WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

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willthrill81
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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by willthrill81 » Wed Jul 11, 2018 3:40 pm

I find it interesting to note that many do not view stocks' annualized real returns of 12.78% from 2009 until now to be indicative of a bubble in that market, but many here view real estate prices increasing by an inflation-adjusted 3.1%* from the bottom of the last recession, then real estate is certainly in a bubble.

I don't think that a 3.1% real annual increase is sustainable over the long-term, but remember that is measured from the very bottom of the trough of the worst economic crisis in decades, one which impacted real estate far more than did nearly all prior recessions. Growth in prices may simply slow down in the future without ever making a significant retreat.

*According to the Federal Reserve, the median price for U.S. homes sold at the bottom of the last trough (Q1 of 2009) was $208,400. The same price is now $328,000. After adjusting for inflation, that's a cumulative increase of 32%, an annual increase of 3.1%.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Engineer250
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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by Engineer250 » Wed Jul 11, 2018 7:38 pm

willthrill81 wrote:
Wed Jul 11, 2018 3:40 pm
I find it interesting to note that many do not view stocks' annualized real returns of 12.78% from 2009 until now to be indicative of a bubble in that market, but many here view real estate prices increasing by an inflation-adjusted 3.1%* from the bottom of the last recession, then real estate is certainly in a bubble.

I don't think that a 3.1% real annual increase is sustainable over the long-term, but remember that is measured from the very bottom of the trough of the worst economic crisis in decades, one which impacted real estate far more than did nearly all prior recessions. Growth in prices may simply slow down in the future without ever making a significant retreat.

*According to the Federal Reserve, the median price for U.S. homes sold at the bottom of the last trough (Q1 of 2009) was $208,400. The same price is now $328,000. After adjusting for inflation, that's a cumulative increase of 32%, an annual increase of 3.1%.
Median home price in my area was $300k at the lowest in 2009. Now it's at $595k. I think that comes out to a 7.9% average increase over 9 years.

Per my prior post, using non-inflation dollars, real median household income in my county peaked at $62k in 2008. It's now $70k real. My point is that the numbers are (if you adjust for inflation) the same as peak housing in 2008. So if we aren't in a bubble now, we weren't then either. The problem is, people's median wages have barely tracked inflation (when it was low) since the recession while home prices have gone up a lot faster. So I suppose what do you use as a starting point?

If you say $595k is inflation adjusted for $500k then, so everything's fine, then you are saying peak housing in 2008 was also fine and not a bubble.
Where the tides of fortune take us, no man can know.

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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by Engineer250 » Wed Jul 11, 2018 7:49 pm

willthrill81 wrote:
Wed Jul 11, 2018 3:40 pm
I find it interesting to note that many do not view stocks' annualized real returns of 12.78% from 2009 until now to be indicative of a bubble in that market, but many here view real estate prices increasing by an inflation-adjusted 3.1%* from the bottom of the last recession, then real estate is certainly in a bubble.
First - many people do think we are in a bubble. User WhiteMaxima I think pulled a bunch of money out this year, and every year there are posts of people doing similar.

Second - investing in a business is not the same thing as purchasing an item. If I buy a shovel that I intend to use, I don't expect my shovel to gain in value unless there's some shortage of shovels. My house doesn't have an R&D department, doesn't become more efficient unless I put money into it, and doesn't generate income for me assuming I live in it. If I am a landlord, I am running a business where I am renting out my house/shovel to people who need a house/shovel but don't want to pay the full cost of one. My house isn't really the business, I'm the business and the house is just my only product and capital asset.

Third - it's not very easy to get a $100k - $500k margin account to buy stock so the average person isn't as hurt by a stock bubble. Mortgages remain fairly easy to get, 9 years post reforms.
Where the tides of fortune take us, no man can know.

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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by Pajamas » Wed Jul 11, 2018 8:14 pm

Engineer250 wrote:
Wed Jul 11, 2018 7:49 pm
If I am a landlord, I am running a business where I am renting out my house/shovel to people who need a house/shovel but don't want to pay the full cost of one. My house isn't really the business, I'm the business and the house is just my only product and capital asset.
I would even go so far as to say the core of real estate investing is not really the property, it's the financial aspects of the business. Especially with equity REITs. it's all about the numbers. When a REIT is overly focused on the physical properties, that's not a good sign. The live and die on their access to and management of capital.

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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by stoptothink » Wed Jul 11, 2018 8:39 pm

Utahdogowner wrote:
Tue Jul 10, 2018 1:55 pm
I think the guy that Josh talked to that "inspired" the article was me. I know I broached this topic with him at the conference, but lots of people talked with him. I certainly wasn't thinking it was a national bubble, more local; we bought ~3y ago for 250k a 3200sq ft split level home that we have come to hate the floor plan. Now that we've retired my student loans we are thinking of moving. As we started looking ~18m ago, our home had already appraised for 115k more, and the higher end homes all seemed to jump by more than that 25%. Mettle's argument in person was that Salt Lake metro is going to be the next San Fran / Portland w/ sustained year-over-year growth because of the tech industry moving to Utah and an inland port that Salt Lake has been trying to get built. I didn't buy it in person, and after reading his article, I'm still not sure I believe him.

That being said, the comments about not wasting your life waiting for the bubble to pop are apropos. The problem is we just want to move, we don't NEED to move, and being the cheapskates we are, we don't want to pay top-dollar to move.

