Monday, January 01, 2007

Housing Predictions For 2007

Here are some my 2007 predictions for the US housing market:

1) High foreclosure rate. Foreclosure rate continues to rise nationally. Lots of financial pain will ensue as hundreds of thousands of homeowners lose their housing units to foreclosure in 2007. The high 2007 foreclosure rate will be due to the very loose lending standards of the past few years in conjugation with the declining housing marking. The Center for Responsible Lending says that "About 20 percent of sub-prime mortgages granted in the past two years will end in foreclosure as owners struggle to make payments and home prices stagnate." The irresponsibility of the lenders is tragic.

2) Prices will continue to decline in most bubble markets. In general, housing units in the bubble markets will fall in nominal dollars between 1 - 12% and in real dollars between 4% - 15%. [ This is for individual housing units, which is not the same as the median sales price.]

3) Interest rates will edge up somewhat, but remain low. By year end, the average contract interest rate for 30-year fixed-rate mortgages will increase to about 6.5 from its current of about 6.1. The average contract interest rate for one-year ARMs will increase to 6.3 percent from its current of about 5.8.

4) Job losses will accelerate in the residential construction sector. The percentage of job losses will be even greater in the bubble markets. Nationally, between 400K to 600K construction jobs will likely be lost during 2007.

5) The US economy will slump into a recession. As the housing market continues to decline, consumer spending and business investment will fall. It will be tough.

55 comments:

  1. Maybe the NAR should hire you...oh no you do not spin it.

    Keep up the pressure David!

    You defintely got their attention.

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  2. http://housingpanic.blogspot.com/2006/12/housingpanic-stupid-question-of-day_31.html

    hahahahaha.

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  3. David predicted:
    "In general, housing units in the bubble markets will fall in nominal dollars between 1 - 12% and in real dollars between 4% - 15%."

    hmmm ... So you've given up on the idea of a price bust? a "1 - 12%" fall in nominal prices is only 1/2 of the appreciation GAINED by home owners in the last year of the boom ... And that is at its worst, i.e., at 12% and not 1%. Remember, prices were rising over 20% a year there for something like 4 or 5 years. I suspect that most of the BHs aren't going to like your prediction.

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  4. Wow VA_Investor, not so cheery today are you?

    How about I clear some things up for you since you seem to be having trouble.

    First: A boom and a bubble aren't the same thing.

    (and in case you aren't playing dumb and really haven't figured it out, the current market is a bubble)

    Second: Everyone here knows that the most common end to a boom in a housing market is stagnation.

    (and in case you aren't playing dumb and really haven't figured it out, the current market is ALREADY DROPPING)

    Third: While any financial mania has certain common elements, history does not repeat itself exactly.

    The current bubble started as an ordinary cyclical housing market upturn but was driven through the roof by a combination of factors that are almost unique in history. The unfolding bust will be far worse than an ordinary market downturn. (and yes… it will take around 2 years for things to finish settling out. So don’t pretend anyone is predicting this will happen in the space of a single month, season, or year.)

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  5. It looks like they will revising there study to include the new data from this housing decline. It is quite evident there is a housing decline happening right now. It's not due to an oil bust or other industry slow down. It's due to an extremely rapid increase in housing costs, affordability, too much debt based on historically low interest rates, and loose lending practices.

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  6. David - My predictions: prices down another 8 to 10% in the DC area by the end of 2007, record levels of foreclosures, rising risk premiums for mortgage loans due to high levels of defaults, and David Lereah leaves the employ of the NAR (unvoluntarily).

    va investor - With regard to your outdated FDIC "study," the key word is "unprecedented." Not one of previous booms listed in the PDF was near the magnitude of the current boom.

    In fact, the vast majority were price gains of 30 to 40% over a number of years. Nothing like the 130 to 180% gains we've seen in DC in the last five years. We're in uncharted territory. You can only reasonably expect the bust will be proportionately larger than any of the past busts. Also, the FDIC study says:

    "...there are reasons to think that history might be an imperfect guide to the present situation. Foremost among these are changes in credit markets that are pushing homeowners—and housing markets—into uncharted territory. A major financial development in the 1990s was the emergence and rapid growth of subprime mortgage lending."

