patrick.net

EconPete says

Property taxes are more than my rent, why would I buy

which zip code are you in? your rent? number of bedrooms baths sqt?
eventually buyers will pay only half of the rent, then even less.

EconPete says

Property taxes are more than my rent

Wut?

EconPete says

anon_d1db0 says

I am assuming from your comment you did not buy?

Property taxes are more than my rent, why would I buy. Plus interest from cd's pays the rent.....

Ok then - if that's true then what is your long term plan - rent forever? It's a sincere question. If you didn't want to buy at the bottom and don't want to buy now, why do you really care if we are in a new bubble or not?

If there is no new bubble, why is the State of California offering cash to homeowners to resolve pending foreclosures? I suspect it is because the State is now solvent due to high property tax revenue and it fears a massive deficit if prices readjust. The logic is to hold up the first dominoes from falling. I just sold my house, it was the least expensive in the area. It took a normal amount of time to sell, less than a month, but with hundreds of views per day and good foot traffic. There were houses priced just slightly more and they were foreclosures. Yes, the rent had climbed to where I had interest at $2,300 per month for San Marcos. Unfortunately, the tenant quality was worse than I had ever seen before. Everyone was dead broke with a story. My real estate agent told me the higher end market is now at a standstill (don't give me the whole, it is winter bit) he had observed this all throughout summer. I listed in October.

Here are the differences this time verses last time.

1. Yes, rents are higher now, but like I said above, the renters are desperate people. I saw mainly cases where the woman had a job and the man had absolutely nothing going on. Also, many nicer neighborhoods are cracking down on short term rentals, so that is impacting the ability of leveraged owners to pay their mortgages.
2. There aren't the time bomb loans that we had before. Yes, they pretty much did away with loans that start at 1% and then go to 10%, however, the reason we are in this situation with 3.5% fixed rate mortgages is because the government re-inflated the bubble by simply lowering the mortgage rates. They basically are stuck there unless we want to detonate the time bomb once again. Also, if rates go up, the stock market will implode as well. The Feds have F'd themselves and good this time.
3. Don't look for massive AIG bailouts this time, they learned from the last time and things are now structured differently. Non FDIC loans, MBS's, all that stuff, will be allowed to fail this time.
4. So there are some fundamentals that are different as far as owners having their payments jump, which by most accounts, was the main trigger last time. A trigger will make a correction happen faster, but fundamentals still say that houses are more horribly overpriced in San Diego than last time. Another fundamental is that again, we are fueling a prosperous economy with mortgage debt, not production. This ALWAYS comes back to haunt people and governments. We saw, last time, that people were more than willing to walk away from a house just because they found themselves upside down by 10 or 20K. Those same clowns are now homeowners again and will do exactly the same thing. That was the moral hazard, last time, of making it easy to do so. This is especially true of the latest round of buyers this last year who have non recourse mortgages. They won't have personal liability or a tax consequence for walking way from their initial loan. Why would someone pay $4,000 a month on a house they can rent for $2,000 a month, when they owe more than it is worth?
5. The tactic of lowering interest rates to maintain property values worked last time, this time, there is no option to do so. The government would literally be subsidizing negative mortgage APRs. The government basically lowered its lending rate from 5 percent to 0 percent to the banks. While we have had a couple of symbolic rate hikes, there is no more rate cutting possible. Certainly, there is less than a point or so, not significant.

So the takeaway is, there is nothing to say prices can't fall. In fact, I'm betting San Diego will have a price decline this year. The severity could be the same or worse than last time, mainly because there is nothing left to pump the valuations back up with cheaper money. An investment property has to make money or it will go to foreclosure, plain and simple, so the maximum an investment property should go for would be an amount less than the monthly rent. I can see that easily shaving a few hundred thousand off of most of the houses here.

Ah yes, and let's not forget that tax reform bill, which has taken the tax incentive away from the most expensive mortgage debt. If it is worthwhile, I picture homeowners putting their homes in LLCs and then renting from themselves. That would be a fun discussion.

Wolf has been wrong for a long time

Those are terrible housing charts too

Not even sure why he is even talking about housing in the first place

Malcolm says

I picture homeowners putting their homes in LLCs and then renting from themselves. That would be a fun discussion.

You picture homeowners being audited then paying back taxes and penalties to the IRS then. Go look at the Economic Substance Doctrine before you try this at home.

bob2356 says

You picture homeowners being audited then paying back taxes and penalties to the IRS then. Go look at the Economic Substance Doctrine before you try this at home.

