If you like this, I have put up a bunch of the data that went into the analysis on the blog. Using tableau public to drive interactive visualizations (which is meh).
Would be good to see a plot of housing prices in SF during the last bubble and the post-bubble ramifications. We've been here before so not including that graph seems strange.
I loved this calculator when they first issued it, (2012ish?) but now they've revamped it and it takes up too much space for whatever functionality they added.
Found it!
The advanced panel, the simple graphics, highlighting the parallel rolls of expected rate of Rent increase vs Home price appreciation and making it a slider! Much usability, minimal space.
If there was a way to live here that didn't suck as an investment that would be great. But there isn't. You can rent (costs the same or more than a mortgage, without the tax advantage) and you'll have nothing left to invest. Or you can buy and "invest" all your money in home equity, exposing yourself to ... all the downside.
Right, if you are underwater this means you basically have to walk away and lose it all. If you are renting you just lose the rent paid, which is a lot, which is why there really isn't a "smart" way to live in the bay area.
Unless I'm dramatically mistaken you don't lose your principal when the bank forecloses.
Obviously in many cases during the 2008 crisis the homes were underwater (valued at less than the loan amount), in that case then yes, you end up without a house or any equity since it's valued at less than you owe.
In the hypothetical where you lose your job and can no longer afford the mortgage - presuming you went an extended period without paying - the bank will eventually force a sale of the property to recover the loan amount.
If you have positive equity in a home then you'll have some money leftover after the proceeds of the sale are used to pay off the remaining balance to the bank.
What you are saying is only true if the overall market is steady.. i.e. all your friends keep their jobs in case you lose your job. For example:
Let's say you save 200k, and buy a house for 1 million. You take out a loan from the bank for 800k.
Opps market correction. You lose your job, and a lot of your friends do too. Your house is now worth 600k. You either sell for 600k and pay the bank another 200k for a total loss of 400k, or you go the bankruptcy route and "only" lose 200k and your credit for 7 years.
Weather or not you had 200k positive equity for 6 months has nothing to do with it. Positive equity is great when something bad happens to YOU and YOU need to get out, but if it happens to everyone - that positive equity very quickly flips to negative equity.
California is non-recourse. You don't have to declare bankruptcy to walk away from a house. The bank gets the house, but the most you can lose is whatever you've paid into it (which can still be a lot).
Unless you've over leveraged your mortgage you should (right now) still be able to get out of a house in the Bay Area with most of your equity intact should you no longer be able to keep up with the payments.
If you're underwater because you've used your house as an ATM you're on your own but responsible parties shouldn't be losing their deposit.
This all changes if there's a huge downward swing in home prices. It's unclear if there's downward pressure whether home prices would significantly fall as opposed to flatten out . The 2008 collapse caused about 5 years of lowered home prices, bottoming out around 2010. But a lot of that was also driven by poor lending practices.
If there is a market correction coming in the Bay Area tech world, then for many of us layoffs and plummeting home prices are likely to happen at the same time. I accept that unemployment is a possibility, and I accept the the collapse of the value of my assets is a possibility, but I'd like to make sure they happen separately.
However, if that happened it would be unprecedented. Seriously so. During the foreclosure crisis, which was itself unprecedented, house prices fell in a significant way for the first time, they also recovered faster than any other part of the country.
A possibly more realistic scenario is a magnitude 9 quake along the Hayward fault. Something that would destroy (not merely damage) a significant chunk of infrastructure resulting in the dissolution of hundreds, if not thousands of businesses and the concomitant unemployment that would ensue.
However even in that case the amount of resources available to restart are really unprecedented relative to the rest of the country.
that's the worst case scenario. But the thing is that you are basically investing all your money in one asset, you aren't diversified. In order to have enough money left over to diversify you need to make a lot here...like...$500k+ a lot.
In relation to salaries? Close enough. This paper (http://web.ppic.org/content/pubs/report/R_304HJR.pdf) came out in 2004 which looked at the area with a broader eye than just house prices vs the median vs the median salary.
Downturns have typically resulted in flat growth of prices, but only the foreclosure crisis managed to push houses serious negative. And typically existing rents don't go down, instead you have to move to get a better rent deal.
Over a long enough window the expected value is that you'll get back your principle. Which is more than you can say for renting. "Worst case" is you end up walking away with nothing because the mortgage is underwater.
The only outcome of renting is you walk away with nothing when you move.
"Meaning even if you put 50% of your income into buying your home, it would take you almost 20yrs to pay for the median home in SF making the median income."
What the heck is going on with that initial scatter plot? The Y-axis is log-base3, which is nonstandard but technically valid. The X-axis? log-base2 times $30k? It doesn't work like that, and it might be misleading to portray SF/California as outliers, especially when different bases are being used for the axes.
Yes, SF real estate is expensive, no one will deny that. But the core argument appears to be "don't buy SF real estate because the economy is on a downturn" which is specific to neither real estate nor SF.
Its a way to emphasize the point, and I agree with you that it pushes it into deception. That said, it seems like most of the people looking at homes in my neighborhood both people work, and generally at engineering median[1], not area median salaries. So when you're annual income is 250K plus, spending 6K a month on a $1.5M mortgage is 1/3 your income.
No, the core argument is "don't buy SF real estate because interest rates are going up". It's a valid point. Given a certain amount of income, a home buyer can afford a certain monthly payment. If interest rates go up, and prices didn't fall, payments would go up. Since the market can't support higher payments -- people are paying as large a fraction of their income as they can stand to already -- what will happen instead is that prices will have to come down.
As for the plot, it's just a log-log plot. Stretch the axes however you like; it's still going to have the same shape.
if the author knows which way interest rates are going, he should quit his day job and buy / short interest rate futures. the road is littered with bodies of people who believe japan's interest rates couldn't stay at "zero" forever.
> when different bases are being used for the axes.
um... there is a constant for converting between any two log bases... so I have no clue what you are claiming is wrong. It is a factor of 1.5849625007211563 for converting between log base 2 and log base 3...
A log scale is a log scale is a log scale. There is no "log-base 3" or "log-base 2" scale.
Would that factor still be valid since the X-Axis "log" is already being transformed by multiplying by 30k? That's what's really confusing me. (It might be so but that just makes interpretation way confusing and the article doesn't elaborate on that.)
The Y axis (price to income) is derived from the X axis (income) as well, which will be affected by representing with different bases.
I have no issues with log/logs for general visualization, but the use of it here seems like brute-force outlier identification which isn't representative of the typical relationship of California and other states. (Especially with a trendline)
The article isn't about buying vs renting.
It's about buying real estate in the Bay Area as an investment. The bottom line is that if you have money to invest you should invest it in something else because it's too risky right now, especially if you are already exposed to the risk by working in tech in the Bay Area.
I was attempting to humorously hint at the fact that everyone needs somewhere to live, and that's the chief function of your house or apartment. It's like we forget about that sometimes.
