I am still not buying. Clearly there are still a lot of buyers left in the system keeping prices from collapsing, I want those flushed out before I jump in.
Originally posted by: senseamp
I am still not buying. Clearly there are still a lot of buyers left in the system keeping prices from collapsing, I want those flushed out before I jump in.
Originally posted by: Vic
Originally posted by: senseamp
Keep in mind also that, to many people, prices are going down simply because they are not continuing to go up.
Unless you live in CA, where prices continue to tumble by the week.
Anyone who thinks that there is going to be a quick turnaround to the downturn for some reason cant answer one simple question. With 70% of people already owning a home, lower income people no longer able to get a loan, investors leaving a negative cash flow investment in droves, and the recently foreclosed not getting loans, who is left to buy up the record level of inventory? Prices will drop until the cost to buy is slighty above the cost to rent.
Originally posted by: rhatsaruck
Uh oh... real trouble for home builders: Centex, DR Horton, Pulte may bust credit terms -S&P. That coupled with this estimate that new home building may not recover until 2011 leads me to wonder if some of the big players are going to last that long.
With so much free money floating around for M&A activity are any of the big builders possible buyout targets?
Originally posted by: Vic
Originally posted by: senseamp
I am still not buying. Clearly there are still a lot of buyers left in the system keeping prices from collapsing, I want those flushed out before I jump in.
They won't flush out. People are always buying and selling homes, it's just a fact. And they are literally tons of people just like you, who are waiting for whatever they consider to be the right price point and time before they jump in. And as each one has a different opinion of what is the right price point, and timing is a matter of circumstance, they will keep prices afloat at a relatively flat level. If anything is keeping buyers out of the market right now, it's that less people are able to qualify due to the subprime lender blowup a couple of months ago.
Keep in mind also that, to many people, prices are going down simply because they are not continuing to go up. Where once they felt too pressured to make a decision, now they feel comfortable enough to do so.
Caveat: Roubini's predicted an 85% chance of a recession... starting in 2006. Given his bias, the quoted comment is interesting because it is the opinion of the senior analysts of a top ten global financial institution. It seems that some folks in the real world are starting to open their eyes.In brief, their view is that: the housing market is still weakening and - based on their May survey of traffic - housing sales traffic is close to dead; it would take developers to shut down all new construction for almost a year to get rid of the excess supply of unsold homes; thus, downward home price action may continue for the next two years...
Motley Fool
The Worst Investment Ever
Friday May 18, 2:05 pm ET
By Robert Aronen
My fellow Fool John Rosevear considers a house to be the best investment ever. I disagree. A house is a place to live, not a road to riches.
Think about it for a minute. What characteristics do Fools look for in a great investment? Positive cash flow, low expense ratios, low transaction fees, and historically proven returns. Using these criteria, the average house falls well short of the all-time best.
ADVERTISEMENT
Positive cash flow
If you buy a house, how much money goes into your pockets every year? How much goes out? That's right -- a house clearly produces negative cash flow. Mortgage payments, maintenance, and taxes add up to a lot of money heading out and none coming in.
This is not necessarily true for real estate as an asset class. Purchase a parking lot, apartment block, or strip mall, and you very well may find that the rents are higher than the cost of ownership. Real estate that generates positive cash flow can be a great investment. This positive cash flow fuels the dividends from REITs such as Avalon Bay (NYSE: AVB - News) and American Financial Realty (NYSE: AFR - News).
Low costs
The Fool has long advocated seeking investment vehicles with low expense ratios and transaction fees. The expense ratio is the cost of owning an investment as a percentage of its value over the course of a year. Shannon Zimmerman at the Motley Fool Champion Funds service searches for mutual funds with expense ratios of less than 1%.
How does this compare to housing? Costs vary significantly by location, but for urban areas, annual property taxes are typically between 1% and 2% of the current property value. Annual maintenance costs can add another 1% of the property value. If your down payment is less than 20%, you will also usually have to pay private mortgage insurance. Add property insurance, and the annual expense ratio associated with homeownership can easily reach 3% or more.