    "Home buyers are also increasingly availing themselves of higher-leverage mortgage products."

    "An increased incidence of default and foreclosure could, in turn, contribute to downward pressure on home prices as distressed properties are liquidated by lenders."

    Happy New Year everyone!

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  7. Va, you sound a little angry. Do you feel less rich this New Year? I'm excited about the next wave of price declines, '07 will be awesome to watch.

    CHEERS

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  8. anon 250 said:
    "Anonymous said...
    Va, you sound a little angry. Do you feel less rich this New Year? I'm excited about the next wave of price declines, '07 will be awesome to watch.

    CHEERS"

    Anon, you sound like someone who is very very jealous of people like Va_Investor who are successful because of the right decisions they have made in the past. If this attitude isn't indicative of peevish jealously, then please explain why you would be exited at the misfortune of others and then go on to wish them "cheers"? Honestly, I think people who display such petty jealously are disgusting ... the scum of the earth.

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  9. threadkilla, your "facts" prove nothing more than that when it comes to real estate, you don't know what you are doing. Period. Why should anyone take your advice this time ... over someone like Va_Investor who HAS proven herself to be successful in real estate investing numerous times and over many years? All you've proven is that you have made one bad decision after another. And THAT is a "fact".

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  10. I expect pessimism to grow and prices to continue the downdraft. Prices are going down big in bubble markets. The Coasts especially.
    Some of these looney markets will see downdrafts of 40% and in Fl expect a few 70% drops!

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  11. When will it be safe to buy? Will it be possible to get a good deal during the next year? My wife wants to be in a single family home very much and I keep stalling, saying let's wait, but this is becoming a real point of disagreement between us. If we find something and pay 20-25% below the asking price, would that be a good risk?

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  12. David's predictions sound very reasonable. While I certainly don't speak for him, it sounds to me like he is saying that housing will continue cooling as it has since 2005. Another year of real price declines on the order of 5-10% will give us real price declines of roughly 11-21% over two years. A few flat-to-down nominal years after that, and real price declines could hit nearly 40%. So by 2010, prices may be more reasonable. But who knows? I suppose things could end up going down a lot faster than that. I think a slow, multi-year decline is the safest prediction, but anything could happen. The only thing I know is that I will continue renting unless there is a huge price decline.

    A Redskins fan

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  13. Lance,
    I confess you've got my number. Maybe you and va can get together and jump off the nearest bridge, seeing your '07 networth is falling faster than a scalded dog ;]



    CHEERS MORON

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  14. Dave,

    Interesting predictions. Let's go through them one by one:
    1) Foreclosures. Yep. Not quite a record year in 2007, but it will be close. (We'll have to wait for 2008 for the all time record, excluding the great depression, of course.)

    2) I agree with your rate of price declines. Home prices are sticky. They won't even decline one year's appreciation as Lance pointed out. Ok... But I predict 2008's declines will be greater than 2007's. By about... 20%.

    3) The one thing I disagree with is interest rates. I see long turn going up a little more (to 6.8%) while short term rates drop (to about 5.0%). Why? A recession means price cuts and thus the Fed can cut rates to stimulate the economy.

    4) Job losses are going to be huge.

    5) I think we're close to recession as is... alas, the definition is through the rear view mirror.

    I would add one:
    A lock up of the housing market. With sub-prime mortgage lenders failing and sellers not budging on price... I expect sales to drop to normal recession levels. In other words, RE commisions at 0.3% of GNP vs. the 2005 0.9% of GNP.

    Neil

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  15. "Anonymous said...
    When will it be safe to buy? Will it be possible to get a good deal during the next year? My wife wants to be in a single family home very much and I keep stalling, saying let's wait, but this is becoming a real point of disagreement between us. If we find something and pay 20-25% below the asking price, would that be a good risk?"

    It's impossible to try to time the housing market, the house flippers proved that, there feeling some real pain.

    It's safe to say that the next couple years will show real home value declines.