I get that you were joking, but this really is no joke. In California we're currently trying to get an affirmative right to sleep written into our laws, and we've failed to advance it two years in a row. And in the meantime cities in the U.S. are working really, really hard to find new and innovative ways to make it illegal to not pay rent or a mortgage.
It's true that everyone needs somewhere to live, and I really, sincerely think that public land should act as a fallback. Currently, the fallback is jail, and that isn't working.
I don't think you are hearing the argument if this is your synthesis.
The article is saying that from an investment perspective it doesn't make sense to buy a house in SF right now if you work in tech.
It's not saying you shouldn't in general. If you derive a ton of value from buying a house, buy a house, just understand the risks of doing it, and buy less house so that if it goes down and you lose your tech job, it's not ruinous.
I find this article to be self-contradictory. The premise is that you should diversify outside of your geographic economic ecosystem, but the claims continue that the whole economy is connected (i.e. when there is a rush for the exit). Agreed that diversification is good, but two quibbles: please draw some distinction to address this contradiction, and two, there is no mention of the difference between owning a home that you personally gain use of, and buying a property as an investment (i.e. one that provides income).
The premise is that you should consider your broad life portfolio, and with sufficient reflection, most people would probably want to diversify their life. Have written about this before:
And yes, everything is connected, but connected to different degrees. That's just an input in how you think about your risk.
We cannot entirely escape system risk (insofar as we are all part of one big system) but that doesn't mean we can't diversify away from out exposure to individual systems (bay area tech for example).
On the other hand, what about the emerging housing markets in the Bay Area? Oakland, perhaps? (For some reason, there doesn't seem to be much demand outside of East Bay- haven't heard of anyone rushing to buy in Daly City or South SF, much less San Jose)
Living south of San Jose and working in SF means very long commutes. Working in San Jose though it would be fine, just like working in Fremont or Milpitas is great for folks living in those towns. If you're working in the Santa Clara valley (aka Silicon Valley) you can live in a lot of places, but commuting north/south on 85 is painful to say the least.
Right, but I mean I never even hear about people living in the communities adjacently south of SF. I understand traffic going into the city is a mess, and those places are somewhat more rundown and more suburban, but it's closer than Oakland is.
Commuting from Oakland, assuming public transit, it much closer to SOMA than even South SF.
And honestly, it's probably a selection bias. The people who live in those areas are families because they're mostly single family homes. They aren't the young single people who make a lot of noise about housing prices.
Oakland was one of the highest growing housing markets last year. Prices will continue to climb as SF continues to become more unaffordable. I'd say most cities surrounding SF are safe investments. It may be too late now to get a good return on investment. You would have wanted to start looking 1-2 years ago.
I live in Oakland atm; The Uptown area prices are already stupid, it's where Uber is leasing a building "soon"; Prices are already up quite a bit from the SF exodus.
Oakland is actually an interesting place to live though, which is not what I would say about Daly City/South SF/etc.
Commute to the South Bay is pretty crap, which is why I refuse to work down there though. Not that I would have bothered when I was in SF either.
In any case, I feel like Oakland prices are highly correlated with SF prices; despite liking Oakland I'd move back to SF if the price difference wasn't so huge.
I think there is something else going on in real estate. This is the only asset class with significantly above average gains for decades. It does go down once in a while but it comes roaring back in relatively short time. Even when dropping, it rarely goes below 25% protecting most of the principal. This is about the only item that had massive inflation in past 7 years.
I think what is happening is real estate is becoming currency just like what gold was used to be. In economics, you can make anything a currency which cannot be manufactured easily and is available in quantity that is very hard to grow. Economists are puzzled why the tons of money poured in to system through QEs isn't producing any inflation. I think QEs are indeed producing massive inflation but it all goes in to real estate. Funds like Blackstone eventually ends up with significant chunk of QE money and guess what is their major investment activity these days? The easy "inexpensive" money is the best way to inflate real estate. It's a like you eat a lot but only your waist is accumulating all the fat and you wonder why your hands and feet remain so thin. I suspect this trend will continue because people are realizing real estate is more safer currency that can be relied upon as opposed to stocks or anything else. The safety is derived from the fact that, in worst case, it can be rented to generate better than interest returns or physically be used. This assumption can only be violated if interest rates grows a lot beyond rent income and thus in high inflation. However overall economic inflation cannot happen if all the surplus keeps landing in real estate. So it seems like virtuous self locked cycle.
> I think there is something else going on in real estate.
It is supported, subsidized, and protected by the government at almost any cost, with the result that average-income people can no longer afford a home in desirable areas.
If people were really being priced out eventually San Francisco would fizzle out as a centre for innovation and the interest would move elsewhere. It probably isn't going to happen any more than high prices in New York failed to price out banks and bankers.
> I think there is something else going on in real estate. This is the only asset class with significantly above average gains for decades
Home prices only started rising, in real terms, after WWII [1]. This appears to be driven by people wanting to drive more income to buying land, i.e. treating land as a superior good. Growing government intervention is also likely a cause. I'd caution against extrapolating two generations encapsulating post-World-War and -Cold-War booms too far.
The "something else" is money laundering (i.e., all-cash purchases with zero oversight). Thankfully, the US government is finally starting to crack down on this stuff:
But so far it's only in other cities. I'm hoping this will spread to the rest of the USA and then we won't have so many foreign criminals buying land with suitcases full of ill-gotten cash, driving up prices.
Hopefully as the USD strengthens against the Yuan and Ruble, you'll start to see less international property laundering. Maybe even some will start to sell, putting supply back onto the market and lowering prices.
Chinese investors are putting money into SF real estate with the goal of exporting capital to safer havens.
Were China to choose to depreciate their currency (especially at a faster rate than they are currently) this could lead to an acceleration in attempts to export capital.
It's not clear which way this linkage works (at least to me)
The Chinese launderers are putting into SF property. In August 2015, 35% of new property in CA was bought by the Chinese (80% in Irvine alone).
If the Yuan weakens to USD, the Chinese have less buying power in the U.S. for laundering, and existing launderers will be incentivized to pull out (sell).
Not to simplify it but chances are there is more gold in the ground, real estate is the one commodity that is truly finite. Granted, people can always build on unbuilt land but that in turn requires infrastructure, etc to support a new community or residence.
For this reason, it being finite, I wish the US government would set some restrictions on allowing business and foreign investments to purchase residential real estate. It is hard enough (San Francisco seems like a large part of the rest of the US on steroids) for working people to purchase these days...having empty homes bought by non-residents just sit waiting until the prices are forced (due to said) to rise is only going to exacerbate the situation.
Those purchases “by business or foreigners” transfer cash to the seller and be up in the economy anyway. Homeowners who sell do so because it is in their interest to do so, the restriction you propose would be Pareto-inefficient.
