Psychology of the Housing Bubble (and its collapse)

[Alex]

Well my 20% down ($120K) earned $30K in 12 months= big return. The history of 20 years of >10% annual increase in SF Bay and 30 year history of >9% annual increase in Honolulu and 12 year history in Vegas (of all places) that is also generating 9% per year! I don't even count my 2003 and 2004 Honolulu purchases that have increased in value over 15% per year. So I'm thinking hell yeah I'll do better than CASH.

If my figures are close you lost $100,000 in sales fees and maybe $200,000 to $600,000 since you sold your California properties in 2002-2003. Sound about right? What kind of earnings on cash do you need to make that up?

And everything I've bought has been retail, thru a REALTOR, conventional financing and I've never been able to go the assessor and request a reduction in taxes because my market value was lower than what I paid for it like you.

But that's just the way I see the facts. YMMV

I too have made a small fortune this past year in both REITS (up over 30%) - and actual owned Real estate properties (I cashed out 140K of pure profit). This gets some people here very upset. Go figure. Schadenfruede, maybe

 

[honobob]

I too have made a small fortune this past year in both REITS (up over 30%) - and actual owned Real estate properties (I cashed out 140K of pure profit). This gets some people here very upset. Go figure. Schadenfruede, maybe

Alex

This is the first internet forum I've participated in and when I read so much misinformed info on real estate I had to jump in and set things straight! Then I was trounced upon and I was very puzzled. At one point I actually thought there was a conspiracy to keep the "money machine" a secret but now I just realize that 1. Some people are just in areas that have not had a history of high appreciation and 2. Some people are just afraid of real estate and finally 3. there are the people who think they are so smart that when they "wheel and deal" and fail they blame the market because it couldn't be them.

It makes me wonder if any of the "investing" information is credible.
But the recipe's look wonderful.

 

[wabmester]

Well my 20% down ($120K) earned $30K in 12 months= big return.

Honobob, I've underestimated you. You are a genius. You've discovered the top-secret winning technique called leverage! Based on your leverage, you've made 25% on your money!

Now, tell us your closing costs. Add this year's principal, interest, tax, insurance, and maintenance. Add to that what your selling costs would be.

OK, got all those numbers?

Great. Now, take a look at the appreciation of your neighbors in the bay area, and please tells us their leveraged investment returns.

Here's some data for you:

DataQuick Bay Area stats

 

[Alex]

Honobob, I've underestimated you. You are a genius. You've discovered the top-secret winning technique called leverage! Based on your leverage, you've made 25% on your money!

Now, tell us your closing costs. Add this year's principal, interest, tax, insurance, and maintenance. Add to that what your selling costs would be.

OK, got all those numbers?

Great. Now, take a look at the appreciation of your neighbors in the bay area, and please tells us their leveraged investment returns.

Here's some data for you:

DataQuick Bay Area stats

Hmm, I'd say its quite a bit higher than the return on cash.....

 

[justin]

I don't know... I'm getting pretty much infinite returns on my cash right now. I borrow money from credit cards at 0%, then invest it in a money market at ~5.44% effective rate pre-tax. I put no money of my own into this venture.

25% returns in real estate? That's for dabblers and amateurs. Zero % balance transfer arbitrage - that's for da pros... :

 

[wabmester]

Hmm, I'd say its quite a bit higher than the return on cash.....

Lemme guess. You and Bob were absent on arithmetic day at school?

Bob buys a little condo for $600K. He puts $120K down, and pays 6% interest on $480K + 1% of $600K on taxes + a 6% back-end load to the Realtor(TM) monopoly when he sells.

1) How much appreciation does Bob need to clear the 5% risk-free return of cash?

2) What is the effect of leverage when Bob's property experiences negative appreciation?

3) How quickly can Bob sell his condo when there are 12 months of inventory on the market?

Knock yourselves out with real estate, guys. I'm putting my money elsewhere for a while.

 

[justin]

Knock yourselves out with real estate, guys. I'm putting my money elsewhere for a while.

But Wab, you're obviously missing the point, what with all your cipherin' and what not. These guys are getting 25% guaranteed returns with no risk!!!!111

(this is sarcasm)

 

[haha]

But Wab, you're obviously missing the point, what with all your cipherin' ...

Great Southernism. Takes me back to my childhood. I wasn't a kid doing his math homework; I was a scholar cipherin'

Ha

 

[Alex]

Lemme guess. You and Bob were absent on arithmetic day at school?

Bob buys a little condo for $600K. He puts $120K down, and pays 6% interest on $480K + 1% of $600K on taxes + a 6% back-end load to the Realtor(TM) monopoly when he sells.

1) How much appreciation does Bob need to clear the 5% risk-free return of cash?

2) What is the effect of leverage when Bob's property experiences negative appreciation?