The big hit, however, arrives when you sell a property. Real estate agents will collect 6% of the selling price, while, lawyers, inspectors, title companies, and banks will collect additional fees. These fees appear as though they will remain stubbornly fixed for years to come. If you flip properties as though you are actively trading stocks, the only folks getting rich will be real estate agents. Meanwhile, transaction fees for stocks and mutual funds have plummeted in recent decades, to the point of falling below $10 per trade at several discount brokers.
Historically proven returns
The Fool has long advocated shares of individual companies as the best road to wealth, because of their inflation-crushing performance over very long periods of time. In The Future for Investors, Jeremy Siegel identifies several companies that have not only beaten inflation but also delivered returns far in excess of the market average for 50 years. It does not take a genius to actually buy companies like Pfizer (NYSE: PFE - News) or Altria (NYSE: MO - News), consistently reinvest the dividends, and build wealth over the decades. Over the 50 years of data compiled, Pfizer and Altria returned 16.0% and 19.8% respectively.
For any time period longer than the past few years, residential housing prices fall far behind these returns. Perhaps the best measure of housing-market appreciation is the S&P National Home Price Index. This index represents the actual appreciation of the same house over time, whereas a portion of overall housing-price increases occurs because new houses are generally much larger than old houses and people frequently spend substantial money upgrading and expanding their houses. Looking at the index, from 1987 to 2006, we see that the overall average appreciation in the U.S. was only 5.6%. Even cities showing huge gains during the final years of the housing bubble -- including San Diego, Las Vegas, and Washington, D.C. -- showed gains slightly above only 7% for the 19-year period. If we adjust these returns for inflation, we end up with real returns on housing in a range of 3%-5%. Subtract our annual expense ratio of 2%, and the return gets pretty thin.
This index is relatively new, and the data ends at the top of the final eight years of the biggest housing boom in U.S. history. Longer-term data paints an even less encouraging picture. Piet Eichholtz studied records on home sales in Amsterdam's premier Herengracht neighborhood from 1628 to 1973 and found an inflation-adjusted return of 0.2%. There were periods of rising prices and periods of falling prices, but not a continuous march upward with spectacular returns.
Final thoughts
I will agree with John Rosevear on one account -- a house is a great place to live. Fool Mary Dalrymple provides a good discussion of the issues associated with the rent-or-buy decision. Those who think renting is "throwing money away" should consider that mortgage interest, maintenance, taxes, and insurance are also "thrown away." Having a place to live costs money no matter what, and a rational evaluation of your local market should let you know which one is a better value. Before you start plugging overly optimistic numbers into the rent-vs.-buy calculator, just remember that past performance may not be indicative of future returns.
Originally posted by: Slew Foot
Some nice graphs you got there.
Sacramento is destroyed in terms of housing prices. I took a 30 min walk and found t about 20 homes newly on the market for sale and three homes with foreclosure notices that I didnt notice 2 weeks ago.
Originally posted by: LegendKiller
A lot of alt-a MBS transactions are ticking up with delinquencies and defaults.
This is a really interesting event, considering that they are mostly prime borrowers with one or two attributes that would disqualify them for prime, such as too large of a mortgage.
If they get worse, things will really get interesting. As it stands the rating agencies are downgrading the lower tranches of the bonds, meaning that there isn't adequate protection for those lower tranches.
-------------------------
dmcowen674
quote:
--------------------------------------------------------------------------------
Yes, I am a Moron. That's been proven many times...
Originally posted by: dmcowen674
Originally posted by: LegendKiller
A lot of alt-a MBS transactions are ticking up with delinquencies and defaults.
This is a really interesting event, considering that they are mostly prime borrowers with one or two attributes that would disqualify them for prime, such as too large of a mortgage.
If they get worse, things will really get interesting. As it stands the rating agencies are downgrading the lower tranches of the bonds, meaning that there isn't adequate protection for those lower tranches.
-------------------------
dmcowen674
quote:
--------------------------------------------------------------------------------
Yes, I am a Moron. That's been proven many times...
I said this would happen more than two years ago.
I am a Moron so how can I have been right?