Or is it? The money flowed in real estate will most likely immediately get used to buy other houses and there by inflating homes even further. I don't think anyone sells their home and uses the proceeds to buy some stock - the proceeds goes almost always immediately to buy other home. It's like you live in a village, a traveler pays you $100 for a goat which was suppose to be only $10. Then you realize goat is so valuable so you use your $100 to buy two goats from neighbor for $50 each. Now your neighbor realizes what's going on and he uses his new money plus some more buy more goats - all in anticipation that everyone needs goat and prices will keep going up. The virtuous cycle starts and sooner or later major portions of people's money keeps changing hands in form of million dollar goats. Very little of that money might actually get used for other purposes like building the hospital or school because those things don't deliver investment returns like a goat does.
> real estate is the one commodity that is truly finite
This is untrue in both the literal and figurative senses. In the literal sense, real estate isn't just land, other properties of land, such as mineral or air rights, can also be created, bought, and sold. You can build up and sell condominiums. You can build down. You can dredge land out of the ocean. Eventually you'll be able to build out in space.
In the figurative sense, people make this claim to assert that real estate is becoming rare, and therefore intrinsically valuable. While certain markets definitely are this way, like NYC penthouses, the asset class as a whole is much like it's brethren in this regard. Value is in the eye of the beholder, trends develop rapidly and can bolster or devalue individual properties at breathtaking rates.
I wish startups could tackle actually making affordable home ownership a reality. This is a much larger problem for our generation than what people care to admit.
Specifically, I'm wondering why there are no cheap modular houses (like in movie ex machina). Houses that are mass produced, cheap and relatively easy to ship and assemble but configurable.
> I wish startups could tackle actually making affordable home ownership a reality.
You're looking at one of the oldest, most capital-intensive markets in existence. It's practically the polar opposite of technology. Not a whole lot startups can really do.
> Specifically, I'm wondering why there are no cheap modular houses (like in movie ex machina). Houses that are mass produced, cheap and relatively easy to ship and assemble but configurable.
Well, that's easy to answer. In most real estate transactions, the cost of the underlying land is going to be the dominant factor, the house is just a value-add, the equivalent of buying a soda with your meal.
Modular houses themselves are at a disadvantage because it's not the cheapest way to put homes on land. Modern stick-framed houses are so cheap to put up these days that once you factor in the R&D, transportation and specialized installation costs, factory-built modular homes are at a severe disadvantage. Construction workers are literally everywhere, the labor is so cheap that it's practically a non-factor.
Also, it's easy to over-build. If developers create a glut, nobody's going to make money for a long time. Prices don't really come down during a glut because the developer would rather let the house sit than sell at a loss. So you get a lot of empty housing stock sitting around.
> In most real estate transactions, the cost of the underlying land is going to be the dominant factor, the house is just a value-add, the equivalent of buying a soda with your meal.
That's really only common in desirable cities with older housing stock.
A land to total value ratio is considered typical-to-high at 30%. Anything more than that gets extra scrutiny from lenders, who don't want to write residential-class loans on minimally-improved properties.
> You're looking at one of the oldest, most capital-intensive markets in existence. It's practically the polar opposite of technology. Not a whole lot startups can really do.
Well, prefab homes are a thing and they even use the word 'modular' liberally http://opinionator.blogs.nytimes.com/2013/05/23/prefab-lives... mobile homes are a thing, and are fairly dominant in low-income areas (which kinda sorta impacts the market acceptance of prefab homes). But no one has quite cracked the prefab for multi-family market.
Elio motors is offering a small 84MPG vehicle for $6,800.
30 year old Volkswagen Westfalia Campers maintain a high resale value to this very day. Why are all mobile homes so huge? How much money do people spend on rent, leases, mortgages, and buying homes?
I'm sure college students would love a compact mobile home vehicle. Developing countries would likely eat such a thing up.
The CEO of Zappos lives in a trailer park of Airstream trailers and Tumbleweed tiny mobile houses with a shared kitchen, living room and other common areas designed to encourage a true neighborhood / community.
Or just consider a house as infrastructure.
Real estate is assumed to be limited, but that's mostly
the result of nimbyism and the gaming of developments
sold off on the real estate market as "investments". The
whole trend of gentrification will likely play out in
less expensive regions of North America and developing
countries, and presumably there will be large dense
affordable housing somewhere someday and these areas tend
to be fertile for creative businesses and cultural
experimentation. New York is long stagnate, and it's
amazing how much San Fransisco suffers from real estate
leaching off of the working population and tech economy.
A heaving, throbbing, contradictory, twisted mass of local, state, and government regulations make modular housing like you describe a pipe dream in the USA.
My understanding is that it's the internals (plumbing, gas lines, heating and A/C, natural gas lines, fireplaces and chimneys) that are hard to modularize.
I've been spending some time recently thinking about alternative options to the rent/buy dichotomy.
Buying a house is in this weird category of quasi-investment that is difficult to offset. In no other market do we encourage consumers to take on debt when making an investment in a commodity. Most consumers are not able to hedge this risk so fluctuations in the housing market can wipe people out and ruin lives.
Renting a house is a whole different problem. The rental market can be very discriminatory, especially against people with poor credit. The friction and lack of information in the rental market prevents many renters from being able price in more than a couple of variables (usually just location and size). The upside of this is that there if little incentive to make certain types of improvements (especially improvements that decrease the utility costs)
It seems that there should be a better way to deal with housing that protects individuals against the risk of mortgages and property bubbles while still aligning the interests of home-owner and home-user.
To be fair only some economists thought QE would be inflationary. Many understood it would not. And why would you call real estate a currency and not an asset class? Most of your comments indicate you think it's a highly attractive asset class vs really a currency.
Currency is a class of asset. A currency is an asset that maintains value, is highly liquid (fungible), and can serve as a unit of account. Of the three criteria, “real estate” as described by the OP only falls short in the third instance. Hence it is as “currency-like” as certain more traditional components of the monetary supply.
This is unusual since real estate is typically not very liquid, or at least wasn't considered to be liquid ‘enough’ and typically earns rates of return (net of maintenance) and had high opportunity costs (much how cigarettes in POW camps can only serve as currency if the prisoner decides not to actually smoke them, homes owned by those who dwell in them are not available for liquidation).
You'd be hard pressed to find many economists (or other well-informed individuals) who would consider real estate a currency. Though at some point we're just debating semantics.
Edit: Also, real estate is extremely non-fungible, as individual instances of the asset class are not easily interchangeable.
And unless you have dozens or hundreds or thousands of acres, you can't subdivide it effectively. Let's say your property is worth $100,000. How do you get only $50,000 worth of value out of it? You have to sell the whole thing, do you then convert the remaining $50k to some other real estate? I suppose you can take out a second (third/fourth/fifth) mortgage on it for the desired value, but then you're stuck paying back that loan. So the property hasn't really provided you any direct value, just collateral to back your debts.
Exactly. The house/real estate isn't the currency, it's the asset backing the currency.