3) How quickly can Bob sell his condo when there are 12 months of inventory on the market?

Knock yourselves out with real estate, guys. I'm putting my money elsewhere for a while.

WOW!!, you are really emotionally attached to your decision to get out of the Real estate market!! Good for you! ( PS- I could do without the insults to my intelligence, thanks.)

Anyway, I think this is exactly why you shoudn't try to 'time' any investment market. Even if Wab wanted to invest in RE right now, he is afraid that the market is going to fall. So, he'll stridently wait on the sidelines and miss out on any potential opportunity. All the while hoping (maybe praying?) for the day when he'll finally be right!! EWWPH! It sounds torturous to me. Personally, I will continue to look for good real estate deals. When and if I find them, I'll invest in them. 8)

But Wab, you're obviously missing the point, what with all your cipherin' and what not. These guys are getting 25% guaranteed returns with no risk!!!!111

(this is sarcasm)

Who ever said there was no risk? Who said the return was guaranteed? You must have read something that wasn't there? Everyone knows that no investment is guaranteed and risk free. Even supposedly 'risk free' cash has inflation risk.

Good Luck

 

[wabmester]

WOW!!, you are really emotionally attached to your decision to get out of the Real estate market!!

I still own a home. That's a lifestyle choice, not an investment choice. When I invest in real estate, I rely on emotional instincts like cap rates and stuff.

What are the cap rates like in SF and LA these days?

 

[justin]

Who ever said there was no risk? Who said the return was guaranteed? You must have read something that wasn't there? Everyone knows that no investment is guaranteed and risk free. Even supposedly 'risk free' cash has inflation risk.

In case you missed it, I was being sarcastic. That's why I said "this is sarcasm" in my post. I guess clearly stating I was being sarcastic was being too subtle.

Best of luck to you. Just remember that plenty of folks made 50-100% returns (on margin) during the tech boom 7-8 years ago. All good things come to an end. Either that, or "this time it really is different". I personally would bet on the former, but, hey, it's your money.

 

[justin]

What are the cap rates like in SF and LA these days?

There you go again with that cipherin'. Why are cap rates important when they are dwarfed in significance by 25% capital gains every year?

(yes, this is sarcasm too)

 

[tryan]

Call it whatever you want, but do you think your house will appreciate over the next few years at a faster rate than say, CASH?

This is exactly my dilemma ... with the run-up to absurb prices - and rents not keeping pace - I can only net 4.5-5% per year on the free n'clear stuff I am carrying. Heck I could sell, pay the gains and invest the wad conservativly and have a much better cash flow with little downside risk. Another step in interest rates and I could do this in CDs!

To each his own ...

 

[cute fuzzy bunny]

In case you missed it, I was being sarcastic. That's why I said "this is sarcasm" in my post. I guess clearly stating I was being sarcastic was being too subtle.

Best of luck to you. Just remember that plenty of folks made 50-100% returns (on margin) during the tech boom 7-8 years ago. All good things come to an end. Either that, or "this time it really is different". I personally would bet on the former, but, hey, it's your money.

Heyyy...are you being sarcastic again?

 

[Sam]

Well, let me be the first one to admit that I was wrong. About six months ago, I was convinced that the housing market in Cali (Orange County and Bay Area), Florida (Palm Beach area), and Boston would crash badly. Florida and Boston did suffer, but not as bad as I thought.

Orange County and Bay Area were not affected at all.

Now that's out of the way, let's talk about something else. Can you help me profile the buyers in Cali. Who are they? What is their household income, how can they afford to buy a home there?

Yes, I know about Google's employees and the likes with gazillion dollars. But I guess they represent less than 5% of the population, and they're most likely not interested in run-of-the-mill houses costing less than 1MM.

 

[Alex]

What are the cap rates like in SF and LA these days?

I really could do without the loaded questions. But what the heck, I'll play along. As you know, the cap rate depends on the deal. Larger transactions with "A" tenants signing 20 year triple net leases are currently in the 6% range. Personally, I would never do a deal for that- but that's just me.

 

[justin]

Heyyy...are you being sarcastic again?

Me? Sarcastic? Never...

 

[haha]

Yes, I know about Google's employees and the likes with gazillion dollars. But I guess they represent less than 5% of the population, and they're most likely not interested in run-of-the-mill houses costing less than 1MM.

That's a pretty safe guess.Since there are 35 milion Californians, 5% would be 1,750,000 people. Even GOOG has not grown that fast!

On the other point, try what you get for $1mm in Palo Alto and environs- one million is a decidedly run of the mill house!

Ha

 

[Nords]

Don Ho said he would have bought an entire floor if he could.

Darn, if I'd known you were going to consult real-estate gurus like Dons Trump & Ho then I would've come up with a real response based on something other than numbers & personal residences. You know that Trump's lifetime performance, notwithstanding supermodels & hairstyles, sorely lags the S&P500, right?

