[(former)FormerSanDiegan]

If rates are 15-20% what will be the annual increase in rents ? Will they track inflation ? If they are even close, then in that scenario the bulk of the price correction will be in rent increases, not price declines.

In fact, if you believe that we will see 15% rates in the next few years, wouldn’t it make sense to lock in a loan now (even on a 40% overpriced property), if you can lock in 6% and pay back in a 15% interest rate environment. IF you assume inflation and rates roughly track eachother that might mean inflaiton in the 12% range.

At 12% inflation the dollars you borrowed at 6% are worth half as much 6 years later. Even if homes fall in value by 6% in real dollars per year you come out ahead.

Rates jumping 9% and the accompanying inflation over the next few years would not benefit a bubble sitter IMO. That scenario favors the property owners.

[(former)FormerSanDiegan]

studenteconomist –
I agree with you that the multiplier depends on the interest rate. I’ve made this same point in other posts.

Look towards the bottom of the following …

http://piggington.com/sell_or_hold_if_mortage_is_roughly_equal_to_rent

In an 8-9% 30 yr fixed rate environment a multiplier of 10x-12x made sense.

My point was to underscore that these data show that at the worst point things broke even with 10-20% down. Some people thought it was a better cash flow environment than that to purchase at the bottom. This is why I am expecting about a 20% decline in nominal prices over 5 years, assuming 3-4% wage growth and interest rates in the same range as today.
sale of my primary residence to

[(former)FormerSanDiegan]

powayseller –

I have always had some portion of my investments long the market since the mid-90’s. (I also have had continuous holding of real estate and cash since then.) I try to reduce my risk by putting significant portions into cash or other investments from time to time. Over the last year I have been increasing my cash position from about 5% to about 35%, anticipating buying opportunities in the stock market this fall (and making sure I have enough cash cushion to soften the real estate blow).

Re: Stock fundamentals: The S&P 500 stocks show a year-over-year double-digit increase in earnings for the past 12 quarters. If the the current earnings season holds form, then it will be 13 straight quarters of double-digit earnings increases.

It’s gotta slow at some point, right ?

[(former)FormerSanDiegan]

Excellent research ! At the absolute null in 1995, it was slightly below 10, staying there for less than two years.

At the end of ’95-early ’96 the 30-year rate was in the 8-8.5% range.

Let’s look at it from an investment standpoint.
Wwould buying a SFR as a rental at that time result in positive cash flow ?

Assume 8.25% loan
1.2% property tax
$50/month insurance
150K property

Using 9.5x rent implies a rent of 1315 per month

100% LTV:
PITI = 1127+150+50 = 1327
Negative cash flow of $12 per month before maintenance, etc
So, with No down, so there is no way to break even before tax considerations (I’ve also ignored PMI or increased rate due to 100% LTV).

90% LTV
PITI = 1014+150+50 = 1215
Postive cash flow of $100 per month before expenses and excluding tax considerations. Probably not break even after expenses, but positive after tax considerations.

80% LTV
PITI = 901 + 150 + 50 = 1101
Positive cash flow of $214 per month. Modest positive cash flow before tax considerations or considering opportunity cost of the down payment.

Conclusion : Previous low point in San Diego resulted in marginal (break even) cash flow from rental properties with 10-20% down.

[(former)FormerSanDiegan]

powayseller incorrect statements …

1. The S&P 500 P/E ratio is not 25
You are incorrect. According to Standard & Poor’s (who happen to run the index – see reference at bottom of this post) they reported a P/E of 17.83 as of 1Q 2006. Current earnings on the S&P 500 are coming in about 10-14% higher than a year ago and the index has not climed that much in the same period. You are off by about 40% ! If this is one of the reasons you expect a correction of a certain magnitude then be prepared to be off by 40%.
By the way a P/E of 17.83 corresponds to and earnings “yield” equivalent of 5.6%. Compare this to alternative investments.

2. The current rally has not been limited to a few Dow stocks. It has been broad. See previously posted charts showing broader indexes outperfming the Dow since 2003 and tracking the Dow since the start of the summer rally.

You may be correct that the stock market corrects or declines over the next six months. But you are basing your decision on false premises not facts.

S&P Fundamentals
http://www2.standardandpoors.com/servlet/Satellite?pagename=sp/Page/IndicesIndexPg&l=EN&b=4&f=1&s=6&ig=48&i=56&r=1&xcd=500&fd=IndexLevelFundamentals_500

[(former)FormerSanDiegan]

Was the Moody’s article claiming another 8.5% from the time of publication or a total of 8.5 ?

I could see another 8.5% for a total of 16.6% being an estimate within the range of possibility. Sure that’s relatively optimistic, but not really bullish.

