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Bubble Meter is a national housing bubble blog dedicated to tracking the continuing decline of the housing bubble throughout the USA. It is a long and slow decline. Housing prices were simply unsustainable. National housing bubble coverage. Please join in the discussion.
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The Bubble Meter Philosophy
The best way to get the housing market thriving again is to drop prices to the point where supply equals demand. Home sellers might not like it, but it's good for buyers and it's great for Realtors.
For Realtors, the best way to make more money is to sell houses quickly, and the best way to sell houses quickly is to convince the seller to drop the price.
For Realtors, the best way to make more money is to sell houses quickly, and the best way to sell houses quickly is to convince the seller to drop the price.
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- Foreclosures Up 25% Year Over Year
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Okay, I'm trying to figure out the last comment. Did David buy in this building!?! From its website, it looks like a really great place --- well undervalued for what it already is today ... never mind its potential for much more!
ReplyDeleteHow can you say the place is undervalued. They don't list the prices on their website. It does look nice though, good area.
ReplyDeleteAnonymous said...
ReplyDelete"How can you say the place is undervalued. They don't list the prices on their website. It does look nice though, good area."
LOL! Actually, we chatted about this one the other day and I did some googling at the time finding out that the units "start in the $400,000s; three-bedrooms are going for as much as $1.3 million". Here's the whole article ... Read it and you'll hopefully see why considering the people it is priced for, it is priced extremely reasonably:
www.washingtonian.com/schools/greatplacestolive/05/emptynesters.html
Lance-
ReplyDeleteI would not consider those prices reasonable, although the property does look nice from its website.
David-
You might also look at the huge plastic house for sale at the intersection of Georgia and 16th street. I think they want over a million for this house on a busy intersection
A Redskins fan.
Redskins said:
ReplyDelete"David-
You might also look at the huge plastic house for sale at the intersection of Georgia and 16th street. I think they want over a million for this house on a busy intersection."
I don't know the house, but I do know the intersection from years past. Is this property commercially zoned? If so, the land alone is easily worth close to $1M alone. As busy as this intersection is, commercial rents would be skyhigh! If this particular corner of the intersection in question is not commercially zoned, then the seller is perhaps just confused by the commercial properties all around him/her in setting the price ..
lance-
ReplyDeleteRe: the corner in SS: The corner in question appeared to me to be a vacant lot until a couple years ago, at which point they put 4-5 huge plastic-looking McMansions there. Because of the way 16th street curves there, it looks to me like you would have busy streets on three sides. It looks awful. I would never pay 1 million bucks for the land there.
I can not believe it is commercially zoned, because the houses are right there. Regardless, I would not pay one million to open a business there either.
As for this condo in DC, it does look nice from their own webpage. And the location is good. HOWEVER, even a good location and a nice building does not mean any price is o.k. 20 years ago, that was near a rough neighborhood, without a lot of hope of things getting better. Who knows what it will be like in 20 years? Even so, again, any price is not o.k. There is an upper limit for everything, and those condos are past what I think they are worth.
A Redskins fan
"Even so, again, any price is not o.k. There is an upper limit for everything, and those condos are past what I think they are worth."
ReplyDeleteThey're not being marketed to you. They're being marketed to people with money.
Well, good luck to the sellers, then. So far they have been selling to people with ARM loans. I imagine people with money didn't get it by stupidly overpaying for real estate.
ReplyDeleteBut sometimes I forget all the playboys and Saudi princes who live in the DC area.
The above post was from me.
ReplyDeleteA Redskins fan
"It does not matter what you think they are worth if the price is out of your reach."
ReplyDeleteActually, if you price something out of enough people's reach, then you fail to sell it. Ya know, demand curves slope downward and all. (You've heard of those, right?)
More importantly, the population of greater fools has dried up now, so you're getting into that issue of people who are too smart to pay that much even if they can afford it.
Hey, I could afford to go to Starbucks and say "$1.62 cents for this delicious coffee is way too low! Here's 5 bucks!" That doesn't make me dumb enough to do it.
hmm..."Empty Nesters" People who have been working for 40 years, are selling their homes in the suburbs, and moving to the city. Nope, they ain't got no money. Builders catering to this demographic will surely fail and ultimately ask bubblemeter for advice on what to do. All those babyboomers in the empty-nester pipeline? Nah, they'll just drop dead rather than continue to pay for housing.
ReplyDelete"Many empty-nesters are abandoning the suburbs for DC. A few years ago, developers began putting up high-rise condos in Penn Quarter, the downtown DC neighborhood around the MCI Center and the Shakespeare Theatre. They thought young professionals would fill those buildings, but older couples also lined up to buy."
Yeah, no reason a young partner at Arnold & Porter or Latham & Watkins would want that ... oh, wait ...
ReplyDeleteJerk needs to get a table at on a Saturday night and then get a table at Jaleo then get a room at HM to see how much DC has evolved since he lived in his isolated enclave of self-satisfied smug white folks who were afraid to venture east of 14th St. and north of K st. Now he chants "the earth is flat!, really, the earth is FLAAAT!" and "I live in the capital of the world THE CAPITAL OF THE WOOOOORRRLD!"
ReplyDeleteThe condo fee for a 2 bdrm in this building is about $950 / month.
ReplyDeleteWell-Paid Benefit Most As Economy Flourishes
ReplyDeleteTrend Is Pronounced In Washington Area
By Neil Irwin and Cecilia Kang
Washington Post Staff Writers
Monday, July 10, 2006; Page A01
http://www.washingtonpost.com/wp-dyn/content/article/2006/07/09/AR2006070900914.html
This comment has been removed by a blog administrator.
ReplyDeletethe "greater fool" may be that individual who gauges where things are going only by where he personally is going.
ReplyDeleteI would venture a guess that most of the people posting on this blog are in the upper-middle or upper cateorgies that this article cites.
ReplyDeleteYou can be upwardly mobile, able to afford ownerhsip, and STILL believe there is bubble. AND when I buy a home, I won't suddenly believe housing is a great investment. This is the oposite of gauging "where things are going only by where he personally is going."
This comment has been removed by a blog administrator.
ReplyDeletedc_too,
ReplyDeleteI've said it before, I'll say it again. Your 3X rule is especially conservative and totally unrealistic. The lawyer average pay you cite (which incidentally I find unbelievable, but don't have the time know to recheck your source for the figure) is still significantly more than what I make and I can very comfortably afford a house in DC (i.e., not a condo, but a more expensive house.) Granted, while you have been holding out to make that "not more than 3X annual salary purchase", I have been busy first buying a very small one-bedroom condo (facing an adjacent building only some 15 feet away from the windows in the main room ... and facing a brick wall only 5 ft away from the window in the bedroom), then "moving up" to a nice two bedroom condo with a lot more light and air, and finally moving into my 2-story dream home rowhouse with carriage house in the back just last year. Yes, holding out to spend no more than 3X annual salary might be considered a conservative move, but I can't say most financial advisors/strategists would say it was a smart move. Penny wise, but pound foolish.
dc_too,
ReplyDeleteOk I've researched your source for average lawyer pay. It is not average pay for a DC lawyer, it is average pay for the following region:
Estimates for "Washington-Arlington-Alexandria, DC-VA-MD-WV"
Factoring in West Virginian lawyers salaries or even Baltimorian lawyer's salaries mean a real lowering of the average salary. You'll need to look harder if you really think you can "debunk" the assumption that there is a lot of lawyer and lobbyist money flying around town nowadays!
When you're figuring pay for lawyers, also keep in mind that the vast majority get substantial annual bonuses.
ReplyDelete"Factoring in West Virginian lawyers salaries or even Baltimorian lawyer's salaries mean a real lowering of the average salary."
ReplyDeleteAs well as most lawyers practicing anywhere in MD or Virginia. Lawyers in DC make a lot more than lawyers in, say, Bethesda.
I've said it before, I'll say it again. Your 3X rule is especially conservative and totally unrealistic. The lawyer average pay you cite (which incidentally I find unbelievable, but don't have the time know to recheck your source for the figure) is still significantly more than what I make and I can very comfortably afford a house in DC (i.e., not a condo, but a more expensive house.) Granted, while you have been holding out to make that "not more than 3X annual salary purchase", I have been busy first buying a very small one-bedroom condo (facing an adjacent building only some 15 feet away from the windows in the main room ... and facing a brick wall only 5 ft away from the window in the bedroom), then "moving up" to a nice two bedroom condo with a lot more light and air, and finally moving into my 2-story dream home rowhouse with carriage house in the back just last year. Yes, holding out to spend no more than 3X annual salary might be considered a conservative move, but I can't say most financial advisors/strategists would say it was a smart move. Penny wise, but pound foolish.
ReplyDeleteYes, in the past decade, by continually trading up, people were able to acquire a nicer home every few years. This was because real estate saw the greatest expansion in history. But this is NOT a normal market. Recommending that people spend 46% of their income on housing and eating beans out of a can is NOT savvy financial advice. In fact, it is the definition of "penny wise, pound foolish" - mainly because it means you have no left over cash for diversifying your investments. You are essentially putting everything you have into your home. If the market declines, how long will you be stuck in that house, unable to trade up?
Fritz said...
ReplyDelete"When you're figuring pay for lawyers, also keep in mind that the vast majority get substantial annual bonuses."
Most definitely! I don't know about lawyer's bonuses, but I do know that in IT, the bonuses for the higher-ups usually serve to double or triple what they make in salary. The bonuses are performance based ... i.e., agreed to at start of the year and pegged to a sliding scale that increases as certain performance goals are met ... with the understanding that at least some of those goals are to be met if they are to retain their positions. So, the average senior person in an IT firm can expect a salary of somewhere between $150K and $250K per year PLUS an additional bonus of 100% - 200% ... meaning $300k minimu to $750K maximum ... And these are only the 2nd echelon I am talking about. The CEOs, CIOs, etc., all make well in excess of $1M if you count stock options etc.
"In fact, it is the definition of "penny wise, pound foolish" - mainly because it means you have no left over cash for diversifying your investments"
ReplyDeleteSo true! I love the way some of these guys on this site will attempt to flip (albeit a poor attempt) the conventional wisdom so that it is in alignment with their plight. Those with an agenda on either side are quite obvious to those who are using their head to make sound decisions. Some people get so caught up in this that they cannot see the forest because of all the trees.
Can we PLEASE stop talking about the income of lawyers? Median income information is available. Everthing else is ancedotal and therfore, irrelevant. The two guys you know who got a $150K bonus are not going to prop up the housing market.
ReplyDeleteALSO, the Post article from this morning helped make the bubblehead argument. Even the salary increases of the wealthy are not keeping pace with housing prices...Example, financial manager incomes went up 13% from 2003 to 2005. Same period, housing went up, what...40%???
Let us start talking about my income levels.
ReplyDeleteI agree with anon 10:05. Debates about how much DC lawyers make are stupid.
