The #1 reason I know we're in a bubble is the cost of rent vs. the cost of ownership, or the PE ratio of housing - which is completely and totally out of whack (as I sit here in a $700,000 condo renting it for $2000 a month, vs. the $5000 cost of owning it)
This economist from UCLA, who is much smarter than me, does a good job walking through the reason and proof of the pubble. And what will happen. VERY important read - enjoy
A real estate bubble, or any asset bubble is not a situation where you hear a pop. Everyone always associates bubble with a pop. They think, gee, if there's a bubble, there must be a pop! coming at the end. That's not what a bubble is. A bubble is when the price of an asset becomes misaligned with the fundamentals that truly determine the price of that asset.
Let me give you an example of what I'm talking about here. Amazon dot-com -- let's go back to the NASDAQ days. At one point in time, Amazon was worth $180, $190 a share. The big question is: was that stock worth $180, $190 a share? Well, what determines the price of a stock? It's the net present value of the profits that accrue to that stock in the future. That's what we teach our MBA students. When they buy that stock, you're buying a share of the profit stream that comes from that company today and in the future. Some bright economist at one point in time, sat down and said, "Well, gee. What if Amazon dot-com captured 100 percent of the DVD, book and CD market in the U.S.? Would they ever make enough profits today or in the future to justify a share price or the market capitalization implied by the share price of $180, $190 a share?" And the answer was no way.
So, when you're talking about a house, and when I say we have a housing bubble, what I'm talking about is that the price of a house is determined by the stream of profits that accrue to that property today and in the future. And that of course is determined by the rental value of that property today and in the future.
Now, the reason I go through all this is, because you have to ask yourself the question, are we in a bubble market or not right now? And the answer is, as I firmly believe, is we are in a bubble market. And the reason I believe that is, there is no justification, there's no underlying fundamental that would make me think that a house in California today is worth 40 or 50 percent more than it was two or three years ago
November 19, 2005
Housing Bubble Q&A with UCLA Forecast
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This "Bubble in Real Estate" is getting nasty. Look at this:
Maricopa County believes some Arizona and out-of-state investors are committing crimes and depriving state of millions.
The Associated Press
PHOENIX - Maricopa County Attorney Andrew Thomas has launched an investigation into the accuracy of the county's property records as well as the financial implications of any errors.
Real estate investors who falsely claim their rental houses as "owner-occupied" are potentially draining millions from the state treasury and may soon face criminal charges. Homeowners who live in their residence get a 35 percent "aid to education" tax rebate subtracted from their tax bill each year. The state reimburses that amount - an average of $200 a home - to school districts out of the general fund.
Thomas said he doesn't yet know the extent of the fraud or how much money was lost. Investigators likely will question owners if addresses of their properties are different from the addresses where their property tax bills are mailed, Thomas said. Violators could be prosecuted for perjury, a felony.
$2000 is month to month rental on a vacation rental in arizona for a place that the similar unit next door is listing for $600,000. Here until I leave for Uk in January
You are correct, a more reasonable rent will be $1000 a month for a one year lease, but in a home that would list for $400,000 - $500,000
As to the math, thanks for the analysis. But one crucial mistake - called home value depreciation.
" You will gain an equity appreciation of $202,661.00"
Whereas I am saying (as are many economists) that houses will deflate, not incrase. Housing values will go to the mean - which is significantly below where we are currently trending.
So, you're whole analysis rides on that one point. And I believe this blog contains enough information that you should at least not have a comfort level when it comes to that one point.
House of cards.
There are two reasons the median home has gone up in price since 1968. Inflation has increased 459% and the median home size has increased 60%.
1968 $20,100 adjusted for both: $179,774
2004 actual $185,200
Any questions?
I thought I was clear with:
Since 1968. Inflation has increased 459% and the median home size has increased 60%.
1968 $20,100 adjusted for both: $179,774
2004 actual $185,200
$20,100x1.6x5.59= $179,774
Even at that it doesn't tell the whole story since median houses at 60% larger are more baths, better wiring, longer lasting components, built to higher codes, etc.
As to me personally pro/anti-bubble? There is a bubble and it has started to turn. Does that make me pro or anti?
The easiest calculator is at the Minn Fed Reserve:
http://minneapolisfed.org/Research/data/us/calc/index.cfm
I suspect that the median price for a comparable 1968 house sold today would lag substantially behind inflation. We'd be talking about 1400 sq ft with two prong 80 amp electrical service and 60% efficient oil heating, single pane leaky wood windows, few built-ins, formica counters, single car garage, uninsulated,... getting the picture?
Long term homeoqnership is a good deal because it is better than renting. Compared to other pure investment choice however... different story.
"Long term homeoqnership is a good deal because it is better than renting"
Before any embittered renters out there complain about not getting fair treatment let me assure you that if we started discouraging homeownership the rental market would suffer. I'm always amazed at my renters voting for higher taxes/fees/restrictions on the rich landlords. Remove the interest deduction, I raise their rents. Increase property taxes, the increase is passed on. I don't lose money renting to others, I make money.
Our blog host pays $2000/month? Ouch. That's like a $700k mortgage after taxes.
again, everyone calm down, to clarify - I sold my home ($150k gain 2 years) and am now renting a vacation rental at $2k a month, while owner is carrying $4k a month cost, or $2k loss for him, until I leave for UK in January
Real rent on a 12-month contract would be $1200 or so
It's time for you to post a new article so you can end this thread and start a new one......you're embarrassing yourself on this thread string and need to start over.
No, you are.
Sorry to burst your bubble, but that argument that housing always goes up, inflation-adjusted, LONG-TERM, depends on not buying at the peak of a bubble.
IF you buy at the peak of a bubble (which has, BTW, already passed.) then the only way you stand to make money, inflation adjusted, is by waiting for the peak of the next bubble, and only if the next bubble brings prices even higher than this one. That is going to be a long way off (probably not in your lifetime.) considering that the current bubble has been unprecedented. The only comparable bubble is Japan about 15 years ago, and prices there have been declining ever since. Maybe one day they'll turn around again, but it'll be another long road up before they get back to the bubble-peak prices of 15 years ago.
Holgs - thanks for the support, but in the end, we can't save everyone. "Everyone calm down" is obviously invested in the scam continuing, not in touch with reality, closed minded as the intelligent design crowd, and beyond help
But, he/she is a good poster and welcome - we need contrarian input, no matter how bad it is
Walter = Genius
Enjoy, and build up your cash so when it's popped, 2007, 8.5% interest rates, you can buy and not have to finance - just pay cash with your 2004 sale proceeds and three years of savings from renting vs. owning
Genius.
devestment - what is it like to sell a home at a 15% or 50% loss emotionally?
Also, did you consider renting it out vs selling?
I want to get into the emotions of what we're about to see. The pain.
Share what you can
There's nothing like taking a break from life and going out on a great excursion or vacation just to get away from it all. I did that over the past week and it was truly freeing. They had an internet connection at this place I was staying, and even supplied a computer. I guess it was one of those extraordinary things some resorts do to keep their people happy. Then, I just went off on the net, in this careless sort of day when I had no outting planned, and started researching Fixed rate mortgage uk like a maniac. Before I knew it, it was dinner time and had to think about making reservations or I would get in anywhere to eat with me and my travel mate. C'ya.
Fixed rate mortgage uk
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