jIM wrote:
- quote -

with no risk and no transaction fees. Then after the house is paid
off, you can start throwing all that monthly income into stocks, maybe
invest in riskier stocks than normal because you're not worried about
the house.

What gets tricky is that CD rates keep rising, ING now offers a 5-year
now at 4.6%. When there's 10 years left on the mortgage and if CDs
are at a higher rate, I might change courses. Maybe spend 5 years
paying the standard house payment and buying a 5-year CD each month to
cover the payment when it matures. Then the last 5 years would simply
be coasting. Seems kinda silly to have 60 CDs though

I also read once that if current rates rise high enough above your
mortgage rate, the lender might offer deals to pay off your house for
less than the full balance. It's favors them but might be worth it if
you're hungry to finish the mortgage and get bragging rights. But
wouldn't you need that amount liquid? It's all so involved sometimes.

I think the increase in housing prices (even for new construction) is
OK and not cause for alarm.

The alarm will be when people try to sell a house there is no market
for, or HAVE to SELL and take a loss.

I have not heard/ read about cases where house owners are losing money
on selling their property. I think if 25-50% of owners start selling
at a significant loss, then the problems will be with banks, not
existing home owners.

The other alarm is the type of credit banks are giving to consumers.
ARMS were pointed out earlier and I assume other lending practices
which would make a private individual go broke are where issues will be
seen in 2-5 years.

And the square map has flat mountains... unless you wrinkle the paper...

the tax man sees things as investments and returns... in the era of a
possible real estate bubble I would comment owning one's home is a good
thing, but owning more property than one needs may not be the best way
to invest/make money.

Getting a 4% return after taxes on something you need (a house) is a
GREAT thing, IMO. You have to live somewhere...

"Mike Stone" <mikews[at]gmail.com> wrote in message news:Ee4Pe.46737> Bottom line: housing is slowing down. In the coming years prices will
- quote -

<boggleWhat !?!??

You mean the earth *isn't* square?

I'm looking at a map hanging on my wall that shows
the earth. The edges of the map are perpendicular,
90 degrees, and of equal length. Looks to me like
the earth *is* a square.

<grin

"Will Trice" <wwtrice[at]paragondynamics.com> wrote in message
news:43108E3D.7010404[at]paragondynamics.com...
- quote -

Bingo. My reason: It's more economical. The appartment
I was renting in college for $250 a month (about 16 years
ago) is now renting for $700 a month. Almost 3 times what
it was renting for way back when.

For my house, the payment will be the same. It will
be the same next year, the same the year after that,
and the same in 5 years. It won't go up. Ever.

- quote -

Not me brother. We put 30% down, got a 15 year loan,
and pay substantial extra every month on principle.
The 15 year loan will be paid off in a bit less
than 10 years.

We go the other way -- the shorter the time period
that we're paying interest, the less we'll spend
on interest, and the quicker we'll free up the
payment. Once it's paid off, the monthly payment
is cash in our pockets. To each his own on this
one.

Michael Sullivan wrote:

- quote -

There's actual a mathematical problem called Gambler's Ruin which
says that if a gambler starts with finite resources, then as time
goes to infinity, he will lose everything he has :-)
http://www.jimloy.com/gambling/ruin.htm

Anoop

"Michael Sullivan" <mes[at]panix.com> wrote
- quote -

It was bad wording.

I agree any investment vehicle has risks.

Elle <elle_navorski[at]nospam.earthlink.net> wrote:

[much snipped because we mostly agree and just had our wires crossed]

- quote -

I need to argue with the logic of this. Consider:

"gambling money on coin flips and going double-or-nothing until you end
up ahead or run out of money is not risky, because most of the time you
eventually win."

Anyway, I really *don't* mean to suggest that investing in boom
real-estate is no different than gambling on coin flips. Only that your
statement doesn't really get at what "risk" means.

Investing in booms *is* always risky, because many of them *do* go bust
(whether most do or not is irrelevant). Of course, investing in busts
is *also* risky, because many of them get a lot worse. All investing
is risky. The question a potential investor should be asking is not
"is it risky?" but "how much risk is there and what is my justification
for taking it?"


