Housing Bubble Bursting?

[The Warrior Monk]

Do your rule of 72s with this puppy. Bought in 1956 for 14K sold in 2006 for 468K.

Am I the only one not getting this? You held on to a home for 50 years but recommend renting?

What if we decided to hold onto our primary residence for 50 years instead of renting?

I'm in George's shoes. I bought my home in 1993. Based on what I put down and my current equity, I've made back my money 23 times. My PITI is less than what I'd be paying for a much smaller home and lot. I'd estimate that I'd have to pay and extra $1,000 per month to rent something similar. Plus I have a wife and two young kids to think about.

For many of us, it is best to do this with other properties, not the primary residence. If I was single with little responsibility I might think more along the lines of what Mike is saying.

 

[DTB]

I don't recommend renting.

The bubblers insist rental rates are not keeping up with property values aren't they? So renting must be cheaper than buying, yet no bubbler is doing it. They don't buy the argument which they are trying to sell.

David, as I said, there are a hundred reasons not to change residences. If one is a bubbler, economics is not one of them.

Hypothetical to demonstrate the cost of so-called ( by the bubblers) dead equity.

600K house with no debt, in a declining or crashing market. it doesn't matter what your entry point is. It is 600K now.

2 ECONOMIC choices.
1. Liquidate, invest 600K elsewhere and rent.
2. Stay and ride your 600K down to 510K using the agreed upon definition of a bubble.

Around here, one could rent that 600K house for about 3000 month. A wash to me, except if one believes the market is going to 510K, it looks a little more attractive.

This is an economic priciple not judging one's personal choices.

Capiche?

 

[Couch Potato]

I MUST be lucky to be successfully doing it for 30+ years of my 46 on earth. LOL.

For a compelling argument all I have is about 50 years fo Chicago history telling me it works. Now if you have a compelling argument to the contrary, let's have it. Hint: it's impossible to continue doesn't count.

Do your rule of 72s with this puppy. Bought in 1956 for 14K sold in 2006 for 468K.

Remember to show your work.

Extra credit 88K in 1994 todays value 425K. You pick the decade, it don't matter to me.

Mike, have you looked at the decade from 1920's (try using a purchase made in 1926) to the 1930's; not exactly the same kind of picture. True, if you bought in 1926 and held onto the investment into at least the late 1940's you would not have lost money, but you would have done much better selling in the 1920's and buying in the 1930's. Also remember to look at inflation when judging results. $100.00 in 1926 bought the same stuff as $183.05 would purchase forty years later in 1966, but after another forty years it takes $1122.60 to by that same stuff in 2006. Real estate is a good long term investment and has not had a severe down cycle in more than 60 years, but the recent steep rise makes the potential risk of a down cycle much greater than it otherwise would be. It is no coincidence that investment advertisers like to show long term growth using charts that start somewhere around 1933.

 

[George Hatch]

Agreed, if the economics were the dominant factor people would definitely follow the money. Now that we've gotten you to acknowledge that to be a big "if", let's see if maybe we can get you to recognize that there is more to the economics than the challenge of maximizing your cash at any given point.

What I find somewhat annoying is the "challenge" you put out there that as much as says "put your money where your mouth is or shut up". I think you're taking an extreme position to make a point, but your use of "the money is the scorecard" mantra makes me want to puke. I truly never envisioned you to be like that and I'm having trouble doing it even now - I think you're just trying to make a point. To each their own, but I normally strive to avoid those people in my life. If I thought you were being sincere I'd be striving to avoid you. And vice-versa, I'm sure.

The gauntlet you've thrown down is the challenge to sell now, lock in the profit and live with whatever happens next. However, you have apparently declined to consider that there are other alternatives for making a buck besides selling now. You're treating this upside of the cycle like it's the last one that will ever come around. That is a straw-man argument if I've ever heard of one.

Anyone who characterizes the trends in terms of both sides of the cycle (not just the one) knows that the cycle will invariably come around again at least a couple more times in the next 20 years. A person may not need or want the taxable income while they're still working, but they do need a place to live. During any slow period of our cyclical business a lower overhead has some definite economic benefits that go beyond the difference in the overhead itself. Those benefits include the ability to thrive on less and the ability to avoid high-risk assignments just because we need the cash flow. From an economic standpoint it's an extremely safe form of asset management, too. That type of stability and security has an economic value. If you look at it in the long run and in the context of our occupation, "mortgage at or less than rent" is a tough strategy for some of us to beat, both in terms of cash management and in terms of stress.

Your strategy apparently works for you - I think that's great. However, you and I are in different lines of work and we are living very different lives. Maybe if I lived your life I'd be doing what you're doing. What we all need to bear in mind is that there is more than one way to live well and more than one definition of exactly what living well is.

