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July 28, 2006 at 8:01 AM in reply to: Dowtown condo buyer “unconcerned” about overpaying $24K on commission #29932
Daniel
ParticipantFor now, the bond market seems to believe that inflation is not likely to be a significant problem in the future. However, it is telling us pretty clearly that a recession is around the corner.
ParticipantAt Arabella, MLS# 061049542 (plan 1) is listed at $775K-$850K (down from $795K-$850K). Since the builder is selling plan 1 units in the low 700s, I can’t quite see how that sale is going to work. Purchase price on 10/12/2005 was $848K (thanks, Equalizer!).
ParticipantYeah, Equalizer, how do you get that info? There are a few more flippers in Airoso that I would like to look up.
Thanks,
DanielPS: nevermind, I think I got it. It doesn’t work for all addresses, though.
ParticipantCarriage Run (another Pardee development, very similar to Arabella, but on the south side of 56) has just started to list on the MLS as well (no price cuts yet).
And speaking of Arabella, there is at least one flipper unit there as well, also priced about $100K above the buider’s new price.
ParticipantRegarding the “core” and “full” CPI: both numbers are in the open for everybody to see. And most (if not all) of government benefits are based on the full CPI, not the core. So it’s unfair to blame the government for massaging the core figure, as they don’t actually use it to compute benefits. The core CPI is of great interest only to the Fed and to Wall Street.
I saw a graph of the full and core CPI over the past 20 years, and it looks exactly how one would expect it to look: big up and down spikes for the full index, while the core index looks like a moving average of the full CPI. Looking at the 2 graphs, it is quite clear that the core captures the overall inflation trend much better than the full index, which swings wildly.
On a side note, the government did indeed mess up the CPI calculation in the 70s, when, faced with high inflation, they started to change the formula to make it more friendly. Their credibility went out the window in the process, and long-term bond rates took off. They won’t make the same mistake again (at least, I hope they won’t). The bond market is not stupid, and, if it smells CPI foul play, then watch out!
ParticipantPS: the flipper unit is MLS 061031750.
PPS: the area is brand new, and yes, it is Carmel Valley (just off 56 at the Carmel Valley Road exit). There is a lot of construction coming down the pike in that area over the next 5 years (the Pacific Highlands Ranch master planned community, with a dozen subdivisions or so).
ParticipantYes, this is the Airoso development, and those units are listed by the builder. There are also some flipper units on the MLS, but they are now suudenly priced $100K too high…
Participant“So with rents being a ton of the CPI what do you think the cpi is going to show in the future?”
You got me there. It could go either way, and I would hate to venture a guess at this point (predictions about the future are not my strong point; cold observations about the present are much easier to make :-).
ParticipantNot bored at all, but I think you’re dead wrong regarding the CPI. I believe it is what it is, and it’s not being “manipulated” (the bond market seems to think so as well, if you look at the spread on TIPS).
I know I’m probably going to be in minority on this board, but I believe the CPI is actually very well computed. I did look it up, and yes, “owner’s equivalent rent” and “hedonics” and all that make perfect sense to me (although you got your hedonics example backwards). I’m sure we could argue this at length, and I’m pretty sure that you’re going to offer a scathing rebuttal to my post, but I thought that a little difference of opinion would be helpful. Truth is, I’m getting a bit tired of all the “government is lying, AG and BB are morons, depression is coming, end of the world is near, get your gold bars and tuna cans and hide in the basement” attitude prevalent on most housing blogs.
And yes, we do experience higher inflation in SD, but the CPI is for the US as a whole, not for SD. In the euro area they had 1-2% inflation the past few years; but it was more like 8% in Ireland and Spain, while Germany was deflating. Personal perceptions can be very misleading. As they say, “In God we trust; everyone else bring data”.
ParticipantYes, the volume is quite pathetic. But that may change in the future, who knows.
Regarding the CME housing futures, I have a couple of tough questions regarding the index calculation: first, can they take into account rebates (such as help with closing costs)? Based on my personal observations, these average about 2% of purchase prices right now in SD, up from nil the years before. Second, how in the world can they account for improvements? I know they do all sorts of analyses and outlier elimination to weed those out, but I think it’s next to impossible to come up with an accurate picture. Say I buy a $500K house, I put $100K of improvements on it, then sell it for $580K. For the purpose of the index, did the house increase in value by $80K? Did it decrease in value by $20K? Somewhere in between? It’s a hard question; I have no idea what the correct answer would be.
I’m sure they do the best work they can to come up with an index that is as accurate as possible. I’m just not sure that even the best effort could capture all features of the market.