Michael

Elle wrote:
- quote -

Well, I think I have to agree with Tad. In this newsgroup, many have
argued that the typical homeowner should not treat the primary home as
an investment, though obviously it is to some extent. If this is true,
then the real reason to own a home is not equity, but "ownership
rights". The owner can change the colors, put up wallpaper, tile the
kitchen, whatever. The renter typically has to move to get new stuff,
or put in all the work knowing that the landlord could take the work and
rent it to somebody else. You still get this with an interest-only loan
plus you get any equity upside from price appreciation (with the
downside as well, of course).

The primary reason that I own a home is that owning became more
economical than renting. I locked in a "low" interest rate and paid
very little down to keep cash free for investment, so maybe my motives
are somewhere between Tad's hypothetical B and Andy's hypothetical B.
Of course, my actions do not make a trend...

-Will

"Tad Borek" <tadborek[at]pacbell.net> wrote
- quote -

It could, in the sense that the sum of the {interest being paid + cost of
home maintenance + cost of property taxes} is a lot less than local rent.
Because that's all a person paying only interest gets: a rental with the
added headaches of ownership upkeep but without any real ownership (equity!)
at the end. That real ownership--is why people bother to own.

Of course if you want to argue that the boom will last a long time, so the
interest only purchase is like a "growth stock" investment, you could. The
risk is high, but you could.

I think your argument is out in left field but might be viable in some very
unusual circumstances, and strictly for serious risktakers. I'm sure you
know all this but it seems to me the dreamy-eyed tone of your post could be
confusing to others.

Andy wrote:
- quote -

Andy,
I hear you, there's the economic argument and then there's the realistic
one! It doesn't work as well if you look at a 25 year old and roll it
forward, if you assume that the money that would go towards principal
was spent instead of saved/invested.

But I think the thesis is a truism, with some examples - eg the mundane
one: retirees A and B, both with $100k in IRAs and a $150k, fully paid
off home - both retiring today at age 65. Let's make it easy and give
them the same life span, until age 85. If A dies in 2025 with a house
worth $300k and still fully paid off, and B dies living in a $300k house
in which he has zero equity, B has consumed that much more during
retirement. A passes the house to the kids, B doesn't, but traveled a
lot more. Right now that could be possible with a reverse mortgage but
the trend that I think could take shape is that these things begin much
earlier, and people simply don't get to the point of having $150k fully
paid off homes. Whether they end up in your two outcomes - A richer,
because B never saved the money, spent it all when young instead - is an
open question.

I should emphasize, I don't think this is happening now - it's just one
of those things I thought about when more people started using
interest-only mortgages - what if this became a trend? At first it seems
kind of irresponsible, but then you think it through there's some sense
to it - why bother owning a home outright? Especially today when homes
are so expensive relative to earnings, and money is so cheap. If the low
interest rate could be locked in (it can't, currently), couldn't that
make sense? This is especially easy for me to ponder as a
(rent-controlled) renter who is paying ~40-50% of the current ownership
cost for the identical unit, and without socking away a big lump sum
into a down payment. To me that's not too different than being an
interest-only buyer - though it avoids up/downside benefits/risks.

And the numbers seem to show that while a lot of boomers have
significant assets, there's this broad and probably irreversible trend
underway where each of us has personal responsibility for our pensions -
companies don't provide them, and it's unclear whether Social Security
will cover the nut even if you move to the middle of Nevada. Is this one
of those "megatrends" to be aware of? If so...the biggest asset sitting
on America's balance sheet is home equity, and it's there even for a lot
of people with no other invested assets.

-Tad

"Andy" <ineverevercheckthismailbox[at]yahoo.com> wrote:

- quote -

We actually had two national influences in the early '80s. One was the decline
of inflation (and resulting increse in real interest rates) and the other was
the tax law changes that took much of the juice out of investing in residential
real estate.

- quote -

Two more: Household formation and inflation rates.

