Sizing the Housing Bubble

[honobob]

Wow Sure can't argue with a graph from somrbody..... .net/housingbubble/
So My $2000 investment in 1978 that is now worth $400K in Honolulu and $5000 investment in 1986- present value of $625,000 that gives me a total of $1,025,000 that could cost me $100K to liquify.

Wab
How could I have gotten here without investing in Real Estate?

Please no more graphs. I gave you actual case histories.

 

[haha]

Please no more graphs. I gave you actual case histories.

Well, many of us like to see data. But hey, we like your "actual case histories" too. 

Ha

 

[wabmester]

Please no more graphs. I gave you actual case histories.

Sorry I wasn't more clear. The graph basically agrees with your case history. My point was that after 10 years, your "gains" simply kept up with inflation. For example, 10 years of 5% growth in a savings account would have given you a 63% gain. Not a great investment, but I guess keeping up with inflation is nothing to sneeze at. If you can resist the urge to move for 10+ years.

 

[honobob]

Sorry    The graph basically agrees with your case history.    .

HaHa   I Win!  ..but I will not be mocked.  Sorry I am so slow, but when they say "you have two apples and you cut them into eight pieces and give two to your friend and ask how many do you have left?" I count the apple pieces.  So WAB won't tell me how I could have better invested $7000. Sure $5000 in 1975 in SWA or $300,000 in 2000 in Hansens beverages. I do have 5 rentals plus the DH (dear homestead) so I'm thinking that I'll be 5 times better off that a renter or 5 times better off than I would have been if I had invested in something I didn't understand.  (so when real property adjusts to the 2005 mean where will my paper be?) Up to and including now paper has eluded me.  So if I just convert everthing into singles I'll be rich?!  I anticipate converting "inflation adjusted" real property gains(?) into cash to be invested into liquid/intangible thingies because it's easier to spend and I will be out of my crazy accumulation of inflation tracking real estate.

Owner/landlord/RE salesman/investor(in four states)/Commercial Appraiser in SF/ over the last 30+ years 

Willing to offer a little real world (in my head) experience.  Hoping to get better educated in market investing.  Thanks


HAHAHA

 

[wabmester]

So WAB won't tell me how I could have better invested $7000.

Well, I suspect that you invested more than $7000 unless you had one of those cool 0% interest-only loans. But you do have a point: leverage is great when the asset value goes up.

Unfortunately, leverage is really bad when the asset price goes down.

As for how you could have made more money: if you had invested the same amount in the stock market in 1986 with the same amount of leverage, I suspect you would have made more money.

The other point that you can see by looking at the graph is that you've made a lot more money in real estate than history suggests you'll make (annualized) over the long-term. Call me crazy, but to me that says one thing: SELL!

 

[wabmester]

Based on this conversation with honobob, I had to ask myself when does a home make sense as an investment?

There are obviously a lot of variables.   Down payment, mortgage rate, inflation, equivalent rent, expected non-house investment returns, etc.   This requires a calculator!

There's a cool rent vs buy calculator here that has just about everything you need to answer this question (except in the rent case, it assumes that you never invest more than your initial down payment equivalent).

So, let's look at the last LA bubble.   If you bought in 1986, like honobob, you saw great appreciation initally, and then a bit of depreciation, and then it was flat for a couple years.   After 10 years (1996), your home appreciated at exactly the rate of inflation, but you were leveraged, so you made much more, right?

Well, maybe not.

If you had rented in 1986 (assuming that rents started at 5% of home prices and went up with inflation each year) and invested your 20% down payment in the stock market for 8% returns, you would have been better off renting for the first 8.4 years!

Unfortunately, the calculator doesn't let you make the assumption that your house depreciates annually (which is what might happen if you bought today), but it's still fun to play with.

Homes obviously can be great investments, but buying at the top of a bubble (or even 4 years before the peak, as in honobob's case) could mean that you won't see the payoff unless you're willing to sit tight for a pretty long time.

 

[TargaDave]

I'm involved in the planning/rezoning/approval stages of new residential construction for a number of developers in NC (a non-bubble area). We've seen a noticeable uptick in new developments. Especially near the coast. Those new neighborhoods will have finished houses within a year most likely. I don't think any of those developers are sensing a slowdown in the local markets. It's pretty much "get it done as fast as you can" at this point. Of course, like rewahoo, houses around here frequently sell for $140,000. The median sale price is a lot higher though. Tons of folks from up north and out west putting their equity to work here due to their jobs relocating here, or snapping up a vacation home on the coast.

Justin- From what I see prime coastal NC RE is definitely slowing big time. So perhaps a lot different from the less expensive inner regions


http://www.newsobserver.com/125/story/456911.html


We've been looking at OBX soundside property for 3 years and this year everything has slowed waaaaay down this year. Inventory is up big time, and the prime summer selling season isn't going so well. Starting to see prices come down but still a healthy dose of seller denial. The OBX is pure second-vacation-"speculation" home territory. I don't really follow the other areas too closely.

