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Demographics may lead to lower house prices
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GenXer



Joined: 20 Feb 2009
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PostPosted: Tue May 05, 2009 11:40 am GMT    Post subject: Demographics may lead to lower house prices Reply with quote

http://www.bloomberg.com/apps/news?pid=20601039&sid=aiiT.sNeq2YQ&refer=patrick.net

This 'correction' may take a long time to unwind, but there are compelling reasons why it will continue. It appears that there is a lot of new construction in the South. The argument which says that there is a limited number of houses and the population is rising misses the point - the population is also moving (especially new grads), which means that they will not be buying 'boomer' houses for sale in the Northeast for 5-7x earnings. Once boomers start retiring en-masse (and this may be happening because jobs are not plentiful and because they are competing against new grads with fresh and/or more advanced skills), they will have to dump their houses, but the new grads and GenXers as well as GenYers for the most part will not be buying (many who already bought got burned very badly, especially if they also lost their jobs).

So this housing market will most likely continue like that for the next 5-10 years. Those who have the patience and a decent 'bullshit meter' will reap the most rewards. Those who say '5x income house is a bargain' will doom their retirement for sure. A house should be 2x income. It may be 3x income in extraordinary circumstances, such as if you have a lot of money (inheritance, etc). Renting is dirt cheap and will get much cheaper once the housing prices fall further.

Fundamentally, NOTHING changed in the Northeast as of this moment. Prices are still in the stratosphere, so anybody who's saying that there are 'bargains' is smoking some serious weed. Bargain is a 2 to 3x income NEW construction with LAND. Anything else is a waste of money and an eventual non-retirement (opportunity lost for a lot of money locked in an 'investment' that is not gaining in value). Pensions are gone for most people, and SSI will only get smaller (remember I-bonds? It doesn't take much for the government to re-write the rules in their favor). If you have to sink so much money into a house for 30 years (i.e. anything above 3x income), this probably means that you are short-changing your retirement savings, and when you REALLY need the money, you'll be at the mercy of the government and housing prices, which is basically gambling with your future (in the worst possible way).
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JCK



Joined: 15 Feb 2007
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PostPosted: Tue May 05, 2009 1:27 pm GMT    Post subject: Reply with quote

Ha. Two years ago, it was "housing prices never decline." Now it's "housing prices will never recover."

Pardon me if I don't buy the hyperbolic statements on either end of the spectrum.

I agree that it's a mistake to purchase a place that greatly outsizes your income, regardless of your prowess in predicting future prices.
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GenXer



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PostPosted: Tue May 05, 2009 1:47 pm GMT    Post subject: Reply with quote

Notice the use of 'may' and 'likely'. There is no certainty, but so far, we've seen every bubble burst, except for the real estate. There is still a bubble out there.

Regardless of what the prices do in the future, a house is not a 'nest egg', as the author correctly notes. Its like saying that oil prices will someday come up, so oil is a good investment. When a price of something can fall almost any amount (for houses, 50% is not unreasonable), you call that asset RISKY and stay away from it, if you actually want to retire in peace. Otherwise, you make sure that you do NOT use leverage when buying such an asset. At 5x-7x income (or even more in some places), every recession will wipe some of these people out. Some will survive due to pure luck, but there will be enough recession to undo most of those who are overextended. Do not join their ranks by thinking that you are immune.
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balor123



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PostPosted: Tue May 05, 2009 2:01 pm GMT    Post subject: Reply with quote

I agree. If house prices remain string after 10 -15 years, then I'd be more confident in the stability of these prices but I also don't want to wait that long to figure it out. Hopefully I can dodge this problem by moving to Texas and buy a house at 2-3x income. I doubt that I'd find a satisfactory place to live in Boston at even 3x income, much less 2x. It's looking like a minimum of about 3.5x if you have pretty low standards around here and just one household income.
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PostPosted: Tue May 05, 2009 2:17 pm GMT    Post subject: a house is a nest egg Reply with quote

I'm not sure why so so many people are so quick to jump on this bandwagon of the real estate decline. Past history shows that a house can be a nest egg and an extremely large one as well depending on where the home is located. I am very confident this will be the case in the future. I agree not every home can or will be one but if planned correctly it still will be one depending on how you choose to live.

If you anyone would look at the public records in let's say Natick, Newton, Cambridge, Weston, Manchester, etc of what people bought their home for 20, 30, 40 years ago and see what they are worth today I think everyone would strongly agree the 30K investment 30 years ago was well worth it and could now be considered a very large "nest egg". I will take my 600K-800K and move to Florida or somewhere in the SE and live extremely comfortable. For those who do not want to move to another location well then the house become a far less of a nest egg. Even for those who want to move let's say an hour or two from one of those areas the home can still be considered a very large nest egg if the location they are moving to is less expensive.

