Rejoice! Your House Is An Investment Again

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Rejoice! Your House Is An Investment Again

Postby Rick Ferri » Mon May 06, 2013 11:22 am

The bubble has popped and home prices are back down to their inflation-adjusted values. A home may not make a great investment, but you have to live someplace, and it beats paying rent. For a long-term perspective...

Rejoice! Your House Is An Investment Again

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Re: Rejoice! Your House Is An Investment Again

Postby Garco » Mon May 06, 2013 11:27 am

The recovery in housing prices varies widely geographically. I've lived in the same house for 40+ years. In inflation-adjusted terms (using general CPI), its market value today is essentially identical to the price I paid for it. Could be worse, of course (and it was a year or two ago), but I don't expect a serious acceleration in housing values where I live.
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Re: Rejoice! Your House Is An Investment Again

Postby Rick Ferri » Mon May 06, 2013 11:33 am

Garco wrote:I've lived in the same house for 40+ years. In inflation-adjusted terms (using general CPI), its market value today is essentially identical to the price I paid for it.


Yes, that's exactly what it is supposed to do. The 'average' house doesn't appreciate in real return like stocks because it has no economic value in that it's not producing income. The price grows with the inflation rate and improvements. The slight upward bias in my chart shows the value of these upgrades.

The historic modulation in home prices within a range has to do with financing cost and the economic cycle. Higher interest rates cause lower prices and lower interest rates put prices higher, but not by that much. Low interest rates contributed to the housing bubble, but it didn't cause it.

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Re: Rejoice! Your House Is An Investment Again

Postby Garco » Mon May 06, 2013 11:46 am

Right. Thank you. But there are some markets where housing prices have accelerated over a very long term. The little house my parents purchased ca. 1949 in Los Angeles for about $4,900 would sell for more than $400,000 today (Zillow estimate) -- an 80-fold increase in nominal terms, while the CPI has increased only 10-fold from 1949 to 2013, so that house "should" be selling for about $48,000. There have been some improvements, of course, but it looks pretty much the same now as it did then.
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Re: Rejoice! Your House Is An Investment Again

Postby xram » Mon May 06, 2013 11:48 am

We are closing on a house right now. Very excited. I think we got a pretty good deal. Very similar houses in the same neighborhood are selling for 10K more. The wife (of the couple selling the house) is a casual friend of my wife (we both have kids on the high-school softball team) and she was telling my wife the other day that she has had numerous conversations with people who are "mad" at her and her husband for selling us the house before it was put on the market and they state they would have paid more than the price we are paying. For whatever that is worth.

I'm just happy that (most likely) even if we sell the house in 5-10 years, hopefully we can at least break even or make a few bucks and at the very least stop throwing money at rent.......
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Re: Rejoice! Your House Is An Investment Again

Postby Random Musings » Mon May 06, 2013 11:56 am

Of course, there is still a risk that we can become undervalued, or below the trend, for a while as well. The only other item of note is that the chart is a composite, so each city can vary in terms of Shiller inflation adjusted.

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Re: Rejoice! Your House Is An Investment Again

Postby Rick Ferri » Mon May 06, 2013 12:02 pm

Garco wrote:Right. Thank you. But there are some markets where housing prices have accelerated over a very long term. The little house my parents purchased ca. 1949 in Los Angeles for about $4,900 would sell for more than $400,000 today (Zillow estimate) -- an 80-fold increase in nominal terms, while the CPI has increased only 10-fold from 1949 to 2013, so that house "should" be selling for about $48,000. There have been some improvements, of course, but it looks pretty much the same now as it did then.


Yes, location is everything. My data is based on the national average home price.

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Re: Rejoice! Your House Is An Investment Again

Postby Leesbro63 » Mon May 06, 2013 12:04 pm

Rick Ferri wrote:
Garco wrote:I've lived in the same house for 40+ years. In inflation-adjusted terms (using general CPI), its market value today is essentially identical to the price I paid for it.


Yes, that's exactly what it is supposed to do. The 'average' house doesn't appreciate in real return like stocks because it has no economic value in that it's not producing income. The price grows with the inflation rate and improvements. The slight upward bias in my chart shows the value of these upgrades.