    Being backwards in your loan is something that could be big trouble if you were to be relocated in your job, or if you had to get out from under the house for any reason. You would not be able to sell with out taking a huge loss if not worse.

    If your wife insist on buying now, try stalling her for another year at least.

    I work in debt collection and it's getting really bad for some to make it month to month.

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  16. I predict an accelleration in the already hyperinflationary residential rental market - and a lot of ensuing angry posts on this site. It's going to be an even worse year to be a renter in 2007 than it was in 2006.

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  17. "Why should anyone take your advice this time ... over someone like Va_Investor who HAS proven herself to be successful in real estate investing numerous times and over many years? "

    VA_Investor has proven little beyond that saving aggressively for a long period of time will pay off eventually. Nothing she has said has demonstrated even a mid-range level of understanding of the market forces at work. She may know a lot about buying housing, but she is clearly lost in the dark when it comes to actual economics or business.

    She has already said that she was still buying rental properties in 2005 and 2006. What kind of "investor" does the math looking at rental prices and sales prices and concludes that 2005 or 2006 was a good time to buy rental properties. You would be hard pressed to find a worse time. She is clearly a one-trick pony as far as "investing" goes. She would have proven just as good an investor if she dumped a large percentage of her money into any slow growth, low risk, investment for decades.

    All of that said... she does seem to know more than you.

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  18. and David Lereah leaves the employ of the NAR (unvoluntarily).

    I think this will happen also. Howevever, I think it will play out a little differently in private than it does in public. In private, I think the NAR will reward Lereah for doing exactly what they wanted him to do - be a spokesman for the trade group while pretending to be an unbaised economist. Since, however, he's been put in a position that will ultimately damage his credibility, the NAR will publicly make a move to change things up.

    IMO, Lereah's failure isn't with his actions right now because he's in a no-win situation now. It would be suicide to come out and tell the entire truth. He really failed when he cheerleaded the boom. After all is said and done, the boom/bust will be very damaging to his organization. A normal steady slow increase in housing prices would have been the best for the long-term health of his members. Lereah should have done as much as possible to slow down the boom...

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  19. It will significantly depend on the locations and ZIP codes. For example, Loudon county house price has dropped more than 20% since 2005 peak, but in Vienna/Tysons Corner area, the price drop is limited within 10%. This patten may happen again in 2007.

    My predication for 2007 is the price in Vienna/Tysons Corner area will drop no more than 5% and no more than 15% in Loudon County.

    The prices may remain flat for a couple years starting from 2007.

    There is new community (10 SFHs, price ranged from 1.25M to 1.6M) near my house in Tysons Corner, the builder dropped price for about 12% in 2006 summer and sold a few lots right after price reduction. The builder raised price by 5% immediately right after the sales.

    Given the traffic congestion situation getting worse and worse in DC areas, I strongly believe the house price in Tyson Area will not dropped much in 2007.

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  20. Lance said...
    “threadkilla, your "facts" prove nothing more than that when it comes to real estate, you don't know what you are doing. Period. Why should anyone take your advice this time ... over someone like Va_Investor who HAS proven herself to be successful in real estate investing numerous times and over many years? All you've proven is that you have made one bad decision after another. And THAT is a "fact". “

    va_investor said...
    ".... I've spent years educating myself about RE, not years moaning on a blog. You decide how best to spend your time. Lots of wheel-spinning here - no money making. Yeah, tell me to go back to school or that bargains can't be found. Eyes wide shut! “

    Of all the folks that talk about facts Lance, you should not be one of them. After all, foreclosures, inventory, and ARM re-sets mean “absolutely nothing” according to you. And while you continue to lament on Va Investors “wise” strategies, these indeed are not facts and she’s proven herself to no one. At most, it’s someone’s rant against BH’s spending time on a blog, when they themselves spend time posing. You have accused BH’s of acting like flippers (investors) wanting to make a quick buck, but then turn around and point to an alleged “investor” that should be listened to and followed. Of course it matters not what the facts really are, just so long as Va carries the “there’s deals to be had, buyers market, buy now” line.