I'm with Wab on this one. I think by the fall of 2007 the downward slide will be in full swing. Still gathering steam right now

 

[justin]

Justin- From what I see prime coastal NC RE is definitely slowing big time. So perhaps a lot different from the less expensive inner regions

We've been looking at OBX soundside property for 3 years and this year everything has slowed waaaaay down this year. Inventory is up big time, and the prime summer selling season isn't going so well. Starting to see prices come down but still a healthy dose of seller denial. The OBX is pure second-vacation-"speculation" home territory. I don't really follow the other areas too closely.

My post was refering to the "less expensive inner coastal regions" - those a few miles from the ICW and/or the Atlantic. Still tons of new developments scheduled to be built. I haven't dealt with any oceanfront or barrier island developments. Most of what I have worked on is in New Hanover County (Wilmington) and Brunswick County.

Of course if the real estate market slows down, the builders will stop building. They always tell us their expected market absorption rate (# units per year) for new construction and then qualify it with "subject to market conditions"!

 

[Alex]

1986 Base year
1987 Up
1988 Value DOUBLED
1989-1991 Still all good
1991 Bubble Burst? Less than 9% down

1991-1995 Enjoying Prop 13 Tax limitations Four years of no double digit appreciation, considering suicide.
1996-1998 inching up again
1999 Neighbor sold for over 3X what I purchased
2000 100K up
2001 Add another $50K
2002-2006 Bubble Burst May 2006? Property worth 7.35X purchase price 20 years ago. Property taxes are $6400 LESS each and every year than the new neighbor pays.
Not sure what your point is but I'll buy all the CA houses you can sell me in 15 years at todays prices.

If you count the leveraging.....I'll celebrate the next "bubble" bust with Alex ...with bubbly!

Hold up now honobob! !!! That data doesn't fit into WAB's carefully constructed dream of endless Schadenfruede moments for the future! He's gonna look awful silly when it doesn't happen in California. How long are you willling to wait for the burst WAB? I'll be swimming in my pool when the bubble bursts, and afterwards too. Wanna know why? Because, I have to live somewhere! ...unless I get a tent on the beach... Hmm.....now thats LBYM!!!!If

For the record, If I could only choose one investment , I'd still take real estate over any other investment, bubbles and all. Cheers!!!

 

[Brat]

Wab has his tent by the beach.   

IMHO Wab is watching the residential home market as a matter of personal interest.  Those trying to max the use of their resources pay attention to details.

A housing bubble is only of interest if you are buying, or needing to sell.  If you sell, then buy under the same market conditions it should be a push (transaction costs not considered).

 

[wabmester]

The schadenfreude thing is part of it.    And I would like more RE in my portfolio, because I like real assets with good supply/demand characteristics.

But the thing that's really driving my interest is that this seems to be one of those relatively rare moments when prices have separated from the fundamentals.   I felt the same way with the stock market in 1999 (and sold about 90% of my stock).

Economics isn't an exact science, but for home prices to continue their upward trend would be like seeing pigs fly.   It would be fun to see pigs fly, but it would make me question some fundamental beliefs.   And I would have to get a new hat.

 

[Alex]

The schadenfreude thing is part of it. And I would like more RE in my portfolio, because I like real assets with good supply/demand characteristics.

But the thing that's really driving my interest is that this seems to be one of those relatively rare moments when prices have separated from the fundamentals. I felt the same way with the stock market in 1999 (and sold about 90% of my stock).

Economics isn't an exact science, but for home prices to continue their upward trend would be like seeing pigs fly. It would be fun to see pigs fly, but it would make me question some fundamental beliefs. And I would have to get a new hat.

Do they makes hats that small??

 

[spideyrdpd]

I wouldnt bet on there being a "crash" but I think that an active investor will be able to find deals. Many people are in over their heads.
Where I invest in Ohio prices have been relatively stable. I did sell my Orlando investments. Missed out on some appreciation but we buy "right" so we made money on purchase.

 

[cute fuzzy bunny]

Do they makes hats that small??

And do they still call it a head when its that little?

The schadenfreude thing is part of it. And I would like more RE in my portfolio, because I like real assets with good supply/demand characteristics.

Man, tell me about it. I'd LOVE to buy a big chunk of land with a little house on it in a cooler area near here. And they should be cheap...theres a bazillion acres and we're in the middle of nowhere. I'm really hoping for a price smackdown. New construction has just stopped dead in the water here, so maybe i'll get it. The only thing that might reignite it is a big drop in interest rates, and I cant see that happening soon.

 

[bearkeley]

Wab

I think most people who are following the market agree with your basic premise that the real estate markets the have seen crazy run ups in prices over the past 5-10 years are potentially set for a correction or at least a stall.

But I have to agree with hobnob that in my limited real world experience real estate has be very good to my wife and I.

I have been working for the Fed Gov for 14 years and maxing out my tsp (401) contributions since my first pay check. My money has been in the stock based funds as diversified as possible in that program.

I made more money (not on paper in my pocket) on one $20,000 dollar investment in 24 months in real estate than I have in all those years investing in stock funds. The best part was that were we watching the value of the house go up each month as our tennant was paying us $400 more than our payment each month in rent, contributing to our principle and we were depriciating the house even though we sold in for $110k more than we paid.