When we had the gold standard in the US, gold was not our currency. It was the asset backing our currency (strictly speaking, you weren't going to go into a corner store with $0.10 worth of gold to pay for your bottle of coke, though I suppose you could've). Gold is simply too impractical to use as the currency directly. You have to back something like that with certificates. IN the case of a commodity like gold it's easy to accumulate those certificates into an amount that's actually worth exchanging for raw gold. But with real estate? How am I going to practically claim 100 sq ft of prime lakeside real estate?
Quite amusingly the Weimar Republic quelled hyperinflation by rebasing the deflated currency on a limited asset... land. The new mark stabilised (until the Wall Street Crash, at least).
It is my understanding that vacancy rates have plunged and that a given property is never on the market for very long before a sale is achieved. This makes it unusually liquid for a real estate market.
What real estate and currency have in common, both being asset classes, is that they're a store of value. Currency has other properties (medium of exchange, unit of account) that Real Estate does not. People aren't meaningfully trading real estate as a medium of exchange or using it as a unit of account. So it's not even close to a currency.
OP might mean that Real Estate has become a leading store of value, on par with currency, due to the factors he outlines.
* QE was tremendously inflationary for all asset prices, including real estate prices which are not called "consumer prices" but it's not that easy to buy the argument behind it. Certainly for a lot of folks, real estate is their biggest expense, and it's very frightening to rent and not buy while housing prices go up all around you and you try to guess how far the cost of owning will become detached from the cost of renting. We can call people scared into buying overpriced houses "investors", but to me it's a bit of a stretch.
* Grandparent calls real estate, of all the asset classes inflated by QE, the new currency.
* You then, without agreeing with the grandparent, say QE isn't inflationary, as "understood" by many economists long ago. But if we stop calling houses "currency", is QE really not inflationary then? (I seriously don't think I fully understand it, BTW... So an honest question.)
Well we have to remember that when the stock market goes up 30% this year (or falls 30% this year) that's not inflation or deflation. That's a marketplace at work. Real estate is also an asset class that rises or falls. But those changes aren't inflation. That's market forces at work (supply and demand)
There may be another link between QE and housing: I suspect a large motivator of QE was to avoid deflation, which could have caused a large number of foreclosures. So the notion of QE propping up home prices might have been the intended effect.
Edit: this also seems in accord with your notion of housing as a currency. If dollar inflation is tied to home prices, then to allow prices to drop is to deflate the dollar - something our government won't allow. So home prices have to be protected as a form of anti-deflationary measures.
I agree that one intended effect of QE was to reinflate the housing market. One problem was homes being way overvalued. After prices somewhat balanced out, the problem was a lack of credit available for most people wanting to buy into the market.
So many changes have happened over the past few years to the U.S. and global economies that I seriously question the understanding behind modern inflation and deflation.
We have been fighting a deflationary spiral since 2008 and it seems like we have almost run out of ammo.
> I think there is something else going on in real estate. This is the only asset class with significantly above average gains for decades. It does go down once in a while but it comes roaring back in relatively short time. Even when dropping, it rarely goes below 25% protecting most of the principal. This is about the only item that had massive inflation in past 7 years.
This is incorrect. The median new house price in the US hit a pre-recession peak in March 2007 of $262,600. In Nov 2015, the price was $305,000. An investment in a theoretical "median real estate" fund would have returned 16.4% over the 7 year period. [1]
An investment in the S&P500, say through SPY or the Vanguard ETF (if it had been available pre 2009) would have returned 27.9% over the same period, or 53.1% if you had reinvested your 5.0% annualized dividends. [2]
At a more granular level (using Zillow data) - the median housing price in San Francisco over the same period increased from $786k to $1.12m for a return of 42.4%. Cambridge, 47.0%. Manhattan, 66.6%.
San Diego? 3.5%. Boise? -12.6%. St. Louis? -22.9%. Detroit? -49.6%. Did you know that the median sales price of a house in Detroit is currently $38.4k?
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> In economics, you can make anything a currency which cannot be manufactured easily and is available in quantity that is very hard to grow. Economists are puzzled why the tons of money poured in to system through QEs isn't producing any inflation. I think QEs are indeed producing massive inflation but it all goes in to real estate. Funds like Blackstone eventually ends up with significant chunk of QE money and guess what is their major investment activity these days? The easy "inexpensive" money is the best way to inflate real estate.
Economists are (for the most part) in agreement that QE is not causing inflation due to a lack of aggregate demand. Here is an article [3] in which Brad DeLong (UC Berkeley, Keynesian-adherent) agrees with Joseph Stiglitz (Nobel Laureate, voted 4th "most influential" economist in the world today) when he makes the following assertion:
The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity...The only cure for the world's malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system -- not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs. [4]
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What does this have to do with the higher real estate prices in urban centers? I believe that what is truly happening is that many are flocking to a decreasing number of cores (usually around universities that churn out well-educated but low-paid graduates) for fewer aggregate job opportunities in select sectors: finance, tech, entertainment, business services (consulting, HR, accounting, etc.), and services (food, drinks, nail salons, etc.). This has happened in a relatively short amount of time as the employment market is generally more fluid and less regulated than the housing market, which is restricted and regulated in the extreme in high-demand, high-price markets. It takes 2-3 years for an org to restructure its work force, but it takes decades to make meaningful changes to the way a city is built.
I think gold prices are impacted by its industrial use as well. So when that component drops, prices goes down. Another component of gold investment is to compensate for inflation which is also down except in real estate. Yet another component of gold investment is to hedge against short term loss in stock markets which was also down because of tremendous gains in S&P. The real estate is a different beast: There is no industrial component and no short term hedges. Also unlike gold, real estate can generate passive returns in form of rents.
Gold is the instrument of choice for growth investor with inflation fears (i.e. it's rumored to hold its value when inflation speeds up). It is not free to own in large quantities, as one must incur additional storage and security costs.
Real estate is the instrument of choice for income investor with inflation fears (i.e. if all goes bad, you can still rent it out, and that rent will still bring something). Through successful lobbying it's relatively cheap to own if you buy in a state with low property taxes.
Yeah, I guess I skipped over the fact that a home has property taxes and insurance/maintenance costs that would add up.
I think the key is the optionality of real estate for income purposes. In a down market real estate can still generate some monthly cashflow, the only way one could do it with gold ETF is lend out the shares to short-sellers.
the influx of foreign buyers (particularly money coming
from China that is not that price sensitive)
I thought this was a major factor in the increase in home prices. Anecdotal evidences of "tourists" coming in to buy property as an investment, instances of people buying homes without even visiting and bidding wars with homes ending up in the hands of people paying premium and in cash. This phenomenon has also been reported in other major cities like London, Toronto, Vancouver.
If there wasn't an extreme housing shortage and expectations for it to continue long-term then such investors wouldn't be interested in the first place. It's a symptom, and probably not much of a cause.
Agreed, though this is advice for the 1%, if that. Must be nice to be considering property in SF, huh? Better drive my Bentley to the office and do some location scouting. ;)
You are born short housing - you need to buy or rent it in order to get neutral. And given the labor market, most people need to buy where they work. This correlation is ~impossible to hedge (I guess you could short local industries, but a lot of these aren't public and there are a lot more covariates driving housing prices, from interest rates to embezzled overseas money). There's also a problem with hedging on an asset-price basis vs. a cash flow basis, which is even more difficult.