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  21. Robert said:
    "just so long as Va carries the “there’s deals to be had, buyers market, buy now” line."

    Robert, Robert, Robert ... Why do you still keep putting words in our mouths? "Buyers market" ... that is your rant ... not mine and not Va_Investor's. The point both of us have made over and over (and which seems to have eluded you) is that whether it is a buyer's market out there or a seller's market, you can still find yourself a bargain. All it take is some hard work and some smarts. I.e., we've NEVER said "buyers market, buy now" ... we have however said "there's deals to be had" if you are willing to put in the hard work it takes to identify them AND make them ...

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  22. Anonymous said...

    I predict an accelleration in the already hyperinflationary residential rental market - and a lot of ensuing angry posts on this site. It's going to be an even worse year to be a renter in 2007 than it was in 2006.

    January 02, 2007 5:43 AM
    -------------------------------------------------

    Are you RETARDED???? I am currently renting a BRAND NEW 2,100 sq ft house from some poor flipper-sucker for about $600-$700 LESS than if I had bought it outright from him at current selling price! That's $600-$700 a month I have to invest/save! How is that a bad investment?

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  23. LOL at the "hyperinflationary" rental market "even worse" than in 2006.

    My rent was up less than two percentage points in 2006. I expect it to be up a little more than that in 2007. Still a very small portion of my salary, so it could go up a lot more without hurting.

    I see lots of new condos and apartments popping up everywhere. My guess is that if they do go up, rents won't stay up for very long.

    Rent increases have definitely not been "hyperinflationary." And part of rent increases is increased fuel costs and property taxes, increases which homeowners also pay.

    But let's do a little experiment. A 10% increase (much higher than what I have seen) in a $2000/month rent (probably a little above average for the region- but I don't know for sure) is $200, which works out to $2400 less income for the year.

    A 5% decrease in the price of a $400,000 condo is $20,000 less for my net worth.

    I think I'd rather have the 10% rent increase than the 5% decrease in the price of my home.

    A Redskins fan

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  24. Yes, rents are going up at a higher rate than before. About 7% in my area. But this is a reflection of the slowdown in the housing market. As people opt out of buying homes (or sell) and move in to rent, rents will go up.

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  25. A bunch sour puss realtors have joined the board and their crabbiness is quite apparent.

    hehehehehee

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  26. "And, how in the world would you know anything about my cash-flow on recent acquisitions? Don't assume that I pay "market" for anything."

    Wow. Brilliant why didn't I think of that!

    [Me flogging myself]

    " I've spent years educating myself about RE, not years moaning on a blog."

    Yes, yes, I see it now. The vision is becoming clearer. You have opened my eyes. Thanks for all the advice. No more blogs for me.

    [smiling at my new found knowledge]

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  27. Redskins Fan said:

    "But let's do a little experiment. A 10% increase (much higher than what I have seen) in a $2000/month rent (probably a little above average for the region- but I don't know for sure) is $200, which works out to $2400 less income for the year.

    A 5% decrease in the price of a $400,000 condo is $20,000 less for my net worth.

    I think I'd rather have the 10% rent increase than the 5% decrease in the price of my home."

    Your analysis is incomplete. The $2,400 in increased rent is money lost forever ... and is also recurring (i.e., $2,400 EVERY year) and certainly only the first of many many future increases. Even making the assinine assumption that this is a one time increase that won't recur in the next ten years, your $2,400 lost in year 1 becomes $24,000 lost over 10 years. Now, getting back to the $20,000 in lost net worth because of a 5% decrease in value in one's property this year. There aren't many things one can be sure about, but one of them is that given 10 years, that 5% decrease in value will have been reversed ... at a minimum. Chances are that not only will that 5% ($20,000) loss been reversed, but that he value will have risen by 5% at least a few times in the ten year period. But assuming it hasn't (very unlikely) you are still down to a $0 loss AS COMPARED TO THE $24,000 due to increased rents in that period. It's really a no brainer that rent increases are far more financially harmful than temporary decreases in price.