Making 400% in 2 years is hard to do in stocks with out taking a lot of risk and I just don't know stocks very well.

My wife and I have been fortunate in the RE markets but we realize we are over exposed (not over extended) and we are actually trying to allocate more of our portfolio to stocks but quite frankly it is hard to do given the current state of things.

At least I know the value of my rental should be stable (compared to the crazy stock market) and the investments are paying for themselves plus giving me a nice profit each month.

 

[laurence]

There is no question that an intelligent individual who does his homework can make money in real estate, but there's been a lot of anecdotal evidence thrown against Wab's arguments that sound alot like, "Oh yeah, well my grandpa smoked two packs a day and died when he was 90 of a hunting accident, what do ya say to that, Mr. Smarty Pants Surgeon General".

Here in San Diego, the Real Estate community finally ran out of ways to massage the numbers and admited prices fell over the last year. Combine that with near 4% inflation and that's some real value loss. And it's only the beginning, IMHO. But the strong hands comment is very valid. I ain't selling, I can afford my mortgage (at 5% - yay!) it's academic to me unless it begins dragging down the economy as a whole when Hummer sales tank because nobody has any more equity to suck out of their house....

 

[brewer12345]

Not sure if this has been mentioned yet, but I found the data here fascinating: http://www.benengebreth.org/housingtracker/

Market in my 'hood has stabilized, but not crashed. The odd thing is that there is a house in my immediate cul-de-sac that got bought about a year ago for $600+k after it was on the market for about a year. One of the biggest and most expensive houses in the area: 2+ acres of land that backs up to a lake (50 feet below the house and no risk of flooding), 6 beds, etc. But it needed a lot of wrork. I think it sat because anyone who could afford the house would probably choose a ritzier area. Well, the buyers must have decided to flip it, because it is back on the market after a LOT of work was done. Asking price: $895k

I don't think they will get anywhere close to that price.

 

[mikew]

Just some random thoughts of what I have seen in Japan.

The bubble popped about 1990. Property didn’t exactly crash and burn in a ball of flames but I have read it is 1/10 of its peak. But it isn’t done deflating. Our property assessment fell again in April. Tokyo is starting to see some life but there is none down here in Kyoto. Part of this is because of the economic concentration in the Tokyo area which is increasing. Other parts of the country like Osaka are definitely falling behind.

In Kyoto, the price is ‘too low’ for people to sell and the amount of housing coming onto the market is restricted. What is available isn’t really priced to sell. The size of the housing market is nothing compared to a US city the same size. The permanent population is definitely skewed towards the elderly more than the national average. When parents die, a lot of kids are turning the houses into parking lots to take advantage of low tax rates or letting houses sit empty. According to our realtor, when anything interesting does come up it sells within hours but that only happens a couple of times a year.

In the meantime it is hard to price homes. We bought our apartment for 240,000 two years ago. The guy above us sold his for 620,000 last month. Although his place is a third bigger, there really isn’t that much difference. It is hard to see how the market will come back without a lot of new families moving in or people start forgetting about breaking even.

 

[justin]

In Kyoto, the price is ‘too low’ for people to sell and the amount of housing coming onto the market is restricted.

Interesting. When you say the amount of housing entering the mkt is restricted, do you mean the quantity that can be sold is regulated by the govt (ie - take a ticket and we'll call you when you can sell) or is it people owing way more than their place is worth and prefering to pay the mortgage instead of come up with a huge wad of cash? I guess there's also the holdouts who are waiting for the mkt to come back.

 

[mikew]

Sorry maybe I am using restricted wrong.

I meant mainly people who don't see a reason to sell so they sit on their property. Although there are a lot of people underwater.

 

[justin]

Sorry maybe I am using restricted wrong.

I meant mainly people who don't see a reason to sell so they sit on their property. Although there are a lot of people underwater.

Gotcha, thanks!

 

[Scrooge]

Although there are a lot of people underwater.

Well, it is an island! 

 

[lazygood4nothinbum]

Not sure if this has been mentioned yet, but I found the data here fascinating: http://www.benengebreth.org/housingtracker/

already have looked at this & just noting here that you might want to be careful with their numbers. first (and it does mention) it quotes asking, not selling prices.

but also i checked out the so-called "miami area" where they make it look like every house is for sale. they are including all the way down to homestead which is right before the florida keys, all the way out west to the everglades and all the way north past, even, the county line. i'm only surprised they didn't go all the way east to the bahamas (a similar distance away as homestead). i'm pretty sure not everyone there would consider themselves to be the miami area.

more likely, many probably moved to those areas to get out of the miami area.

 

[spideyrdpd]

They also included property in broward.
lots of new inventory. Plus I have to thing the zillion dollar property they are trying to sell must effect the numbers.

 

[califdreamer]

In today's LA Times business section, the chief economist for the Calif Assn of Realtors who has been describing the housing mkt as experiencing a "soft landing" says she is no longer comfortable using that description.

"Maybe we need something new. That's all I'm prepared to say," Appleton-Young said Thursday.

The association lowered its sales forecast to a 16.8% decrease instead of the earlier 2%.

Wow. The CA Assoc of Realtors as housing bear.