who are convinced that the overall SD market is in collapse are trading CME housing futures for windfall profits, since the “powayseller” quoted 10-20% price drops don’t match the modest (1-2%) decline in the August 06 contract (nor the 3% decline in the May 07 contracts…).
Here is a link to a chart of the Aug06 San Diego contract:
http://chartsrdc.cme.com:443/cs/charts.jsp?_symbol=SDG&_month=-1Note that these contracts are indexed to the Case-Shiller data, which is generally regarded as an accurate indicator of overall housing prices. I’ve appended the index values for San Diego since 2004:
January 2004 186.33
February 2004 189.89
March 2004 196.40
April 2004 203.64
May 2004 210.94
June 2004 218.18
July 2004 224.22
August 2004 227.67
September 2004 230.64
October 2004 232.28
November 2004 232.63
December 2004 233.08
January 2005 233.78
February 2005 235.64
March 2005 236.56
April 2005 239.58
May 2005 242.00
June 2005 245.35
July 2005 247.33
August 2005 248.45
September 2005 249.03
October 2005 249.79
November 2005 250.34
December 2005 248.55
January 2006 247.46
February 2006 247.89
March 2006 248.09
April 2006 249.35
May 2006 249.15Note that the CME Aug06 contract is trading at ~247 and May07 at ~242 (1% & 3% declines from May06, respectively). I don’t believe I’ve seen this data on the site, so I may repost the futures information as a new thread.
With that said, the posters who feel so strongly about the unrealized housing market decline and the “lies” that are being spread, now have a great opportunity to profit. Hopefully they will focus their energies is such a constructive manner, vs. inane name calling.
cooperthedogParticipantIn response to the clear, but oversimplified view of using an I/O loan, where tax savings would remain constant:
When using an amortized loan, the scenario becomes more complex, but with significant changes. As tax savings decline due to less interest paid, equity is increasing at a faster rate. This should be accounted in a long term analysis (very long term, as I think it takes ~23 years before the halfway point is met in a 30 year loan). Also, as rents rise (and more equity is “paid”), there will come a point where the monthly rent payment is equal to the mortgage. Of course, you have to compare the whole timeline of events, otherwise its apples to oranges.
Since jumping into the market (any market) results in risk, and as a previous post stated, you will be highly leveraged, I would take the time to build a spredsheet to model all these costs and variables and plot the data over the life of a 30 year loan.
Your goal is to have a core sheet with variable inputs (home appreciation/depreciation over the next X years, increase in rents per year, investment return, marginal tax rates, etc.) that will determine the growth of each scenario, basing everything relative to a fixed mortgage paymnet & 120K in capital (so you’ll have a chart with rent vs. buy over the years, adjusting variables to give you best & worst case scenarios, with a crossover line to determine how long you will need to own to be better off than renting (or how long before you can sell without a loss).
This core sheet will be fed by three others; tax projections, costs, & rates of return.
To be accurate, you should build a tax sheet to estimate your taxes as a renter, and each year as a buyer, since your interest expense declines each year. Assume your income, tax rates, etc. all remain constant… though you could tweak these too to see what happens during a big promotion or job loss (tax “savings” disappear, but the mortgage payment doesn’t…). Also, be sure to evaluate whether the Alternative Minimum Tax (AMT) will affect you (you may get a surprise when you find the AMT disallows a big chunk of your interest deduction). You will now have the difference between your taxes as a renter and buyer over 30 years.
Build a cost sheet to calculate the increase in rents per year and the increase in all ownership costs (insurance, HOA (they will go up), property tax, routine maintenance, major repairs, etc.). You must subtract the tax savings (step above) from the home ownership costs, but leave the princpal in (since this is accounted for elsewhere). The difference between these will be used each year to determine the amount of savings (or loss) that can be used by the renter for investment.
Build a return sheet that tracks the renters 120K investment in some financial instrument (initial amount + savings/loss from renting (step above), multiplied by what rate of return you expect, less tax (use a rate that accounts for long term cap gains vs. short term income, dependent on your investment/trading style). You will end up with the value of the investment at years end, which you will use as the start for the next year (inputing the new savings/loss from renter & upping the marginal tax rates as the compounding accelerates). Do this for each of the 30 years. Plot this as your rental return on 120K.
For the buy scenario return, fully amortize the loan into a table that records the remaining debt each year. Then, determine the rate of appreication on housing, using your purchase price as the base. I would set your appreciation rate variables in two 5 year chunks & a 20 year. This will allow you to test how a downturn vs. flattening will affect you in the near term, and a rebound would in the intermediate term. For the remaining 20 years, use a historical growth average for your geographic market. You should now have the market value for the house over 30 years. Subtract the debt from these amounts (amortization table) to come up with your equity. Now subtract 5-7% of the market value for sales costs (broker fees, transfer tax, closing, house prep, etc). You now have your true equity should you decide to sell (if your market value exceeds you purchase price by > 250k (500k married) you will need to subtract tax from the amount over (remember, tax laws change, and the huge deduction may be reduced or disappear)). Plot these values, which tracks the growth of your 120K downpayment. You should now have to plots that compare rent vs. buy on 120K. You should tweak the variables in your core sheet to evaluate various scenarios.
I think you’ll find that owning will take a few years to exceed renting even with the most optimistic of housing market growth (up 5-10% by 2008 – good luck there). Near term price declines or even flattening will paint a very bleak picture, but over the very long term housing will be the clear winner (even if housing only returns at the rate of inflation, you’re still better off since you’ve fixed your payments for housing, which you always have to incur (vs. a true investment property, which could be a poor choice if it doesn’t exceed inflation). Of course, most people do not stay in a home for 20-30 years, and life circumstances could force a move. Conversely, owning a house is forced savings, as most renters will not save the difference between a rent & mortgage payment.
I guess you could liken it to investing in the stock market. Someone on the sidelines, never jumping in will suffer from sub-standard returns. Someone jumping in at the worst possible time will severly overpay, but over the long haul you will come out ahead, even if investing at a market top. On the other hand, why wait 5 years for a rebound to break even. You definitely want to reap the benefits of home ownership sometime in your life, but why not wait and see what the market does? If prices decline or even remain flat, stay put and enjoy the spread on rent savings, update your spreadsheet with new prices, and patiently wait until there is proof of a bottoming out or accelerating gain.
I know this is alot of information, but hopefully it will help.
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