It gets frustrating to see the masses jump on the bandwagon of this topic due to it is now easy to point fingers and say "I agree a house is not a nest egg" since we all know what has happened in the real estate mkt of the last 3 years or so. This is something all of us will most likely not see again see in our lifetimes. If you look beyond the "hype" and look at reality you will all see a house can indeed and will still be a very good nest egg if it is planned correctly. All it may take to do a little self thinking and analysis.
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JCK



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PostPosted: Tue May 05, 2009 2:29 pm GMT    Post subject: Reply with quote

A house should not be your primary source of your retirement funds. I absolutely agree with that. Even if the numbers work out, who wants to be forced to move at the moment they retire? That doesn't sound like much fun to me.

But I'm wondering if the extreme negativity is misplaced. Is "housing will never go up" the new "housing never goes down"?
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admin
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PostPosted: Tue May 05, 2009 2:36 pm GMT    Post subject: Re: a house is a nest egg Reply with quote

Anonymous wrote:
Past history shows that a house can be a nest egg and an extremely large one as well depending on where the home is located.


That is, until you account for inflation. Those fantastic returns of those who bought 30+ years ago are due largely to money illusion from the high inflation that was rampant in the mid 1960s - mid 1980s. Prices on everything were rising rapidly, not just housing. Real prices on US housing have been essentially flat for the last century, with the most notable exception being the huge spike in prices during the current bubble.

- admin
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JCK



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PostPosted: Tue May 05, 2009 2:44 pm GMT    Post subject: Re: a house is a nest egg Reply with quote

admin wrote:
Anonymous wrote:
Past history shows that a house can be a nest egg and an extremely large one as well depending on where the home is located.


That is, until you account for inflation. Those fantastic returns of those who bought 30+ years ago are due largely to money illusion from the high inflation that was rampant in the mid 1960s - mid 1980s. Prices on everything were rising rapidly, not just housing. Real prices on US housing have been essentially flat for the last century, with the most notable exception being the huge spike in prices during the current bubble.

- admin


Admin, I fully agree with your point, but I think you're making the wrong comparison.

In a rising price environment, having (a) a leveraged investment tied to inflation and (b) a fixed monthly payment is a wonderful thing. Thirty years ago, renting wasn't less expensive than buying and would be expected to increase every year.

So the return on investment for those folks who chose to buy over renting is not illusory, because your baseline is your rental costs, not your inflation adjusted dollar amount.

The situation now, I think is far different. In many area,s rental costs are far lower than buying costs, especially when one considers the downside risk on the purchase price.
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john p



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PostPosted: Tue May 05, 2009 3:02 pm GMT    Post subject: Reply with quote

I talked with a young bartender the other day and they said that they pay something like $14,000 for room and board, and that only covered them for the months that school was in session. I dated a girl several years back who said that it was a growing trend for parents to buy a condo for their kids because it was cheaper and they could sell the place four years later for a profit.

Since 2004, colleges have jacked up their capacity for student housing which I think has relieved some pressure on condos. Since 2006 to about 2008 I was hearing reports of many people downsizing in the suburbs or divorcees moving back into the city. Perhaps the condos went down because the incentive for people to buy condos for their kids in school didn't hold up any more, and the person downsizing was getting less and less on their place so they had less to offer on the condo in Boston?

I'm trying to understand the components of the supply and demand equation with respect to demographics...
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PostPosted: Tue May 05, 2009 3:10 pm GMT    Post subject: Reply with quote

Folks, Massachusetts was a jobs creation machine for the years from 1965 to 2000. Our local economy (when you sum total the DECs, Wangs, Gillettes, John Hancocks, Polaroid, etc) was the equivalent of any number of western European nations and yet, we're only a sliver of the United States. Yes, my friends from other nations were impressed at our collective accomplishments.

That's why you need cause and effect; fundamentally, the housing market follows the job market and when jobs were always in creation mode, (the modern history of our state before Nasdaq 5K), people can grow into their mortgage, hence the 3:1 ratio isn't entirely out of the picture. The 3:1 ballooned into the present day 5-to-7:1 after our job creation machine discombobulated and when most of the jobs, during the post-IT/telecom recession, was in real estate and mortgage finance related industries. Now, we're in some serious trouble, people simply can't "grow into their mortgages" anymore. Likewise, I don't think all our landed aristocrats will be holding up the entire region with their *rentier* incomes either, as much of that was also in a credit velocity bubble for a long time.

