Thanks, Robert! (nt) - Posted by Skip
Posted by Skip on May 23, 2006 at 03:02:57:
nt
that’s a book I would like to read - Posted by Gene
Posted by Gene on May 22, 2006 at 12:34:04:
that’s a book I would like to read
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene
Posted by Gene on May 18, 2006 at 21:03:20:
I personally believe that the disconect between prices and rents is temporary. History shows that they are closely tied and really cannot remain so far apart.
Why will people keep buying if they can rent for 1/2 the price? They have been buying because they were planning on double diget appreciation and because realtors filled thier head with “if you don’t buy now youll never get in”.
Now that appreciation has stopped and prices are actully dropping, many renters will stay renters untill prices drop to a level where it is worth buying.
It’s not diffrent this time. Historic norms will return.
Gene
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)
Posted by Mark (SDCA) on May 19, 2006 at 09:40:14:
So are you saying that prices will drop to where SFR rentals makes sense or it will be a combo of that and rents rising?
My guess is that it would take on the order of a 50% drop in prices for new purchases to make sense as rentals. I don’t see that happening.
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey
Posted by John Corey on May 19, 2006 at 06:50:04:
Gene,
I am talking about SFR and maybe 2-4 unit properties below.
You can easily find markets that have not made sense for long term rentals based on the ration between average rents and average prices. Much of CA has had such an imbalance. Maybe it would be better to say the balance is what it is and rentals just do not make sense.
People place a premium on owning compared to renting the same property. Hence people will buy even if the renting would save money in the near term.
There are also locations that have very long histories of rents and prices being more in line.
I am not sure that Phoenix will see a return to the days when it makes sense to hold SFR as rentals if you do not already own the rentals. Prices might stay above the level needed for a new purchase to cash flow as a rental.
Side note: During periods when prices stagnate the number of renters tends to increase as more people rent rather than buy. Less motivation to buy before prices go higher. Hence rents can increase during a period of poor appreciation.
John Corey
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene
Posted by Gene on May 19, 2006 at 10:05:33:
>>>>>>So are you saying that prices will drop to where SFR rentals makes sense or it will be a combo of that and rents rising?>>>>>>>>
That is a strong possibility.
>>>>>>My guess is that it would take on the order of a 50% drop in prices for new purchases to make sense as rentals. I don’t see that happening.>>>>>>
Well what could happen is we will see a combination of factors…prices dropping, prices holding flat for a few years (decreasing in price when indexed for inflation), and like you pointed out above…rents increase.
The fact that intrest rates are moving up right now will only make things worse (for home prices).
I don’t know if home prices will drop a lot, but seeing all the factors at work right now…a 50% decline is possible.
Gene
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene
Posted by Gene on May 19, 2006 at 10:29:56:
>>>>People place a premium on owning compared to renting the same property. Hence people will buy even if the renting would save money in the near term.>>>>
This is a true statement but is overy simplistic. Without hopes of huge appreciation, that premium is much smaller. And to savey folks, that believe the prices will drop, renting will actually have a premium over owneing. I have a few freinds that have sold and are now renting, investing thier money in other forms of investment which will provide a better return.
With lending practices tightening, and intrest rates rising, prices will drop even if the current price of homeownership vs renting correlation stayed the same.
How will it all play out? I am not sure, no one is. I just know that there is tremendous risk of falling prices in the Phoenix market. Anything can happen. Some outside stimulous might come along and appreciation starts ramping up again, or it could go the other way.
For me its all about risk vs reward. Its way to risky for me vs the very limited return on my investment $$.
Before I sold my rental in Phoenix, I had possitive cash flow of about $100 per month after all expenses (morgage was $800; rented for $1400). But my equity was over $100k. My annual return on investment was 1.2% (a bit higher if you count morgage paydown, and tax deductions). I demand much more than that from my portfoil. I sold it, paid cap gains, and reinvested. That money is now holding a very secure second note on a commerical building making me 12% a month. I got rid of all my managment hassels and my return on investment is much higher. I know make about 10k a year (vs $1200) and I don’t have the downside risk. Also I have a 3 year ballon on that loan so I will get my money back right when I think there will be lots of deals. If I have to foreclose on the building, I would be in a great possition, as the building is worth ~ 30% more than the 2 loans.
I am just saying there are opportunity costs in every senario. Phoenix’s market wasn’t my best choice in regards to risk/reward.
Gene
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey
Posted by John Corey on May 21, 2006 at 08:02:12:
Gene,
There is no way you could support such an argument.
Look at the historical data. Even when there have been large corrections the definition of large is much smaller than 50%.
If you have mass unemployment and a decreasing population you would be hard pressed to hit 50% from most markets. I am not even sure if you can find a market that has such a correction in the last 50 years.
On a national level the US has had only up years since WWII. If you look at specific cities you will see some that have been down more than up. Buffalo is one where the population has been falling for 20 years. Even with a falling population (you just need less housing in such an environment) the house prices are not down 50%.