ReplyDeleteThe 2004 ACS, if I read it correctly, reported median household incomes for DC, PG County, Montgomery County, and Fairfax County. If I understand the data correctly (and I encourage everyone to check at www.census.gov), none of those places had median household incomes over 100K, and none had more than 20% of their populations making more than 150K. So all these debates about Saudi princes, playboys, and lobbying lawyers are pretty foolish, unless I am misreading the data.
A Redskins fan
Slight correction- Fairfax county median household income, if I am reading the data correctly, shows about 22% of households made more than 150K in 2004. That's the highest in the area, and only Montgomery comes close. Data are also available for Prince William.
ReplyDeleteA Redskins fan
Who knew everyone in DC was rich?
ReplyDelete"Penny-Wise, Pound-Foolish ( cautious with small amounts of money, but careless with larger amounts ... )"
ReplyDeletewww.goenglish.com/PennyWisePoundFoolish.asp
i.e., in order to save yourself $100/month in mortgage payments, you have deprived yourself of hundreds of thousands of dollars of equity. THAT is penny wise, pound foolish. The fact that you can't see that and that you are trying to turn around what you have "accomplished" by not buying over the last 6 to 10 years is just plain amazing and astounding. Our disagreeing with what is best going forward is one thing, but rationalizing one's hindsight errors is quite another.
Where in DC right now does renting save only $100 per month? Right now, it saves closer to $1K-2K per month.
ReplyDeleteI understand what the statement means. Foolishly spending large amounts on housing (almost half your income), while being stingy with smaller purchases (like eating out) is the defintition of penny wise, pound foolish.
And since I don't beleive I have made errors, I don't need to rationalize. I have built equal equity without the risk of being heavily leveraged (mortgaged). And my equity is liquid.
'Penny wise, pound foolish' defines what has happened in the real estate market it the DC area in recent years.
"When you're figuring pay for lawyers, also keep in mind that the vast majority get substantial annual bonuses."
ReplyDeleteHahaha. Fritz, do you know many lawyers? It's funny to me that people on here harp on lawyers as though they're so rich and are just waiting to buy condos. Sure, bunches of lawyers get big bonuses - "big" equalling maybe 40-50 K, which while big probably goes to their loans for a while. And take taxes of 40% out of that (bonuses taxed higher), and it's not much in the end. Also, lawyers salaries don't rise like financial people. Top associates make around 250, 300 for several years. Partners make good money, sure, but how many actually reach that stage? And not to mention, these number are only good when looking at top law firms - most lawyers don't work at large law firms. Factor in other costs of living, families, etc., lawyers are doing well, but aren't, on the whole, wealthy.
Seriously, the lawyers topic is getting old on this site.
"And since I don't beleive I have made errors, I don't need to rationalize. I have built equal equity without the risk of being heavily leveraged (mortgaged). And my equity is liquid."
ReplyDeleteNot using leverage is your error. And believing you can build equal equity without leverage is another error.
Leverage is risk. Leverage is stuff like buying stocks on margin. Can it increase your gains? Of course. Does it also increase your risk exposure? Yes.
ReplyDeleteSo, for now, I am old fashioned. I choose to set aside money that I earn and invest it in mutual funds and equities. Am I looking to double my $ each year? Nope. My strategy is more long-term than that. I am happy to beat the S&P year after year. I'm young. I'll take my annual 15-20% for the next 40 years over the feast-or-famine real estate market any day of the week. Reminder: Historical real estate returns = 3.4%
anon said:
ReplyDelete"And take taxes of 40% out of that (bonuses taxed higher)"
LOL ... where on earth did you ever get the idea that bonuses are taxed higher than any other income? They're not. Could you be confusing what you company withholds with the tax rate actually paid on this money when you do your taxes at the end of the year? Are you the same Anony who still can't understand what "Penny wise, Pound foolish" means and how it let his inability to "see the forest for the trees" cheat him out of hundreds of thousands of lost equity over the last 6 to 10 years?
anony said:
ReplyDelete"Factor in other costs of living, families, etc., lawyers are doing well, but aren't, on the whole, wealthy."
Sorry, but if we had a "best of" on this blog, this is the line I'd nominate!
from another blog
ReplyDeleteAttorneys concentrating wealth as fast as they can
Title: The New Billionaires
Source: Trial Lawyers Inc.
From the article:
Once upon a time, the average person blanched at lawyer fees that reached upward of $500 an hour at many of the best firms. But those high hourly fees are chump change compared with what Trial Lawyers, Inc. is raking in these days. From tobacco settlements to asbestos class action suits, the industry now boasts fees that can range as high as an astounding $30,000 an hour, turning some members of Trial Lawyers, Inc. into overnight billionaires and providing the capital to bankroll new lawsuit ventures in new markets.
Also
Regardless of one’s view about the merits of the suits, the mega-fees from the 1998 tobacco settlement were nothing but egregious. Some 300 lawyers from 86 firms will pocket as much as $30 billion over the next 25 years even though, for many of them, the suits posed minimal risk and demanded little effort.That staggering sum comes right out of taxpayers’ pockets—enough money to hire 750,000 teachers.
http://concentrationofwealth.blogspot.com/2004/03/attorneys-concentrating-wealth-as-fast.html
lance, you obviously dont know what you are talking about when it comes to lawyers. Two examples, both my friends. One an indian woman who graduated from georgetown in the top 5% of her class. Starting salary in dc, 115k. She said she would be making this salary for about the next 5 years or so then she could hope to go up. My other friend did not graduate in the top 5%. He is clerking making peanuts. Why, because most of his job offers were less then 70k. So he is clerking for crap to boost his resume. He makes less then 50k per year as do most clerks. Only the creme of the crop lawyers make big cash and only lawyers with alot of experience. Most government laywers make around 100k per year. Look at the job postings at usa jobs if you don't believe that. So, maybe your lawyer friends are all rich and mine arent, that is the only explanation I could understand. Because on the whole, anon post about lawyers not being wealthy(for most of them), is about dead on.
ReplyDeleteBob
anony said:
ReplyDelete"I choose to set aside money that I earn and invest it in mutual funds and equities."
So, have you ever stopped to think where the earnings on your mutual funds ad equities are coming from? Do you think it might be possible --- or even extremely likely --- that perhaps the equities you are so heavily invested in operate with leverage (i.e., they borrow funds to supplement and leverage the ownership funds you have supplied? And so, you are indirectly, leveraged yourself?
Of course it would be even more interesting if you "invested" any of your surplus funds in bonds or saving certificates because there you would allow others to be leveraged (and earning above average returns) while you yourself were contenting yourself with the average or below-average returns that come with having relatively less risk.
Also, you might want to look closer at the supposed $1K to $2K you are "saving" each month by renting over buying. Those of us who own, get to "write off" about 33% of our monthly mortgage payment (25% federal return and 8% state return). Some of us get to write off more (28% federal return and 9% DC return in for high taxpayers in the District = 37% total deduction.) You need to subtract that percentage from your "savings" each month, since it is an Uncle Sam subsidy that you don't get!
Not sure why this is so funny to you. Anon 12:02 is right. He is correctly using the word 'wealth.' Being a lawyer might help you obtain a high income; it does NOT ensure wealth. Wealth includes far more than just income - all assets are included in wealth.
ReplyDeleteUnless someone here knows the average asset valuation for DC-area lawyers and can prove that the typical lawyer has ammassed wealth, it is fair to say that lawyers in general are not 'wealthy' in the true sense of the word.
Few people are.
Your lawyer friends are losers, Bob.
ReplyDeleteSorry, but anyone who graduates top 5% from G'Town Law is not stuck in a job in DC making $115k for 5 years. That's just ridiculous. Either you're lying, your friend is lying, or your friend did not graduate top 5%. Starting salaries in a good DC firm for someone like her would be around $130k, and rising very nicely each year. As a fifth year associate, she would be making at least $200k, with about $30-50k in bonuses each year depending on how well the firm did.
And your clerking friend earning peanuts is also a loser. Why? Because he can temp at one of the plethora of DC legal temping agencies, get on a doc review project, work about 10 hours a day, and be making around $75 a year, not including money he could make from working OT.
So in short, your lawyer friends have made very poor employment decisions. It is hogwash to say that only creme of the crop attorneys make big money. You can be a mediocre attorney and still pull down $130k. Of course, if you go into public interest law, then you will be earning peanuts. Which is why many lawyers who work for big firms stay there for abotu 4 years, earn a fortune to pay off loans and use as a down payment, and then leave big firm life for something with a better quality of life.
It has been proven mathmatically time and again on this blog that even with the tax deduction, renting saves cash every month.
ReplyDeleteWhy would I care if I am 'indirectly leveraged'? By investing as I do, I can never lose more than I invested. Even a fund that has leveraged itself cannot come to me and say "you invested $10K but now we are down, you owe us $20K" Not so in real estate.
Like I said, I have been beating the S&P for the past 7-8 years. So my return is above average. Are other doing better than me? Maybe, but I don't need to worry about how others are doing. Mine is a long-term strategy, meant to build over time. It means I don't have to try to 'time the market' or guess at the 'next big thing.'
I'm cool with that.
Here we are AGAIN talking anedoctal smack about lawyers' incomes. This is publicly available data people.
ReplyDeleteFritz, despite the facts differnce, which isn't much 115 to your 130k. You stated that lawyers work here, make big cash, then leave for a better quality of life. So, by that statement I assume you also don't believe in lances "lawyers caused the housing price to increase" theory.
ReplyDeletebob
Bob said:
ReplyDelete"Because on the whole, anon post about lawyers not being wealthy(for most of them), is about dead on."
Bob, we're not talking about your Indian friend or your clerk friend. We're talking about the high priced lawyers at the high priced law firms located right around the corner from the subject condo at 9th and F. These undoubtedly include many a trial lawyer like the article I posted as I believe these class action lawsuits often get settled here in the U.S. District court that settles DC matters as well as matters extending throughout the various states. Also, lobbyists are usually also lawyers. I posted a link last month showing how they've doubled their earnings since Bush came into office because companies know this is an opportune time for them to get regulations changed (to their benefit) and are falling overthemselves to get good lobbyist who can do this before the window of opportunity closes. Sorry, but your anacdotal lawyer friends are representative of the K Street lawyers and lobbyists that are the "target market" for DC downtown condo market.
meant to say:
ReplyDeleteSorry, but your anacdotal lawyer friends are not representative of the K Street lawyers and lobbyists that are the "target market" for DC downtown condo market.
David,
ReplyDeleteYou should be able to trackdown whoever is commenting in your name since their "David" is linked to a blog like yours (i.e., it's hyperlinked.) I would think that you could report them to the blogspot folks since you can indentify their blog. And, I'd bet it's Bill ...
lance-
ReplyDeleteThose lobbyists and lawyers represent a small portion of the overall DC area. If they move into the Gallery Place area condos, then they are going to move out of the upper NW condos, or the Georgetown condos, or the Bethesda condos, or the Arlington condos, or wherever they currently live. And the rest of the area can't move in to those places.
There are not as many people in this area that can afford a 300-800,000 dollar condo as you seem to think.