Likewise, if a working professional can get that 3:1, by living in Texas, a state friendly towards job creation and now, unlike during the oil patch bust of the 80s, a more diversified economy, then it makes sense for the next up and coming generation to move there then to stay in a white collar rust belt. All and all, I think Balor's plan is sound.
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admin
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PostPosted: Tue May 05, 2009 3:11 pm GMT    Post subject: Re: a house is a nest egg Reply with quote

JCK wrote:

In a rising price environment, having (a) a leveraged investment tied to inflation and (b) a fixed monthly payment is a wonderful thing.


That is true in some respects, though I'm not sure that the leverage provided a positive benefit, apart from making the purchase possible to begin with. If mortgage rates exceeded inflation (and I believe they did most of the time), you would have been better off paying cash rather than using leverage.

But you're right... if buying were cheaper than renting an equivalent, and inflation was high, then locking in the lower payment would seem like a good idea.

- admin
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JCK



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PostPosted: Tue May 05, 2009 3:36 pm GMT    Post subject: Re: a house is a nest egg Reply with quote

[quote="admin"]
JCK wrote:

If mortgage rates exceeded inflation (and I believe they did most of the time), you would have been better off paying cash rather than using leverage.


- admin


That's an academic debate, unless you have the cash on hand. Would the person in the 1970s have been better off saving cash, waiting to buy, and continuing to rent, or buying in at 20% down?
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admin
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PostPosted: Tue May 05, 2009 3:53 pm GMT    Post subject: Re: a house is a nest egg Reply with quote

JCK wrote:

That's an academic debate, unless you have the cash on hand. Would the person in the 1970s have been better off saving cash, waiting to buy, and continuing to rent, or buying in at 20% down?


I don't think it's academic because if it wouldn't make sense to buy in cash, then it wouldn't make sense to buy with leverage either - my point being that leverage does not improve the situation (apart from making possible an otherwise impossible transaction). Yes, I think that someone in the 1970s would probably have been better off buying in at 20% down despite the leverage, not because of it.

- admin
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JCK



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PostPosted: Tue May 05, 2009 4:11 pm GMT    Post subject: Re: a house is a nest egg Reply with quote

admin wrote:
JCK wrote:

That's an academic debate, unless you have the cash on hand. Would the person in the 1970s have been better off saving cash, waiting to buy, and continuing to rent, or buying in at 20% down?


I don't think it's academic because if it wouldn't make sense to buy in cash, then it wouldn't make sense to buy with leverage either - my point being that leverage does not improve the situation (apart from making possible an otherwise impossible transaction). Yes, I think that someone in the 1970s would probably have been better off buying in at 20% down despite the leverage, not because of it.

- admin


Right. You can certainly use buying in cash as an example to rule out bad purchase decisions. If you'd be better off parking the money in a CD and using the interest to pay rent + grow your principal balance, for example, because the price was so high, then you shouldn't buy.

But if the cash example says it's a good decision, it may or may not be a good decision to buy w/leverage.

I see your point on the leverage being at best neutral, but I'm still trying to get my mind around this.

Assuming a "normal" market, where prices increase with household income, and where rental costs are at parity with PITI. Moderate inflation, "normal" interest rates. Is the leverage in that situation a bad thing, i.e., does it put you in a situation worse off than not leveraging? If so, I'm not seeing it.

Where else would you put the money, in that market?

Again, I'm not talking about today, but in the hypothetical normal market.
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GenXer



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PostPosted: Tue May 05, 2009 4:12 pm GMT    Post subject: Reply with quote

Quote:
That's an academic debate, unless you have the cash on hand. Would the person in the 1970s have been better off saving cash, waiting to buy, and continuing to rent, or buying in at 20% down?


It is safe to say that with hindsight everything becomes predictable. We have no idea what will happen, and betting your future on a prediction is reckless and prone to negative surprises.

Quote:
But I'm wondering if the extreme negativity is misplaced. Is "housing will never go up" the new "housing never goes down"?


I do not think we are dealing with extreme negativity. We are dealing with sobering reality. Whatever the house prices do, we now know (and several very smart people knew for quite a while) that prices of risky assets sometimes have unpredictably large fluctuations.

House prices may go up, or they may go down. Just like with stocks, you want to diversify. When a house is the biggest asset, lets face it, you have all your eggs in one basket. Historically, people did well over certain periods of time, but that is completely irrelevant.

If you look at prices as a stochastic random process, as opposed to 'supply and demand' and value-driven, you will see that value as well as supply-demand factors are drowned out by random fluctuations, which in hindsight are always explained by something, yet at present, nobody knows WHY the prices do what they do, and we can only speculate. Once we admit that we are clueless, the next step would be to mitigate our risks, which is not to buy anything with leverage (if you can help it), and/or to keep the price at 3x income.
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