What's that song that Don Ho sings... oh, yeah, something about bubbles.

Let's not confuse overhyped marketing with reality-- let's just wait & see how the property is doing when people are living there for a couple years. They haven't even found any Hawaiian remains at the excavation site. Yet. My good realtor buddy George Stott was taking many $20K deposits from people who were dying to get into the tower, but neither he nor his family were buying. They're selling their Hawaii properties and 1031'ing into Mainland commercial & residential TICs.

Why are you such a naysayer? Oh, weren't you in the market for a condo? Ummm...........prices are way inflated..next seasons bathing suit fashion in a 1910 retro.....Sell while you can for whatever you can get....See me to avoid that realty commission!

I'm not a naysayer... just a guy who looks at the past few years of property-tax assessments and doubts how much longer this can go on. How'd you feel owning that Hawaii real estate during the "fun" years of 1990-2000? I managed to knock 25% off my assessment in 1994 with only an hour's appeal paperwork.

Spouse and I are value investors, but both of our current Hawaii properties (home & single-family rental) were acquired for ohana purposes. That's why we're in the market for a condo too. Maybe we'll 1031 out of the SFH to that condo someday when the ohana situation clears up, but I don't think our kid-- should she decide to stay in the islands after leaving the nest-- would be as lucky as we were to be able to parlay a CA real estate profit into a Hawaii down payment. Home improvement's a hobby of ours but I think that long-term home prices generally rise with inflation (no real estate premium). If it's not coming from rental cashflow then the extra oomph has to come from bottom-fishing and financial leverage.

You should enjoy the benefits of your Honolulu RE leverage just as someone should enjoy profiting from buying Google stock on margins & options. But if your cash-on-cash return is less than 6%, and if you can get at least that much in many places on the Mainland, then why are you still crowing about being in Hawaii real estate?

I've been behind on this board for a couple days, but an e-mail I got this weekend suddenly makes a lot more sense in the context of your 28-year comparison. Allow me to offer you this anonymous quote from a respected friend: "FYI, the S&P was at 96 in January 1979. You know where it is today. My math shows me that's a 10% gain per year, without the headaches of real estate. This reminded me of when I was a stockbroker/branch manager in California. Real estate was our biggest competition. We just had a boom there and trying to sell securities was work. I ran a 30 year comparison for a 2 bedroom, 3 bedroom and 4 bedroom house vs the S&P. Clearly the S&P won, but we both know there are some tax advantages as well as headaches to home ownership. Once I ran the numbers vs one of the most attractive real estate markets in the country I never looked back."

Speaking of real estate, where are all the gold & commodities people that were crowing here last year? I'm wondering when those asset classes will be on sale again too...

 

[wabmester]

On the other point, try what you get for $1mm in Palo Alto and environs- one million is a decidedly run of the mill house!

I sort of get $1M for a dump in Palo Alto, but $1M for a 2000sqft tract home in SoCal? I don't get that one.

Who buys them? People trading up from their $800K tract homes. It's a game of musical chairs, and the music stopped last year.

 

[Sam]

Allow me to offer you this anonymous quote from a respected friend: "FYI, the S&P was at 96 in January 1979. You know where it is today. My math shows me that's a 10% gain per year, without the headaches of real estate.
This reminded me of when I was a stockbroker/branch manager in California. Real estate was our biggest competition. We just had a boom there and trying to sell securities was work. I ran a 30 year comparison for a 2 bedroom, 3 bedroom and 4 bedroom house vs the S&P. Clearly the S&P won, but we both know there are some tax advantages as well as headaches to home ownership. Once I ran the numbers vs one of the most attractive real estate markets in the country I never looked back."

Nords, I believe your respected friend. It makes sense to me.

Can you find another respected friend who would share his/her wisdom on S&P vs REIT?

 

[Sam]

I sort of get $1M for a dump in Palo Alto, but $1M for a 2000sqft tract home in SoCal? I don't get that one.

Why not? I don't get either one. But if one is real, why not the other one? What's to get?

 

[cute fuzzy bunny]

I'm still trying to figure out who the hell is moving into all the mcmansions in the sacramento CA area.

I keep hearing its bay area refugees cashing out for a bigger house on a bigger lot, but the dang bay area must be a ghost town by now...

 

[wabmester]

Why not? I don't get either one. But if one is real, why not the other one? What's to get?

Google and friends do have an effect in Palo Alto. AFAIK, there is no instant down-payment machine in SoCal and other off-the-chart areas.

 

[Nords]

Can you find another respected friend who would share his/her wisdom on S&P vs REIT?

Sorry, if you're talking about the S&P500 then I'm trying very hard not to be invested in either one.

Sell!!