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powayseller
ParticipantAnother option is to live in the duplex. If you pay off the loan of your SFR, you have free rent, but if you live in the duplex you have free rent, insurance, water, sewer, and trash, and the tenant on the other side is paying for it all. Meanwhile, your money is not tied up in equity in a paid-off house but is instead hard at work earning interest.
Participantsdrealtor is right, and I love the example.
jg, your graph proves the point that the median is a lagging indicator. The median is down 7% from its peak in Nov 05, but we’ve got houses down 20%. The Case-Shiller index is down only .98% from Sept 05 to Sept 06. Anyone looking at the median mistakenly thinks their homes is worth 5% less today. The median is so useless, that Bob Casagrand, a realtor who spends 3 days every month analyzing the MLS data in Excel, stopped posting it in his monthly report. Because the truth on the ground is so far off from the number.
Eventually, the median will show the decline. When the market turns around, the low end will pick up first, skewing the median down. So everyone tracking the median will think the market is still dropping, when in reality it will be on a rebound.
There is no way in the world you can know what is going on in housing unless you are on the ground, hitting the pavement, and talking with realtors. In my case, I talk with realtors as much as I can. We are very fortunate to have the wisdom of sdrealtor and SD Realtor and bloggers like Jim Klinge, Bob Casagrand’s newsletter, and my various realtor friends. You simply cannot understand housing by just looking at data, and I become more convinced of that as time goes on.
Employment and recession are lagging indicators of the economy, so it’s not news that a number can be a lagging indicator.
I just don’t understand exactly why the numbers lag by 18-24 months. Some of it is because as prices drop, people buy more expensive homes. First time buyers are priced out. Both reasons mean a greater percentage of the sales are higher end homes, but even those homes are worth less today than last year. Case-Shiller could be affected by all those kitchen remodels. Perhaps remodeled homes sold while unremodeled homes did not, so there is no outlier to throw out. 4 bedroom homes sell while 3 bedroom homes just sit…so many variables.
kristinejm – Steve is talking about incremental cost. There’s a baseline cost for the land, and each additional square foot costs $50 – $70 (or more).
ParticipantWhile rents have continued to rise in many big cities on the coasts, including New York and Los Angeles, they are falling in more than 80 percent of metropolitan areas across the country. – New York Times, Nov 2006
Rents are DOWN 20% in San Francisco since 2000. I’m now encouraged that rents in San Diego will fall a lot in the next few years.
ParticipantRiverside is in a huge bubble. The prices there should be half what they are now. Sales are down 24% from last year, and the months supply is higher than ours. The Inland Empire got hurt worse than San Diego in the last downturn, with bigger percentage drops in prices and sales volume.
ParticipantGood advice, Steve.
Participantsdsundevil, this is all part of the housing cycle, as I’m learning. In FL, the rents are dropping like crazy, as people who cannot sell their homes and banks with foreclosed properties are putting those homes on the rental market. FL is several quarters ahead of us in this downturn.
Rents here will flatten out or decline slightly next year, as the carrying costs of the 30% of vacant homes on the market becomes too high. Thousands of downtown condos will add to the rental pool.
Rents in SD have never gone into a bubble. They can’t. If rents get too high, people either leave town or double or triple up. Housing prices only got high because of exotic lending, but notice that housing payments cannot exceed 50% of income. People have stretched to pay 50% of income on a mortgage believing in appreciation, but they will not stretch that much for a rental.
So while your theory is interesting, it is pure folly. I suggest you google what is going on in Florida with their rents, and report back.
ParticipantI wanted to bring this thread back to everyone’s attention. The longer we wait to buy, the less we’ll pay for a house. A long-time realtor told me to wait until the bottom, and then buy a duplex. She said, “set yourself up for your retirement. Get some rental property. If you buy a duplex, you can live in one side and let the tenant pay your mortgage.” Sounds like a good plan. Maybe I’ll buy a single family home plus the duplex. All I know is this: the longer I rent, the more properties I’ll be able to buy.
ParticipantSelling a house and moving up to a more expensive house is not cashing out.
Your theory that lower prices will bring in more buyers is not borne out by the facts. People are irrational, so they buy high and sell low. That’s why most investors underperform.
If sales were dependent on lower prices, then why did sales INCREASE when prices INCREASED? Under your theory, sales should decrease as prices go up.
Likewise, sales decrease as prices decrease. We are back to 2004 prices, so why aren’t our sales going UP? As a matter of fact, our sales are way down from October 2004.
In October 2004, sales were 4700. Now we are back at those same prices, but our sales are only 3200. Why aren’t all those buyers who are waiting in the wings, jumping on the chance to buy at 2004 prices?
Because the lower prices get, the more people start to think, “The prices are getting lower, so I’ll just wait a little longer and see how low they’ll go…”
So your logic/theory is violated by real world facts.