A Redskins fan
"
ReplyDeleteThere are not as many people in this area that can afford a 300-800,000 dollar condo as you seem to think.
A Redskins fan "
Redskins fan, you're wrong.
"Fritz, despite the facts differnce, which isn't much 115 to your 130k. You stated that lawyers work here, make big cash, then leave for a better quality of life. So, by that statement I assume you also don't believe in lances "lawyers caused the housing price to increase" theory."
ReplyDeleteBob, you're an idiot. The fact is that there are thousands of lawyers in DC making anywhere from $135k (to start) all the way up to $2-3 million per year. You must be the only idiot in the world who doesn't buy that there are a buttload of lawyers here.
It's amazing. So many of you not only live on the poor side of the economic divide, but your perspective is so screwed up that you don't even realize that there are people -- lots of people -- with money in this city.
ReplyDeleteNever mind that this housing "bubble burst" you keep predicting never seems to happen.
I have posted this before. if you want to know what lawyers make right out of law school in DC (never mind the partners who are pulling down serious money), here you go. Each of these firms employs dozens to hundreds of lawyers in DC:
ReplyDeletehttp://www.infirmation.com/shared/insider/payscale.tcl?state=DC
"Affordability" is a good discussion for this board since there are varying opinions about what that means.
ReplyDeleteFor some, if they don't have the 20% down payment, they can't afford it
For some, if it takes up more than 30% of gross (or net) income, they can't afford it
For some, 50% of their income is affordable
For some, financing the down payment is okay
For some, if the banks says you can afford it, you can.
How you choose to define affordability strongly influences how you see the DC housing market.
SO, what is affordable to you???
I don't mind starting: I need to be able to put 20% down, free and clear. Beyond that, I don't want to go more than 20% of income. (This is conservative, but currently, I comfortably rent at about 9% of household income and I don't want my lifestyle to have to change TOO drastically...)
Anony,
ReplyDelete"It's amazing. So many of you not only live on the poor side of the economic divide, but your perspective is so screwed up that you don't even realize that there are people -- lots of people -- with money in this city."
They've got their heads in the sand. In pure denial. I'm not sure what it buys them. I rather face the reality that I am "poor" in the grander scale of things around here ... This lets me see beyond my world and make better decisions affecting it in the end. Had I taken the bubblehead's perspective, I would not have sold my condo last year for more than 3 times what I paid for it 5 years earlier. I would have thought "geez, there can't be that many people out there that can afford what I think I can get for it. No, I should listen to my realtor instead who is just looking for an easy sale and price $100,000 less than what I think it can go for. " In the end I had 11 offers on it ... and it sold for $57,000 more than what I'd listed it at. Yes, that's about $157,000 more than what the realtor said it was "worth". But I still sold it for less than what it was worth. I did have 11 offers after all ... And all it takes is one offer ... a high offer. My friend down the hall who sold 2 weeks after me priced her similar unit at what I had sold mine for ... and ended up selling it for $85,000 more than what I sold mine for. Yep, she ended up selling her unit for nearly a quarter million dollars more than what my realtor had originially said my unit was worth. Two lessons to be drawn from this (1) Realtors just want to get a sale. They'd rather do two $400K sales in the time it otherwise will take to do a $675K sale. They make more in the aggregate (volume sales like Walmart.) (2) There are lots of folks out there raking in big, big bucks ... My only chance of getting some of these big big bucks is leveraging what I have ... such as a "hot" condo. If I were a bubblehead I'd say "I don't think I should charge what the market will bear ... I will instead charge what I think is the fair amount. Which of course means if one of these guys earning the big bucks ends up buying it, he can just buy himself another Mercedes with his savings ... and the bubblehead can sleep well at night.
It is good that some people sold for a huge profit. Last year was the height of the mania. We all remember - the bidding wars, the escalation clauses.
ReplyDeleteThe really smart money took that profit off the table and ran with it. They moved away, or they invested it, but they did not roll it all into their next house. Mainly because tripling in value every 5 years is unsustainable.
Lightning rarely strikes twice. It's so over.
"I'll take my annual 15-20% for the next 40 years over the feast-or-famine real estate market any day of the week. Reminder: Historical real estate returns = 3.4%"
ReplyDeleteAnnon, good luck with this "strategy." Real estate is no more feast or famine than stocks and bonds, and leverage does not necessarily equal risk. Let me suggest that the companies you invest in most likely recognize this, and you'll probably realize this too someday. Maybe you're too young to have had your stocks hammered during bear markets, or to have owned real estate during housing booms. But if you make the anticipated 15-20% return during each of the next 40 years on stocks and bonds, as you plan, then I suppose you don't have time for real estate, especially with a return of 3.4%. No need to diversify here.
Actually, the richest trial lawyer I know of is a guy from Texas, not DC, and trial lawyers only make money if they get lucky - they have to be good, sure, but law is like the housing boom in a way - you have to find the "next big thing" in the plaintiffs world (be it breast implant litigation, etc.) and then everything else has to work out after that in order to really strike it rich. Unless you take volume work over quality and then you're working your butt off.
ReplyDeleteAnd Fritz, you seriously know nothing - telling someone that they choosing clerking over a low paying job was a poor job decision? Tell that to those who clerk for the Supreme Court justices and make no money. Clerking is prestigious. It's one of the hardest positions to get, especially in the Federal circuit courts. It can lead to big paydays later - making less in the beginning is the smart move if you can get it. But then again, it wouldn't fit in with your theories to have any understanding of the way the legal profession operates, would it?
OK! Lawyers make big bucks, they can afford this place. So what!
ReplyDeleteThere are more available condos than lawyers and lobbyists. I would love to grab a flux capacitor and a delorean and travel 88 miles an hour so I can forward into the year 2008 to find out what has become of these condos.
"OK! Lawyers make big bucks, they can afford this place. So what!
ReplyDeleteThere are more available condos than lawyers and lobbyists."
Idiot. Nobody said that lawyers and lobbyists were going to live in all of them. (Not that you've given any reason to believe your calculation is true). They are a "for instance."
D in DC,
ReplyDeletePlease provide an example where leverage does not mean increased risk. I am not being sarcastic - if there is a financial situation where this is true, I want to know.
I don't consider 15-20% to be that ambitious either. Annual historical return on stocks is 11-12%. And that includes all companies, including those that went belly up, and it includes some of those really lean years in the 70s.
Wharton School Finance Prof. http://www.econlib.org/LIBRARY/Enc/StockPrices.html
Anony at 2:03 -
ReplyDeleteLet's try some reading comprehension and basic logic.
Let's start with reading comprehension. Follow along with me if you can. If not, don't worry, I'll wait for you to catch up.
1. Bob says his clerk friend is clerking because all the job offers he got sucked.
2. So, Bob's friend decides to clerk in order to boost his resume and hopefully have some better success next time he seeks firm employment.
Now we'll move on to the logic part of this exercise. Put on your thinking cap and let's go!
1. If Bob's friend was unable to get any good job offers, then chances are that he did not go to a top tier law school and/or did not have top 25% grades.
2. Whatever clerking gig Bob's friend has, it can't be too selective, otherwise someone who doesn't get offers from big firms ain't gonna do amazingly in clerkdom.
3. Following #1 and #2 above, it's highly unlikely that Bob's friend is a Supreme Court clerk since those kinds of folks would be getting job offers of more than $70k.
4. If Bob's friend is interested in making more money, then legal temping is a better idea than clerking.
5. If Bob's friend is interested in boosting his resume, then clerking is a good idea, but the combination of either non-top tier law schools or mediocre grades will still hurt him in his law firm job search.
Now, let's analyze your post in light of the above.
You point out that clerking is prestigious in the federal appellate courts. This is very true. A Supreme Court clerkship is the Holy Grail of all clerkships. The likeliness of it being offered to someone who couldn't get a decent firm job is, however, very low.
Federal appellate clerkships are the next best thing. They are also highly coveted and competition for them is fierce. Once again, it's pretty unlikely that someone who can't get a good firm offer would get one of these appellate clerkships.
Which leaves us with clerkships with federal district courts, federal magistrates, bankruptcy and tax courts, state courts, city courts, and assorted state and local agencies. This is where people with mediocre grades and non-Ivy law school pedigree go to clerk. Yes, it looks nice on an otherwise non-stellar resume. But let's be realistic: it's not going to get him an offer from Skadden or Cleary or Cadwalader (you might want to Google those names to see what they mean; one of them was my former employer).
So, to recap: yes, federal clerking is very prestigious at the appellate levels. And yes, it pays very poorly, but the big payday comes when the clerkship ends and the firm offers come flooding in, usually with various levels of signing bonuses.
But based on Bob's post, it's highly doubtful that his friend, who had trouble getting firm offers for more than $70k, is the high-quality candidate that would get such a coveted federal appellate clerkship.
In other words, if you'd read more carefully, you wouldn't get so pwned! by someone who knows what they are talking about.
Have a nice day. And there's no charge for this lesson.
Federal District Court clerkships are considered prestigious by most measures, and tend to go to people with good grades at top schools. And they will usually get your foot in the door at big law firms.
ReplyDeleteLance's anonymous posts are so incredibly transparent. Scrolling through these self-referential and mirrorlike "anonymous" comments is like watching M.C. Escher paint the illustrations for a collection of Borges stories.
ReplyDeleteJerkstore
That was a very long post about lawyers, which we have already established have only a minimal effect on the housing market, at best. Can't we talk about something else now?
ReplyDelete"That was a very long post about lawyers, which we have already established have only a minimal effect on the housing market, at best."
ReplyDeleteUh, no we haven't established that. We've established the contrary.
I see. Out of the 5.9 million people in the DC metro area, lawyers make up 10% (590,000), 20% (1.2 million), 40% (no, 2.3 million) of the population....
ReplyDeleteThey are all making $200K each and this justifies the huge run-up in real estate over the past decade. The run-up in other cities is also justified by lawyers.
And if anyone says there aren't enough lawyers (or subsequent salary increases) to drive real estate up 20% every year, they are just ignorant of the fact that there are ambassadors and Saudi prices hanging out at the hotel Monaco, sipping martinis.
I am yet to be convinced.
No, you're right, anon. The whole city is making $40k a year, just like you. Only a real estate agent would dispute that.
ReplyDeleteDAVID CRONENBERG PRESENTS: "r.e."
ReplyDelete"Am I a real estate speculator who went to bed and woke up a lawyer, or am I a lawyer who went to bed and woke up a real estate speculator?"
Anonymous said...
ReplyDelete"Lance's anonymous posts are so incredibly transparent. Scrolling through these self-referential and mirrorlike "anonymous" comments is like watching M.C. Escher paint the illustrations for a collection of Borges stories.
Jerkstore"
Sorry, I haven't even been in front of a computer the last several hours. David can see IP addresses, he'd let you know if those were mine. It's probably more that you are either paranoid and/or not sure in your opinions.
OK, Fritz -- I mean, Lance, I mean anonymouses 3, 5, 7, 12, 14, 15, 19, 22, 29, 33, 34, 39, 41...