Great point, but I don't picture many prosecutions. Obviously someone just calling a house a rental, never renting it, or worse, using it as a second residence would be opening themselves up to this. However, tax avoidance is not illegal in any way. There is no reason an LLC can't own a house. It is a legal entity. Your point intrigues me because I know that people will find a workaround. It will be interesting to see how it plays out. Nothing says I can't call a second home a rental, and rent it to a relative for below market rent.

For those who think we are going to see a seasonal dip and that the market is stronger this time; please consider that before the last meltdown, I never saw a note like this on my 1098 mortgage interest statement. This is my ACTUAL statement, that I just received in the mail.

Logan Mohtashami says

Not even sure why he is even talking about housing in the first place

Isn't that strange? The S&P is producing a return last I checked. A house is a liability.

Heraclitusstudent says

Logan Mohtashami says

Not even sure why he is even talking about housing in the first place

Isn't that strange? The S&P is producing a return last I checked. A house is a liability.

My favorite kind of liability is the one that pays a monthly dividend so large that it covers the rent

Heraclitusstudent says

A house is a liability.

No, housing is the cost of shelter to your own capacity to own the debt. This is what humans do, they buy a home to live in it and raise their families.

Nobody cares about the investment demand theory outside investors which with mortgages isn't the primary buyer of homes these days. Whatever net equity you create that is even better as that goes into the forced saving thesis.

errc says

My favorite kind of liability is the one that pays a monthly dividend so large that it covers the rent

First owning a house doesn't cover the rent: you still have to pay for maintenance and taxes. That would be included in the rent.
It doesn't matter that you have to pay for shelter....
It still doesn't produce anything and costs money.
It's still a big widget sitting there doing nothing.
It can still be produced on demand in other places.
So why would its price stay more or less in line with an investment in massively productive assets?

I also have to pay for food, and toothpaste. By your logic why can't I buy and store a lifetime supply of THESE and have it increase in price just like financials assets?

I expect rising wages, thank you Trump, higher business income as result of higher spending by people.

Also interest rate climbing to offset inflation by Feds. Next 8 years will have great economy, provided Republicans stay in charge.

No crystal ball of course, how do you see housing market going in CA over this year?

Logan Mohtashami says

Those are terrible housing charts too

Heraclitusstudent says

errc says

My favorite kind of liability is the one that pays a monthly dividend so large that it covers the rent

First owning a house doesn't cover the rent: you still have to pay for maintenance and taxes. That would be included in the rent.
It doesn't matter that you have to pay for shelter....
It still doesn't produce anything and costs money.
It's still a big widget sitting there doing nothing.
It can still be produced on demand in other places.
So why would its price stay more or less in line with an investment in massively productive assets?

I also have to pay for food, and toothpaste. By your logic why can't I buy and store a lifetime supply of THESE and have it increase in price just like financials assets?

Are we talking about house as in just the physical structure? Or a house as in a unit of Real Estate which includes a piece of land in a package deal?

anon_fd7ee says

Yet, it's the landlord that that becomes wealthier. Please explain how.

Oops.
Strategist.

Logan Mohtashami says

Whatever net equity you create that is even better as that goes into the forced saving thesis.

I bought my million dollar shaq in bay area in 2009. Now its worth $2M. I have a loan of $420K remaining on the property (it would have been lower if the bitch didn't ditch me and cash out her share of equity in the house) and my mortgage is around $2500 per month, out of which around $1500 is interest. So I figure my real cost of staying in the house is $1500 (mortgage interest) + $1000 (property tax) = $2500 per month. After cashing out all the equity in the house, my ex-bitch is now paying $3600 per month in rent compared to my $2,500. I already feel like I am one up on the bitch. If I rent out the house, I will get $5300 per month in rent or around $1500 profit every month.

errc says

First owning a house doesn't cover the rent: you still have to pay for maintenance and taxes. That would be included in the rent.
It doesn't matter that you have to pay for shelter....
It still doesn't produce anything and costs money.
It's still a big widget sitting there doing nothing.
It can still be produced on demand in other places.

Yet, it's the landlord that that becomes wealthier. Please explain how.

anon_fd7ee says

Yet, it's the landlord that that becomes wealthier. Please explain how.

Appreciation and tax write offs.

I’m an old timer from this site’s past.

I have 16 homes in Phoenix, bought 2009-2012.

I collect $24000 a month in rent, and pay $9800 in mortgages, of which $2400 is principle. Of course, I average another couple k in repairs.