The historic modulation in home prices within a range has to do with financing cost and the economic cycle. Higher interest rates cause lower prices and lower interest rates put prices higher, but not by that much. Low interest rates contributed to the housing bubble, but it didn't cause it.

Rick Ferri


Similar here in Pittsburgh. The house my parents bot in 1962 is worth about the same today in real terms. We had a little spike in prices in the mid 2000s and a little crash after 2008. But overall houses keep pace with inflation here...not more and not less.
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 12:29 pm

Rick Ferri wrote:
Yes, location is everything. My data is based on the national average home price.

Rick Ferri
[/quote]
Then of what use is it? If the movement is up but it is only the result of only one geographic area then does it even show a nationwide trend? And is your only argument that ""average" housing "should" increase only by inflation because it does not produce income? Does that mean that SFR that are rented increase in value more than owner occupied? Isn't it really based on supply and demand in a particular market?
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Re: Rejoice! Your House Is An Investment Again

Postby AJS » Mon May 06, 2013 12:52 pm

My house never was an investment. That kind of thinking leads to trouble.
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Re: Rejoice! Your House Is An Investment Again

Postby Rick Ferri » Mon May 06, 2013 1:07 pm

Honobob wrote:
Rick Ferri wrote:
Yes, location is everything. My data is based on the national average home price.

Rick Ferri


Then of what use is it? If the movement is up but it is only the result of only one geographic area then does it even show a nationwide trend? And is your only argument that ""average" housing "should" increase only by inflation because it does not produce income? Does that mean that SFR that are rented increase in value more than owner occupied? Isn't it really based on supply and demand in a particular market?


There is a correlation between what's going on nationally and what is going on regionally. Prices went up and down in all 20 markets in the Case Shiller index.

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Re: Rejoice! Your House Is An Investment Again

Postby Tortoise » Mon May 06, 2013 1:10 pm

I apparently live in one of those non-average regions. Average home prices are shooting up again here in West San Jose, California. They are higher than ever. :shock:
Note that we paid $350k for our little 1370 sq. ft. cracker box back in 1998. It should only be worth $500k today if it followed CPI.
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Re: Rejoice! Your House Is An Investment Again

Postby otbricki » Mon May 06, 2013 1:11 pm

My father paid $2500 for his suburban Boston house in 1952 and his sons sold the property for $389,000 in 2010.

Factor of 155. But there were a lot of taxes, inflation and maintenance, and a moderate addition over the years. At the end it was torn down and new house was built on the lot which was sold for $900,000.

It was really the building lot that appreciated, not the house.
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Re: Rejoice! Your House Is An Investment Again

Postby Leesbro63 » Mon May 06, 2013 1:29 pm

AJS wrote:My house never was an investment. That kind of thinking leads to trouble.

+1
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Re: Rejoice! Your House Is An Investment Again

Postby surfer1 » Mon May 06, 2013 1:35 pm

One thing particularly funny about this rebound in prices is the low inventory. There are far fewer houses being put on the market and thus, contributing to the drive in demand and price. If more houses went on the market, I don't think prices would be spiking as they seem to be. This may or may not be an artificial high.
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Re: Rejoice! Your House Is An Investment Again

Postby investingdad » Mon May 06, 2013 2:20 pm

It's kind of funny...

I'm about 40 miles outside of Philadelphia but still in PA.

If you go North out of Philly by that distance you end up in upper Bucks County. That area has seen very little impact from the housing 'crunch' and home prices remain very high and very strong due to high demand, low supply, and a strong tax base.

Go the same distance to the west, and you end up in a more rural setting (Berks / Lancaster area). That area HAS seen a strong, negative impact from the housing bubble and people that stretched thin to buy have gotten slammed. Many foreclosures.

It's not just location in the macro sense, it's location in the micro sense.
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Re: Rejoice! Your House Is An Investment Again

Postby Scooter57 » Mon May 06, 2013 3:04 pm

Baloney!

Your house price is rising only because people are being offered ridiculously low mortgage rates. When rates rise--as they are certain to do within the next decade, it will take more income to afford the same priced home and your home's value will drop to where people in your region can afford it. Unless you see some reason why incomes in your region should rise over the next decade, it is very unlikely that your home value will rise.

If inflation rises, rates are certain to rise, which will undo any benefit you'd get from rising nominal incomes.