Good thing CA is a non-recourse state, which means your mortgage comes with an embedded put option. When you consider the option value of the put, the option value of locking in interest rates (ie a call on a long-term zero-coupon bond), the inflation hedge, and potentially lower month-to-month costs (not unheard of, depending on your tax bracket) it makes it pretty easy to break even or minimize your losses even given a fairly bad story, over a 5-10yr period. This assumes you actually run the numbers.
That's not even accounting for the consumption value of the house itself.
1. You are not born short housing. The population in western countries is growing very slowly and the new construction has kept up with it very easily. The problem occurs because of population movement. For example, massive people moving from many different areas to one single area.
2. Buying home is not always a value proposition. In fact, for most people it is actually not until late in the cycle and tax benefits more likely cancels out with other expenses like property taxes, maintenance and HOA. My feeling is that most people ends up cutting down other costs to compensate and thus they experience overall decrease in the living standards, however I don't have data to support this.
When I say "born short housing", I mean you must acquire housing of some kind in order to just exist in society. It's not a "housing / no housing" choice, it's a "buy / rent" choice wherever you are.
That must have been a fun birth... I'm guessing C-section?
More seriously, being short means you have a position you need to buy in order to cover. Unless those builders are giving those new houses away, guess what, you're still short until you buy one.
Your other point, however, is very good. From a purely mathematical perspective, it doesn't always work out in your favor. But there's also a lot of intangibles that come into play with something as personal as housing.
Spoken like a true economist (not that this is a bad thing). I agree with your first point, but I think you're wrong about the put option. It is not easy to "break even or minimize your losses" at all. Only if you're putting no money down would this be even close. Real estate is illiquid by definition and post 2008 nearly every foreclosure lost 100% of the equity built (and a major impact on your credit score).
Right, I'm looking at it as one component of an overall cash flow & asset portfolio. It's easy to construct a scenario where it doesn't pay off - deflation that hits incomes, house prices, and rents is an easy one. But, as one component of an overall portfolio it has certain characteristics that help you hedge other risks you're exposed to in a way that not a lot of other asset classes can.
This still requires that it isn't "too" expensive even given those other benefits.
I spent the first 5 years of my career in commercial real estate where I met a lot of people who started with a single house and turned it in to massive portfolios. I asked every single person for advice on the best strategies and two points came out of those discussions:
1) Interest rates falling is the single biggest factor that allowed people to make a lot of money on real estate. (This is pointed out by the author and its worth rereading that section and really understanding it).
2) Geographic diversification doesn't work in real estate because its a physical asset that requires a hands on approach. Big developers / owners get big by buying locally and being ruthless about only buying things very, very close to where they live until they get so big that they start hiring (40+ units). Then they stretch out 1-3 miles and they don't truly geographically diversify until they get absolutely massive (200+ units).
I leave this comment as a warning for those who think its a good idea to buy a rental property in Vegas or whatever. Feel free to not buy anything in SF, but what ever you do, DO NOT ATTEMPT to geographically diversify by buying a house outside the bay area if you live in the bay area. It will not be a fun time.
That is a misconception. Once you do the math, a property manager is not economically feasible and a home warranty doesn't really help.
Typical property management fees are 10% of gross where most properties net much less than 10% over the first 10 years of ownership in cash flow.
A home warranty is usually only given for new homes as an incentive. New homes can appreciate, but if you are 'investing' you should be focused on buying at a good price, not buying at a retail price from a home builder.
The home warranty second market (i.e. 3rd party home warranties) can reduce risk, but do not typically cover small repairs like a toilet not working etc. Those need to be done by the home owner, because if you hire someone every time it will cost you too much.
Like I said, you will have a very, very bad time if you try to geographically diversify real estate holdings.
Gotta agree with @wtvanhest on this - I've been a passive real estate investor for more than a decade now and between scenario A, where several distinct properties are owned and managed through several property managers, and scenario B, where a single property manager takes over multiple properties, B would offer a consistent lead all else being equal.
It's just easier to scale things such as service requests, day-to-day operations, a large manager would have a better time negotiating things like paint jobs or re-carpeting due to sheer volume.
I think this is pretty trivially a poor analysis as it focuses on the median. Most of the real estate in SF is being bought by people who are seriously above the median and for whom this may be a much easier financial burden for them to bear. SF has a seriously non-uniform distribution of incomes and (more importantly) wealth.
yep. This is a common argument against using % of income for housing burden as a measure.
If you make $200K, paying 40% of your salary for housing is much less of a burden than if you make $20k. (e.g. you are left with a much larger amount of money to pay for necessities like food, and probably still have quite a large disposable income)
> When you work in tech and live in the Bay Area, your life is already so positively exposed to the local economic and financial system, that buying a home is just doubling down on a (life) portfolio that’s already in need of diversification.
I wasn't buying the monetary arguments because the Bay Area is monetarily primarily defined by the startup scene, but this argument seems interesting.
The comparison to the oil boom drives it home.
As for "what defines a bubble", we really only know once it bursts... Otherwise it's a bull market!
House prices are almost at pre-recession levels in some places, but it's still possible to get a really nice 2000 sqft place in a 30-45 drive for $300-400k (cheaper in worse areas)
I feel like people have been saying this about Portland (e.g. its about to become way too expensive and 'ruined') for about ten years, and Portland is still a very nice and affordable city.
"This is the only asset class with significantly above average gains for decades."
One can't just look at the increase in value of Real Estate over time, one must also consider the cost of holding that asset. Unlike many other assets Real Estate is very expensive to own (taxes, maintenance, mortgage interest). That all adds up.
Over the long term it's typically better to own than rent (in part because our tax system significantly favors owners over renters). However, people that talk about buying more house than they need (or a far more expensive house than they need) and then say "but it's an investment so it's OK" usually have no clue. Long term it's hard to consistently 'make' money on a home you live in.
Commercial or investment real estate is a whole different ball game... but when it comes to your own home the best financial decision is usually to live modestly (and understand that a bigger or fancier house is a cost and no "an investment").
The argument about exposure is a general argument against home ownership. If you own a home in Detroit and work for Ford, you are doubly exposed to the region's financial health. If you live in Houston and work for an oil company you are doubly exposed. This is why I think home ownership is overrated. We should be looking for policies that enable people to adapt to changing economic situations, even if that means moving from place to place, and home ownership (which we heavily incentivize in the US) actively hampers that.
The article is comparing median income (of all residents) to prices that home-owners pay which is pretty much apples to oranges.
Fewer people are buying houses in the Bay Area right now already which causes the disparity in the house-price-to-income ratio: Most folks who can afford a house worth 1M (and prove it to a lender) are probably earning dual-income in the tech sector and 330K (which would make the ratio 3x, same as the national average) is not too much of a stretch between two technology jobs.