ReplyDeleteJerkstore
Has anyone looked at
ReplyDeletewww.census.gov
Or are we just going to keep blathering about how much our friends make?
The reason I don't believe that there are that many people making that much money is because the BEST DATA AVAILABLE SAY THAT.
Leaving the baseless ad hominem attacks aside, median household income in DC in 2004 was between 40 and 50K a year. It was about twice that in the RICHEST counties nearby. And between the rich parts of DC, Montgomery, and Fairfax, not to mention Arlington and Loudoun, there is PLENTY of available housing for rich folks. These facts have nothing to do with whether I live in a cardboard box or a Potomac mansion.
The additional stuff being built will not find buyers at current prices and current area household incomes. Either we need massive wage inflation or massive house price deflation or some combination of both.
A Redskins fan
Redskin,
ReplyDeleteYep. This is all available information. Which is why these discussions are so amusing and yet, pointless.
And if you point the median income out and how it relates to median real estate prices, everyone starts throwing around how they know people who make more (um, yeah, that is why they are median incomes). And then they accuse you of making $40K a year. Hee hee.
:)
"And if you point the median income out and how it relates to median real estate prices, everyone starts throwing around how they know people who make more (um, yeah, that is why they are median incomes).."
ReplyDeleteDoesn't matter in DC. In DC there are many very rich and many very poor, and they're not in eachother's real estate markets.
"People hiding behind anonymouses hate getting called out. "
ReplyDeletePeople hiding behind "jerkstore" get called "douchebag."
"Angry much? Why? Sitting on a depreciating asset?"
ReplyDeleteYou're the one who seems angry. Poor? Upset that there's no bubble and no burst?
anon said:
ReplyDelete"Doesn't matter in DC. In DC there are many very rich and many very poor, and they're not in eachother's real estate markets."
Additionally, bubbleheads keep pointing to income. They aren't understanding that affordability is based on more than just income. When we say there are a lot of people with money here, we mean with money in the bank or money in stocks and bonds or money is house equity. My house purchase was easy owing to all the equity I could bring to the table. Yes, salary played a factor ... but it wasn't the only factor. And while I was fortunate to have sacrificed starting 10 years ago to earn that equity, there are many people out there much richer than I with lots more savings/equity to bring to the table. If only the bubbleheads could understand that the vast majority of real estate transactions involve large down payments, then maybe they'd begin to understand how irrelevant their median income argument becomes. If you doubt that, then how do you counter the statistic I quoted the other day showing that 80% of all investment and second homes are paid for and free & clear?
jerk,
ReplyDeleteyou're not doing your fellow bubbleheads any favors showing your paranoia to the world. frankly, i think you need professional help. do you often get the feeling that the world is monolith opposing you? not healthey ... get thee to a psychiatrist, and soon!
what is it about the bubblehead cult that it can attract such weirdos?!?
This is the most ridiculous thing posted today:
ReplyDelete"I'll take my annual 15-20% for the next 40 years over"
The total value of my stock market investments and bank accounts, plus $20,000 per year (my average savings rate per year) for the next 40 years, at an interest rate of 17%, would produce nearly $151,000,000. And you are telling me that I'm missing out on this by paying around $2k per month for my mortgage, out of my nearly $170,000 gross household income?
You're friggin' delusional.
Let's see; the same figures above, with an additional $1000 per month in savings (assuming I rent a smelly little hovel to "save money") comes out to an additional $12K per month in savings which means..... I'll have $194,000,000 if I rent versus $151,000,000 if I own. Since I'm missing out on that extra $43,000,000, maybe you could brag to me here about what you're going to do with it in 40 years? Or is your current net worth $10,000, and your annual savings rate around $2000? Lets see... assuming an impossible 17% annual return, that will give you $12.5 million versus my $151 million. Wow - a Wall Street Wunderkind hanging out at bubblemeter in spite of the fact that he's making 15%-20% annually.
Lance, "then how do you counter the statistic I quoted the other day showing that 80% of all investment and second homes are paid for and free & clear"
ReplyDeleteThe stat is misleading. If you tapped all the equity you built up in your 10 years and turned around and bought an investment or second home with the proceeds, that would show up as an ALL cash transaction.
While you might not be the type to tap the home equity ATM, Morgtage equity withdrawal is at record levels. Some of this extraction fueled discretionary spending. Lots of that extraction fueled the second home and investment property purchases.
Anti-bubbleheads dismiss the census data on median incomes by stating two things that we can also see are false from the data.
ReplyDelete1) MYTH: while median household income in the DC area may not look like the DC area is full of two-income super-lawyer/lobbyists, that's because the DC area has lots of super-poor and super-rich.
FACT: The Census also shows what percentage of households in each area (DC, Montgomery, Prince George's, Prince William, and Fairfax) made more than 150K in 2004. In two areas (Montgomery and Fairfax), the percentage was near 20%. In the other areas, it was less. These data say to me that there are nowhere near as many wealthy households as DC housing bulls imply.
2) MYTH: income data do not show how much wealth is being brought to the table.
FACT: Approximately half of DC homes bought in 2005 were bought with ARMs. I doubt these buyers were bringing huge nest eggs to the table. The percentage was lower in the suburbs, but not a lot lower.
A Redskins fan
itsawrap said:
ReplyDelete"While you might not be the type to tap the home equity ATM, Morgtage equity withdrawal is at record levels. Some of this extraction fueled discretionary spending. Lots of that extraction fueled the second home and investment property purchases."
I did state built-up equity as one source of wealth. You apparently don't believe it is. I say it is because you can indeed "tap" it and spend it. And in the case of re-investment into real estate (via tapping of equity), it furthers my point that the run-up in prices is not "that bad" given that other factors have caused all sources of wealth for the wealthy to be run-up ... making buying an expensive home comparatively easy. I guess the point I am trying to make is that the widening gap of the halves and the have nots has distorted what each side of the divide views as "worth". Easy money on the high side of the divide has caused an inflation there for high side items (including houses in prime areas such as Washington or NYC or the Californian coast) at the same time that relatively real prices have deflated (and nominal prices stayed stagnant) for low side items (including houses in the heartland.) Taking what I am saying outside the real estate arena, over the last 20 years we've had the divergence of everyone shopping in a mid-sized department store or shopping center anchor to the dual pronged shopping of Walmart for the masses with its cheap everything in cavernous stores to the Prado and other specialty stores where prices are high but service is personal and the experience meant to luxuriate. Walmart prices are dirt cheap compared to what its items cost 20 years ago (in real dollar terms), while prices in the the speciality places that increasingly are sprouting up to serve the wealthy (i.e., those with high net worth) are sky high. It's two different camps ... and two different markets and extends to the real estate market. And since all real estate markets are local (i.e., there is no one grand overall real estate market.) the lawyers may not be pushing up the prices in the Haymarket Va. real estate market --- and that may be due for a correction, they definitely are pushing them up in DC. real estate market.
"1) MYTH: while median household income in the DC area may not look like the DC area is full of two-income super-lawyer/lobbyists, that's because the DC area has lots of super-poor and super-rich.
ReplyDeleteFACT: The Census also shows what percentage of households in each area (DC, Montgomery, Prince George's, Prince William, and Fairfax) made more than 150K in 2004. In two areas (Montgomery and Fairfax), the percentage was near 20%. In the other areas, it was less. These data say to me that there are nowhere near as many wealthy households as DC housing bulls imply."
Actually, that's quite a lot considering the relatively small number of transactions we're talking about. Sorry, RF, you lose again.
"FACT: Approximately half of DC homes bought in 2005 were bought with ARMs. I doubt these buyers were bringing huge nest eggs to the table. The percentage was lower in the suburbs, but not a lot lower."
Funny how you have to include your "doubt" in a paragraph labelled "fact." You lose again.
If you're so smart, then where's the collapse you've been predicting? It hasn't happened. Just admit you were wrong.
um, house prices have dropped in the DC area, quite significantly. if you would have bought a 699,000 last sep. it would only be selling for 649,000. And actually this data is only asking price so it may be much lower then that. That is a real 50k loss. So, the discussion is over on this topic, the only question is how far will they drop. Or maybe you will just come back with a super intilegent quip...."Bob, your an idiot...blah blah blah.."
ReplyDeletehttp://www.benengebreth.org/housingtracker/location/DC/Washington/
Bob
"um, house prices have dropped in the DC area,"
ReplyDeleteSomeone in the market for a house in Chantilly or Herndon is NOT in the market for a house in DC. We're back to the misunderstanding that the "DC Real Estate Market" is this amorphous blob that extends from Fredricksburg VA to Baltimore MD.
In a perfect world, where there are no routine 22 mile long backups on I-395 (coming up from Fredericksburg), then yes, the Fredericksburg RE market would be more of a factor for DC. But when these so-called suburbs take six (6) hours per *day* to commute to/from; it underscores the fact that markets like F'burg and even Ashburn are NOT part of the DC market.
Stop lumping Culpepper in with DC.
"The total value of my stock market investments and bank accounts, plus $20,000 per year (my average savings rate per year) for the next 40 years, at an interest rate of 17%, would produce nearly $151,000,000. And you are telling me that I'm missing out on this by paying around $2k per month for my mortgage, out of my nearly $170,000 gross household income?"
ReplyDeleteNot at all. You missed my orignal point completely. Diversification is the point. If you have a stock portfolio that will equal $151 million in 40 years (with the numbers you provided) you are diversified and this argument does not apply to you. What I was arguing against is paying so much for a mortgage that nothing is left for savings and investments. And as your math demonstrates, time is key. You can't catch up later. Better to pay a cheap rent now and get that base nest egg established.
I am not sure why you felt the need to attack me so strongly. You seem very angry for someone whose financial future is headed to the $100 million plus range. Ironically, we have the same household income. And similar savings rates (although, by renting, ours is closer to $30K annually.)
"You missed my orignal point completely."
ReplyDeleteYour "point" comes across as: You can either buy a home or invest in the stock markets.
That is wishful thinking for those who hope for a economic collapse. (bubbleheads)
Many, many, many homeowners are not in over their heads.
What is so utterly ridiculous about your position is your claim of realizing "15% to 20%" returns, year over year, for 40 years.
If you knew even a little about the performance of the equities markets over time, you'd know why your claim is laughable. Suggest looking into yourself rather than taking a stranger's word for it.
I have looked into equities over time. Many financial experts recognize that stocks are the only consistent long-term way to beat inflation over time. In the same way that the average return of the stock market is 11-12%, this average includes the years where the market declined.
ReplyDeletePerhaps saying 'year over year' implies that I expect to earn 15-20% every single year. If so, it was a poor choice of words. I know that some years will be better, some worse.
And in this market, whether they realize it or not, many are choosing to buy a home instead of investing - because with these prices they can't afford to do both. So, it is coming down to that for many young people, like myself.
I am not worried about homeowners like yourself who already have their nest egg established. I am worried about young people thinking that buying a home is the only 'investment' they need to make.