One more that I don't know how to quantify is baby boomer housing preferences.
Right now, most of them seem to be keeping their present housing and maybe
adding a vacation home. Some of the older ones are now selling their regular
homes and moving to the vacation home full time. Over the next 10 to 20 years,
many will be seriously downsizing their residences by moving into
condos/retirement living/apartments.

-- Doug

"Michael Sullivan" <mes[at]panix.com> wrote
- quote -

Lately I'm thinking the banks have factored in defaults the same way credit
card companies factor in a certain amount of people never paying their
bills. That is, even if X% of the payers declare bankruptcy, they still have
(100% - X%) paying whopping amounts on interest only mortgages, etc.

- quote -

If there is any bias in the articles from the FDIC site, I think the above
(re panics) is it. The authors want to promote a feeling of calm.

And yet, I just don't see how they did so falsely. Overall, I think the
articles are a warning to people that where they are may be a boom about to
go bust. But it may not be, too. I like that it gives some precise figures
on the coasts. Also, I think the articles do put a reasonable amount of
emphasis on the creative financing going on, and how risky this is.

- quote -

If you go back to the first post I made to this thread, then you will read
that I attest that the table to which I provided a link illustrates that
booms are spotty, rather than national.

Otherwise, I think it illustarates that, no, investing in booms is not
always risky, since many do not go bust.

I think the thread speaks for itself at this point. Overall, I think it's
been a productive discussion, even if we all don't agree about the
usefulness of this particular study.

Elle <elle_navorski[at]nospam.earthlink.net> wrote:
- quote -

Well, you might consider their mission, which is to insure deposite. I
would assume they care greatly about the potential for a financial
crisis where so many mortgages default that banks with typical
portfolios face failure.

I don't see why they would (or *should*) care that a bunch of
real-estate investors take a bath because they invested in a boom
property at the wrong time, unless the problem is so widespread as to
cause panics and bank failures. But if I'm one of those investors, I
care about taking a bath.

- quote -

I already did so. I would adjust for inflation in both cases. I would
show data for worst 5 years even in places that didn't meet my
"highlight in red" test, whatever that was.


- quote -

I didn't see those (unless you mean the "there were 142 busts if we did
X" stuff in the explanation). But I didn't look all that hard for the
raw data either.

- quote -

Yes, and I'll give them credit for that. The problem is that *you*
posted a link to the chart as an apparent contradiction to the idea that
investing in a boom is riskier than normal. I think you're wrong, and
that the data doesn't back you up at all. Nobody here has claimed that
you should run, run, run from real estate automatically.

- quote -

Right. And in Akron in 1978-83, you may have failed to achieve this. I
don't know the fundamentals in Akron in 1978, but if they looked
anything like SF in 2005, you'd *definitely* have failed to achieve
this. A pattern like you saw in Akron in 78-83 happening in SF for the
next 5 years (high inflation, significant real fall of house prices
despite low nominal appreciation) would be a *very bad* outcome for
anyone buying property in the bay area today.

- quote -

You might want to keep your day job and give up the psychiatric
diagnosis.

You have absolutely no understanding of the metric I am using to
determine when I would buy real-estate or what my risk tolerance is.
The fact that I am "concerned about" a risk doesn't mean I refuse to
take it or stay up nights worrying once I have done so. It means I try
to make an assessment of the potential downside and the probability of
experiencing it, and balance that against similar expectations on the
positive side. Looking at rents vs. house prices in *my* market, even
though there's been a big run-up in prices, I would be willing to buy.
Real estate stayed way undervalued here after the last crash (early 90s)
because people were unreasonably afraid of it. It's got a long way to
go before it gets so high I wouldn't buy. But this market is totally
different from california, where a large share of a house's current
price appears to be based on market expectations of continued
significant real appreciation.

- quote -

Duh. If you think I'm (or Tad or Rich is) predicting what the markets
will do in the short term, you need to go back and reread what you're
responding to.

- quote -

I don't dismiss the article, I just don't like the chart. The fact that
they discuss their decisions and have their reasons for making them
certainly puts them head and shoulders above a lot of stats-generators,
but it doesn't change what I believe to be a false impression that the
chart generates when looked at from the context of the discussion in
which you posted the link.