– – – – – – – – –

I looked back and Moody’s claim was peak-to-trough. Too bad, they could have had some more credibilioty with an additional 8.5 %.

[(former)FormerSanDiegan]

LOOK FROM THE PREVIOUS LOW IN 2003 UNTIL TODAY YOU WILL SEE THAT BOTH THE S&P 500 and NASDAQ HAVE EXCEEDED THE RETURN ON THE DOW. These are broad indexes.

By looking back to 2000, your sources are showing you that the DOW fell less than the NASDAQ and the S&P 500 from 2000 to 2003, but since then, the broader indices have grown MORE THAN THE DOW.

The statement If you look at broader market averages, such as the S& P 500 or the NASDAQ Composite, the former is about 13% below its 2000 high, while the latter is 55% below. is due solely to the fact that both of these indexes FELL MORE THAN THE DOW FROM 2000-2003. FROM 2003 to the present they hace EXCEEEDED the DOW

Stop eating this spoon-fed bull$h!t. Look at the numbers yourself. Did you actually look at the chart. Make a chart yourself.

Can you not see that the S&P 500 has grown more than the Dow since March 2003 ? This rally is broader than a few Dow stocks. It’s right there in the data.

If you can’t see it, then I can’t help you. I just want to make sure it is perfectly clear that both the recent rally off the summer lows and the 3.5 year bull market starting in 2003 are broader than a few Dow stocks.

I’m simply trying to be fair and balanced and occasionally provide data and reality checks on this board. There is too much spoon-fed crap that people need to look behind the numbers.

[(former)FormerSanDiegan]

powayseller –

I posted charts showing that the current rally over the last 3 months has been identical for the S&P 500 as well as the DOW.

I also posted a 5-year chart showing that the S&P has tracked the DOW over that period and furthermore that chart shows that since the current Bull market started in March of 2003, the S&P 500 has made up ground on the DOW.

Do you still believe that the recent rally is due to a few Dow stocks ?

[(former)FormerSanDiegan]

cabinboy – yes … a very big IF.
In my particular case I do not know the future, so I tend to be rather diversified across stocks, cash (more these days), and property. But that’s just me.

[(former)FormerSanDiegan]

Diversification does not make sense if you know you are correct about the future direction of given investment alternatives.

[(former)FormerSanDiegan]

PS –

There is no discrepancy. Chris’ chart is a 13- YEAR chart.
I plotted the currect rally which is THREE months

The current rally is NOT DUE TO A FEW DOW STOCKS.

Furthermore, the underperfomance of S&P 500 verdsus Dow on Chris’ chart all happened between 2000 and 2003. This is OLD NEWS. Since 2003 The S&P 500 and the DOW have tracked nearly identically. GO look at Chris’ chart and see it. The gap between S&P and DOW has remained constant for three years,

If you look over the last FIVE YEARS (chart below), you can see that the NASDAQ has outperformed the DOW and that the DOW and S&P are about even. Go chart it and prove it to yourself. Don’t take some bullshit claim by some analyst that the recent rally was due to a few Dow Stocks. It is not. Click on the chart below to see.

[img_assist|nid=1822|title=FIVE YEAR DOW, S&P and NASDAQ|desc=|link=node|align=left|width=100|height=75]

[(former)FormerSanDiegan]

poway –

At the low point in SD house prices (’96), there were properties that could nearly cash flow with ~10-20% down.

The following is based on my personal experience at that time.
Example: Clairemont, 160K for a 3bed/1 bath.
20% down, 30-year fixed rate at 8.25% => 962 P&I
Taxes ~ 170/month
Insurance ~ 50/month
Total PITI : 1156

Rent : ~ 1100

With repairs and other expenses (vacancies) you needed to count on the depreciation deduction to come out positive.

[(former)FormerSanDiegan]

cawireman –

The problem with your initial formula is that the appreciation rate fluctuates wildly in the SD market.

At the last bottom of the market (~96) properties could be purchased with 10% down and rented out for about break-even cash flow. The 8-12x factor that powayseller pointed out, depends on interest rates. With high rates (e.g. 10-12%) then you would expect around 8x rent to make it cash flow.
With low rates (e.g. 6-7%) wou would expect around 12x to make it cash flow.

[(former)FormerSanDiegan]

I agree with LA_renter. The change in the inventory numbers is just the cat doing a flip in mid-air. Not a bounce. Save this post topic for 2008.

[(former)FormerSanDiegan]

Cash vs Stocks – Mean reversion

PS is correct that cash has done generally better than stocks since 2000.

Since cash has outperformed stocks over the last 6 years, why shouldn’t we expect some reversion to the mean since long-term stocks have averaged significantly higher returns than cash investments over the last 50 years ?

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