BTW - readers, go to a compounding intrest calculator online. 40 years is a very long time. You will be amazed at how much you can have in that amount of time. Even without astounding returns. :)
"So, the discussion is over on this topic, the only question is how far will they drop. Or maybe you will just come back with a super intilegent quip...."Bob, your an idiot...blah blah blah..""
ReplyDeleteYeah, the discussion is over because housing prices in DC have been stable at worst, while inventory has actually declined in recent weeks. So the only question that remains is when you people are going to admit that you're wrong.
Bob, this is what your link says:
ReplyDeleteMedian Price
$475,000 -2.0% (1 month) 0.0% (3 months) +5.6% (6 months) -2.9% (9 months).
Nice bubble burst. I'd say I can't wait for you to admit that you're wrong, but you'll just keep coming up with more and more bullshit reasons why you're not really wrong. it's pretty pathetic.
50,000 in 9 months is a lot of money to lose. Now, I agree, its not a bubble burst, but when I see the numbers it makes me glad I didnt buy.
ReplyDeleteBlah, blah, its pathetic... Ok, I am not wrong. Home ownership is the best thing, no doubt, when its financially smart. Losing 50k on a house in 9 months is not smart. And that, once again, is just asking price! I would like to see the drop in sale price. Instead of calling people names, lets discuss what is really happening in this market. Information is what most of us come here for not cheerleading.
Bob
"
ReplyDeleteBlah, blah, its pathetic... Ok, I am not wrong. Home ownership is the best thing, no doubt, when its financially smart. Losing 50k on a house in 9 months is not smart. And that, once again, is just asking price! I would like to see the drop in sale price. Instead of calling people names, lets discuss what is really happening in this market. Information is what most of us come here for not cheerleading.
Bob "
Bob, you made up the 50000k number. The market hasn't done anything like that, and asking prices are not relevant. it's sale prices that matter. Sorry, idiot, but there's been no bubble burst.
Just because he made it up doesn't mean it can't happen somewhere to someone at some time.
ReplyDeleteOr something like that.
"Anonymous, if you are getting 15-20% returns annually, you are in an even bigger bubble market than the housing market!"
ReplyDeleteExactly. During the past 20-25 years annual returns of S&P 500 have been twice the long term historical average. Application of classic bubblehead logic (i.e., what goes up must come down, return to mean, etc.) dictates several decades of lean returns. Maybe anon shouldn't start spending any of the anticipated $150,000,000 s/he expects to have in 40 years.
Bob said:
ReplyDelete" if you would have bought a 699,000 last sep. it would only be selling for 649,000. And actually this data is only asking price so it may be much lower then that."
uh ... Bob ... if this drop is in asking prices, how can you say:
"um, house prices have dropped in the DC area, quite significantly."
Didn't anyone ever tell you that the list/asking price is just that? and not a definitive indication of value? That not only can you offer what you like for the house, but that likewise people can be unreasonable and list the house for way too much. You don't measure whether housing prices have fallen or risen based on asking price ... but on actual selling price.
anon said:
ReplyDelete"I am not sure why you felt the need to attack me so strongly. You seem very angry for someone whose financial future is headed to the $100 million plus range. Ironically, we have the same household income. And similar savings rates (although, by renting, ours is closer to $30K annually.)"
funny, I read his post to say (1) how ludicrous your expected return rates are (i.e., $100M+ returns in 40 years) and (2) if it really were true that you were going to earn that amount, what real difference would the "pennies" (relative to your millions in the bank) you'd be paying for the mortgage make? (I.e., You are claiming to make such a ludicrous return that if it were true, the house purchase would be an indicental exchange. Of course the truth is --- as the poster said --- you are basing your 10 - 15% on the naivete of someone whose experience only goes back to the 90s which were an aberation. Over the longterm, real returns from stocks have averaged between and 3% and 4% ... not anywhere near the 10% to 15% you are banking on bud.
Median sales prices are down in the Washington Metropolitan area QoQ since 3Q05.
ReplyDeleteSource: http://www.realtor.org/Research.nsf/Pages/MetroPrice
Whether the trend continues or not will be made clear when NAR publishes their 2Q06 numbers - likely in mid August.
I suspect that 2Q06 will be the quarter to show the first YOY decline.
My $0.02.
MyTwoCents said...
ReplyDelete"Median sales prices are down in the Washington Metropolitan area QoQ since 3Q05."
A few observations on this report:
1) this metro area includes West Virginia and Baltimore! hardly indicative of Washington, DC
2) as I've tried to explain before, the "median-priced" home in the metro area that we are talking about is not a real (and stationary) one. Where it might have been in Logan Circle in the late nineteenth century, it had krept out to something like Bethesda or Springfield by the mid 20th century and is probably now out in Frederick or Fredericksburg. The valuation of this ever moving fictinal median-priced home has little, if any, relation to any home you might buy ... because you will be buying an actual and stationary house. Perhaps according to someone's study out there, the median price of a house in the whole US has only gone up by 3.4% over the last century (which is incidentally in line with what the stock market has done over the same period), BUT that doesn't reflect the fact that if you'd bought a house in Bethesda in 1960, it would now be worth a lot more than 3.4% per yr compounded. Don't believe me? Go look and see who is living in Bethesda now .... and who was lving there in 1960s.
3) the decline in median price is only for one quarter ...
Question for all the realtors. When you can't make a living in RE any longer will you become used car salespeople or will you go back to waiting tables?
ReplyDeleteLance,
ReplyDeleteI was going to ignore this because I knew it was coming, but please, re-read the point of this blog. It discusses the bubble in general, not the single condo that you own that'll never go down in price.
Furthermore, prices have declined from 3Q05 to 4Q05 to 1Q06 and 1Q06 numbers were already lower than 2Q05 numbers so even if 1Q06 numbers remain flat there's a YOY decline.
My $0.02.
Lance,
ReplyDeleteBaltimore is tracked seperately. NAR breaks this down based upon Metropolitan statistical areas. Sure some suburbs in WV are considered part of "DC's Metro Area" but these are the $1.2 million homes built on golf courses that the lawyers are buying so your counterpoints are weak.
My $0.02.
Lance,
ReplyDeleteYour assertion that the stock market has only returned 3-4% is also incorrect. The market has historically returned 10% +/- 2%. Several discussions can be easily googled that show the after inflation number is around 7%. Arguments for and against social security reform (a completely different subject) use these numbers as well.
For reference housing has been historically 1-2% over inflation.
My $0.02.
The original point was that housing should not be your only investment. For many, it is, because they can't afford to both invest and buy. (Heck, they can't afford to eat out, unless it is pizza slices.)
ReplyDeleteBTW - the $151 million was what the responder said he would have in 40 years, not me. Even using conservative estimations though (very little additional equity, modest gains), I will be in the $10 million plus range. I also consider that that $10 million will be only worth about $3.8 million in 40 years, due to inflation. My goals for long-term growth are realistic.
Use a compounding interest calculator & check it out. 40 years is a long time and given my current nest egg, having millions is not a pipe dream. As stated before, historically homes barely keep up with inflation. Stocks are an investment that keep you ahead of the inflation curve. These are not opinions.
my2cents said:
ReplyDelete"I was going to ignore this because I knew it was coming, but please, re-read the point of this blog. It discusses the bubble in general, not the single condo that you own that'll never go down in price."
a) I don't own a single condo
b) The single actual home that someone will buy is VERY relevant because the bubbleheads are saying "don't buy now, you'll lose your money in that single actual home" ... and I'm saying you'll not be losing that money because (1) you are confusing rising or decreasing "median" home prices with the real appreciation or depreciation possible with the actual house you buy and (2) long term trends support the fact that that home can only go up in value as it's stationary location causes it to go up the scale from "median" to "high end" ... i.e., as it becomes relatively closer and closer to the middle as the metro area ever expands ...
Lance,
ReplyDeleteSo what you're saying is, there is no home in the entire Washington Metropolitan area that will ever go down in price because eventually, WV will be a desirable "close in" suburb, preferred over Ohio, for it's shorter commute to DC?
Yes I've taken your argument to an extreme, but that's because I think your argument is extremely weak.
And no I'm not confusing median prices with actual prices - your point (1) above. You're essentially recommending that people buy whatever they want and then believe that they won't be affected. That's irresponsible.
My $0.02.
"Even using conservative estimations though (very little additional equity, modest gains), I will be in the $10 million plus range. I also consider that that $10 million will be only worth about $3.8 million in 40 years, due to inflation."
ReplyDeleteIf this is true, then your portfolio is worth only a few thousand dollars, at most. You *cannot* afford a home, regardless of whether or not there is a bubble. So stop arguing that you are doing the best thing by choosing not to buy. You couldn't put 20% down on a $150k property if you wanted to! And didn't you say that you are saving $30k per year? Liar!
That compounding interest calculator really gets you thinking, eh??
ReplyDeleteMy conservative estimation was an additional $10K per year and 10% returns, compounded once annually. (Play around with it if you really need to know the current worth of my portfolio.)
Yes, I save closer to $30K but figured that a $10K estimate was more than fair, considering that this is the least possible amount I would save, even in the worst of financial situations. (In reality, putting $10K OR $30K a year into savings won't be squat in 30 years, so the amount saved each year will be increasing as well, but... that would only increase my returns as well, so we will leave it at the pitiful $10K per year, for the argument's sake.)
I have nothing to gain by telling others to invest wisely. Use an interest calculator to see what I am talking about. Understand that by not investing, you are still taking a risk. Understand that if you DON'T have more than a $1 million in 40 years(which will be worth about $300K), you will be in sad shape. Understand that every year you spend paying interest on an overinflated mortgage takes away from the $ you need to be investing today. Starting 10 years earlier makes a drastic difference.
I am not saying homeownership is a bad thing, or that people who can afford to own and invest should rent. I am saying that many people are making a trade off and they aren't even aware of it.
Accusing others of not being able to 'afford' a home as means of refuting an argument on this board is weak. And it comes across as mean and spiteful too.
ReplyDeleteBut anyway, it has been pretty well established that most people on this board who rent could certainly get the loan necessary from a bank to afford a home (I think Lance said that a household of $55K should enable a $375K mortgage). They simply are choosing not to buy now, as they either save for a down payment or hope that prices decline from record levels.
"I am not saying homeownership is a bad thing, or that people who can afford to own and invest should rent. "
ReplyDeleteYour first position was that people either own homes OR invest in equities. You've since revised or clarified that position.
Apparently, I was modeling my net worth (from a comfortable chair in my own home) while you were still in grammar school, so I'll cut you some slack for presuming to know more than an "anon" on a blog.
"I am saying that many people are making a trade off and they aren't even aware of it."
The underlying motivation for you to be here arguing about your own personal decisions can only be that you aren't completely comfortable with your position in life. Why else would you argue with strangers about it?
"weak, mean and spiteful"? He layed out his financial position, and then said he was *choosing* not to buy.
ReplyDeleteAfter disclosing his financial position, it became clear that he couldn't afford a conforming loan on a very modestly priced home. Then, I call him on the very facts that he presented, and I'm "mean" and my point of view is "weak"?