Beyond that, average sales prices are highly skewed by a few large metro areas where investors have bought a gazillion homes for speculative purposes. I keep very close tabs on real estate prices in the region where I live where real estate speculation is not a factor, and house prices are not rising significantly. Houses in Connecticut that are identical to a house I sold in 1989 on the same street are still listing at less than $15K over what I received for my house in 1989. These are very modestly priced houses for the region. No way does that appreciation cover a tiny fraction of inflation since 1989.

Incomes are not rising in our region so that greatly limits how high prices can rise. A realtor yesterday told me that the local banks are requiring as much as 30% cash down to buy a house. Houses are going under contract and then falling back out of contract in the higher price range (in this area, $500K-$600K) partly because of difficulties with financing and partly because of difficulties of buyers selling their houses. The realtor told me that a surprising amount of the sales they are seeing are cash sales. How many people have enough cash to buy your house at a price that would give you the kind of profit we associate with "an investment?"

Homes are worth buying if you want to own a house and control what happens to it. They aren't a way of growing your wealth, as a generation of about-to-retirees have learned the very hard way.

And the fantasy that you can downsize from an expensive home into a cheaper condo and spend down your house equity is also a delusion. In our region the non-slum condos you could downsize into cost as much as the homes people are trying to downsize out of--more when you figure in the monthly maintenance fees which can be upwards of $500/mo.
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Re: Rejoice! Your House Is An Investment Again

Postby Leif » Mon May 06, 2013 3:15 pm

Tortoise wrote:I apparently live in one of those non-average regions. Average home prices are shooting up again here in West San Jose, California. They are higher than ever. :shock:


That's right. Silicon Valley is not average. :wink:
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Re: Rejoice! Your House Is An Investment Again

Postby Leesbro63 » Mon May 06, 2013 3:15 pm

Good point about future rising interest rates causing the ability to buy an "$X" dollar house to decrease.
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 3:41 pm

Actually this is closer to reality.
AJS wrote:My house never was an investment.

That kind of thinking leads to trouble.
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Re: Rejoice! Your House Is An Investment Again

Postby cheapskate » Mon May 06, 2013 3:47 pm

Leif Eriksen wrote:
Tortoise wrote:I apparently live in one of those non-average regions. Average home prices are shooting up again here in West San Jose, California. They are higher than ever. :shock:


That's right. Silicon Valley is not average. :wink:


+1

Homes (in many cities) here are selling between 7x-10x median household income (the ratio is higher in places like Palo Alto). The realtor that helped us buy our home in 2011 tells me that his clients are having a hard time purchasing and routinely outbid (1950s-1960s homes in our neighborhood routinely sell for 200K over list, according to him). Absolute insanity reigns. The valley is abuzz with rumors of Chinese all cash buyers buying homes sight unseen.

Maybe this will end well, but I don't see how. I am not modeling in any appreciation with our home if/when I sell.
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Re: Rejoice! Your House Is An Investment Again

Postby OverTheHill » Mon May 06, 2013 3:52 pm

AJS wrote:My house never was an investment. That kind of thinking leads to trouble.

I agree. Owning a house is owning a place to live. If you can keep up with inflation you're doing ok. If you can keep up with inflation, taxes, insurance, and maintenance then you are doing really good. Much beyond that is bubble territory if you ask me, not that I would pass up a better sales price. I think home equity loans were the ruination of our society, because they make it easier to live beyond your true means, and that almost never leads to good results. Around where I live, the price isn't the issue. It's simply finding buyers who will pay any price. I live in a resort area in the NC mountains, where most of the homes are second homes, as opposed to primary residences. The market around here got hit really hard when all the high salary folks from Charlotte and the high income folks from Florida got slammed during the crash. That said, life is good.
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 3:55 pm

Rick Ferri wrote:
Honobob wrote:
Rick Ferri wrote:
Yes, location is everything. My data is based on the national average home price.

Rick Ferri




There is a correlation between what's going on nationally and what is going on regionally. Prices went up and down in all 20 markets in the Case Shiller index.

