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(former)FormerSanDiegan
ParticipantAn old Classic feud from ps and sduuuude, with some interludes from docteur.
An instant classic, this was !ParticipantHopefully she is doing some research or getting her new business off the ground. In the mean-time I suggest that we drag out old Posts of hers. Sort of like a “Greatest Hits” collection.
ParticipantI prefer all-weather diversification.
Take your net worth and divide equally …
1/3 cash
1/3 equities (2/3 US , 1/3 International)
1/3 propertyI know this is very boring, but it held up after the Tech bubble burst and likely will hold up through the current burst as well as whatever comes next.
ParticipantPrediction Update :
S&P near 1340 today.October 3, 2006 at 10:35 AM in reply to: People still buying – masses have no clue about bubble #37134Participantsurveyor –
In my opinion, renting in So cal and holding cash flow real estate is a great idea, just hard for most to execute. Problem is that you have to purchase out-of-state to do so. Tough for the amateur to pull off without inimate knowledge of the rental area. Amateurs will tend to get screwed because of lack of connection to the area(s).
But this strategy is an excellent way to hedge your bets in the current environment.October 3, 2006 at 9:44 AM in reply to: People still buying – masses have no clue about bubble #37127ParticipantJosh –
When we hit bottom, nobody in their right mind will want to buy a house. We’ll be at a “permanantly lower plateau” and any initial run-up will simply be prices “correcting” a bit before they go lower. I wouldn’t worry too much about the competition as Pasadena broker suggests.
ParticipantPerhaps the future is not as obvious to the market participants.
October 2, 2006 at 10:34 AM in reply to: People still buying – masses have no clue about bubble #37016ParticipantSomeone living in Southern California would have to be living in a cave to not hear all the negative reports regarding the housing slowdown. I don’t buy the “masses have no clue” statement.
ParticipantThanks sduuuuuude. I was having the same problem.
Funny thing though. If someone is REALLY having trouble logging in, how are they supposed to respond to this post ?
October 2, 2006 at 9:42 AM in reply to: Is “highly desirable” property immune from the downturn? #37003ParticipantGreat example to illustrate that high priced areas tumble in downturns as well. (You just have to ignore the fact that the price tripled from the 40% overvalued 600K to the 40% overvalued 1.8 Mil, estimated by the author, in 2005). Seems to me that Ben is bragging here.
Participantps –
Yes, SF of 20 implies gross return of 5%. (1/20=0.05)
Think of it as a Price-to-earnings ratio for housing.The scale factor in the range of 8-13 (and the corresponding gross return of 7.6% to 12.5%) reflects people’s opinions of where they would buy or hold property. Again it is relative to other investments that matter.
A range of 8-13 is a huge range. (60% difference)
Why is this important ? If I think that homes will drop to 8x annual rent, but they only drop to 13x annual rent (because competing investments are in the 5% range), then my prediction for price lows will be off by ~60%.Property owners don’t determine the SF, the market does. Right now it is in the 16-20 range for SFR in San Diego(OUCH !)
I wholly expect this to correct to the 8-13 range. Does that mean that I expect a > 50% drop in the price. NO. If the ratio drops to 8 (12.5% gross yield), then inflation must be running high and the bulk of the drop in ratio would be due to rental increases. If the ratio drops to 13 (7.6% gross yield), then inflation must be low and the bulk of the drop would be due to price decline, but would be less of a decline.
September 29, 2006 at 12:05 PM in reply to: Sell or Hold if Mortage is roughly equal to rent? #36848Participantpowayseller –
On this board we look behind the numbers of median price reporting, carve up other statistics reported in the media, and hinge our positions on ratios of median income to median home price. Why should we blindly take someone elses rule-of-thumb multiplier of 10 or 8 or 13.3?
Let’s look at what that multiplier or Scale Factor means.
AnnualRent * ScaleFactor = PropertyValue
or in notation AR*SF=PV.Solving for SF
SF=PV/ARIf you want to consider the gross return on investment in the property you could compute
GR=AR/PV *100. So The percentage of return (gross) is the inverse of the ScaleFactor.
A ScaleFactor of 10 implies 10% gross return
A SF of 8 implies a 12.5% gross return
A SF of 20 implies a gross return of 4%This is why you need to consider what investment return rates on alternative investments yield when making an estimate or expectation of property value and determining what scale factor to use. (You also need a crystal ball to predict where rates will be 1,3,5 and 10 years from now)
If a single family home falls to the point where the scale factor is 8, but bond yields are at 4%, guess what happens ?An investor in that property will collect collect 12.5% gross rent, which might be >10% net after expenses. In an 4% world that is not sustainable and would likely lead to a significant increase in the price of the asset.
As far as the direction of rents. I believe that over a five year period they will at least track the rate of income increases. If you think incomes will stagnate than you will be right.
Participantpowayseller –
mephisto estimated low-end rent at $1300, which is consistent with today’s rental market for properties in the 300K range.
Rent at 1458 in 5 years would represent a total increase of about 12% (2.4% per year), which is feasible but probably on the low end.
If we see inflation at 2.4% per year, then that rent growth is reasonable. HOWEVER, if inflation is at 2.4% then bonds and cash flow investments would likely be in the 5% range. If the property value fell in half as you suggest, the cash-on-cash return for this property would be 10% minus expenses. That seems awfully high in a 5% world. In that scenario, I see more like a value of around 230K (13.3x annual rent instead of the 10x you used for equivalent yield of 7.5%)How much have median household incomes risen in San Diego in the last 5-6 years. I saw in another post (by DrHousingBubble under the “UCLA Anderson Forecast” thread) That level of income gain (~6%) per year would support more significant rise in rents.
ParticipantDr Housing Bubble – Median household incomes up by 45% over past 6 years. Please share the source.
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