It's like taking an xray of your broken arm, then telling your doctor he is "mean" for telling you that you have a broken arm. Silly.
or its like telling someone that home prices in the "DC METRO" area have dropped, giving the link to the data, then they call you pathetic or post that you made up the number. Silly.
ReplyDeleteLance, if asking prices drop in a buyers market, which is what we are in, why would people bid above the asking price? The answer is they wouldnt, so its very probable that the homes are selling for less then the asking price.
Bob
The underlying motivation for you to be here arguing about your own personal decisions can only be that you aren't completely comfortable with your position in life. Why else would you argue with strangers about it?
ReplyDeleteWouldn't this apply to you too then?
But Bob,
ReplyDeleteYou're forgetting that the person selling is still selling at a major gain over what they paid for the place 2,5,10, or 400 years ago. So, in reality, pricing aren't declining*.
My $0.02 (responding for Lance)
*Cause recent comps don't apply when I have to be nimble and change my argument again...
NAR source reporting declining values: http://www.realtor.org/Research.nsf/Pages/MetroPrice
Ok Anon, the believer that securities prices will always go up (I guess you never saw the inflation adjusted return of the DJIA for the 60 years following WWI-it is Zero. That's right, the full working lifetime of an entire generation of Americans following your investment strategy failed to exceed inflation on their investments).
ReplyDeleteSince you like historic averges and the power of compounding, maybe you should check out housing prices in 20 years assuming annual returns of 3.4% as you stated. Let's see, a 400k house now will be 800k in 20 years. That doesn't sound like a great return. But you should figure out what the return on investment would be assuming leverage (i.e., a 20% down payment and mortgage). I think that you'll see that, if you really are investing for the long term as you state, real estate returns on investments of 20-40 year terms will rival your anticipated 10% (or your initial over-optimistic 15% to 20% year over year)
my2cents,
ReplyDelete"And no I'm not confusing median prices with actual prices - your point (1) above. You're essentially recommending that people buy whatever they want and then believe that they won't be affected. That's irresponsible."
you've read enough of my posts to know i've never said this and have to the contrary said the opposite. again, my point is simply: just because the price of that median house might very well fall, it doesn't mean the property you buy will also fall. YOU NEED TO LOOK AT THE INDIVIDUAL PROPERTY ... and not try to "time it" as the bubbleheads are doing waiting for their 50% crash which ain't gonna happen. THAT is irresponsible ... like wishing on a star instead of taking control of your own destiny
"or its like telling someone that home prices in the "DC METRO" area have dropped, giving the link to the data, then they call you pathetic or post that you made up the number. Silly."
ReplyDeleteUh, Bob, your link did not support your statement. Sorry, imbecile. Bubbleheads lose again.
Lance,
ReplyDeleteI can agree with your last post. I'm not a complete bubblehead, I just have a different level of risk tolerance. :)
My $0.02.
anon 12:40, can you read? If you go to the link I posted above it will show you that the upper 75 percentile home dropped from 699 to 649, and overall homes have dropped 2.9% in the last 9 months. The asking price. Likely, since we are in a buyers market, even realestate agents stipulate that, the actual sale price is less then the asking price. LEARN TO READ.
ReplyDeleteBob
For anonymous 12:40,
ReplyDeleteNARs report on Washinton's Metro area median prices:
http://www.realtor.org/Research.nsf/Pages/MetroPrice
QoQ prices down for 2 quarters running and are already lower than 2Q05 if prices stay level.
I know I'll "lose" this argument but can I at least win a point?
My $0.02.
"I guess you never saw the inflation adjusted return of the DJIA for the 60 years following WWI-it is Zero."
ReplyDeleteWhat?! Where did you get this statement?
Anony at 12:10 -
ReplyDeleteYour "facts" regarding the DJIA return are nothing more than pure poppycock. Please come up with a name so that we know which users can simply be ignored.
No one here has stated that securities always go up. They have simply made the claim that they have an historical average in the 8-12% range. Which isn't an opinion, it is well documented and understood by historians and financial experts alike.
ReplyDeleteWhy are equity returns better? Because the risks are higher. But please don't think that a home is a 'safe' investment just because the return is piss-poor. Just like buying stock on margin, you can end up owing more than you invested if things stagnate or decline, and you need to sell.
This is why over time real estate is not the best investment. Risk is high due to leverage but the returns just aren't that great. And long term investment strategies don't need to depend on the latest hype to be sucessful.
"Your "facts" regarding the DJIA return are nothing more than pure poppycock."
ReplyDeleteFritz I can always count on you for a reality check.
"Your "facts" regarding the DJIA return are nothing more than pure poppycock. Please come up with a name so that we know which users can simply be ignored."
ReplyDeleteWVU a reality check. Ha ha ha.
Thankfully Fritz has identified himself so people can ignore his useless posts, since he's proven time after time that he dosen't know much about what he posts. This DJIA post is but one example. He dismisses (without support) the post as "pure poppycock." In fact, he's wrong, and WVU 84, you've been had too.
There have been very long periods of time during which the DJIA has had no or very low annualized returns. There have also been very long periods of time during which these returns were zero (or negative) when factoring inflation. For example, from about 1900 to 1940 the annual rate of return was less than 2.5%, and from about 1962 to 1982 the annual rate of return was also less than 2.5%. Factor in inflation, and these little returns disappear. The DJIA peaked at 381 in 1929, and reached 1000 for the first time in 1982. More detailed supporting information is available from Dow Jones itself: http://averages.dowjones.com/mdsidx/index.cfm?event=showAverages
The rate of return from 1929 to 1982 BEFORE factoring inflation was 1.8%. Ouch. The rate of inflation during that time was well in excess of 1.8%. http://eh.net/hmit/inflation/
In fact the 1940s was a period of the highest rates of inflation during the past century.
If these percentages and references to inflation are boggling your mind, you can simply look at an elementary chart of the DJIA. From 1929 until 1955 there was no gain whatsoever. And again from 1962 to 1982 you can see what appears to be no gain, but it’s actually a little less than a 2.5% gain. http://finance.yahoo.com/q/bc?s=%5EDJI&t=my
So think about that, these are examples of 20-25 years and more when the DJIA essentially had no gain. So the initial post is correct—i.e., that during the working lifetime of an entire generation of some Americans, not only did they not achieve 15-20% returns on DJIA, but they actually had no return when factoring inflation.
The people on this blog who keep posting about 15-20% year over year returns from their safe mutual fund investments are delusional. The historic rate of return isn't that high. It's not even 8-12%, which other posters have termed “conservative.” The rate of annual return (factoring inflation) for the history of the New York Stock Exchange is 7.7%.
I’m surprised that so many bubbleheads here are such stock market bulls. Maybe you’re hoping for a quick buck to make up for missing out on the last real estate run up?
There's a lot of posts here today, and I'm amazed that the bubbleheads have shown not only ignorance regarding real estate, but now also investing.
All of this information is easily verified by a Google search, so I’m not going to waste more of my time spoon feeding this information to you. But, here are some random links to sites which might be good places for you to start learning about stock market returns:
http://www.ibbotson.com/content/kc_published_research.asp?catalog=Article&category=Knowledge%20Center%20Published%20Research
http://www.econlib.org/LIBRARY/Enc/StockPrices.html
http://economicjourney.blogspot.com/
http://zmagsite.zmag.org/Nov2005/dolack1105.html
http://www.stockmarkettiming.com/historical-charts.html
http://www.internet2.edu/~shalunov/stock-market/
Anony 4:52 said:
ReplyDelete"I’m surprised that so many bubbleheads here are such stock market bulls. Maybe you’re hoping for a quick buck to make up for missing out on the last real estate run up?
There's a lot of posts here today, and I'm amazed that the bubbleheads have shown not only ignorance regarding real estate, but now also investing."
EXCELLENT POST! I think you've hit the nail on the head so precisely that your assertions must be evident to everyone reading this. A bubblehead is a stock market bull because they have to be ... having missed the latest great run-up in real estate appreciation, they must now find hope --- in of all places -- the very equity market whose "bust" they so often like to quote in predicting a similar bust for real estate prices! So, amazing, but true!
So after all that initial blather you finally write that the rate of annual return (factoring inflation) for the history of the New York Stock Exchange is 7.7%.
ReplyDelete7.7% still beats real estate. Stocks are still the only investment to beat inflation over time.
Also, 7.7% represents what you would get if you invested in every available stock. Obviously people are able to do much, much better by weeding out poor performers.
People who have a long term strategy can weather their losses and aren't trying to make a 'quick buck.' Until you can point to another investment that has a better return over time, stop telling people that they shouldn't invest in their best bet out there.
OR is it possible that those who have put everything they have into real estate (and not much else) are seeing that historically the facts just don't back them up? The heyday of huge real estate returns have ended and now all real-estate-only-investors have is the roof over their head, which is now a drain on their finances and illiquid to boot.
ReplyDeleteThis is NOT debatable people. Google 'investments over time' and see what you get. Stocks outperform everything else, given a long enough time horizon. If you are young, you have that time. Don't rely on being able to jump from bubble to bubble.
Don't be impressed by all the links. I am pretty disgusted. After taking the time to read through the provided links, I found they failed to support Anon 4:52's own arguments.
ReplyDeleteFrom the second link (6th paragraph): Over time, the total return on stocks has exceeded that of any other class of asset.
From the next link: According to Ibbotson Associates (www.ibbotson.com), the historical (1926-2000) growth rate on the S&P 500 has been in the range of about 10.7% per year. This represents a nominal measure that includes capital gains, retained earnings and the reinvestment of dividends paid. In real terms (adjusting for inflation -- the percentage change in the Consumer Price Index) this growth rate is roughly 7.7% per year (10.7% - 3.0 annual rate of inflation)....Thus, I believe that eventhough it is possible for some investors to realize a rate of return of 8% or more, as we talk about large segments of the population building portfolios the realistic rate of return must be closer to the actual rate of economic growth -- 3%. The last statement was the opinion of a blogger
Th next link is a political opinion piece by Pete Dolack "an activist, writer, and photographer who has organized with the No Spray Coalition, Brooklyn Greens, New York Workers Against Fascism, and the National People’s Campaign. He is the author of The Winners and Losers of Fascism." He is tearing down stocks to oppose the privitization of SS. Yawn.
The next site is pro-equities! It is an advertisement for a "timing the market" software product. It basically says the market has seen booms and busts and its software can help you time it. Come on. Really.
Finally, again, from his own, final link... If he had scrolled down, he may have noticed that it said:
But even if one were to assume that it is possible to time the real estate market (buy at the bottom and sell at the top), the change between 1975 and 2002 HPI is at an annual rate of 1.082% (note that this is a best-case scenario -- the 0.635% figure better describes average returns). Instead, this guy recommends TIPS (Treasury Inflation-Protected Securities) as a comprable investment to the Dow Jones.
SO, basically for all the time he/she spent being condescending about spoon feeding people stuff, his 'proof' that stocks are useless adds up to a big wad of nothing. (And those who agreed with him obviously jumped on his/her bandwagon without reading the actual information.)