The UK has a national housing correction where prices feel by an average of 30%. There are areas that saw little to no fall. Many areas did fall. If you dig into the data you see 25% inflation, 15% interest rates, high unemployment, a change in the tax code moving away from deducting the interest on a mortgage, large social unrest (union issue and a miner’s strike) plus almost all mortgages being what we call ARMs. That and no credit scoring so it was hard to shop around. It was even hard to move your bank account.
So, a 50% correction is possible in theory. The theory requires a number of factors to align. Those factors are not even close today and there is no reason to think they will be. We are talking about something that is past a 6-sigma event (the very tail end of a bell curve so very unlikely). The fact that something like 45% of the mortgages are 30 year fixed and some number of the ARMs are 3, 5, 7 year fixed means that many people will not see any direct impact from rising interest rates if they continue to go to work and come home to the same home.
John Corey
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene
Posted by Gene on May 19, 2006 at 13:04:25:
Here is an article in the paper today…
http://www.azcentral.com/arizonarepublic/news/articles/0519layoffs0519.html
“Home builders are laying off construction superintendents, subdivision sales agents, finance specialists and other employees, a telling sign that metropolitan Phoenix’s new-home market has taken a radical turn from last year’s selling frenzy.”
“Housing is the Valley’s biggest industry. At least one of every $3 in the area’s economy is generated by housing, according to Republic research. A downturn in home building will be felt throughout the state’s economy.”
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey
Posted by John Corey on May 19, 2006 at 14:56:09:
Gene,
A simple question an then a comment.
Are you really earning 12% a month or 12% annually with monthly payments
As to the bigger point you are making. I just disagree but we can agree to drop it if you like.
Most home owners are not in it for the investment. Rarely do they look at it that way. Most own for the family values, the stability, etc. Something like 68% of homes are owner occupied. The owner occupant buyers and sellers dominate most markets and most markets show a small turn over in any one year.
If you look outside the markets that have had rapid appreciation (Midwest south to TX, upstate NY, etc) you will see that even with tiny appreciation people still want to own their own place. In many of these markets you will find a lot of people paying 2x the cost of a mortgage if they could buy (just comparing the mortgage payment to the rent and assuming a down payment if they did buy).
So, the logic you are presenting is compelling for investors but the market is not made up of investors generally. When you mix in the difficulty of market timing with an illiquid market plus the transaction costs associated with switching (to a rental or to a OO property) most do not want to play.
BTW - Even when one of a couple want to market time things their partner rarely wants to go along so is it rather uncommon. If it stays uncommon then the market behavior will track such OO buy & hold ‘investors’.
People even think that paying off the mortgage is a good idea so even less motivation to move and get a new loan.
John Corey
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene
Posted by Gene on May 22, 2006 at 12:23:57:
Do some reaserch on JAPAN. You’ll see how bad it can be.
To clarify I don’t think 50% reductions are possible nation wide. But I do think they are possible for PHX.
Gene
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by randyOH
Posted by randyOH on May 21, 2006 at 10:32:19:
Are we talking about the whole U.S. market or just Socal? If we are talking about the whole U.S., then I would agree that a 50% decline is almost impossible.
However, if we are talking about Socal, a 50% decline in values would only take us back to about early 2004 prices, which were already extremely overvalued. In terms of affordability, a 50% decline would probably take the affordability rate up to about 20% which is historically still very low.
The problem is that the last two years were virtually unthinkable on the upside. If you could go back in time and predict that prices would almost double in the next two years after just doubling in five years, most people would think you were crazy. The past two years, by any rational economic analysis, should never have happened. It is like something out of a science fiction movie.
Still, prices are what they are now and I doubt that they will decline by 50%. But if you really look at the numbers objectively, I have to conclude that a 50% drop is possible. Probable, no, but possible, yes.
Thoughts?
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)
Posted by Mark (SDCA) on May 19, 2006 at 13:22:16:
This doesn’t particularly concern me. It should surprise no one that home sales are slowing- and that would include new home sales. It seems to be nothing specific to Phx:
“On Tuesday, the National Association of Home Builders index for new-home sales dipped to its lowest level since 1995. The trade group is predicting new-home sales will drop 12 percent this year.”
We are seeing the same thing in SD.
To wit:
“Builders are struggling with reduced demand brought on by skeptical buyers hit with higher prices and rising interest rates”
This is basically the same thing shown on the graph in this thread: inventory going up.
It will be interesting to see how big an effect this has on price and what, if any effect on rents and rental vacancies.
Thanks for the link,
Mark
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Gene
Posted by Gene on May 19, 2006 at 15:31:13:
“Are you really earning 12% a month or 12% annually with monthly payments”
Your right…its 12% per year (my bad…I need to proof read a little bit more).
“I just disagree but we can agree to drop it if you like.”
I am actually learning a lot from this thread. You have made me think about some things and I have enjoyed the dialog. My wife is sick about hearing about housing, rate hikes, yield curve, liar loans, domestic migration, ect ;)…so I enjoy the debates on this forum.