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  28. Lance your analysis is even more incomplete and incorrect. Of course it may be different in your fairy tale world, but in our real world we have other factors. Namely interest, inflation, property taxes, PMI etc. An interest rate of 6% on a 400,000 loan is itself 24000 dollars. I am not even going to go in the details. It is pointless. Anybody interested should do this analysis themselves (use online tools) and then decide for themselves.

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  29. Redskins fan should read a newspaper once in a while. Rents are skyrocketing out of control in the DC area.

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  30. Anonymous said...
    "Lance your analysis is even more incomplete and incorrect."

    Anon, Redskins' example was comparing the incremental costs related to two AND ONLY TWO factors ... rent increase expenses vs. price flucuation losses. PERIOD.

    I guess BHs don't like to see how much more expensive it is to rent over buying when one is looking over a period of time. Or is it that they aren't capable of understanding the longterm consequences associated with their shortterm "savings"?

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  31. "Anon, Redskins' example was comparing the incremental costs related to two AND ONLY TWO factors ... rent increase expenses vs. price flucuation losses. PERIOD."

    It doesn't matter. You have to prove this wrong by a correct argument. You haven't done this.

    I can claim that renting is cheaper because I do not have to pay the interest on the mortgage. I am considering only ONE factor now. Therefore by your logic, renting is cheaper.

    "guess BHs don't like to see how much more expensive it is to rent over buying when one is looking over a period of time. "

    Please do the complete analysis and post it here. You cannot make this statement, because you haven't proven it.

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  32. Lance-

    Of course if you assume the loss in house price is temporary, then the comparison works in your favor. Personally, rather than assuming a 5% loss in 2006 and a gain in 2007, I would guess that there would be an equal or larger loss in 2007. So it could get worse, not better.

    The point is, house price falls can be much more devastating than rent increases.

    "Rents are skyrocketing out of control in the DC area."

    LOL. First of all, my personal experience is that this is not even close to true. Second of all, I do seem to recall seeing an article, posted here or on another housing bubble site, that said that rents had risen 3-5%. Then someone said they were "skyrocketing." LOL. Basically, they had risen the same as the CPI, which means real rents were unchanged.

    And BTW, a major reason for rents rising is increased energy costs and property taxes. Homeowners will see those kinds of increases the same as renters.

    So my response is....

    1) DC area rents are not skyrocketing

    2) to the extent DC area rents are rising, part of the reason also will raise the housing costs of homeowners

    3) there is plenty of new DC area housing coming in the next few years, so I don't see DC area rents skyrocketing in the future. But I could be wrong.

    A Redskins fan

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  33. ""And, how in the world would you know anything about my cash-flow on recent acquisitions? Don't assume that I pay "market" for anything."

    Wow. Brilliant why didn't I think of that!

    [Me flogging myself]"

    Don't you see? VA_Investor is using her magic wand to buy properties at half price!

    VA_Investor, There have been so many studies over the last few years demonstrating that the rental market and purchase markets in the area are completely out of whack. If you have found a way to buy houses in the area cheap enough to rent them profitably then you are getting them for half market price or less.

    Assuming that is true... then why the hell are you RENTING them? Just sell those houses at market price and pocket the difference. You would have plenty of room to undercut even the current falling market if you were really able to buy houses that far below market price.

    That is what a smart "investor" would do. Of course.... I don't believe for a second that you were actually buying rental units in 2005-2006 that you are now renting out profitably.

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  34. Lance said...
    “Robert, Robert, Robert ... Why do you still keep putting words in our mouths? "Buyers market" ... that is your rant ... not mine and not Va_Investor's.”

    Lance, Lance,Lance, once again you tip toe around your inconstancies, totally skipping over anything mentioned in your previous diatribes that may tie you down to a coherent banter.

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  35. "Don't you see? VA_Investor is using her magic wand to buy properties at half price! "

    But think about the possibilities. It doesn't end there. VA_Investor's genius can be adapted to other areas apart from real estate. I always thought my dentist was a crook. Now I don't have to pay him what he asks. Same at the grocery store. You think the price is too high, demand a cut. Also I think stocks are highly overvalued today, especially with the slowdown expected in the economy. But who says I have to buy them at market price?