Rick Ferri

What is the correlation? You say " Prices went up and down in all 20 markets".. Your conclusion is that "your house is an investment again"? Would it be different if prices went down and up in all 20 markets? Also you did not explain how you came to the conclusion that "average" houses are "supposed" to appreciate at the rate of inflation.
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Re: Rejoice! Your House Is An Investment Again

Postby Rick Ferri » Mon May 06, 2013 4:02 pm

Also you did not explain how you came to the conclusion that "average" houses are "supposed" to appreciate at the rate of inflation.


There is nothing mysterious about this. A home doesn't pay income and it doesn't grow into two houses over time. Homes are a hard asset. They go up in value with the inflation rate like gold. There will be bubbles and there will be corrections, but in the end, if you had a diversified portfolio of homes, you get the inflation rate.

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Re: Rejoice! Your House Is An Investment Again

Postby EternalOptimist » Mon May 06, 2013 4:21 pm

Been in my house for over 30 years (no mortgage) and besides a place to sleep at night, I always believed that it helped me sleep at night :happy
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 5:34 pm

Rick Ferri wrote:
Also you did not explain how you came to the conclusion that "average" houses are "supposed" to appreciate at the rate of inflation.


There is nothing mysterious about this. A home doesn't pay income and it doesn't grow into two houses over time. Homes are a hard asset. They go up in value with the inflation rate like gold. There will be bubbles and there will be corrections, but in the end, if you had a diversified portfolio of homes, you get the inflation rate.

Rick Ferri

I appreciate your continuing the conversation.
1. I do think your statements/conclusions are mysterious. A rental home pays income and I can use the cash flow/appreciation/equity to build the inlaw unit that increases the units/size/value.
2. Home = Gold ? You are ignoring the utility of the home.
3. Define a "diversified portfolio of homes". Now I THINK you are saying have a home in every market, but even then I will have the national AVERAGE appreciation. That probably IS NOT the rate of inflation. No need to buy in Detroit and that makes me better than the national average!
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Re: Rejoice! Your House Is An Investment Again

Postby Rick Ferri » Mon May 06, 2013 5:57 pm

Honobob,

A house rental is not like a corporation. All else equal, the rent from a house does not grow faster than inflation because the house does not get bigger and grow real earnings like a company might. It is more like an inflation-adjusted bond that requires a new roof every 15 years.

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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 6:26 pm

Rick Ferri wrote:Honobob,

A house rental is not like a corporation. All else equal, the rent from a house does not grow faster than inflation because the house does not get bigger and grow real earnings like a company might. It is more like an inflation-adjusted bond that requires a new roof every 15 years.

Rick Ferri


Rick Ferri,
Again, I thank you for continuing this discussion.
You said,

"the rent from a house does not grow faster than inflation because the house does not get bigger" So in areas where rents have dropped considerably are the houses getting smaller? As any renter can tell you it is all about supply and demand. Now how do you explain RENT CONTROL...GENTRIFICATION?

House = Gold
House = inflation-adjusted bond

??
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 7:03 pm

It's slowly dawned on me that we won the real estate lottery!
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Re: Rejoice! Your House Is An Investment Again

Postby Leesbro63 » Mon May 06, 2013 7:23 pm

OverTheHill wrote:
AJS wrote:My house never was an investment. That kind of thinking leads to trouble.

I agree. Owning a house is owning a place to live. If you can keep up with inflation you're doing ok. If you can keep up with inflation, taxes, insurance, and maintenance .....


Actually I think the above equation needs to subtract the imputed rent that you are not paying yourself. Or some sort of factor for the rental value.
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Re: Rejoice! Your House Is An Investment Again

Postby Rick Ferri » Mon May 06, 2013 7:34 pm

Honobob

99.999% of Ameican houshols are not affected by rent control.

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Re: Rejoice! Your House Is An Investment Again

Postby pjstack » Mon May 06, 2013 7:40 pm

It appears that house flippers and hedge funds are working hard to bubblize (to make up a word) the housing market again.

People keep cheering rising prices, which seems strange to me.

(Disclaimer: my mortgage is paid off.)
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Re: Rejoice! Your House Is An Investment Again

Postby ourbrooks » Mon May 06, 2013 7:57 pm

As Robert Shiller has pointed out, it's "supply and demand" that ensures that housing prices don't grow faster than the rate of inflation. In most parts of the country, when demand increases and prices rise, new houses are built which can be sold at lower prices. Even if these new houses are further from the center of the city, the price is low enough so that people ask themselves the question, do I want a brand new house at lower price or a house further in at a higher price.