I’ve retired, and now live in Nevada.
If buying homes doesn’t work Out as an investment, you did it wrong.

Housing had some nice appreciation in last 6 years, but so did everything else. From 2012 and on you could have put money into stock market and gotten all same gains as houses. Hell some stocks would have made you an instant millionnaire.

Only difference, is you can't borrow money to buy stocks. So some borrow money to buy houses, and hope to cash out on appreciation. Although most house purchases are still families.

anon_e09d2 says

Now its worth $2M.

Logan Mohtashami says

Nobody cares about the investment demand theory outside investors

Difference between investors and primary resident home buyers which is still the bulk of home transaction these days. Two different worlds we are talking about. In a low rate enviornment, rental yield looks good even if the peak of rent inflation growth has happened as supply has caught up with demand

FortWayne says

how do you see housing market going in CA over this year?

CA home sales look like national home sales, slow demand trends but as long as inventory stays below 6 months national, prices have legs.

On another note we see markets like in Canada, Sweden and Norway .. start to show some pricing cracks

Be mindful with housing that real home prices national are not back to 2006 levels here in the U.S. and interest rates are 2% - 2.75% lower in this cycle duration period which lasting a long time.

Channel out 10 year yield peaks in 2000 and 2006 & 2007 and we haven't even come close to breaking over the 3% 10 year yield data and even with more PMI data on fire our 10 year yield is still sticking in it's big cycle channel between 1.56% - 2.62%

2 year yield is up over 2% and we can easily see an inversion this year with any market pull back and drop in oil prices

FortWayne says

Housing had some nice appreciation in last 6 years, but so did everything else. From 2012 and on you could have put money into stock market and gotten all same gains as houses. Hell some stocks would have made you an instant millionnaire.

Only difference, is you can't borrow money to buy stocks. So some borrow money to buy houses, and hope to cash out on appreciation. Although most house purchases are still families.

You can borrow with a margin account, but the leverage is less than when buying a house. Still you can get quite a decent leverage for ~8% APR.

anon_e09d2 says

Logan Mohtashami says

Whatever net equity you create that is even better as that goes into the forced saving thesis.

I bought my million dollar shaq in bay area in 2009. Now its worth $2M. I have a loan of $420K remaining on the property (it would have been lower if the bitch didn't ditch me and cash out her share of equity in the house) and my mortgage is around $2500 per month, out of which around $1500 is interest. So I figure my real cost of staying in the house is $1500 (mortgage interest) + $1000 (property tax) = $2500 per month. After cashing out all the equity in the house, my ex-bitch is now paying $3600 per month in rent compared to my $2,500. I already feel like I am one up on the bitch. If I rent out the house, I will get $5300 per month in rent or around $1500 profit every month.

Did you buy that house by yourself and let the bitch onto the title? Don't do that again, if you are the primary buyer, only you are on the title. Period.

ja says

anon_eba5e says

I’m an old timer from this site’s past.

Roberto,

Did you calculate if this investment would still be possible in Nevada? Or whether it would have been possible in a big city at all?

I"d be careful believing anything that is said on the interwebs. And today you should be doubly careful when buying for investment purposes, the ROI simply isn't much there anymore and the possibility of quite some depreciation is real. The 2008 crisis and the following QE bonanza was an anomaly for the market. Phoenix and Las Vegas areas WERE cheap though following the crash.

Logan Mohtashami says

Be mindful with housing that real home prices national are not back to 2006 levels here in the U.S. and interest rates are 2% - 2.75% lower in this cycle duration period which lasting a long time.

Channel out 10 year yield peaks in 2000 and 2006 & 2007 and we haven't even come close to breaking over the 3% 10 year yield data and even with more PMI data on fire our 10 year yield is still sticking in it's big cycle channel between 1.56% - 2.62%

2 year yield is up over 2% and we can easily see an inversion this year with any market pull back and drop in oil prices

I see the possibility of a drop in housing prices if rates rise significantly, but will they, that is the question. Not enough rumbles in the bond/rate market yet.

anon_eba5e says

I’m an old timer from this site’s past.

Roberto,

Did you calculate if this investment would still be possible in Nevada? Or whether it would have been possible in a big city at all?

anon_eba5e says

I’m an old timer from this site’s past.

I have 16 homes in Phoenix, bought 2009-2012.

I collect $24000 a month in rent, and pay $9800 in mortgages, of which $2400 is principle. Of course, I average another couple k in repairs.