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SF housing didn't go bust during the 2001, but there was significantly less leverage in the system and home prices were significantly more affordable.
-- http://web.archive.org/web/20120228050050/http://www.nytimes...
This is the exact reason I support Archive.org...well that and occasionally it helps with work stuff.
Obviously in many cases during the 2008 crisis the homes were underwater (valued at less than the loan amount), in that case then yes, you end up without a house or any equity since it's valued at less than you owe.
In the hypothetical where you lose your job and can no longer afford the mortgage - presuming you went an extended period without paying - the bank will eventually force a sale of the property to recover the loan amount.
If you have positive equity in a home then you'll have some money leftover after the proceeds of the sale are used to pay off the remaining balance to the bank.
Let's say you save 200k, and buy a house for 1 million. You take out a loan from the bank for 800k.
Opps market correction. You lose your job, and a lot of your friends do too. Your house is now worth 600k. You either sell for 600k and pay the bank another 200k for a total loss of 400k, or you go the bankruptcy route and "only" lose 200k and your credit for 7 years.
Weather or not you had 200k positive equity for 6 months has nothing to do with it. Positive equity is great when something bad happens to YOU and YOU need to get out, but if it happens to everyone - that positive equity very quickly flips to negative equity.
If you're underwater because you've used your house as an ATM you're on your own but responsible parties shouldn't be losing their deposit.
This all changes if there's a huge downward swing in home prices. It's unclear if there's downward pressure whether home prices would significantly fall as opposed to flatten out . The 2008 collapse caused about 5 years of lowered home prices, bottoming out around 2010. But a lot of that was also driven by poor lending practices.
A possibly more realistic scenario is a magnitude 9 quake along the Hayward fault. Something that would destroy (not merely damage) a significant chunk of infrastructure resulting in the dissolution of hundreds, if not thousands of businesses and the concomitant unemployment that would ensue.
However even in that case the amount of resources available to restart are really unprecedented relative to the rest of the country.
Could you elaborate?
Downturns have typically resulted in flat growth of prices, but only the foreclosure crisis managed to push houses serious negative. And typically existing rents don't go down, instead you have to move to get a better rent deal.
Over a long enough window the expected value is that you'll get back your principle. Which is more than you can say for renting. "Worst case" is you end up walking away with nothing because the mortgage is underwater.
The only outcome of renting is you walk away with nothing when you move.
Yes, SF real estate is expensive, no one will deny that. But the core argument appears to be "don't buy SF real estate because the economy is on a downturn" which is specific to neither real estate nor SF.
[1] http://www.indeed.com/salary/q-Software-Engineer-l-Silicon-V...
What I'm smdh about is that least squares fit, I want to see what happens if you use a Huber loss.
As for the plot, it's just a log-log plot. Stretch the axes however you like; it's still going to have the same shape.
um... there is a constant for converting between any two log bases... so I have no clue what you are claiming is wrong. It is a factor of 1.5849625007211563 for converting between log base 2 and log base 3...
A log scale is a log scale is a log scale. There is no "log-base 3" or "log-base 2" scale.
The Y axis (price to income) is derived from the X axis (income) as well, which will be affected by representing with different bases.
I have no issues with log/logs for general visualization, but the use of it here seems like brute-force outlier identification which isn't representative of the typical relationship of California and other states. (Especially with a trendline)
Personally, renting is better value than buying for me, even given london house prices.
It's true that everyone needs somewhere to live, and I really, sincerely think that public land should act as a fallback. Currently, the fallback is jail, and that isn't working.
The article is saying that from an investment perspective it doesn't make sense to buy a house in SF right now if you work in tech.
It's not saying you shouldn't in general. If you derive a ton of value from buying a house, buy a house, just understand the risks of doing it, and buy less house so that if it goes down and you lose your tech job, it's not ruinous.
http://www.snow.ventures/blog/2015/12/10/diverisify-your-lif...
And yes, everything is connected, but connected to different degrees. That's just an input in how you think about your risk.
We cannot entirely escape system risk (insofar as we are all part of one big system) but that doesn't mean we can't diversify away from out exposure to individual systems (bay area tech for example).
And honestly, it's probably a selection bias. The people who live in those areas are families because they're mostly single family homes. They aren't the young single people who make a lot of noise about housing prices.
Oakland is actually an interesting place to live though, which is not what I would say about Daly City/South SF/etc.
Commute to the South Bay is pretty crap, which is why I refuse to work down there though. Not that I would have bothered when I was in SF either.
In any case, I feel like Oakland prices are highly correlated with SF prices; despite liking Oakland I'd move back to SF if the price difference wasn't so huge.
I think what is happening is real estate is becoming currency just like what gold was used to be. In economics, you can make anything a currency which cannot be manufactured easily and is available in quantity that is very hard to grow. Economists are puzzled why the tons of money poured in to system through QEs isn't producing any inflation. I think QEs are indeed producing massive inflation but it all goes in to real estate. Funds like Blackstone eventually ends up with significant chunk of QE money and guess what is their major investment activity these days? The easy "inexpensive" money is the best way to inflate real estate. It's a like you eat a lot but only your waist is accumulating all the fat and you wonder why your hands and feet remain so thin. I suspect this trend will continue because people are realizing real estate is more safer currency that can be relied upon as opposed to stocks or anything else. The safety is derived from the fact that, in worst case, it can be rented to generate better than interest returns or physically be used. This assumption can only be violated if interest rates grows a lot beyond rent income and thus in high inflation. However overall economic inflation cannot happen if all the surplus keeps landing in real estate. So it seems like virtuous self locked cycle.
It is supported, subsidized, and protected by the government at almost any cost, with the result that average-income people can no longer afford a home in desirable areas.
Home prices only started rising, in real terms, after WWII [1]. This appears to be driven by people wanting to drive more income to buying land, i.e. treating land as a superior good. Growing government intervention is also likely a cause. I'd caution against extrapolating two generations encapsulating post-World-War and -Cold-War booms too far.
[1] https://www.dallasfed.org/assets/documents/institute/wpapers...
http://www.nytimes.com/2016/01/14/us/us-will-track-secret-bu...
But so far it's only in other cities. I'm hoping this will spread to the rest of the USA and then we won't have so many foreign criminals buying land with suitcases full of ill-gotten cash, driving up prices.
Were China to choose to depreciate their currency (especially at a faster rate than they are currently) this could lead to an acceleration in attempts to export capital.
It's not clear which way this linkage works (at least to me)
If the Yuan weakens to USD, the Chinese have less buying power in the U.S. for laundering, and existing launderers will be incentivized to pull out (sell).
https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...
With the continually dropping oil prices, the ruble isn't going to get better anytime soon.
For this reason, it being finite, I wish the US government would set some restrictions on allowing business and foreign investments to purchase residential real estate. It is hard enough (San Francisco seems like a large part of the rest of the US on steroids) for working people to purchase these days...having empty homes bought by non-residents just sit waiting until the prices are forced (due to said) to rise is only going to exacerbate the situation.