- quote -

Of course not. I thought I made that very clear in the all the stuff
you dismissed as "hand-waving speculation." It would not even surprise
me very much if things worked out so that people who buy right now do
much better than people who don't 5-10 years down the road. That's
variance. The fact that we can't predict what will happen with
pinpoint accuracy doesn't mean that it's impossible to say anything
useful at all.

What I think is that the long term prospects of those who eschew that
market today (and I'm talking specifically about the sf bay, not all
coastal markets, some of which were seriously undervalued relative to
incomes/rents before the run-up) are significantly better than those of
people who buy in now at current prices. I think the prospect of a
signficant downturn during the next 10 years, or long-term stagnation
over that time (real appreciation <=0 for a 5+ years of it) is much
higher than the prospect of continued significant real appreciation
(maybe 80-20 if I had to throw out a guess), and that the prices in the
SF bay and much of CA reflect an expectation of the latter. Anything
else will end up being a bad deal for current buyers.


Michael

Tad Borek wrote:

- quote -

I am not sure I accept your thesis that owning a fully paid off home
reduces your lifetime consumption.

Lets use a simple hypothetical: Two guys A and B who both make $40K a
year after taxes from age 25 to 65. They both buy homes worth $200K
with no money down. The difference is that A takes out a 15 year
mortgage at 5%, and B takes out perpetual interest only loan at 5.5%
(banks will charge more because there is is less equity). They both
trust in social security, so they both spend the left over money each
month on consumption. In the early years A's total consumption lags
behind B's because he has the higher mortgage payment. At age 45,
when A pays off his mortgage, A has only been able to spend $45K on
consumption while B has been able to spend $165K. B sure looks like the
winner at age 45! However, check in 20 years later at age 65, and A's
lifetime consumption is $594K while B's is only $440K. It gets worse
after that because after retirement B still has his monthly payment
while A doesn't, which means that A's lifetime consumption grows by
$916 more than B's for each additional month that passes. By age 75 A
is now $263K ahead of B in lifetime consumption. Now lets say both A
and B sell their houses and buy a smaller place for half the price. A
now has an additional 100K more in equity to spend on consumption that
B does, raising the lifetime differential in consumption to $363K.

Clearly if your goal is to maximize lifetime consumption you should pay
off your house as quickly as possible.

Andy

"Michael Sullivan" <mes[at]panix.com> wrote
- quote -

What do you think "*their* purposes" are again?

- quote -

How would your decisions differ? Can you give a few examples?

The authors explained the basis for their decisions. There's no
leger-de-mein going on here. If one does not like the assumptions, they give
numbers for other sets of assumptions. Plus, the authors point out the
possible flaws in their analysis.

- quote -

Well shucks no, I wouldn't be concerned, as a person who buys a home
knowing it may or may not appreciate in the very short-term. I have bought
my homes with the intent of having a nice standard of living, and the hope
that they were cheaper and more comfortable than an apartment when I'm done
living in them after many years.

snip
- quote -

Huh. I'd say you probably should never buy a house--either to live in or as
an investment for retirement--as the risk is just too great for you.

Because foreseeing what the markets will do in the short term (like five
years) is pretty darn hard.

- quote -

I really don't know what that means, other than being a cliche.

Prices that go up do not in fact always come down, unless you want to argue
that inflation catches up yada yada. There's no piper being paid; it's not a
zero-sum game.

snip stuff that is speculation with, it seems to me, a lot less
justification than any alleged speculation at the links I provided.

Your opinions are welcome. I just don't dismiss the article like you do. Nor
do I think it sends a conclusive message or a prediction of any kind.

Are you prepared to bet that the coastal markets will collapse, suddenly and
disastrously, within the next year?

Elle <elle_navorski[at]nospam.earthlink.net> wrote:
- quote -

I've made no such claim. I think they were making perfectly reasonable
decisions for what I see as *their* purposes. If I were doing a table
to analyze the riskiness of investing in real-estate during booms, I
would make *very* different decisions. I think the ones they made
confound the issues that an investor faces.