ParticipantSolar energy is still very expensive. We planned to install solar panels on our house, and got a few estimates. It was about $25K (after the tax rebates), so there’s a 20 year payback period. Anyone planning to live in their house less than 20 years, or not having the money for this outlay, wouldn’t do it. Why did your friend choose gas over solar?
ParticipantCity % Overvalued
Austin, TX 17.7%
Dallas/Forth Worth, TX 15.2%
Corpus Christi, TX 14.2%
Lubbock, TX 11.9%
San Antonio, TX 11.0%
Beaumont/Port Arthur,TX 10.6%
Raleigh-Durham-Chapel Hill, NC 8.6%
Greensboro-Winston-Salem-High Point, NC 8.5%
Brownsville-Harlingen-San Benito, TX 8.0%
McAllen-Edinburg-Mission, TX 6.8%
Fayetteville, NC 3.9%Source: John Talbott, former investment banker at Goldman Sachs, visiting scholar at the UCLA Anderson School of Management
I would like to know which cities are NOT overvalued, and your proof.
Commercial real estate is in a bubble too. The December 6 2006 story in the Washington Post:
“The new story is the bubble in the commercial real estate market — offices, hotels and retail establishments — which has generated spectacular returns for investors over the past few years. Prices have risen to ridiculous levels, relative to the risk involved and the amount of income generated by these properties. But even those prices don’t seem to scare away pension funds, university endowments and Arab investors, who continue to pour hundreds of billions of dollars into real estate investment trusts, private-equity real estate funds and hedge funds that specialize in real estate finance.Exhibit A is the purchase of Equity Office Properties, the country’s biggest owner of office buildings, by the real-estate arm of the Blackstone Group, a private equity firm. What you need to know about this $36 billion deal is that 80 percent of the purchase price will be financed with debt, and that the “cap rate” — the rate of return from next year’s rental income — is an estimated 5.5 percent.”
Commercial real estate lags residential real estate, that is just basic knowledge. Sam Zell knows this all too well – he just sold $20 billion of REIT’s to a private equity group, cashing out of the commercial real estate bubble.
I think REITs are going to be hit hard next year. This economic slowdown will bring a glut of vacancies to that sector.
ParticipantDaCounselor, as I said before, people make the mistake of thinking that an investment or strategy which has worked before will continue to work, even when the conditions that allowed the good performance have totally changed. People also tend to extrapolate current conditions into the future.
Your advice of buy and hold real estate is bad advice for today’s times. You were fortunate that you were able to attain rental properties before this big bubble started, but from your comments and your own admission, it was pure luck and not any financial planning or genius on your part. You are also in complete denial of housing cycles, or you just don’t understand them.
If you are so sure about your real estate outlook, my ramblings should be either annoying, boring, amusing, or a challenge. Maybe you are the best person here to answer the question of why you are angry, and give some insight into the topic of this thread: why do people get angry when you say their house can lose value?
I’m sure everyone on this forum, and I especially, are eager for your thoughts on the future of San Diego housing. Do you think the next bubble will be even bigger than this one? Where will the money come from to fund it? How can housing prices go to 20x income, or 40x rental prices? In San Diego, in 2000, the price/rent ratio was about 13.5, and now we’re at 28.9. You think that in the future we will be at 40x rental income? That sounds impossible, but hey, you said the prices would go higher in the long run so the ball’s in your court if you care to take it. I look forward to your insights.
As far as my recession call, I was 1 or 2 quarters early. Let’s judge our results next spring, after the market has gone down, and see if those who rode it to the top were able to get out in time. Then we can see whether I made a mistake of earning 5% in CDs vs. your profit/loss by trying to hang on until the end.
By the way, a poster of similar delusion got mad at me too, last summer, and said he would still read piggington but never post again. I thought that was a whimpy response. If you guys think houses can grow to the sky and I challenge you, don’t run away, but tell me why I’m an idiot and you are right.
ParticipantMy lack of response is not because I agree with you, but because… well, I’ll bite my tongue.
ParticipantWe’ve got a couple long-time real estate investors on this forum in that same denial. surveyor, counselor, and former poster Docteur come to mind. They think this downturn is either a blip before the next big rally, or their own “superior property” is immune to big drops, certain desireable coastal properties will increase in value in the next few years, in a decade prices will be higher than today, etc.
None of them remember that in the last downturn, coastal properties were in foreclosure and rented out, because there were no buyers.
Let me repeat: there were no buyers for prime real estate in Laguna Niguel and Pacific Palisades, big beautiful homes on or near the ocean. Some homes had to be boarded up to prevent theft. For many years they were rented, until the market turned around and buyers returned.