    Glory Hallelujah!

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  36. VA_investor, lets review:

    "And, how in the world would you know anything about my cash-flow on recent acquisitions? Don't assume that I pay "market" for anything. "- VA_investor (scroll up if your memory is short)

    "Only one of the recent acquisitions has a "meaningful" tenant in it. Somewhat hard to rent vacant land. " - VA_Investor (your most recent post in case your memory is REALLY short)

    Why didn't you come right out at the start and say: "Yes, you were right! I am negative cash flow on those purchases exactly like you said I would be." Instead of trying to weasel around the facts?

    You have been buying land at the top of the biggest RE bubble in the area's history. No wonder you are on this blog so much...

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  37. va_investor said...
    “I know it is hard for people with no vision to imagine making money in a hot market. News Flash! It happens every day.”

    Gee, is that the wisdom for the day? Making money in a hot market? You are one slick investing machine there Va, making money in a hot market, who would ever think of such!

    Please inform us feeble readers how you would make money when inventory and days on market have doubled, and the markets not so hot.

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  38. VA your real identify must be the Tooth Fairy. All you have to do is wave a magic wand and you make money. All of are just in amazement at you. On a more somber note, your arguments did not hold water so now you are trying to impress with your education, your wealth and your great business sense..sorry none of what you say hold water...

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  39. "sorry none of what you say hold water... "

    You mean buying land at the top of a giant RE bubble isn't a great idea? What could possibly go wrong with that plan?

    I mean it isn't like builders all over the country are rushing to back out of land deals is it? They just don't have VA_investor's knowledge and experience I guess.

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  40. I guess BHs don't like to see how much more expensive it is to rent over buying when one is looking over a period of time. Or is it that they aren't capable of understanding the longterm consequences associated with their shortterm "savings"?

    Lance, you conveniently assume we are going to rent for ten years. In Redskins example he was looking a year ahead and judging whether he should buy now or reevaluate the situation in a year.

    You constantly bring up the long term implications of renting which is not in question here. The reason you do this is that you know buying a house is a terrible decision RIGHT NOW... not in 2 or 3 years.

    Your arguments have no relevance here.

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  41. Don't assume that I pay "market" for anything.

    That's great. You have a knack at finding cheap land/houses. I'm happy for you.

    So, why are you on here trying to convince us that paying market value for a house is not a bad investment?

    The topic of this blog is about the real estate bubble. By definition, that means we're discussing whether the current market value is too high. Your ability to find properties for way under market value is pretty much off topic. If anything it supports our positions.

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  42. http://www.thestreet.com/_htmlbtb/newsanalysis/businessinsurance/10330500.html

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  43. Anon 8:10,

    Just to fill you in in case you haven't been on this blog with us in a while. While David may have intended this blog to be the discussion of whether current market value is too high (i.e., market value is based on false premises), it is mainly inhabited by people who have spent a lifetime justifying not taking on the commitment to be homeowers (or any other commitment for that matter.) The David's of this blog who are really sincere about someday wanting to be homeowners merit having counter-balancing voices from those who have made the plunge and can dispense with the unsubstantiated fears that the commitment-phobes so love to spread. Yes, it would be nice if we were able to stick to subject and only discuss whether real value is being reflected in prices or not, but it's not going to happen. And were voices such as mine and Va_Investor's not heard, I fear we could end up with the Davids on this blog become commitmentphobic bitter renters instead of the happy and successful homeowners which they want to be. So, if you can make EVERYONE stick to talking to whether prices are justifiable or not, I'll be glad to stick to that rule. Good luck.

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  44. Lance said...
    “Just to fill you in in case you haven't been on this blog with us in a while. While David may have intended this blog to be the discussion of whether current market value is too high (i.e., market value is based on false premises), it is mainly inhabited by people who have spent a lifetime justifying not taking on the commitment to be homeowers (or any other commitment for that matter.)”