This is untrue in both the literal and figurative senses. In the literal sense, real estate isn't just land, other properties of land, such as mineral or air rights, can also be created, bought, and sold. You can build up and sell condominiums. You can build down. You can dredge land out of the ocean. Eventually you'll be able to build out in space.
In the figurative sense, people make this claim to assert that real estate is becoming rare, and therefore intrinsically valuable. While certain markets definitely are this way, like NYC penthouses, the asset class as a whole is much like it's brethren in this regard. Value is in the eye of the beholder, trends develop rapidly and can bolster or devalue individual properties at breathtaking rates.
Specifically, I'm wondering why there are no cheap modular houses (like in movie ex machina). Houses that are mass produced, cheap and relatively easy to ship and assemble but configurable.
You're looking at one of the oldest, most capital-intensive markets in existence. It's practically the polar opposite of technology. Not a whole lot startups can really do.
> Specifically, I'm wondering why there are no cheap modular houses (like in movie ex machina). Houses that are mass produced, cheap and relatively easy to ship and assemble but configurable.
Well, that's easy to answer. In most real estate transactions, the cost of the underlying land is going to be the dominant factor, the house is just a value-add, the equivalent of buying a soda with your meal.
Modular houses themselves are at a disadvantage because it's not the cheapest way to put homes on land. Modern stick-framed houses are so cheap to put up these days that once you factor in the R&D, transportation and specialized installation costs, factory-built modular homes are at a severe disadvantage. Construction workers are literally everywhere, the labor is so cheap that it's practically a non-factor.
Also, it's easy to over-build. If developers create a glut, nobody's going to make money for a long time. Prices don't really come down during a glut because the developer would rather let the house sit than sell at a loss. So you get a lot of empty housing stock sitting around.
That's really only common in desirable cities with older housing stock.
A land to total value ratio is considered typical-to-high at 30%. Anything more than that gets extra scrutiny from lenders, who don't want to write residential-class loans on minimally-improved properties.
Well, prefab homes are a thing and they even use the word 'modular' liberally http://opinionator.blogs.nytimes.com/2013/05/23/prefab-lives... mobile homes are a thing, and are fairly dominant in low-income areas (which kinda sorta impacts the market acceptance of prefab homes). But no one has quite cracked the prefab for multi-family market.
Multifamily and prefab.
Elio motors is offering a small 84MPG vehicle for $6,800. 30 year old Volkswagen Westfalia Campers maintain a high resale value to this very day. Why are all mobile homes so huge? How much money do people spend on rent, leases, mortgages, and buying homes?
I'm sure college students would love a compact mobile home vehicle. Developing countries would likely eat such a thing up.
The CEO of Zappos lives in a trailer park of Airstream trailers and Tumbleweed tiny mobile houses with a shared kitchen, living room and other common areas designed to encourage a true neighborhood / community.
A home isn't limited to being a house.https://www.youtube.com/watch?v=MvgN5gCuLac
I see what you did there... Now lets try that on my wife.
My understanding is that it's the internals (plumbing, gas lines, heating and A/C, natural gas lines, fireplaces and chimneys) that are hard to modularize.
There's an interesting article by a guy who wrote an entire book on prefab housing http://opinionator.blogs.nytimes.com/2013/05/23/prefab-lives...
I've been spending some time recently thinking about alternative options to the rent/buy dichotomy.
Buying a house is in this weird category of quasi-investment that is difficult to offset. In no other market do we encourage consumers to take on debt when making an investment in a commodity. Most consumers are not able to hedge this risk so fluctuations in the housing market can wipe people out and ruin lives.
Renting a house is a whole different problem. The rental market can be very discriminatory, especially against people with poor credit. The friction and lack of information in the rental market prevents many renters from being able price in more than a couple of variables (usually just location and size). The upside of this is that there if little incentive to make certain types of improvements (especially improvements that decrease the utility costs)
It seems that there should be a better way to deal with housing that protects individuals against the risk of mortgages and property bubbles while still aligning the interests of home-owner and home-user.
If 432 Park Ave taught us anything it's that one can always build up.
This is unusual since real estate is typically not very liquid, or at least wasn't considered to be liquid ‘enough’ and typically earns rates of return (net of maintenance) and had high opportunity costs (much how cigarettes in POW camps can only serve as currency if the prisoner decides not to actually smoke them, homes owned by those who dwell in them are not available for liquidation).
You'd be hard pressed to find many economists (or other well-informed individuals) who would consider real estate a currency. Though at some point we're just debating semantics.
Edit: Also, real estate is extremely non-fungible, as individual instances of the asset class are not easily interchangeable.
It's a value store, but hardly a currency.
When we had the gold standard in the US, gold was not our currency. It was the asset backing our currency (strictly speaking, you weren't going to go into a corner store with $0.10 worth of gold to pay for your bottle of coke, though I suppose you could've). Gold is simply too impractical to use as the currency directly. You have to back something like that with certificates. IN the case of a commodity like gold it's easy to accumulate those certificates into an amount that's actually worth exchanging for raw gold. But with real estate? How am I going to practically claim 100 sq ft of prime lakeside real estate?
OP might mean that Real Estate has become a leading store of value, on par with currency, due to the factors he outlines.
* QE was tremendously inflationary for all asset prices, including real estate prices which are not called "consumer prices" but it's not that easy to buy the argument behind it. Certainly for a lot of folks, real estate is their biggest expense, and it's very frightening to rent and not buy while housing prices go up all around you and you try to guess how far the cost of owning will become detached from the cost of renting. We can call people scared into buying overpriced houses "investors", but to me it's a bit of a stretch.
* Grandparent calls real estate, of all the asset classes inflated by QE, the new currency.
* You then, without agreeing with the grandparent, say QE isn't inflationary, as "understood" by many economists long ago. But if we stop calling houses "currency", is QE really not inflationary then? (I seriously don't think I fully understand it, BTW... So an honest question.)
Edit: this also seems in accord with your notion of housing as a currency. If dollar inflation is tied to home prices, then to allow prices to drop is to deflate the dollar - something our government won't allow. So home prices have to be protected as a form of anti-deflationary measures.
This is incorrect. The median new house price in the US hit a pre-recession peak in March 2007 of $262,600. In Nov 2015, the price was $305,000. An investment in a theoretical "median real estate" fund would have returned 16.4% over the 7 year period. [1]
An investment in the S&P500, say through SPY or the Vanguard ETF (if it had been available pre 2009) would have returned 27.9% over the same period, or 53.1% if you had reinvested your 5.0% annualized dividends. [2]
At a more granular level (using Zillow data) - the median housing price in San Francisco over the same period increased from $786k to $1.12m for a return of 42.4%. Cambridge, 47.0%. Manhattan, 66.6%.
San Diego? 3.5%. Boise? -12.6%. St. Louis? -22.9%. Detroit? -49.6%. Did you know that the median sales price of a house in Detroit is currently $38.4k?