What determines the price of the new houses is the construction cost and construction costs have historically risen only at the rate of inflation.

Even things like gentrification fit in this framework; when prices get too high in desirable areas of the city, people purchase cheaper properties in less desirable areas and either build new houses or remodel the old ones. Again, construction costs determine the floor on prices.

There are, of course, places like Silicon Valley or Manhatten where it's difficult to build a lot more new houses but there are also places like Houston and Dallas and Cleveland and Detroit where housing prices have either risen slowly or dropped. Overall, though, supply and demand ensures that housing prices over longer periods of time are limited by the rate of inflation.
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 8:14 pm

Rick Ferri wrote:Honobob

99.999% of Ameican houshols are not affected by rent control.

Rick Ferri

So?
I think you are being evasive.
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 8:16 pm

ourbrooks wrote:As Robert Shiller has pointed out, it's "supply and demand"

What determines the price of the new houses is the construction cost and construction costs have historically risen only at the rate of inflation.


.

Source?
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 8:20 pm

ourbrooks wrote:As Robert Shiller has pointed out, it's "supply and demand" that ensures that housing prices don't grow faster than the rate of inflation. In most parts


houses but there are also places like Houston where housing prices have either risen slowly or dropped. Overall, though, supply and demand ensures that housing prices over longer periods of time are limited by the rate of inflation.

http://www.neighborhoodscout.com/tx/hou ... ace/#rates
do you have the slightest idea what you are saying?
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Re: Rejoice! Your House Is An Investment Again

Postby momar » Mon May 06, 2013 8:33 pm

ourbrooks wrote:As Robert Shiller has pointed out, it's "supply and demand" that ensures that housing prices don't grow faster than the rate of inflation. In most parts of the country, when demand increases and prices rise, new houses are built which can be sold at lower prices. Even if these new houses are further from the center of the city, the price is low enough so that people ask themselves the question, do I want a brand new house at lower price or a house further in at a higher price.

What determines the price of the new houses is the construction cost and construction costs have historically risen only at the rate of inflation.

Even things like gentrification fit in this framework; when prices get too high in desirable areas of the city, people purchase cheaper properties in less desirable areas and either build new houses or remodel the old ones. Again, construction costs determine the floor on prices.

There are, of course, places like Silicon Valley or Manhatten where it's difficult to build a lot more new houses but there are also places like Houston and Dallas and Cleveland and Detroit where housing prices have either risen slowly or dropped. Overall, though, supply and demand ensures that housing prices over longer periods of time are limited by the rate of inflation.

You forget local regulations which prevent construction of denser housing.
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 8:43 pm

momar wrote:You forget local regulations which prevent construction of denser housing.

Which would decrease supply...... Dang, I remember something about elasticity of demand from econ 101............................... :moneybag
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Re: Rejoice! Your House Is An Investment Again

Postby richard » Mon May 06, 2013 9:30 pm

Rick Ferri wrote:The bubble has popped and home prices are back down to their inflation-adjusted values. A home may not make a great investment, but you have to live someplace, and it beats paying rent.

Whether it beats paying rent depends entirely on the relative costs of renting a home and buying a home.
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Re: Rejoice! Your House Is An Investment Again

Postby ourbrooks » Mon May 06, 2013 9:50 pm

Honobob wrote:
ourbrooks wrote:As Robert Shiller has pointed out, it's "supply and demand" that ensures that housing prices don't grow faster than the rate of inflation. In most parts


houses but there are also places like Houston where housing prices have either risen slowly or dropped. Overall, though, supply and demand ensures that housing prices over longer periods of time are limited by the rate of inflation.

http://www.neighborhoodscout.com/tx/hou ... ace/#rates
do you have the slightest idea what you are saying?


Yup. http://www.neighborhoodscout.com/tx/houston/rates/ Look at the city as a whole, not just Lamar Terrace.
(Remember that gentrification thing.) Considering the growth in population in Houston since 1990, this is remarkably low appreciation.
Of course, Houston now has three concentric rings of freeways, as people have moved out from the center to lower cost, new developments on the periphery.