I’ve retired, and now live in Nevada.
If buying homes doesn’t work Out as an investment, you did it wrong.

Roberto! Long time no see!

Coastal communities prices will remain unchanged or go up slightly.
The government won’t allow another drop in prices, and certainly won’t allow another bubble to burst. Don’t bet on the fundamentals when there’s enough owned money out there to skew any economic function.
That’s what I failed to see in 2010, when I should have bought a house. But I expected it to crater further as the recession deepened, and didn’t realize the above truth until a couple years later. By then I’d missed out on at least 20% housing price growth.

anon_eba5e says

I have 16 homes in Phoenix, bought 2009-2012.

I collect $24000 a month in rent, and pay $9800 in mortgages

16 tenants and 32-48 toilets? Oh my!

anon_eba5e says

I’m an old timer from this site’s past.

I have 16 homes in Phoenix, bought 2009-2012.

I collect $24000 a month in rent, and pay $9800 in mortgages, of which $2400 is principle. Of course, I average another couple k in repairs.

I’ve retired, and now live in Nevada.
If buying homes doesn’t work Out as an investment, you did it wrong.

Pretty good.
Diversifying to other cities would be reasonable.

Quigley says

Coastal communities prices will remain unchanged or go up slightly.
The government won’t allow another drop in prices, and certainly won’t allow another bubble to burst. Don’t bet on the fundamentals when there’s enough owned money out there to skew any economic function.
That’s what I failed to see in 2010, when I should have bought a house. But I expected it to crater further as the recession deepened, and didn’t realize the above truth until a couple years later. By then I’d missed out on at least 20% housing price growth.

The Recession ended in 2009

To answer a few questions and comments:

I’m in Reno now, have been here a year. The prices in Reno are too high to make sense to a value investor. Also, I see land that could be developed everywhere here, so I don’t really understand the Imbalance between supply and demand here. It seems builders could come in, and prices would drop, since it is a small market, and one builder could add thousands of homes here. I’m sick of hearing how it makes sense because Tesla, Tesla average salary is in the mid 40s, and Reno is not a rich town.

We are moving to Vegas in a couple months though. My wife didn’t like reno much, too small, too far to see our friends in Phoenix often, very small Chinese community, plus few and small Asian markets. I’m going to miss Lake Tahoe, and the fantastic hiking here, plus the best rock climbing gyms I’ve ever seen, but oh well, I can explore Death Valley in the winter, southern Utah in the summer from Vegas. In Vegas, obviously buying a house a few years ago would have worked out fantastic. Today, homes of I type I’d like in the part of town I’d want to live cost around 300k, rent for around 1500. Those numbers are reasonable if you want to buy and live there for years, but not terribly compelling as an investor. Rental inflation will probably make them work Out ok, but my last purchase in Phoenix was 1.5 years ago for $195k. Close to asu. It’s rented for 1500 now to a family, but after I remodel it, and get it vacant in summer, it will get 2000+ to spoiled pain in the ass college kids, which is my normal business model.

those saying diversify to another city, sure, which ones have compelling price/rent ratios, that would be nice to actually live in too? Preferably in a low or no tax state, since my college pension is taxed in the state I live in!

mell says

I see the possibility of a drop in housing prices if rates rise significantly, but will they, that is the question. Not enough rumbles in the bond/rate market yet.

I can't see the 10 year yield going above 3% and staying higher with any duration period this late in a cycle. Heck, I am looking for a inversion this year. The economist at Freddie Mac and I have this on going discussion on twitter on what rate level will impact home sales enough.

You need to see 5.875% 30 year plus to just get back to the pre crash base level... that would mean a 4% plus 10 year yield and you need to see it with duration as well.

So, it's hard to have a higher rate thesis in this cycle.

A more plausible argument going out for decades is that rates can in theory be higher in the next cycle even if the 10 year yield stays below 3% because unless we print out a 1.25% -2.25% 30 year fix rate in the next cycle, then the 36 year trend of 2% plus lower mortgage rates in a new cycle goes away. This in itself would mean real home prices become less affordable.

That is something to look at in the next cycle until then ... 1.60% -3% 10 year yield for this cycle... anything over 3% should be short lived compared to this long expansion already

anon_eba5e says

those saying diversify to another city, sure, which ones have compelling price/rent ratios, that would be nice to actually live in too? Preferably in a low or no tax state, since my college pension is taxed in the state I live in!

Roberto, how's the dog?