The above four people have failed entirely to see the point of anon 4:52.
ReplyDeleteThere was no issue with whether stocks beat real estate in investment returns.
The point was whether stock market bulls--who also happen to be housing bears--were correct in claiming that they'll take their "savings" from rent, invest in the market, make 15-20% year over year returns, and end up with something like $151 million in 40 years.
Anon 4:52 pointed out that DJIA returns are nowhere near 15-20% historically, and that they are in fact 1/2 that, 7.7%
Anon 4:52 also pointed out that 1929-1982 DJIA average return was only 1.8%. (I think real estate during the same time handily beat DJIA-but that was not the point being made). And that lifetime DJIA was only 7.7%
One brillent bubblehead then said Anon 4:52 was wrong because DJIA average is 7.7% percent. But this is exactly what Anon 4:52 argued!!!
Another bubblehead, apparently not aware that DJIA consists of 30 stocks, stated that the DJIA average performance doesn't mean much because it represented all stocks, and that this particular bubblehead belived that s/he could pick better performing stocks.
Fritz called this DJIA return cited by Anon 4:52 poppycock, and Anon 4:52 thoughly proved that Fritz was wrong.
Random bubbleheads then argued that Anon 4:52 didn't prove his point by claiming that stocks always beat real estate as an investment.
Once again, bubbleheads miss the big picture. First, nobody argued that real estate beat stocks. The point was that DJIA does not always go up (unlike claims of bubbleheads), and that many, many years, even decades, pass without any DIAJ gains. Specifically, Anon 4:52 stated that DJIA average had zero gains after inflation from 1929-1982. Nobody has disputed this, but instead have tried to change the subject to real estate vs. stocks.
Finally, the preceeding bubblehead states "SO, basically for all the time he/she spent being condescending about spoon feeding people stuff, his 'proof' that stocks are useless adds up to a big wad of nothing. (And those who agreed with him obviously jumped on his/her bandwagon without reading the actual information.)" This pretty much sums up the level of reading comprehension demonstrated by bubbleheads in general. Nobody argued that stocks were useless, and the links referenced by this bubblehead, presumably in opposition to Anon 4:52's argument, in fact state exactly what 4:52 explained: That DJIA average return in 7.7% However, this bubblehead, like all of the other responders, did not refute Anon 4:52's primary statement that DJIA have essentially no gain after inflation from 1929 to 1982.
I really can't believe why all of the bubbleheads are such stock market bulls. I always thought bubbleheads were goldbugs and kept their saving in their mattress. Looks I was wrong.
I'd be curious to know if bubbleheads are reducing their securties exposure considering their belief in upcoming doom and gloom, because, I'm sure you all realize that the a collapse of the housing market might have more than a wee effect on the stock market. Or do you believe that stocks will go up forever?
It seems that bubbleheads will argue about anything. DJIA return is not a secret, you can confirm it at the source--the Dow Jones website. Anyone who who knows how to use Google can confirm that DJIA's average historic return is not 15-20%, and that many decades passed after Great Depression with no significant gains of DJIA.
ReplyDeleteNow that the mass media and most homeowners acknowledge upcoming prices declines, its probably just a matter of time before argumentative bubbleheads begin asserting that there is no bubble.
Looks like a good way to diversify is to hold real estate, equities, and bonds.
ReplyDeleteNow this is weird. Some anonymous guy is dissing "bubbleheads" beause bubbleheads prefer equities to real estate. After all, anonymous says, equities only have a 7-8% real return, with long periods of zero real appreciation.
ReplyDeleteBut historically, real estate has done even worse. Real estate averages a 1% real return historically. I guess the anonymous poster forgot about that part!
The real point here is that you should have a diversified portfolio, and you fail to do that if you overpay for your housing.
Lance has argued in the past that DC housing prices will stay flat (i.e. depreciate in real terms) and rents will rise. Even if I believed Lance, then the best real estate play would be to forgo purchasing a house and buy REITs instead. Remember, there are lots of ways to hold real estate in your portfolio.
Keith, I think that was the inital point made by anon., i.e., that diversification (including stocks and real estate and other investments) is the way to go because even stocks have long periods of no appreciation, and historically, during these types of periods real estate may have performed better. Take a look at the last 5 years for example, stock market sideways and real estate took off. Or look at 1929-1982 DJIA vs. real estate performance. If you were born in 1910, invested in DJIA your entire career, you're return would have been zero after inflation. Hopefully this person wouldn't have been a bubblehead, and would have also owned real estate which I think had much better returns during this period of time.
ReplyDeleteThe discussion began by bubbleheads saying that they would not touch the "feast or famine" real estate market, and would instead make 100s millions by investing in stocks, which they "conservatively" figured would return 15-20% year after year.
Ironically bubbleheads are in denial of the fact that stocks don't always go up, and that historical data shows there is the possibility of 20 or more years of no returns.
This reality is inconvenient to bubbleheads who have trained themselves to believe that real estate is a terrible investment, and that everybody who puts 20k in stocks each year will retire with 100 million portfolio. Smarter investors understand that balance between both is needed.
"But historically, real estate has done even worse. Real estate averages a 1% real return historically. I guess the anonymous poster forgot about that part!"
ReplyDeleteIts true that historic after inflation rate of return on homes is about 1%. But the analysis of whether real estate or securities is better investment over long term is much more complex than just looking at annual rates of real estate vs. stock market (which appears to be 7.7%).
The real estate rate of return does not factor in many other types of "return on investment" income streams. What if you purchase a house, live in it for 10 years and than rent it? This would probably generage positive cash flow. What if you rent your house after the mortgage is paid? This would generate even greater cash flow. Homeowners over time can make a lot profits from rents.
You can also factor in savings from not renting. Most people, if they don't own, pay rent. This is an expense eliminated by owning. In addition, over time, especially after the mortgage is paid off, the rent savings increases dramatically.
These are only two examples of many of what I consider to be relevant information not considered in your cited conclusition that "real estate return is less than 1%."
Bubbleheads tend to view things in absolute terms, such as all DC condos are overpriced or stocks always beat real estate, but reality is too complex for absolutes like these.
I posted right above, but I forgot of another example, a real life example that might help some bubbleheads understand.
ReplyDeleteI have elderly relatives who bought a brownstone in house about 40 years ago for about 40k. Its probably worth 350k now. So if you only look at the appreciation of the property, which is how your conclusion that real estate return is 1% is calculated, you'd think that my relatives have had an annual rate of return of about 5% during the past 40 years. Perhaps the stock market would have been better. However, the mortgage was paid off 20 years ago, and my relatives have been renting the house for all of those years. The current rent is about 2k a month. So now each year they're making about 50% return on their initial investment of 20k. And going forward, as rents rise, these returns will only improve, and arguably this income stream will last indefinately.
Keith said:
ReplyDelete"Lance has argued in the past that DC housing prices will stay flat (i.e. depreciate in real terms) and rents will rise. Even if I believed Lance, then the best real estate play would be to forgo purchasing a house and buy REITs instead. Remember, there are lots of ways to hold real estate in your portfolio."
Spoken like a true shortterm investor. Again, for the record, buying/selling strategies for homeowners are not --- and cannot be --- the same as for shortterm investors. Why? Because you shouldn't be betting on the roof over your head. Now what Keith says is absolutely a good strategy if he is only talking about that extra money once he has taken care of his housing needs. Everyone should have a diversified portfolio because it reduces risk. Where Keith and I disagree is that I would argue that before you can even get to investing in stocks or REITS or even in Real Estate, you have to be sure first to have taken care of your living situation. And with all the risks and unpredictability involved in renting, I don't think one can claim they have taken care of their living situation if they are renting. Their living situation is only guaranteed as long as the lease runs. And as a fiscal conservative, I can't understand how someone would risk their living situation to have cash to play with risky equity, bond, or even real estate markets. I think we are all in agreement that all investments are risky. I just don't think we are in agreement as to whether it is a good idea to "play the market" with your living arrangement. I don't think it is. And I believe that should be your first concern before you even consider what money is to be made out there by selling stock or bonds or real estate.
A long term stragtegy must consider the best historical return. Hoping to do well in equities when stocks are up and jumping to real estate when that seems to be going up is basically trying to predict what the next big thing will be. And as we all know, good luck with that. As Buffett says "The worst reason in the world to buy a stock is because it is going up." Same applies to real estate.
ReplyDeleteSo you have to make decisions based on the best information you have. The best information says, over time, stocks will outperform real estate. Will there be periods of time where this isn't true? Sure, but a long term strategy can't get distracted by hype.
I don't view my own home as a vehicle for creating wealth. Will I try to buy when things are low? Yes, but not for the gains I might realize when I sell. The low price simply means that my monthly payment for housing will be low. And as Lance argues, having a low payment over time, is the way to go. By having a low montly payment (via cheap rent or low fixed mortgage) I can continue to divert funds into better investments.
PS Some stuff in this thread is getting distorted. It was a housinghead responder who claimed his portfolio would make $151 million in 40 years, not the original poster. The original anon said they would end up with $10 million, based on a starting value of $150K, 10% return per year, with additional capital of $10K per year, over 40 years.
"It was a housinghead responder "
ReplyDeleteI'm that "housinghead responder", and I was using the real value of my current portfolio and plugging in the bubblehead's anticipated (and since revised) annual yield.
My calculation, using my real numbers and those claimed by the bubblehead, were meant to refute the bubblehead's claim. That bubblehead went on to revise his/her claim of 15%-20% annual returns.
"Spoken like a true shortterm investor."
ReplyDeleteHow is hoding a decent portfolio short-term investing?
"Because you shouldn't be betting on the roof over your head."
That's inherently what you do when you buy a house. Nothing wrong with that if the price/rent ratio is decent.
Otherwise, you're paying more for your shelter than you have to. There's nothing wrong with that, either, if you get some big kick out of ownership. But in that case, you're paying extra for a consumption good. And you should take care of your savings before you pay extra for consumption.
In fact, most financial advisors would tell you to have your other financial priorities in order before you get a house.
"And with all the risks and unpredictability involved in renting, I don't think one can claim they have taken care of their living situation if they are renting."
Owning is inherently riskier, if only because you cannot adjust your housing payment if things in life go wrong. Again, nothing wrong with that risk from owning, if you've established some investments and savings. But those investments and savings are job one.
In the meantime, as you rent, you can still hold real estate within your portfolio without having a mortgage. In other words, you can hold a sensible amount of real estate, diversified into commercial and noncommercial holdings.
"And as a fiscal conservative, I can't understand how someone would risk their living situation to have cash to play with risky equity, bond, or even real estate markets."
Actually, taking away the opportunity to diversify by hooking all your savings into a large mortgage is the foolish move. Unless the price/rent ratio is low enough, you're buying a house for the joys of ownership. That's consumption. Buying a house before you have your other financial ducks in a row is a poor decision.
Of course, some moron will say, "I bought instead of saved and it worked for me so I must be smart and right and you're dumb and wrong and bitter."