Also, please don't quote me out of context; my original statement was "there are also places like Houston and Dallas and Cleveland and Detroit where housing prices have either risen slowly or dropped."

BTW, in my city, local regulations favor the development of denser housing.
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Re: Rejoice! Your House Is An Investment Again

Postby ourbrooks » Mon May 06, 2013 9:56 pm

Honobob wrote:
ourbrooks wrote:As Robert Shiller has pointed out, it's "supply and demand"

What determines the price of the new houses is the construction cost and construction costs have historically risen only at the rate of inflation.


.

Source?

Try Shiller's 2005 book, Irrational Exuberance. In that book, he claims that house princes in the U.S. has shown a tendency to return to their real levels in 1890 terms.
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Re: Rejoice! Your House Is An Investment Again

Postby interplanetjanet » Mon May 06, 2013 10:07 pm

richard wrote:Whether it beats paying rent depends entirely on the relative costs of renting a home and buying a home.

Pretty much, and that all depends on local factors.

I just renewed my lease for another year. My rent has been flat in nominal dollars for 7 years now, and with the house we are in being valued at 20x what we are paying in annual rent...it seems like a fair deal. I almost decided to buy this summer but it would have stretched my finances just a bit too much for comfort. I'd rather take my time and have more of a buffer - I have no desire to be "house poor".
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Re: Rejoice! Your House Is An Investment Again

Postby Rick Ferri » Mon May 06, 2013 11:37 pm

richard wrote:
Rick Ferri wrote:The bubble has popped and home prices are back down to their inflation-adjusted values. A home may not make a great investment, but you have to live someplace, and it beats paying rent.

Whether it beats paying rent depends entirely on the relative costs of renting a home and buying a home.


Clearly there are patches of the marketplace were renting is still a better option than buying. Those places are the exception. In most locations people would be better off buying than renting if they can afford too.

Rick Ferri
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Re: Rejoice! Your House Is An Investment Again

Postby avalpert » Mon May 06, 2013 11:42 pm

Isn't a chart of home prices that doesn't account for maintenance costs/property taxes etc. as misleading and of questionable use as a market chart that ignores dividends?

Your house might be worth the same in real terms as in 2000 but that is before you account for all the money you had to put into it to keep it that way.
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Re: Rejoice! Your House Is An Investment Again

Postby Honobob » Mon May 06, 2013 11:51 pm

ourbrooks wrote:
Honobob wrote:
ourbrooks wrote:As Robert Shiller has pointed out, it's "supply and demand" that ensures that housing prices don't grow faster than the rate of inflation. In most parts


houses but there are also places like Houston where housing prices have either risen slowly or dropped. Overall, though, supply and demand ensures that housing prices over longer periods of time are limited by the rate of inflation.

http://www.neighborhoodscout.com/tx/hou ... ace/#rates
do you have the slightest idea what you are saying?


Yup. http://www.neighborhoodscout.com/tx/houston/rates/ Look at the city as a whole, not just Lamar Terrace.
(Remember that gentrification thing.) Considering the growth in population in Houston since 1990, this is remarkably low appreciation.
Of course, Houston now has three concentric rings of freeways, as people have moved out from the center to lower cost, new developments on the periphery.

Also, please don't quote me out of context; my original statement was "there are also places like Houston and Dallas and Cleveland and Detroit where housing prices have either risen slowly or dropped."

BTW, in my city, local regulations favor the development of denser housing.

why why why would I not only look at Lamar terrace? I know better than to buy on the wrong side of the tracks!!!!!!!!!!!!!! You, yourself say "this is remarkably LOW appreciation."
It's slowly dawned on me that we won the real estate lottery!
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Re: Rejoice! Your House Is An Investment Again

Postby umfundi » Tue May 07, 2013 2:57 am

I should be so lucky.

Our house is now worth about what we paid for it in 1993, not inflation adjusted.

Welcome to SE Michigan.

Keith
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Re: Rejoice! Your House Is An Investment Again

Postby umfundi » Tue May 07, 2013 3:09 am

Rick Ferri wrote:
Also you did not explain how you came to the conclusion that "average" houses are "supposed" to appreciate at the rate of inflation.


There is nothing mysterious about this. A home doesn't pay income and it doesn't grow into two houses over time. Homes are a hard asset. They go up in value with the inflation rate like gold. There will be bubbles and there will be corrections, but in the end, if you had a diversified portfolio of homes, you get the inflation rate.