ParticipantWell, in general buying is way better than renting, no brainer here. But there are times when this relationship is turned on its head. One of those times happens to be right now (at least in SD).
Wall Street could have said in 2000 that stocks in general perform way better than cash. Strictly speaking, that would have been true as well.
PS: gotta love the observation that homeowners are worth 36 times as much as renters (which is probably true, I have no reason to doubt it). But I happen to know a thing or two about statistics, and I can offer an even better investment idea: people who own Rolex watches are worth on average 500 times as much as those who don’t. However, before you rush to your favorite watch dealer to do a 100% financing on a Rolex, you would do well to remember that correlation and causality are very different things…
ParticipantIs that the Airoso development, by any chance? I know that area fairly well. If so, I think you forgot to add the Mello Roos taxes (total tax rate is something like 1.8%, I think, rather than 1.25%). Also, the rent you’re using may be a bit high. $2,200 is possible, but $2,500 quite unlikely, I think.
You may also want to include realtor fees. When you sell, 3 to 6 percent of the selling price will go to agents (even if you do FSBO, you’ll probably have to offer a buyer’s agent commission, otherwise nobody will show up). There may also be carrying costs if your house stays empty on the market for several months until it is sold. If you decide to use a figure of 5% for “selling expenses”, and you plan to stay in the house for 10 years, that works out to about 0.5%/year.
As for the risk premium, this is very hard to estimate, as it depends on sentiment in the market. But now that I think about it, you may have taken it into account already, without realizing it. This is because you didn’t assume any price appreciation at all. A correct calculation would have assumed a historical price appreciation of, say, 4%/year, offset by the risk premium, which historically also runs at about 3-4%. Considering further price appreciation in these bubblicious times smacks of craziness, but a cold logical calculation would actually need to include it.
Your method (assume you buy the house at 600K and sell it at the same price later on) is probably as fair as it can be. But, if you assume that the selling price down the road is 500K or 700K, your results, as they say, will vary 🙂
And a personal perspective: I did a “buy vs rent” calculation for myself, and, like you, I found that the numbers were in the same ballpark (a bit cheaper to rent). But I judged, based on historical trends, that the risk of a price decline was substantially higher than the risk of a price increase, so I decided to wait for a few years.
Daniel
ParticipantMr Wrong,
You’re actually “wrong” in a very subtle way (this is leaving aside the obvious opportunity cost issue, which many others already pointed out). It all has to do with risk premiums.
The interesting thing is that a “buy vs. rent” analysis would – surprisingly for most on this board – conclude that the housing market is fairly priced, as you noticed.
However, the same analysis done at any point in the past decades would have shown buying to be a screaming deal when compared to renting. Simply put, buying a home has always assumed an implicit risk premium, which has now all but disappeared.To better understand this, I recommend that you read a very, very good housing paper at:
http://neweconomist.blogs.com/new_economist/files/HSBC_frothfindingmission.pdf
The section “Using a zero-risk premium” precisely addresses your observation. I’ll cite from it:
“Could it be that house prices in the past 30 years that we have data for have always been ridiculously cheap and that it is only now that house prices are moving towards fair values?
Not likely. These calculations assume a zero housing risk premium. But who cares about a risk premium? After all, this is a home, not an investment.
Unfortunately, this is the equivalent of saying that if you hold stocks for a long enough time period (a few decades), and you are sufficiently diversified, then history shows that stocks have proven to be no riskier than bonds, and therefore one should apply a zero-risk premium to stocks.
On this basis, today’s Dow Jones should be north of 50,000 instead of 11,000, taking the PE ratio from 19 times to about 100 times or more. Of course, many did start to think that way in the late 1990s, with the publication of ‘Dow 36,000’, one of the more notable book titles of the tech-bubble era.”
Daniel
ParticipantFolks, read the paper, it’s pretty good (although perhaps a bit too techical for some).
The title is catchy, but the paper doesn’t really address the issue of current deficits, external creditors, etc. It’s a piece solely focused on the BIG picture of inter-generational accounting. It states that there is no way in hell that US can meet its obligations promised to the older generations under Social Security and Medicare. That’s not a surprise for anybody, I think. AG told Congress something to the effect that “you can pass any laws you want, but you can’t change the laws of mathematics”. Simply put, Social Security and Medicare promises will be cut, one way or another.
Does that constitute “default” and “bankruptcy” for the US? Well, in a strict technical sense, it does, because US can’t meet an obligation it promised to its “creditors” (older generation). But that’s not what most people would consider a default. If Congress passes a law tomorrow cutting Social Security benefits, I don’t think any paper will have “US Declares Bankruptcy!” on the front page.
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