    Just to fill you in in case you haven't been on this blog with us in a while, Lance’s advice for buying a home? Let’s see:

    Lance said...
    whitetower said:
    "So, you are saying that a person who has a mortgage should ignore the total amount paid for his house?"

    now you're getting it! yes, yes, and yes. It is the present value and cashflow characteristics of the stream of payments that you will be making that counts.
    July 25, 2006 11:09 PM

    Lance said...
    “that is correct, there is never a bad time to buy”
    July 28, 2006 3:14 PM

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  45. Robert,

    Regarding your 1:46 post. If you honestly don't understand that (1)it is cash flow out that matters and NOT "sales price" and (2) that there is never a "bad" time to buy anything, you'll not only never be a successful homeowner, you'll also never be successful at anything related to finance. These are two fundamental and basic principals of finance ... (1) that the cash flows (in and out) are of paramount importance (with "sales price" being inconsequencial and only important to the extent that it affects cash flows) and (2) that one doesn't rely on market timing to bring them bargains but rather creates their own bargains despite good or bad market conditions. Honestly, you are making yourself look like a fool when you quote me and try to discredit me with what anyone with the slightest of financial smarts knows is GOOD financial advice. You just make yourself end up looking really stupid for mocking something that you obviously don't understand.

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  46. (1)it is cash flow out that matters and NOT "sales price" and (2) that there is never a "bad" time to buy anything, you'll not only never be a successful homeowner, you'll also never be successful at anything related to finance. These are two fundamental and basic principals of finance

    Really? Fundamental principles of finance? Postulated by who?

    Both of these are the ABSOLUTE WORST thing you can do financially.

    1) What does cash flow out mean? This is purely determined by sales price and interest. Interest is only important if you are financing the asset, and obviously lower the interest rate, the better. If you don't negotiate the sales price or think it is important, you are a fool. The VALUE of an asset changes over time. This is what is important, not your monthly payment. The monthly payment determines affordability, not whether it is a good investment.

    2) There are always good and bad times to buy anything. Example tech stocks in March 2001 would not have been wise. Similarly a house in Los Angeles in 1990 would not have been a wise decision if the time frame was 5-10 years.

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  47. Honestly, you are making yourself look like a fool when you quote me and try to discredit me with what anyone with the slightest of financial smarts knows is GOOD financial advice..

    No, that is not possible. It is not possible to discredit you, because there really is nothing to discredit.

    Also speaking of financial smarts. I didn't know that there was anybody who thought that the sales price of an investment is not important. But, I am surprised everyday.

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  48. Posterboy, you still don't get it. The place you live in is not an investment, it is an expense. If someone offered you a $500,000 house for $0 down and 1% interest on an interest-only loan for 30 years, is that a better deal than buying the same house for $400,000 for $100,000 down and 7% interest on a fully amortizing loan? The first costs you $416.67 a month for the next 30 years and in 30 years you either pay off the $500,000 loan, refinance it, or sell the house. The second costs you $100,000 up front and $2,661.21 per month for the next 30 years. Let's say in 30 years the house is worth $5,000,000. In the first case you have $4,500,000 in equity and have spent $150,000 in mortgage payments over the last 30 years, netting you $4,350,000; in the second case you have $5,000,000 AND have spent a total of $958,035.69 in mortgage payments over 30 years, netting you $4,041,964. Now which was the better deal? Paying $500,000 and getting the no downpayment low interest deal (first scenario) or paying only$400,000 and getting socked with (1) a $100,000 down payment, (2) high monthly mortgage payments, and (3) netting less in the end? Yep ... it's the price that matters ... and not the cash flows ...Yeah, right

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  49. oops ... scenerio 2 should have been calculated with $300K financed ($400k- $100k downpayment) ... making payments $1995.91 for a total of $718,526.69 ... netting $4,281,473.

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  50. Ohhh! I get it now. Thanks, Lance for the clarity and brilliant math.

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  51. Posterboy, you still don't get it. The place you live in is not an investment, it is an expense.

    Why are you giving us numbers then?

    If someone offered you a $500,000 house for $0 down and 1% interest on an interest-only loan for 30 years, is that a better deal than buying the same house for $400,000 for $100,000 down and 7% interest on a fully amortizing loan?...