Originally posted by: rhatsaruck
Doom and gloom from Nouriel Roubini's May 31, 2007 blog:
This caught my eye:
Caveat: Roubini's predicted an 85% chance of a recession... starting in 2006. Given his bias, the quoted comment is interesting because it is the opinion of the senior analysts of a top ten global financial institution. It seems that some folks in the real world are starting to open their eyes.In brief, their view is that: the housing market is still weakening and - based on their May survey of traffic - housing sales traffic is close to dead; it would take developers to shut down all new construction for almost a year to get rid of the excess supply of unsold homes; thus, downward home price action may continue for the next two years...
What I don't understand is why the CME S&P/Case-Shiller futures show a slackening of housing price decreases into 2008. Folks investing in housing futures figure the excess housing inventory will be off the market by then. How's that going to happen when the excess inventory is concentrated in the low end of the market and buyers in those markets aren't able to get subprime loans.
On the other hand, there was an article in the past day or two (here) in which housing experts observed that between 10%-30% (and possibly up to 50%) of the folks who obtained a subprime loan in the past few years actually qualified for a prime loan. If those borrowers default I suspect they will no longer qualify for any kind of loan. Then what happens to all that excess inventory?
Originally posted by: GrGr
Well this was the most inflated housing bubble ever. The subsequent recoil will be as severe.
Originally posted by: Vic
Originally posted by: GrGr
Well this was the most inflated housing bubble ever. The subsequent recoil will be as severe.
Is every other asset that has inflated in the past 20 years going to decline in value as well? Stocks, commodities, etc. etc.? Economics isn't gravity.
Do some of you realize how long it's been now that you've been predicting total disaster in the housing markets? Years. And all that's happened is the flattening (to mild decline in some especially overheated markets, like Slew Foot's Sacramento) that I've been predicting all along. Hey, if believing that home values are going to fall A LOT is what you need to explain to yourself why you haven't bought a house, that's cool... but you really should keep in mind that there are literally millions of people thinking just like you (that will buy in when values fall a lot) and that that alone is enough to keep values propped up. The only way values will actually fall "a lot" is when even you (and everyone else like you, speaking in general) won't be able to take advantage of the buying opportunity.
Originally posted by: Vic
Originally posted by: GrGr
Well this was the most inflated housing bubble ever. The subsequent recoil will be as severe.
Is every other asset that has inflated in the past 20 years going to decline in value as well? Stocks, commodities, etc. etc.? Economics isn't gravity.
Do some of you realize how long it's been now that you've been predicting total disaster in the housing markets? Years. And all that's happened is the flattening (to mild decline in some especially overheated markets, like Slew Foot's Sacramento) that I've been predicting all along. Hey, if believing that home values are going to fall A LOT is what you need to explain to yourself why you haven't bought a house, that's cool... but you really should keep in mind that there are literally millions of people thinking just like you (that will buy in when values fall a lot) and that that alone is enough to keep values propped up. The only way values will actually fall "a lot" is when even you (and everyone else like you, speaking in general) won't be able to take advantage of the buying opportunity.
Originally posted by: LegendKiller
Originally posted by: Vic
Originally posted by: GrGr
Well this was the most inflated housing bubble ever. The subsequent recoil will be as severe.
Is every other asset that has inflated in the past 20 years going to decline in value as well? Stocks, commodities, etc. etc.? Economics isn't gravity.
Do some of you realize how long it's been now that you've been predicting total disaster in the housing markets? Years. And all that's happened is the flattening (to mild decline in some especially overheated markets, like Slew Foot's Sacramento) that I've been predicting all along. Hey, if believing that home values are going to fall A LOT is what you need to explain to yourself why you haven't bought a house, that's cool... but you really should keep in mind that there are literally millions of people thinking just like you (that will buy in when values fall a lot) and that that alone is enough to keep values propped up. The only way values will actually fall "a lot" is when even you (and everyone else like you, speaking in general) won't be able to take advantage of the buying opportunity.
It depends, what is the mean rate of appreciation that one could reasonably expect from an asset and how far from the mean did that asset appreciate? That is the influence upon whether an asset will fall or not.