Rick Ferri

Rick,

The statement "Your house is an investment again" has all sorts of connotations I do not accept.

Pray tell, to whom does the statement "if you had a diversified portfolio of homes" apply? Exactly no one, in my opinion.

Keith
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Re: Rejoice! Your House Is An Investment Again

Postby Valuethinker » Tue May 07, 2013 3:12 am

Rick Ferri wrote:
Also you did not explain how you came to the conclusion that "average" houses are "supposed" to appreciate at the rate of inflation.


There is nothing mysterious about this. A home doesn't pay income and it doesn't grow into two houses over time. Homes are a hard asset. They go up in value with the inflation rate like gold. There will be bubbles and there will be corrections, but in the end, if you had a diversified portfolio of homes, you get the inflation rate.

Rick Ferri



Your economics is not quite right.

A house pays imputed rent, if you live in it. Ie otherwise someone else would live in it, and pay rent.


Imputed rents tend to rise over time, with rising housing quality and rising real incomes.

if you look at the apartment REITs you get a feeling for it. And, in fact, money has now moved into owning single family residential homes-- a big source of demand right now is investor demand. Whether in the long run it will stay given the higher maintenance costs, complaining home renters etc. we don't know.
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Re: Rejoice! Your House Is An Investment Again

Postby Valuethinker » Tue May 07, 2013 3:27 am

Rick Ferri wrote:Honobob,

A house rental is not like a corporation. All else equal, the rent from a house does not grow faster than inflation because the house does not get bigger and grow real earnings like a company might. It is more like an inflation-adjusted bond that requires a new roof every 15 years.

Rick Ferri


No but the real income of householders grows. Otherwise you'd get a situation where housing services was a falling percentage of the national economy-- and that's irrational. People don't trade down their relative housing simply because they are richer-- rather the reverse, just as richer people buy nicer cars and take nicer holidays and send their kids to private schools, so too do they buy (or rent) more expensive homes. Ditto richer countries.

So then it's a question of supply. In some parts of the USA, supply is not constrained. In some, zoning constrains supply. Manhattan is not allowed to build as tall as Hong Kong, for example, nor as densely.

For the dramatic real price increases we have seen in the last 30 years in some metropolises you need:

- a successful local industry. Tech in the Valley. Usually finance-- Boston and New York (and Toronto, and London) all have strong financial services industries. Growth in average compensation in wholesale securities industry has far exceeded that of other industries in the last 30 years. Those people and in ancillary industries like law and health care can pay more for their rents and to buy their homes. Think of housing prices in Greenwich and Stamford Connecticut, the homes of the hedge fund industry, in the last 30 years. There is now a *reverse* commute out of Grand Central Station early in the morning, out to hedge fund land

- openness to international capital-- this is a perceptible factor in appreciation in Toronto, Vancouver, New York, London at the very least-- housing there is seen as a 'safe haven' investment, akin to fixed income

- openness to international migration - I cannot think of a city with strong real house price growth in the last 30 years that does not have a relatively high percentage of foreign born residents (cause and effect are not clear, of course) and this is also true of Shanghai, Beijing and Mumbai of course

- zoning - local ordinances and/or planning rules which prevent construction of new housing

Long run housing price appreciation is low. I think Shiller estimates 1% pa real very long run for the USA.

Neil Monnery's book 'Safe as Houses' takes you through the international evidence.
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Re: Rejoice! Your House Is An Investment Again

Postby steadyeddy » Tue May 07, 2013 3:59 am

Scooter57 wrote:Baloney!

Your house price is rising only because people are being offered ridiculously low mortgage rates. When rates rise--as they are certain to do within the next decade, it will take more income to afford the same priced home and your home's value will drop to where people in your region can afford itl


Interest rates do play a role in affordability, but they are only one slice of the pie. If interest rates rise while unemployment falls, will housing prices go up or down? In my own area, vacancy is below 3% and rents are increasing dramatically faster than income. At least in the short run, people will not move out of town or become homeless--they will simply allow housing to take a larger share of their income. Healthcare and education are examples of other sectors that have seen prices outpace wage growth recently with little effect on demand.
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