Avoiding being priced out in Los Angeles by buying the stock market

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MNS CA
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Avoiding being priced out in Los Angeles by buying the stock market

Post by MNS CA » Wed Jan 10, 2018 1:57 pm

The stock market (Russell 3000) seems to be highly correlated with high end Los Angeles real estate (worth >$850K) (Case Schiller index).
https://fred.stlouisfed.org/graph/?g=hshd

The monthly correlation is >0.80.

The stock market goes up faster and has lower holding costs, but is a bit more volatile. So I think LA real estate is like a stock with beta less than 1.

Does this mean that if you're interested in buying a home in LA and are concerned about rising prices, buying more stock could be an effective strategy rather than buying a home sooner than you really need the space?

Are there any better strategies to keep pace with rising prices without buying early? There are some California focused REITs, but I don't know that any of these are more highly correlated with the LA market than the overall stock market.

riverguy
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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by riverguy » Wed Jan 10, 2018 2:39 pm

Pretty much all assets are correlated these days. Why do you think the stock market crashed when real estate did? I think you are overthinking this...

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by Tyler Aspect » Wed Jan 10, 2018 2:43 pm

My personal opinion is that in these high housing price cities it is no longer attractive to purchase a home there. Although I am sure the rental prices are also high, it is just a cost of staying in a place with good job opportunities.
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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by MNS CA » Wed Jan 10, 2018 11:42 pm

Tyler Aspect wrote:
Wed Jan 10, 2018 2:43 pm
My personal opinion is that in these high housing price cities it is no longer attractive to purchase a home there. Although I am sure the rental prices are also high, it is just a cost of staying in a place with good job opportunities.
Agreed. I'm in an unusual situation because my employer is giving me downpayment subsidy *if* I buy. It's a zero interest loan that is forgiven over 10 years of employment equal to roughly 15% of the purchase price for the kind of place I'd want to buy.

The problem is that I'm not thrilled with what I can buy right now, and keeping lots of cash on the sidelines while I'm looking at real estate seems very expensive.

I'm thinking, it should be safe to have a high equity allocation so I can save and afford more real estate because if there's an asset value crash, I'll win by buying real estate cheap with leverage, and if there isn't, the stock will go up faster than real estate.

The only danger would be if the stock market crashes and stays low but LA real estate maintains its price level. This seems unlikely to me.

I'm thinking if the stock market crashes, LA real estate probably goes down too by almost as much in percentage terms, and by more in dollar terms, since my net worth is less than the value of housing I'd buy with a mortgage.

Does that sound right?
riverguy wrote:
Wed Jan 10, 2018 2:39 pm
Pretty much all assets are correlated these days. Why do you think the stock market crashed when real estate did? I think you are overthinking this...

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by Tyler Aspect » Thu Jan 11, 2018 12:38 am

MNS CA wrote:
Wed Jan 10, 2018 11:42 pm
Tyler Aspect wrote:
Wed Jan 10, 2018 2:43 pm
My personal opinion is that in these high housing price cities it is no longer attractive to purchase a home there. Although I am sure the rental prices are also high, it is just a cost of staying in a place with good job opportunities.
Agreed. I'm in an unusual situation because my employer is giving me downpayment subsidy *if* I buy. It's a zero interest loan that is forgiven over 10 years of employment equal to roughly 15% of the purchase price for the kind of place I'd want to buy.
The conditional loan does not sound like a good deal; too many strings attached.

The problem is that I'm not thrilled with what I can buy right now, and keeping lots of cash on the sidelines while I'm looking at real estate seems very expensive.

I'm thinking, it should be safe to have a high equity allocation so I can save and afford more real estate because if there's an asset value crash, I'll win by buying real estate cheap with leverage, and if there isn't, the stock will go up faster than real estate.