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> In economics, you can make anything a currency which cannot be manufactured easily and is available in quantity that is very hard to grow. Economists are puzzled why the tons of money poured in to system through QEs isn't producing any inflation. I think QEs are indeed producing massive inflation but it all goes in to real estate. Funds like Blackstone eventually ends up with significant chunk of QE money and guess what is their major investment activity these days? The easy "inexpensive" money is the best way to inflate real estate.
Economists are (for the most part) in agreement that QE is not causing inflation due to a lack of aggregate demand. Here is an article [3] in which Brad DeLong (UC Berkeley, Keynesian-adherent) agrees with Joseph Stiglitz (Nobel Laureate, voted 4th "most influential" economist in the world today) when he makes the following assertion:
The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity...The only cure for the world's malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system -- not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs. [4]
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What does this have to do with the higher real estate prices in urban centers? I believe that what is truly happening is that many are flocking to a decreasing number of cores (usually around universities that churn out well-educated but low-paid graduates) for fewer aggregate job opportunities in select sectors: finance, tech, entertainment, business services (consulting, HR, accounting, etc.), and services (food, drinks, nail salons, etc.). This has happened in a relatively short amount of time as the employment market is generally more fluid and less regulated than the housing market, which is restricted and regulated in the extreme in high-demand, high-price markets. It takes 2-3 years for an org to restructure its work force, but it takes decades to make meaningful changes to the way a city is built.
[1] https://www.census.gov/construction/nrs/pdf/uspricemon.pdf
[2] http://dqydj.net/sp-500-return-calculator/
[3] Eridrus ↗ What's your take on the NYC market? I work in tech and am moving there soon and was thinking about buying property. ransom1538 ↗ This is incorrect. roymurdock ↗ My point is that housing is not the only asset that has seen considerable appreciation since the recession, and that not all housing is created equal.
SF/Oakland prices seemed way too correlated with tech salaries for me to feel comfortable buying anything there, but NYC feels better in that sense...
You are simply not adding in rent. A $262,600 house would generate $1400 monthly rent, ~$117k in rent for the 7 years (not raising rent).
I agree that factoring in rent bumps up the rate of return quite a bit in high-demand urban centers.
Gold is actually down.
Real estate is the instrument of choice for income investor with inflation fears (i.e. if all goes bad, you can still rent it out, and that rent will still bring something). Through successful lobbying it's relatively cheap to own if you buy in a state with low property taxes.
I think the key is the optionality of real estate for income purposes. In a down market real estate can still generate some monthly cashflow, the only way one could do it with gold ETF is lend out the shares to short-sellers.
It gives off a different price signal.
Good thing CA is a non-recourse state, which means your mortgage comes with an embedded put option. When you consider the option value of the put, the option value of locking in interest rates (ie a call on a long-term zero-coupon bond), the inflation hedge, and potentially lower month-to-month costs (not unheard of, depending on your tax bracket) it makes it pretty easy to break even or minimize your losses even given a fairly bad story, over a 5-10yr period. This assumes you actually run the numbers.
That's not even accounting for the consumption value of the house itself.
1. You are not born short housing. The population in western countries is growing very slowly and the new construction has kept up with it very easily. The problem occurs because of population movement. For example, massive people moving from many different areas to one single area.
2. Buying home is not always a value proposition. In fact, for most people it is actually not until late in the cycle and tax benefits more likely cancels out with other expenses like property taxes, maintenance and HOA. My feeling is that most people ends up cutting down other costs to compensate and thus they experience overall decrease in the living standards, however I don't have data to support this.
That must have been a fun birth... I'm guessing C-section?
More seriously, being short means you have a position you need to buy in order to cover. Unless those builders are giving those new houses away, guess what, you're still short until you buy one.
Your other point, however, is very good. From a purely mathematical perspective, it doesn't always work out in your favor. But there's also a lot of intangibles that come into play with something as personal as housing.
This still requires that it isn't "too" expensive even given those other benefits.
http://x.lnimg.com/photo/poster_768/cd2c8bac35bc428b9e0f1b30...
1) Interest rates falling is the single biggest factor that allowed people to make a lot of money on real estate. (This is pointed out by the author and its worth rereading that section and really understanding it).
2) Geographic diversification doesn't work in real estate because its a physical asset that requires a hands on approach. Big developers / owners get big by buying locally and being ruthless about only buying things very, very close to where they live until they get so big that they start hiring (40+ units). Then they stretch out 1-3 miles and they don't truly geographically diversify until they get absolutely massive (200+ units).
I leave this comment as a warning for those who think its a good idea to buy a rental property in Vegas or whatever. Feel free to not buy anything in SF, but what ever you do, DO NOT ATTEMPT to geographically diversify by buying a house outside the bay area if you live in the bay area. It will not be a fun time.
Typical property management fees are 10% of gross where most properties net much less than 10% over the first 10 years of ownership in cash flow.
A home warranty is usually only given for new homes as an incentive. New homes can appreciate, but if you are 'investing' you should be focused on buying at a good price, not buying at a retail price from a home builder.
The home warranty second market (i.e. 3rd party home warranties) can reduce risk, but do not typically cover small repairs like a toilet not working etc. Those need to be done by the home owner, because if you hire someone every time it will cost you too much.
Like I said, you will have a very, very bad time if you try to geographically diversify real estate holdings.
It's just easier to scale things such as service requests, day-to-day operations, a large manager would have a better time negotiating things like paint jobs or re-carpeting due to sheer volume.
If you make $200K, paying 40% of your salary for housing is much less of a burden than if you make $20k. (e.g. you are left with a much larger amount of money to pay for necessities like food, and probably still have quite a large disposable income)
I wasn't buying the monetary arguments because the Bay Area is monetarily primarily defined by the startup scene, but this argument seems interesting.
The comparison to the oil boom drives it home.
As for "what defines a bubble", we really only know once it bursts... Otherwise it's a bull market!
what i want to know: where are people from portland moving to?
One can't just look at the increase in value of Real Estate over time, one must also consider the cost of holding that asset. Unlike many other assets Real Estate is very expensive to own (taxes, maintenance, mortgage interest). That all adds up.
Over the long term it's typically better to own than rent (in part because our tax system significantly favors owners over renters). However, people that talk about buying more house than they need (or a far more expensive house than they need) and then say "but it's an investment so it's OK" usually have no clue. Long term it's hard to consistently 'make' money on a home you live in.
Commercial or investment real estate is a whole different ball game... but when it comes to your own home the best financial decision is usually to live modestly (and understand that a bigger or fancier house is a cost and no "an investment").
Fewer people are buying houses in the Bay Area right now already which causes the disparity in the house-price-to-income ratio: Most folks who can afford a house worth 1M (and prove it to a lender) are probably earning dual-income in the tech sector and 330K (which would make the ratio 3x, same as the national average) is not too much of a stretch between two technology jobs.