Most homeowners polled, see thier home as the thier biggest investment. I agree that most will not sell and move into appartments. I am just saying that the benifit of owning over renting is much lower when prices are not rising. And most would argue that if housing prices drop, renting is more benificial.
So dose owning a home have a premium over renting…I would say for most people…YES. Is the premium worth 2X (or 3x like here in CA) the costs?..I don’t think so.
However, people buying homes for themselves is not the only reason the market is double what it was a few years ago. Speculation accounted a good portion on the sales. They will treat it like an “investment”.
“People even think that paying off the mortgage is a good idea so even less motivation to move and get a new loan.”
This brings up another seperate issue…many people are now in morgages with low teaser rates, that when they roll over (usually after 2 to 5 years) the barrowers (owners) will not be able to afford the new payments. I don’t recall the exact #s for the phoneix market but I know this is/was very common.
Also, home equity is lower than it was 5 years ago. Even thoug prices have doubled, equity is lower…because people keep pulling it out and spending it. Houses have become giant credit cards. It seems to me that “paying down the morgage” dose not seem to be important to most people.
Gene
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)
Posted by Mark (SDCA) on May 19, 2006 at 16:17:38:
I agree that this has been a great thread. I have really enjoyed the exchanges.
“This brings up another seperate issue…many people are now in morgages with low teaser rates”
This has been a time bomb in SD for years and it just now getting ready to explode. I expect A LOT of people to get badly burned by this. If anything can cause the SD market to implode, this is it.
“Houses have become giant credit cards. It seems to me that “paying down the morgage” dose not seem to be important to most people”
Totally agree with this and it’s completely anathema to me. I refinanced most of my properties into low interest rate, fixed interest loans in the past 3 years. My mortgage paydown is around 2700 per month. I absolutely love it.
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey
Posted by John Corey on May 19, 2006 at 19:44:14:
Mark,
What is the logic of paying down the loan?
John Corey
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by Mark (SDCA)
Posted by Mark (SDCA) on May 19, 2006 at 19:58:20:
The logic is that I am past what I call my “acquisition” stage where I was buying everything I could that made any sense at all.
And I am into my “milking” stage- the ultimate goal for me being to get to what I call “hassle free cash flow”. And for me, that is SFRs with no mortgages. I am very much in the equity rich/cash poor trap, and I want to change that. On a normal amortization schedule, it wouldn’t start happening for 10 more years. But with 1 or 2 modest sized “income hits”, I can GREATLY speed that up.
I sold one Phx property last summer and that certainly helped. I should have sold my Cali condo at the same time. If I had I would have been where I needed to be. That was my bad. 
So now I am looking for different ideas.
Re: Cities to watch (good, neutral and BUBBLE?) - Posted by John Corey
Posted by John Corey on May 20, 2006 at 07:57:51:
Mark,
Thanks for the reply.
I do not know your mix of properties. Hence some of the following might be off the mark or not that interesting.
One conservative approach is to assume that you would walk from the rentals while keeping the family home if things turned really bad. That means having zero debt on the family home (and losing the tax deduction for those who care about such things) and have the debt on the rentals. Over time you can pay off the rentals if you like. Just that when a property is F&C you can not lose it to a lender. In the same way you would keep the debt on 1 rental high while paying off the other one so that you shift the risk away from the one you want to keep.
The following is going to sound like a new idea in the US but it is a bit common in a few other countries.
For the family home or for a rental you can have a HELOC or HELOC like 1st mortgage. As you aggressively pay extra each month you ratchet down the loan balance and shift the split between principal vs. interest.
You could do this with any fixed mortgage also. The difference with the HELOC is the ability to fund a quick deal if something comes your way. A flip or other deal where a cash buyer is going to get a bargain. You either sell or refi and pay back the HELOC plus book the profit. The profit goes into the HELOC so further reduces the loan balance.
If we are talking about a business all I described is a working line of credit that is secured. Very common in the business world. Seasonal businesses (farmers even) borrow when it is time to build up inventory and then pay down the debt when the season ends. Even with floating interest rates they are ahead most of the time as the term of the loan is short. The only difference is US based lenders are starting to see how a home can be used in the same way as a WLOC for a business.
Complete tangent…
You said you are looking for income producing ideas that are hassle free. The truly hassle free ideas are the ones where you pay someone else to deal with the hassle. A bank CD pays a lower rate because there is no hassle. The bank deals with investing the money, making sure they do not lose it, etc. As you go up the scale you get a bit more hassle. You can still make it less hassle than a rental and earn a lot more than a CD.
What have you considered so far? My suggestion is to never go to zero hassle as you have built up a lot of knowledge. You want to leverage that knowledge in some way. Suggestions that spring to mind are paper deals, hard money lending and JV deals with someone else handling the hassle. Any of the three let you leverage your knowledge while earning a higher return than a CD. People who want to invest zero knowledge can buy a CD. You have already paid to acquire the knowledge (K) and wisdom (W) so milking that K & W is the the best route IMHO.
John Corey