I am recommending 25% bond allocation for your portfolio. This is just to limit your losses when a recession hits. My feeling is that real-estate price will drop less than stock, since some houses will no longer be offered for sale when the price is too low. This could cause some sell-side pressure to disappear.
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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by boglerdude » Thu Jan 11, 2018 5:18 am

Stocks and RE will move up and down together. Dont waste mental energy with market timing, instead research neighborhoods until you're confident (earthquake risk, read HOA CC&Rs, etc).

Areas near the current and future rail lines have been doing well
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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by adamthesmythe » Thu Jan 11, 2018 10:37 am

> Does this mean that if you're interested in buying a home in LA and are concerned about rising prices, buying more stock could be an effective strategy rather than buying a home sooner than you really need the space?

Not exactly. If you have a mortgage you have leverage. Few people, especially in LA, buy for cash.

> I'm in an unusual situation because my employer is giving me downpayment subsidy *if* I buy. It's a zero interest loan that is forgiven over 10 years of employment equal to roughly 15% of the purchase price for the kind of place I'd want to buy.

While this is not quite free money it is close to being free money. If the employer and job were stable enough this is a substantial inducement to buy.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by DVMResident » Thu Jan 11, 2018 11:37 am

MNS CA, what are the conditions of pay back?

Is it prorated per year of service? Or cliff forgiveness at the 10 year mark?
Is the full payment due at separation?

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by MNS CA » Thu Jan 11, 2018 10:58 pm

DVMResident wrote:
Thu Jan 11, 2018 11:37 am
MNS CA, what are the conditions of pay back?

Is it prorated per year of service? Or cliff forgiveness at the 10 year mark?
Is the full payment due at separation?
It's pro-rated per year of service. If I leave before 10 years are up, repayment is due within 90 days of separation, which probably gives me enough time to refinance or sell the place. In any case, I'd try to keep enough in my taxable account that I could pay the loan down if I had to. The job is very stable--I think I'll be there at least 5 years, probably more than 10. I'd probably only leave if I was moving to another city, In which case I'd want to sell anyway.

The subsidy itself is a good deal.

A challenge is real estate is super expensive right now (~$1,000 per square foot), both the stock market and the real estate market feel frothy, anti-homeowner tax reforms that should drop the real estate market don't seem to have been priced in yet (maybe another year or 2), and I need less space now than I may need in the future (family size may change).

I could stretch to buy more space than I need now in which case I'll have most of my assets outside of retirement tied up in real estate and probably feel like I'm being wasteful and self-indulgent--and taking a big risk. Since most of the return to real estate is imputed rental income, not appreciation, this just feels dumb.

Or I could buy a bit less than I might need in the future, but then I'm setting myself up to have to buy and sell again, which is a pain and expensive.

Or I could try to wait it out for a bit and find a way to keep pace with (or gain on) real estate without locking myself into real estate just yet.

But as a Poster above noted, not using leverage the way I would with real estate could make keeping up challenging unless the stock market keeps outpacing real estate.
adamthesmythe wrote:
Thu Jan 11, 2018 10:37 am
If you have a mortgage you have leverage. Few people, especially in LA, buy for cash.
Using leverage in a stock portfolio when Shiller PE/10 is > 30 is probably too risky for me.

Going 80 or 90 percent equities, maybe I could live with.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by DVMResident » Fri Jan 12, 2018 12:14 am

MNS CA wrote:
Thu Jan 11, 2018 10:58 pm
DVMResident wrote:
Thu Jan 11, 2018 11:37 am
MNS CA, what are the conditions of pay back?

Is it prorated per year of service? Or cliff forgiveness at the 10 year mark?
Is the full payment due at separation?
It's pro-rated per year of service. If I leave before 10 years are up, repayment is due within 90 days of separation, which probably gives me enough time to refinance or sell the place. In any case, I'd try to keep enough in my taxable account that I could pay the loan down if I had to. The job is very stable--I think I'll be there at least 5 years, probably more than 10. I'd probably only leave if I was moving to another city, In which case I'd want to sell anyway.

The subsidy itself is a good deal.