Also, these grown-up decisions are really difficult. :shock:
We're just south of you. Our ~1500sq. ft (town)home was built in 2013 and sold new for $149k, we bought for $190k in 2015, and now we could easily sell for $250k. While we bought well below our means, I don't know how some of my newer neighbors do it; we're talking mortgages 5x+ of household income. We'll likely have our home paid off in ~3yrs and my wife would like to get her dream home, but like you, we are just going to sit, hoard cash, wait for it to pop and then buy something in cash (we have no intentions of ever selling current home). I'd actually prefer to stay where we are forever, but I'm probably going to ultimately lose that one.

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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by willthrill81 » Wed Jul 11, 2018 8:47 pm

Engineer250 wrote:
Wed Jul 11, 2018 7:38 pm
willthrill81 wrote:
Wed Jul 11, 2018 3:40 pm
I find it interesting to note that many do not view stocks' annualized real returns of 12.78% from 2009 until now to be indicative of a bubble in that market, but many here view real estate prices increasing by an inflation-adjusted 3.1%* from the bottom of the last recession, then real estate is certainly in a bubble.

I don't think that a 3.1% real annual increase is sustainable over the long-term, but remember that is measured from the very bottom of the trough of the worst economic crisis in decades, one which impacted real estate far more than did nearly all prior recessions. Growth in prices may simply slow down in the future without ever making a significant retreat.

*According to the Federal Reserve, the median price for U.S. homes sold at the bottom of the last trough (Q1 of 2009) was $208,400. The same price is now $328,000. After adjusting for inflation, that's a cumulative increase of 32%, an annual increase of 3.1%.
Median home price in my area was $300k at the lowest in 2009. Now it's at $595k. I think that comes out to a 7.9% average increase over 9 years.

Per my prior post, using non-inflation dollars, real median household income in my county peaked at $62k in 2008. It's now $70k real. My point is that the numbers are (if you adjust for inflation) the same as peak housing in 2008. So if we aren't in a bubble now, we weren't then either. The problem is, people's median wages have barely tracked inflation (when it was low) since the recession while home prices have gone up a lot faster. So I suppose what do you use as a starting point?

If you say $595k is inflation adjusted for $500k then, so everything's fine, then you are saying peak housing in 2008 was also fine and not a bubble.
There may well be a bubble in your area. The numbers I cited were for the U.S. as a whole.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by willthrill81 » Wed Jul 11, 2018 8:50 pm

Engineer250 wrote:
Wed Jul 11, 2018 7:49 pm
willthrill81 wrote:
Wed Jul 11, 2018 3:40 pm
I find it interesting to note that many do not view stocks' annualized real returns of 12.78% from 2009 until now to be indicative of a bubble in that market, but many here view real estate prices increasing by an inflation-adjusted 3.1%* from the bottom of the last recession, then real estate is certainly in a bubble.
First - many people do think we are in a bubble. User WhiteMaxima I think pulled a bunch of money out this year, and every year there are posts of people doing similar.

Second - investing in a business is not the same thing as purchasing an item. If I buy a shovel that I intend to use, I don't expect my shovel to gain in value unless there's some shortage of shovels. My house doesn't have an R&D department, doesn't become more efficient unless I put money into it, and doesn't generate income for me assuming I live in it. If I am a landlord, I am running a business where I am renting out my house/shovel to people who need a house/shovel but don't want to pay the full cost of one. My house isn't really the business, I'm the business and the house is just my only product and capital asset.

Third - it's not very easy to get a $100k - $500k margin account to buy stock so the average person isn't as hurt by a stock bubble. Mortgages remain fairly easy to get, 9 years post reforms.
I never claimed that housing prices should be escalating at 3.1%. I actually said that I don't think that that's sustainable. But given the fact that the economy is stronger today than it was in at the bottom of the housing market's trough, the data do not convince me that the current real estate market is as 'bubbly' as it was pre-2008. But that's just my opinion.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by willthrill81 » Thu Jul 12, 2018 11:10 pm

I just remembered part of the reason that inflation-adjusted housing prices have been steadily increasing: homes have gotten bigger. According to Statista, the median size of the U.S. single family home was 2,057 sq. ft. in the year 2000 and peaked in 2007 at 2,277 sq. feet before falling and not surpassing that level until 2012 (2,306 sq. ft.). Today, that number is 2,426 sq. ft., 6.5% larger than homes were right before the housing crash and 18% larger than in the year 2000. This has been an ongoing trend in the U.S. for decades: home continue to get bigger even as median household size (number of people) gets smaller.

This along isn't likely as big of a factor as some others in accounting for real estate's price increases over the last decade, but it's definitely a contributing factor.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: WCI blog post - "This Real Estate Bubble - Likely Isn't a Bubble"

Post by ReformedSpender » Fri Jul 13, 2018 1:42 pm

willthrill81 wrote:
Wed Jul 11, 2018 8:50 pm
I never claimed that housing prices should be escalating at 3.1%. I actually said that I don't think that that's sustainable. But given the fact that the economy is stronger today than it was in at the bottom of the housing market's trough, the data do not convince me that the current real estate market is as 'bubbly' as it was pre-2008. But that's just my opinion.
Home prices have out-paced wage growth since the trough of the recession, increasingly so in the last 12-24 months making it harder and harder to buy.

Revisiting a comment I mentioned earlier in this thread, I've confirmed with close realtors locally that the majority of folks are taking on mortgages 4 to 5x income, well over the 3x or 30-35% mortgage to income ratio lenders once suggested. Also rarely have enough to put more than 5 to 10% down.

Currently, folks are stretching themselves further than before to own in most cases imo. What influence that has on other business sectors is yet to be seen.
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

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