bostonbubble.com

[GenXer]

I guess Brandeis and Bentley may be exceptions - plenty of Brandeis students living in Waltham, but mostly right around the corner. I'm not sure if Bentley students live elsewhere, but I think some fall in the 'graduate student with cars' category (the MBAs).

I think interest rates have to hit 10% before we see some relaxation in prices (that is in accord with unemployment going higher). But I think this will not happen because the government is meddling with the rates to suit its own purpose. They dont want to pay interest on all those treasury bonds, and there may be other reasons. In any case, this could be another subject for 'bets' on the direction of the market. At least last time (in '90), the bottom in housing coincided with the peak of unemployment. We'll see where we end up. I somehow do not have much faith in the 'fixes' currently put in motion.

[balor123]

You'd be surprised where students live.

[Guest]

To flip this around, does anyone believe that 1 house in 1 neighborhood should be >75% of your net worth?
I'm just saying it's extremely concentrated.
And because I'll be paying higher taxes for the rest of my life to bail out bad, imprudent and non diversified choices by homeowners and banks, I have a right to ask questions.
Diversification can mean occasionally going short or buying puts to hedge. All I'm saying is people devote nearly 100% of their time, energy and self financial education it seems to housing. I'm just saying things should be more balanced.
My personal view is that above basic needs for comfortable shelter, housing is absolutely an investment.

[concernedcitizen1]

p.s. if you think housing is just a home and without risk, think about all the people who bought in Detroit 30 years ago when times were just fine for the auto industry. I'm going to guess their investment is down 50% or so since purchase vs up 1000% for other types of investments.

I know the average person will stay in a house for 5-7 years but even that is almost a private equity time horizon. Private equity because it's illiquid and uses some leverage some times commands expected returns of 25%+ per annum. Does housing give you that? I know it's slightly more liquid but leverage is probably even higher so there should be a higher expected return in my view.

p.s. I do own housing but it generates a cash yield and I bought it underpriced.

[CC]

[GenXer]

concernedcitizen1: underpriced is for the markets to judge. Consider yourself lucky. I know people who just got lucky because they got a good deal, and they could afford it, as they made progress in life. But tell that to people who could afford it when prices are low, and are now out of work. I think its all relative. Some get lucky, some do not. The point is to be able to make a decision under possible scenarios, and this is where most people fail badly. One good rule of thumb: if you got lucky, never attribute this to skill, especially when it has to do with buying risky assets. If you try to repeat this enough times, you will lose eventually when you least expect it.

[ConcernedC]

Hi,
Genexer, I totally agree re luck vs skill and always being vigilant about that. I shouldn't have said underpriced, what I meant more so was I could pay it in cash (the entire apartment) because (in my view at least) I refused to give in to the peer pressure to buy (again in my view) overvalued housing. Now I am saving up to buy when I feel prices in Boston have reached a good level. If they never reach my price point I will not buy and instead buy somewhere else to get a better return. I am just trying to promote people spreading their wealth away from housing. I think housing as 30-40% of net worth is acceptable but 75%+ is too concentrated. Re why 3x income as a rule of thumb, it's really just a way of tracking what % of disposible income is spent on housing so of course it's a blunt instrument given different tax levels etc. I am just trying to promote different ways of looking at how to accumulate wealth and promote safety in retirement.

[GenXer]

ConcernedC: Point taken. I'm a bit more radical than that. I think you must build a retirement portfolio first, and buy a house next. In that order. Because otherwise you set yourself up for failure, regardless of whether the house price was 'fair' or not. Buying simply sucks long term. If I was building portfolios like that (i.e. here's a nice balanced portfolio, and oh, by the way, lets buy this stock X, and it will be 40% of your portfolio), my clients would be pissed, because I'd be gambling away 40% of their wealth. See my point? A house is a place to live in, and if you are stuffing your house full of cash (which people do as a matter of fact - 20% downpayment, 80% leverage), do you really have any money left for financial independence? Or is your house going to take over at some point in time as your piggybank? This seems to be the answer for most people in US.

[JCK]

GenX,

In a more balanced market though, the correct comparison needs to factor in your rental costs vs. buying costs. Not investing in house vs. investing in stocks. Or, as in the MFH thread:

Stock/bond investment - Rental cost vs. (reduced) stock/bond investment - purchased home cost.

Certainly not now, but historically buying has made sense, not because housing is some sort of magical investment vehicle, but because the rental costs, once you got that down payment together, were higher than your carrying costs.

For the market right now, I agree with you. Spending $800k-$1m on a home in Newton makes little sense, from any perspective, because the equivalent rental is so much cheaper.

The problem is not so much buying per se, but it's buying into a market where the fundamentals are out of whack. You have to pay to live somewhere, and if you can save money by buying, doing so can make sense. The problem is that right now, the capital costs are so high and downside risk on prices so great, that buying makes little sense as compared to renting.

[GenXer]

JCK: Markets do what they do. We would be wise not to try to time them. I want strategies which work in ALL markets, and this is what I plan to deliver. Otherwise, what is the use for somebody who has to TIME the market and has to time it RIGHT more often than not? On average, my strategies will win more than they will lose, and at worst, the risk of the bottom falling out will be mitigated (or so we hope). Isn't that what we are all looking for? A long term way of making money over time while not losing it all to a rare random event?

[JCK]

This has nothing to do with market timing and everything to do with measuring yield.

I think admin's example of the cap rate analysis of real estate proves my point.

If you can pay cash on property, the rent you save less costs (taxes maintenance) is your return on investment.

If the numbers work, I don't see how this is too different from investing in a bond. You can project repair costs (even conservatively), taxes, and your saved rent, and come up with yield based on that number.

So I'm not suggesting timing the market per se based on momentum or whatever, or even making a prediction about where the market is headed, because we acknowledge that it cannot be done.

I'm suggesting an ROI analysis on the purchase as it stands.

[nickbp]

[GenXer]

I'm not disagreeing with you. Rather, I'm suggesting that the risk premium (if such even exists, which I highly doubt) is so small as not to justify investing in real estate. The only way to do so would be if you had a lot of access to 'inside information', i.e. being able to get in on good deals, and MANY good deals. On a single deal your risk does not come even close to the safety you get with bonds.

Which would you prefer:

$ payoff/ Probability
$10 0.99999
-$100,000 0.00001

or

$ payoff/ Probability
$1000 0.99
-$100,000 0.01

or

$ payoff/ Probability
$1 0.999
-$10,000 0.001

This is a quiz

This is a trick question, but the point is simple: if you do not know what your expected return is, don't assume its positive

[balor123]

[balor123]