 

[JSmith43]

OK, I'm jumping in at the end. Mike's hypothesis is interesting. I think it is basically, shouldn't the principle of substitution work cross species? I.E. why wouldn't people adjust their purchases of bundles of ownership rights based upon their perception of a shift in more ownership rights for the buck from renting, if the future is so clear....or, if the future (crash) is now?

It is an interesting theoretical premise. However, I believe the old RE saying that residential behavior is 90% emotion driven vs hard core commercial behavior being 10% emotions driven. Quibble about the ratio, but, that is the reason I think any flow toward rental based upon an impending bubble will be blunted. I think it will still be detectible, however, if there is a big enough hit to the home market for a long enough time. Just harder to measure, and probably less than expected.

I tried to make this post sound awkward, honest

 

[Randolph Kinney]

Roger, a shift from owning to renting? That means you need to find someone to buy your home. Substitute? Maybe you can sell it to an investor and rent it back? There is a principle in natural law that describes what would happen under that scenario.

Bottom line, as more homes are put onto the market so that the sellers could rent without owning, what happens to the price of homes?

As more renters enter into the rental market for the available rental stock, what happens to rent?

 

[DTB]

Randolph,

That shifting would cause prices or values to shift is understood.

My premise which Roger stated better than I did, asks isn't there a time when renting is preferable to owning and vice versa. Economically speaking.

We have many stating that rents haven't kept up with sales prices and that sales prices are unsustainable. If that is their belief, they "should" be in agreement with my premise.

Appraisers who see the peak, could sell, transition into an equivalent rental at lower overall costs and preserve their capital.

Appraisers who see the run up coming could move back in at a lower price point and ride the run up.

Emotions of home ownership aside, it is akin to a play on a rolling stock. the opposite is buying at 100K, watch the runup to 600K, and staying on the ride bact down to 400k and celebrating how well they did.

 

[JSmith43]

Randolph: Your sentences describe the striving of the market to regain equilibrium. It usually does so in a herky jerky fashion.

I see what's missing! The bubble people and the non bubble people need to be offered and sold some sort of hedge fund that mitigates risk. I think there is some sort of home value index that at least symbolically protects homeowners from equity risk. I'm not sure about anything that would play residential rental rates, but it could be created and marketed, I suppose.

 

[Randolph Kinney]

Mike:

My premise which Roger stated better than I did, asks isn't there a time when renting is preferable to owning and vice versa. Economically speaking.

I suppose you can make a theoretical argument to suggest that. However, people have been conditioned that owning is more preferable than renting. Why? What are the advantages of owning over renting?

We have many stating that rents haven't kept up with sales prices and that sales prices are unsustainable. If that is their belief, they "should" be in agreement with my premise.

The flaw as I see it in your premise is that you are looking at a very short period of time, relatively speaking. Markets are dynamic, not static. If you were to make as part of your premise that renting would be 20% cheaper than owning over the next 5 years, you might have more people buy into your premise. OTOH, if renting is 20% cheaper this year, 15% cheaper next year, 10% cheaper the following year, 5% cheaper the 4th year, 0% cheaper the 5th year, how many owners would be enticed to sell out and rent? Lets say you pay $2,000 a month PITI now so that you could rent your home at $1,600 a month. At the end of 4 years, your savings would be $11,160. What sort of pricing would home values have to adjust to over that same time frame for you to execute your economic theory of selling your home and renting?

Appraisers who see the peak, could sell, transition into an equivalent rental at lower overall costs and preserve their capital

Hmm, that assumes what, preserve capital? Risk free?

Emotions of home ownership aside, it is akin to a play on a rolling stock. the opposite is buying at 100K, watch the runup to 600K, and staying on the ride bact down to 400k and celebrating how well they did.

So you are making the assumptions that go with a highly liquid market without leverage?

 

[Randolph Kinney]

Randolph: Your sentences describe the striving of the market to regain equilibrium. It usually does so in a herky jerky fashion.

I see what's missing! The bubble people and the non bubble people need to be offered and sold some sort of hedge fund that mitigates risk. I think there is some sort of home value index that at least symbolically protects homeowners from equity risk. I'm not sure about anything that would play residential rental rates, but it could be created and marketed, I suppose.

I thought there is a way to capitalize the rate differences of owning versus renting.

One could extract equity from the appreciated home and either reinvest it in more real estate or competing investments having a better investment characteristic.

Having extracting 100% + of the equity at the peak of the housing market, if the decline is significant, you can default and let the debt holder buy it back from you, in effect. If you had that kind of conscience, you would have put your investments off shore before defaulting.

There are synthetic financial products that lay off risk. You only need to study the characteristics to find the ones that match what you want to achieve.

Edit: The act of defaulting with negative equity is a financial PUT option: you make the debt holder buy it from you at the agreed upon price, the amount of the debt.