For example, if an asset is expected to grow at 10% annually for 10 years, it will appreciate 100% (ignoring compounding returns for simplicity). Let's assume that the market can and will only take that 100% growth, it's impossible to outstrip it. Now, if instead of growing 10% annually it grows at 30% annually for 3 years, that means 90% of your expected growth occured in 30% of the time.
This means that for the remaining 7 years you can expect 10% growth. What happens if the economy, instead of 100%, grows 200% in 5 years? Then what?
You have grown 2x as fast in 1/2 the time. Now, you can only grow 100%, so what do you do? Let's be generous and say that we'll extend our time period out to accomodate your 200% growth, so we double it to 20 years. That means that for 15 years you have 0% growth, since you already accumulated all of the growth. By you hit Y20, you are back to the "mean" rate of growth, you have regressed there by not growing at all.
The realistic perspective would be for the market to fall sometime after Y5. Lets say we grew to 200% in Y5, then in Y6-10, we fell by 100%. That would put us right at 100%, we regressed to the mean, but did it in a different way.
See, you may think that giving all of those loans to people was a great idea. It let them "afford" houses and expanded the amount of owners in the market. However, it was a horrible idea in reality. Not only did we outstrip natural appreciation due to inflation, which is the most natural piece of appreciation for an almost risk-free asset. We also outstripped the "risk" component of appreciation, by a significant margin.
That priced many people out of the market, people who shouldn't have been there in the first place. It also cause rampant fraud and also over-stretching by borrowers. This will lead to an economic downturn.
I think you keep missing that last point. GDP was .6% last quarter. That's the slowest growth in a decade and puts us on the gusp of a recession. It is 1/4th of what it was in Q4-2006. The spring pickup in housing hasn't materialized. Prices keep falling. Mortgage rates are going up. Oil and gas is not getting cheaper. Foreclosures are getting worse. Credit Cards are at an all-time high utilization rate.
For the last 5 years we financed ALL of our economic growth on the never-ending spiral of housing appreciation. Almost 60% of the total GDP growth in the last 5 years can be directly attributed to mean equity cash out. 20% more can be directly attributed to the use of consumer unsecured credit. That means that 80% of GDP growth in the last 5 years was ONLY due to racking up debt.
Debt has to be repaid. It's just shifting future wealth into the present. If you spent $2 today when you should have spent $1, means you have $0 to spend tomorrow. Factor in interest and you actually are -.08.
That is the reality of the situation. Perhaps you should go to S&P's website and get familiar with the Case-Shiller index, because it's showing housing going down, and it is accelerating, even through spring.
I can't believe people are still thinking that the last 5 years was a great thing. That's like saying 96-00 was "great" or '27-29 was "great". Yeah, it's great on the way up, but it sure sucks on the way down. In 00 and 29, people thought it would never end. The warning signs were ignored and detractors told that their years-long projections of a downturn were folly.
I guess they were wrong, eh?
For the millionth time, California has seen a double digit decline in property values (after an even larger run-up) every decade since the gold rush. No one cares but Californians who (for reasons not even God could understand) always seem surprised by this.Originally posted by: Slew Foot
25% in 2 years with no end in sight is a "mild decline?"
Originally posted by: Vic
For the millionth time, California has seen a double digit decline in property values (after an even larger run-up) every decade since the gold rush. No one cares but Californians who (for reasons not even God could understand) always seem surprised by this.Originally posted by: Slew Foot
25% in 2 years with no end in sight is a "mild decline?"
And edit: Prime has nothing to do with mortgage rates, and whoever is President has nothing to do with decisions by the Fed. And the outsourcing of jobs to China was Clinton's baby, the U.S.-China Relations Act of 2000, which he wrote and put before Congress himself.
Edit2: And comparing housing to the dot-com or '29 is simply sillyness. And for the 10,000th time, LK, I'm not saying that housing will continue to boom or that it will not struggle. I have been saying that it will for years, and I get sick of the way you pretend to yourself that I say otherwise simply because I don't buy into your apocalyptic doomsaying. What I am saying is that you can only predict "the end of the world is nigh" for so long without the world ending before people with intelligence start asking themselves what your motive is.