    In the first case you have $4,500,000 in equity and have spent $150,000 in mortgage payments over the last 30 years, netting you $4,350,000;

    Please check the definition of "interest only loan". If I only pay interest for 30 years, at the end of it I own nothing.

    Let's say in 30 years the house is worth $5,000,000.

    Why should we say that? Nobody is saying that. That implies an average return of 8% annually over the next 30 years. If I am guaranteed that return I will take my money out of my 401K and put it in real estate. Oh but wait, a house is not an investment.

    What we are saying is that the value of the house is going down for the next few years. After that it may make sense to buy. Oh, a house is an expense? Shit, I didn't know that. I will go buy one tomorrow.

    Also why are you comparing 1% and 7% interest? Who is giving me 1% interest? What happens if I need to sell my house in 10 years and the house value is down? What happens if interest rates go lower as many are predicting? Why can't I refinance my house at a lower interest rate if they are lower a few years down the road? Do you know for a fact that interest rates are guaranteed to be higher 5 years from now?

    Don't come up with rubbish examples. It is easy for me to come with similar examples on the other side of the argument.

    The argument is still this. House values are going down. Whether they are an investment or not, I will not buy because I believe I can get a house for cheaper a year or two down the road. I will also take my chances that interest rates are not going to increase dramatically. Even if they do, they will affect house prices to go lower. Nothing is as sensitive to interest rates as a highly leveraged asset like housing.

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  52. For those who don't know, Pimco's Bill Gross is the world's largest money manager. Nobody understands interest rates like he does. Bill Gross is predicting lower interest rates through 2010.

    http://www.businessmusings.com/?p=47

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  53. Anon 8:06,

    My post was addressing the issue of whether price is the determinant in deciding whether purchasing a house is affordable. The point of my post was to prove that price is only incidental ... other factors play into the decision and the most direct consideration is "what is this going to cost me per month to live in?" (this of course comes after the "Does this place give me what I and my family need in the way of shelter and all the rest that comes from being a homeowner?") The issue of one's "return on investment" was not even considered. And it wouldn't be since if you are looking to make money off of your money, you should invest in stocks or some other high paying passive asset. For most of us, buying a house is simply an expense ... and we try to minimize that over the long run by minimizing and pushing out the cash flow expenditures that we must pay for this expense. For some of us, such as Va_Investor, it is "buying a job". By that I mean Va_Investor isn't making her money speculating (i.e., shortterm buying and selling of properties) but rather by providing a service ... i.e., providing a rental to renters. THAT is where she is making her money. The fact that the market has been good to her (and she has bought intelligently) and she now has a lot of equity is really incidental. Note, that she isn't planning on selling these properties ... She has stated she will will them to her children. She is looking at the money to be made renting them out, and there is money to be made there on rentals ... 'cause as we all know, it is cheaper to buy than to rent ... and the delta is where the money is at.

    And since you have taken the liberty of twisting my post to address something I wasn't addressing, I will do the same. Namely, quit dreaming about a bursting bubble. By and large the real estate "market" is not a market in the sense that stocks have a market and other investment vehicles have a market ... Why? 'Cause as I've said over and over again, by and large, real estate is an expense for most of us ... and we aren't buying a place to live in as an "investment" which by definition is something that gives you a "return on your money" and not "shelter and other things" like a house does. So, don't expect a bursting bubble ... That just can't happen with your housing expense any more than it can happen with your transportation expense.

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  54. My post was addressing the issue of whether price is the determinant in deciding whether purchasing a house is affordable.

    Yes, monthly payment = sales price and interest on sales price. I think a 10 year old can tell youth that.

    And since you have taken the liberty of twisting my post to address something I wasn't addressing, I will do the same. Namely, quit dreaming about a bursting bubble.

    Thats not twisting my words. I expect a dramatic slowdown especially in hot areas. However you used 1% interest rates. How about I use 50 dollar house prices?

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  55. There are 2,200,000 licensed real estate agents according to the Swanepoel Trends Report. Wow. Didn’t realize that there were so many. With a declining housing market do you think the number of agents will also go down?

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