A challenge is real estate is super expensive right now (~$1,000 per square foot), both the stock market and the real estate market feel frothy, anti-homeowner tax reforms that should drop the real estate market don't seem to have been priced in yet (maybe another year or 2), and I need less space now than I may need in the future (family size may change).
100% I would take that deal.
Personally, I'd also try to buy a multi-unit rental RE and live in one unit. But that's another issue.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by ssquared87 » Fri Jan 12, 2018 1:44 am

Look I’m not going to comment on the financial aspect of this. I also live in LA and understand the struggle.

You seem early on in your career and I am relatively early in mine as well. One thing I have learned is that opportunities come up all the time. You may think that you’ll stay at this company for 5 years, but lots of things change.

If you come across something that’s a better opportunity do you want to have the loan as a factor in your decision? Strings like that tend to distract you from the more important questions so for me I’d rather not have that as a consideration in my career decisions

Also, you feel that housing in LA is frothy. If you buy a place now and decide to leave the company in 2 years and your underwater on the house cause the market declined, even if you sell the place in 90 days you may not get enough to cover your debts.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by unclescrooge » Fri Jan 12, 2018 2:09 am

MNS CA wrote:
Wed Jan 10, 2018 1:57 pm
The stock market (Russell 3000) seems to be highly correlated with high end Los Angeles real estate (worth >$850K) (Case Schiller index).
https://fred.stlouisfed.org/graph/?g=hshd

The monthly correlation is >0.80.

The stock market goes up faster and has lower holding costs, but is a bit more volatile. So I think LA real estate is like a stock with beta less than 1.

Does this mean that if you're interested in buying a home in LA and are concerned about rising prices, buying more stock could be an effective strategy rather than buying a home sooner than you really need the space?

Are there any better strategies to keep pace with rising prices without buying early? There are some California focused REITs, but I don't know that any of these are more highly correlated with the LA market than the overall stock market.
Did you not see the graph between 2000 and 2002? Looks like stocks went down while real estate went up.

Buy a condo in the valley. You should be able to buy something nice for $500k.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by DVMResident » Fri Jan 12, 2018 1:26 pm

ssquared87 wrote:
Fri Jan 12, 2018 1:44 am
Look I’m not going to comment on the financial aspect of this. I also live in LA and understand the struggle.

You seem early on in your career and I am relatively early in mine as well. One thing I have learned is that opportunities come up all the time. You may think that you’ll stay at this company for 5 years, but lots of things change.

If you come across something that’s a better opportunity do you want to have the loan as a factor in your decision? Strings like that tend to distract you from the more important questions so for me I’d rather not have that as a consideration in my career decisions

Also, you feel that housing in LA is frothy. If you buy a place now and decide to leave the company in 2 years and your underwater on the house cause the market declined, even if you sell the place in 90 days you may not get enough to cover your debts.
Sure, this could happen. There's always risks, but the OP has a huge tail wind: the +1.5%/yr equity per year from the employer. Plus the employment market is hot in LA. LA, especially west LA, has a lot of employers (google, youtube, yahoo!, SpaceX, EA, etc) opening offices. Even if the OP's employer goes bust, there are a lot of others.

OP, it comes down to your appetite for risk. Personally, a +1.5%/yr free equity would tip me into the 'buyer' group. Only people in the future will know if it was the right call.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by DrGoogle2017 » Fri Jan 12, 2018 1:28 pm

I’m never able to pull the trigger in LA area either. Not sure I want to live there either. Work maybe. Maybe that’s why there is a huge grid lock on major freeways to LA every day.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by golfCaddy » Fri Jan 12, 2018 5:05 pm

Where did you get the correlation from? Just eyeballing the FRED graph, it looks like the correlation should be well below 0.8.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by MNS CA » Sat Jan 13, 2018 9:09 pm

golfCaddy wrote:
Fri Jan 12, 2018 5:05 pm
Where did you get the correlation from? Just eyeballing the FRED graph, it looks like the correlation should be well below 0.8.
I ran the numbers in excel using the underlying monthly data, checking the "high tier" LA real estate from Case Shiller against Russell 3000. The correlation is above 0.8.