But we live in a probabalistic world, where the dumb decision can occasionally work out better than the smart one. In this case, we went through a period of unusually rapid house appreciation, so even those who bought when they shouldn't have made money. That's fine. Most of these people are very nice and appreciate their good fortune. But some people are too dumb to know they're lucky.
You're offered a chance to bet $1 on the roll of a fair six-sided die. You have two choices. You can bet on 1-5, so you win of 1,2,3,4,5 is rolled, or you can bet on 6. Somebody might choose 6 and might actually win. Does that mean they made the right choice?
Keith said:
ReplyDelete"You're offered a chance to bet $1 on the roll of a fair six-sided die. You have two choices. You can bet on 1-5, so you win of 1,2,3,4,5 is rolled, or you can bet on 6. Somebody might choose 6 and might actually win. Does that mean they made the right choice?"
Ah another area where we disagree. I firmly believe people make their own luck. I've often found that claiming bad luck is a cop out for simply having made bad decisions.
I suspect many bubbleheads are blaming not having made the decision to buy earlier on "bad luck" that the market has now escalated beyond their means. Considering how long the run up was, I would say it had nothing to do with luck but rather an obstiance against facing reality.
"I firmly believe people make their own luck."
ReplyDeletePsychologists call that "attribution error." Look it up.
Lance, did you ever buy any call options on builder stocks, since you knew that housing was going to appreciate?
ReplyDeleteNo?
Then sorry, dude, it was luck in your case.
One last thing, Lance. Are you saying you would bet on 6?
ReplyDeleteAre you saying that if somebody bet on 1-5, and it came up 6, that the person made the wrong decision?
Keith, all of your analysis in support of the merit of renting is based upon the premise that renting is less expensive than buying. This is for the most part a false premise, and therefore leads you to your faulty conclusion.
ReplyDeleteWhat you and many bubbleheads don't seem to comprehend is that most owners pay less than rent now. Why? Was it because they were "lucky" enough to buy when favorable "rent/price" ratios prevailed? Probably not. Renting is almost always cheaper for the present. And this usually is all it takes for shortsighted bubbleheads to conclude that, "my god, rent is cheaper now, therefore renting must be better than buying."
What this shortsighted analysis doesn't consider inflation! I know Lance has made this argument many times in the past, but for some reason many bubbleheads still don't understand it. They simplistically assume that renting is cheaper. Of course, anyone who bought a house more than a few years ago has a mortgage that is less than rent for a comperable house. Even the total costs (mortgage, taxes, etc.) of the house I bought in 2002 is about $300 cheaper per month than renting a comperable house. And the owning to renting savings will only continue to increase as inflation drives up rent (and my mortgage stays the same). Just imagine how much cheaper owning is for people who bought 10-15 years ago; your monthly rent would probably pay 4 months of their mortgages. Ha ha.
If you've been renting for more than 4 years, do you know that you would presently be saving money if you had instead bought 4 years ago?
Why do you focus all of your analysis on present rent vs. buying? It seems to me that its a weak justification for your mistake of not buying already.
anon 10:37 has serious logic flaws
ReplyDeleteyes, people who bought years ago might NOW be paying less than renters, since they bought their house at 2002 prices and their mortgage is the same.
However, that DOES NOT justify buying at 2006 prices when the mortgage is twice the cost of renting. People on this board are discussing the best decision to make NOW, today.
Only housingheads keep dwelling on the past, and the coulda, woulda, shouldas. Do you think there is really one bubblehead laying awake at night saying, 'if only i had bought, if only i had bought'?
I feel bad for anybody who takes Lance's advice. This is a man, after all, who says you should buy at well over 3 times income and then turns around and calls himself a fiscal conservative.
ReplyDeleteYes, yes, yes, buy if the price isn't so far beyond renting so that your mortgage payment acts as a good hedge against future inflation, and if your other saving and finances are in order. That's worth some premium. That was the case in '02, not today.
Today, there are less expensive ways to hedge against inflation other than overpaying for a house.
And remember, especially in the DC area, high interest rates can and will lower prices, so your total payment for housing won't go up (by much) if interest rates rise.
Let financial wisdom, not fear and psychological insecurity, guide you.
Anon,
ReplyDeleteYes, planning for the future is flawed, but only from a bubblehead's perspective.
Don't you get it? Housing prices ALWAYS seem high compared to rents. Even years ago when houses were an astounding 20k, those prices were high compared to rents then.
"However, that DOES NOT justify buying at 2006 prices when the mortgage is twice the cost of renting. People on this board are discussing the best decision to make NOW, today."
Perhaps you should read the posts before commenting. Many of the posts are bubbleheads ridiculing home owners, based on their false presumption that ALL homeowners are going to be paying far more in mortgages than bubbleheads are paying in rent. Of course bubbleheads only look at everything at today's prices (given their lack of foresight), so they cannot comprehend that a vast majority of homeowners have mortgage payments better than bubbleheads present rent payments.
"Only housingheads keep dwelling on the past, and the coulda, woulda, shouldas. Do you think there is really one bubblehead laying awake at night saying, 'if only i had bought, if only i had bought'?"
Wel, actually, yes. I suspect this is exactly what every bubblehead is thinking. Of course none will admit it now.
Wow. Total lack of historical financial knowledge.
ReplyDeleteThroughout time the cost of renting and owning are roughly the same. Remember the ads "Own for what it costs to rent!" Seen any of those ads lately? Of course not. Because you can't own for the cost of renting now.
It is a FACT that renting and ownership are way out of whack now. Many economists pointed to this as proof of a bubble. It doesn't just SEEM like owning is more expensice than renting. Right now, it is true.
The stuff about planning for the future. Yawn. Generalizations about how bubbleheads are really just bitter and don't plan for their futures - booooring. Ads nothing real to the argument. Only reveals insecurity.
Keith said:
ReplyDelete"And remember, especially in the DC area, high interest rates can and will lower prices, so your total payment for housing won't go up (by much) if interest rates rise."
Another bubblehead assumption ... If this is the case, then please explain why the last time we were in a bad inflationary period with gvery high interest rates (late 70s/early 80s) housing prices went up and not down?
"The stuff about planning for the future. Yawn. Generalizations about how bubbleheads are really just bitter and don't plan for their futures - booooring. Ads nothing real to the argument."
ReplyDeleteFrankly, if I were a bubble head I'd rather be labled as not planning for the future than the alternative which is just not seeing the simple and obvious truth that in every generation in every time, buying as always been cheaper than renting over the long haul. Why should this time be any different? What makes this time so special?
"Throughout time the cost of renting and owning are roughly the same. Remember the ads "Own for what it costs to rent!" Seen any of those ads lately? Of course not. Because you can't own for the cost of renting now."
ReplyDeleteI think this for the most part is a bubblehead myth. Yes, there were ads in the past making this claim. But there are also the same ads in the Post TODAY. I see those ads in the Express's weekly real estate sections. Why haven't you??? So, if you're relying on these ads as your proof that historically buying and renting were the same costs, well then you'll also have to admit that buying and renting is the same cost today as well since these ads are still out there today.
The bottomline is that if you're waiting for renting and buying costs to be equal, you'll be waiting and really really long time. It just doesn't happen often. And it doesn't happen often because of general economic principles, i.e., the market is willing to pay a premium to buy vs. rent to 1) lock in today's present value of money and 2) receive future property appreciation.
Once again.
ReplyDeleteLong term is not short term. Why when stock bulls say "over time" housing heads point to short periods when real estate out performed stocks and say "see, see" but when a bubbleheads says in the short term for now renting is cheaper than owning housing heads say "over time." ???
Bseides, while still in my twenties I have built a sizable portfolio. So don't assume with bubbleheads aren't planning for the future and prefer to be labled that way.
This consumer culture that we all have to be owners NOW is silly. Our parents did not buy at age 25. They saved their down payment bought a house when they had kids.
There are also some class values in play here that people just can't shake. Stop pressuring people into poor financial decisions because of an "owners are better than renters" mantra that is nothing but class insecurity.
"Bseides, while still in my twenties I have built a sizable portfolio. So don't assume with bubbleheads aren't planning for the future and prefer to be labled that way."
ReplyDeleteI don't think there's anyone here who would pressure someone in their 20s to buy, especially if they don't feel ready to buy.
But this isn't the point.
The point most homeowners are trying to make are directed towards people like Redskins Fan. People who are now in their 40s, and they've been renting since their 20s, always afraid to buy due to suspected impending busts and booms.
Anon 3:07
ReplyDeleteThat is a reasonable response. Even as a bubblehead, I dont' plan to rent for 20+ years.
But I do think that some people on this board take the attitude renting is always stupid and that owning is the only reasonable thign to do.
anon said:
ReplyDelete"This consumer culture that we all have to be owners NOW is silly. Our parents did not buy at age 25. They saved their down payment bought a house when they had kids."
Agreed a 25 yr old is probably not in a position to buy for various reasons including needing geographic flexibility for their career. However, bubbleheads are waiting for the market to drop by 50% so that they can buy. So, the assumption is that you're looking to buy.
"If you've been renting for more than 4 years, do you know that you would presently be saving money if you had instead bought 4 years ago?"
ReplyDeleteThe picture 4 years ago was different than the picture now.
I wanted to buy 4 years ago, but couldn't, I was changing careers. THIS was my longterm investment, to establish myself in a field that I can see supporting me for the rest of my life, that allows me to love going to work.
Now, prices are about to fall. So though I can buy (I was about to, and backed out of a contract and got my money back) I am not walking into impending negative equity.
That would be silly.
There's timing the market, and then there's stepping away from it at its obviously most volatile point.
"Well, actually, yes. I suspect this is exactly what every bubblehead is thinking. Of course none will admit it now."
ReplyDeleteHey, if I could have forecast the future, I would have bought 3 houses and payed 75% of my income in interest-only mortgages. Then I would have sold in spring 2005.
Actually, what I really wish I'd done is bought a bunch of call options in builder stocks in 2001-2003, and then bought a bunch of puts in builder stocks in 2005.
The investors, like Ken Heebner, who made money because they actually correctly forecasted the housing price runup are now saying housing prices will go down. What does that tell you?
The only people who keep cheerleading housing around here are the people who happened to buy in 1999-2001, and confused their luck with skill.
Exactly Keith. Happening to buy in 2001 or even thinking it was a good time to buy in 2001 is not the same as truly predicting a housing boom and investing on many levels. Even buying a rental property in 2002 is not genius because by then the upward momentum had begin and it was sort of bandwagon investing.
ReplyDeleteFinally, as keith says, if those who truly predicted the run up are now seeing the decline, what is the justification that other provide for a continued run up?
Hey!
ReplyDeleteBuying a rental property in DC in 2002 was an act of genius or faith. The DC property market was still reeling from 9/11 and big property investors were sitting on their hands waiting for the other shoe to drop. Some were even pulling out from a market that was an "obvious" target.
The "smart money" was saying "how much is your condo going to be worth after the bomb goes off?"
Gee, I thought this was about the Ventana......
ReplyDelete