Now, this horrible downturn occured when median prices dropped 6% year over year, and when people still had to put down 10% – 20% on their home and more on rental property.
How much worse will this one be, when you have 0% down on rentals, 0% down on your own home, and median prices are already down 6% in the first year of the downturn. Just wait until the loans reset and we lose 50,000 construction jobs in San Diego alone. I don’t have time to give out all my theory on the job losses now, but it will be forthcoming in the next month.
So this downturn will make the last one look like a little child’s play. And even the old timers don’t get it!!!!!
How do we expect the average Jane Smith of Eastlake to get it?
The biggest disservice we all do is relying on the median, or the Case-Shiller index to show what is happening with prices. Even Rich says it’s the best we’ve got. I have to disagree with him. The best we’ve got is to stop using the median as a way to measure this market. Bob Casagrand stopped using the median in his monthly reports because they are utterly useless in telling us what is happening today. For historical analysis, they are fine though. But because they lag by 1-2 years, we simply cannot glean current market conditions from them.
Other measures might be better. For example, Rich’s $/sq ft seems like a better alternative. This is something he computes himself from MLS data. Jim Klinge has the active/pending ratio. Your “dropped out” measure could be another one. I like months inventory, because it shows the severity of downward pressure on prices and measure the supply/demand balance or imbalance.
Ultimately, we may find that you cannot distill real estate into one number.
People think this is a blip because they are not educated. I have never seen a book titled “Real Estate Cycles”, “The Cyclical Nature of Real Estate”, “Real Estate: Buy Low and Sell High”, because very few cities even have cycles, and those that do have long 10-12 year cycles, too long for the short attention span of today’s investors who want riches within days or at most 3 months.
Another problem is that the NAR has been the keeper of the data. Their data goes back to 1966. They have the inventory data, but why don’t they release it? Dataquick data goes back only to 1988.
The only reason I know what I do, is thanks to the internet and blogs, and the free exchange of information resulting therefrom. If I were relying on the mainstream media, I would be as clueless as everyone else.
Why do you think homes coming off the market is important? Is this a trend that is increasing, as sellers cannot get their dream price and give up? So in a down market the cancelled and withdrawn listings go up? Maybe you could track that statistic. Again, like months supply it wouldn’t tell us one single number.
There is also that emotional component as mentioned in the thread “anger”. People are defensive when you say their home is worth less.
Last, it goes against people’s experience. Many extrapolate the present into the future. Since home prices have gone up for 5 years, people cannot imagine it can go down. It reminds me of being in college and dead broke, and not being able to imagine ever having money.
Other people remember the last downturn, but correctly realize that prices at this peak ended up higher than the last peak, so they think this too is a blip and eventually prices will end up higher than today. They fail to understand or remember that real estate cycles last 12 years.
I think any listing presentation could include a primer on real estate cycles. People need to understand that housing prices go up for 6 years, down for 6 years. Just as night follows day, prices rise and fall. Do you think people would accept and understand that? Have you shown them any of Rich’s graphs?
Now I better stop writing before sduuuude chides me for writing too much. I thought you all enjoyed my little breather in November, but hoping you are even more glad that I am BACK.
December 14, 2006 at 7:07 PM in reply to: Secrets of the Federal Reserve – We need to Wake Up! #41751ParticipantWhat is DHS?
I think some conspiracies are possible, but not everything is a conspiracy. If it were, then nothing is due to chance, and 100% of conspiracies are successful. Judging from the colossal failures of FEMA in Katrina, our war planning in Iraq, our utter failure to plan for the energy decline and Social Security shortfall, the upcoming bank failings (did the CEOs of WaMu and Wells Fargo plan to go under), I find it hard to believe our leaders are brilliant and coherent enough to work together to orchestrate a grand plan. Heck, they couldn’t even get a few people out of a flood in New Orleans, and figure out who was already paid once. To me, our government leaders are more like bumbling fools than brilliant puppeteers.
I do agree that people are too complacent, and we don’t realize how little we know. For example, people think we have a choice of political parties, but there really is only a choice between Republican and Democrat. Third parties have to jump through hoops. For example, to get on the ballot, each state has a different window (in CA, it’s 6 weeks in July -August) to get a certain number of signatures , just to have your name on the ballot! The 2 major parties essentially block other parties from getting on the ballot, and from having their ideas heard.
So I don’t take you up on your challenge to study conspiracy theories, because I doubt that too many really exist. I do not believe in the 9/11 conspiracy either (the alleged Bush planning of 9/11 as a premise to take away civil liberties and invade Iraq; evidence is demolition of Trade Towers since one airplane cannot make a tower crumble down like that, demolition of another Tower that was not even touched by a plane but was supposedly falling in a demolition-type manner, lack of airplane parts and manicured lawn untouched by any airplane tracks in front of Pentagon, and more).
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