Check for yourself. I might have used average monthly instead of end of month--I don't remember.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by golfCaddy » Sun Jan 14, 2018 2:22 pm

MNS CA wrote:
Sat Jan 13, 2018 9:09 pm
golfCaddy wrote:
Fri Jan 12, 2018 5:05 pm
Where did you get the correlation from? Just eyeballing the FRED graph, it looks like the correlation should be well below 0.8.
I ran the numbers in excel using the underlying monthly data, checking the "high tier" LA real estate from Case Shiller against Russell 3000. The correlation is above 0.8.

Check for yourself. I might have used average monthly instead of end of month--I don't remember.
I don't know where you get Russell 3000 data(free), so I used the F-F mkt return and the change in the Case Shiller index and got a monthly correlation of 0.035.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by MNS CA » Tue Jan 16, 2018 12:58 am

golfCaddy wrote:
Sun Jan 14, 2018 2:22 pm
MNS CA wrote:
Sat Jan 13, 2018 9:09 pm
golfCaddy wrote:
Fri Jan 12, 2018 5:05 pm
Where did you get the correlation from? Just eyeballing the FRED graph, it looks like the correlation should be well below 0.8.
I ran the numbers in excel using the underlying monthly data, checking the "high tier" LA real estate from Case Shiller against Russell 3000. The correlation is above 0.8.

Check for yourself. I might have used average monthly instead of end of month--I don't remember.
I don't know where you get Russell 3000 data(free), so I used the F-F mkt return and the change in the Case Shiller index and got a monthly correlation of 0.035.
Just download the data from the chart from FRED in the OP. It's Russell 3000 and Los Angeles Case Shiller index for high-tier real estate. You need to set Russell 3000 to monthly so it lines up. You can use the link below and run the correlation on the first two columns.

https://fred.stlouisfed.org/graph/?g=hyfz

The correlation should be around 0.827.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by golfCaddy » Tue Jan 16, 2018 9:47 pm

MNS CA wrote:
Tue Jan 16, 2018 12:58 am
golfCaddy wrote:
Sun Jan 14, 2018 2:22 pm
MNS CA wrote:
Sat Jan 13, 2018 9:09 pm
golfCaddy wrote:
Fri Jan 12, 2018 5:05 pm
Where did you get the correlation from? Just eyeballing the FRED graph, it looks like the correlation should be well below 0.8.
I ran the numbers in excel using the underlying monthly data, checking the "high tier" LA real estate from Case Shiller against Russell 3000. The correlation is above 0.8.

Check for yourself. I might have used average monthly instead of end of month--I don't remember.
I don't know where you get Russell 3000 data(free), so I used the F-F mkt return and the change in the Case Shiller index and got a monthly correlation of 0.035.
Just download the data from the chart from FRED in the OP. It's Russell 3000 and Los Angeles Case Shiller index for high-tier real estate. You need to set Russell 3000 to monthly so it lines up. You can use the link below and run the correlation on the first two columns.

https://fred.stlouisfed.org/graph/?g=hyfz

The correlation should be around 0.827.
You can't directly correlate between two indices. The index represents an accumulated return in the stock market, not a monthly return. If you want the correlation between monthly returns, you have to first calculate the monthly returns.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by MNS CA » Thu Jan 18, 2018 2:14 am

golfCaddy wrote:
Tue Jan 16, 2018 9:47 pm
You can't directly correlate between two indices. The index represents an accumulated return in the stock market, not a monthly return. If you want the correlation between monthly returns, you have to first calculate the monthly returns.
You're right. My mistake. If you use monthly returns, the correlation is only 4.6%. If you look at annual returns, the correlation is 29%.
https://fred.stlouisfed.org/graph/?g=hAAY

I think there's more seasonality in real estate than in stock returns, so annual might be a better measure.

Any ideas for something better than the stock market to correlate returns with LA real estate?

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Returns correlated to Los Angeles real estate prices

Post by MNS CA » Thu Jan 18, 2018 3:11 am

[Thread merged into here, see below. --admin LadyGeek]

Are there any tradable investments whose returns are highly correlated with Los Angeles real estate prices?

Monthly returns correlations are pretty low for stocks, bonds, reits, and even California centric reits. Correlations are decent for stocks and annual returns (0.30).
https://fred.stlouisfed.org/graph/?g=hABy

Is there anything better, i.e., more highly correlated?

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Re: Returns correlated to Los Angeles real estate prices

Post by Valuethinker » Thu Jan 18, 2018 6:16 am

Shiller & Weiss were trying to create property derivatives by US metropolitan housing market.

I think they were launched but are not particularly liquid. But check Shiller & Weiss's web pages, and also google "property derivative US metropolitan housing" and see if you get anything (also House price future Chicago).

Your best hedge is the very thing itself-- a home in the greater LA housing market. Buy a condo and rent it out, for example (generally I prefer SFH because they hold value better in a downturn, in my opinion; but that may just not be possible).

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Re: Returns correlated to Los Angeles real estate prices

Post by FiveK » Thu Jan 18, 2018 4:20 pm


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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by LadyGeek » Thu Jan 18, 2018 4:48 pm

MNS CA - I merged your thread into here, which is a similar discussion. The combined thread is now in the Investing - Theory, News & General forum (investments tracking real estate).
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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by quantAndHold » Thu Jan 18, 2018 5:04 pm

We tend to think that things are always going to stay exactly how they are. Real estate in coastal Southern California will continue going up forever. The stock market will continue going up forever. Neither of these things is true. Real estate is cyclical. Just ask the people who bought in 2007.

You’re being offered a very nice deal, and I would be inclined to try to take advantage of it. But you may need to be patient and wait until the real estate cycle turns. Personally, if it were me, I’d have the money in bonds, so that you’re truly ready to take advantage when there is an opportunity.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by itstoomuch » Thu Jan 18, 2018 5:10 pm

MNS CA wrote:Does this mean that if you're interested in buying a home in LA and are concerned about rising prices, buying more stock could be an effective strategy rather than buying a home sooner than you really need the space?
It could be but IMO, a risky gambit. However, you may be in a position where you have to take the gamble.
We are trying for a 1031 in the Seattle area. It is very challenging.
Our 1st rental, Seattle has increased by 50% in 28 months and we have not been able to rise rent.
Our other rental is slightly negative CAP rate but we are gaining on valuation. It will be our retirement home in a year. We can tolerate the negative cash flow. It's appreciation is maybe 10-15% in 6 months.
Our son's place has appreciation 50% over 42 months.
Yesterday, We lost a bid on SFH with MIL basement. 14 bidders, cash won at 18% over ask.

In certain areas, even ~18% in VTI (2017) is insufficient to match housing cost increases. Your bet on stock is a risky gambit.
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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by A-Commoner » Thu Jan 18, 2018 5:39 pm

This is kind of what we did, although not by design. We lived in LCOL Midwest for 20 years. Housing was dirt cheap, so I saved a big chunk my income (physician) and invested aggressively in equities. Had an 80:20 equity:bond allocation for most of those 20 years. Hit the 2 comma net worth 8 years ago, and now have a healthy multiple of that. We pulled the trigger last summer and moved to Los Angeles and bought a $1million house. We would not have made that move or been able to afford it had we not been heavy in equities for 2 decades. So yes, the stock market kept us from being priced out of the LA housing market.

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Re: Avoiding being priced out in Los Angeles by buying the stock market

Post by A-Commoner » Thu Jan 18, 2018 5:58 pm

I checked Zillow to see how much the house we bought in LA 4 months ago is now worth. Holy Molly. It has jumped 9% in 4 months. I don’t believe it, and I don’t really care since we still have the bulk of our net worth in financial assets, and we are retiring in this house anyway (i.e we aren’t selling). But it is what it is.

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