- quote -

About which the FDIC should be concerned? No. About which I'd be very
concerned if I owned real estate in Akron in 1978? Hell, yes!

- quote -

When I use the term, I'm not intending to restrict it to those who don't
live in their property. Whether typical home buyers think of themselves
as investing in real estate or not, that's what they are doing, and they
*are* real-estate investors subject to most of the same the benefits and
risks of equity ownership.

- quote -

In terms of a decision to buy vs. rent, I'm not just worried about going
bankrupt if things don't work. Any result that causes my future net
worth to be much smaller under one scenario than another is a risk that
I'm concerned about. If I pay much more in mortgage interest for 5
years than I would have in rent, even after the tax deduction and not
considering expenses, and at the end of the 5 years, my house is worth
exactly what it was when I bought it -- I'm going to be very upset with
the results of my decision to purchase, especially if I could have
foreseen the problems when I bought.

- quote -

Well, it's pretty common for bubbles not to burst when the contrarians
start thinking they should. It's par for the course to keep going in
contravention of logic long past the time when people first start
noticing a market unglued from the fundamentals. It's also very common
to have long periods of stagnation or slow negative growth following a
big bubble rather than an actual crash. But unless something really
fundamental has changed about the market, the piper must be paid
sometime. Historically, fundamental market changes are much less
common than bubbles, and usually have a bubble component to them (looks
like the stock market boom of the 90s is going to be a good example but
it's hard to say for sure). You have a new logic which changes prices,
but you also have a lot of speculation based purely on the performance
that change generates which doesn't follow the new logic any more than
the old.

Note, I wouldn't have advised people to sell all their stocks in 2000,
and I don't think people are stupid to buy all real estate now. I *do*
think that it was worth selling the most radically overvalued stocks in
early 2000 and before that. And I *do* think it would have been really
stupid to stretch hard to invest a large share of your portfolio in a
basket of internet companies with no profits and huge P-S ratios. And
I thought so as early as 1998, and you can read posts about it in the
google archives.

Similarly, I doubt I would advise someone with plenty of other assets to
divest from real estate in SF or some other boom town unless it was
really eating them alive to maintain it. But I certainly think it would
be foolish to to buy something there *now* unless it was going to be a
fairly small part of your overall portfolio. Since fairly standard
houses are costing close to a million dollars now, you'd need a sizable
net worth for that decision to make sense, IMO. Many of the people
buying out there are asking for trouble.


Michael

"anoop" <ghanwani[at]gmail.com> wrote
- quote -

An article at bankrate.com apparently just today noted there is an update to
the article that provided the table above. I didn't dig enough to see
whether 70% appreciation had been atteined, but you might be able to extract
it from the information at:

The bankrate.com article (which summarizes the update) is at
http://www.bankrate.com/brm/news/mor...ldYouWait2.asp . Excerpt:
"In an update based on newer home-price data, Angell and Williams calculate
that 55 metro areas were experiencing booms in 2004 -- 'the highest
proportion of 'boom' markets nationwide in the 30 years of historical price
data,' they write.

The FDIC Angell and Williams update:
http://www.fdic.gov/bank/analytical/...050205fyi.html

Ninety-one percent of the real estate boom cities are on the two coasts.

Andy wrote:
- quote -

I think one wildcard in this is that it IS possible that attitudes
towards home ownership will change, or even are in the process of
changing. Owning a fully paid off home does reduce your lifetime
consumption - home equity is money that could be spent on stuff, but
instead it ends up passing on to heirs. It could become standard for
people to accumulate little or no home equity, in effect renting your
home from the bank (in the form of interest payments). In the extreme
you would just pay interest and never repay principal.

And if that happens, and it's true that home prices are set by the level
of monthly payment that owners can afford, then logically the effect of
a widespread trend towards long-term, interest-only mortgages would be a
step-up in prices.

Of course right now this isn't really happening, and all the factors
aren't in place to let it happen. Interest-only mortgages aren't
long-term and I can think of reasons they might never be (who would want
to finance that transaction? you'd just buy property instead so you get
the upside benefit in addition to the downside risk). So any current
price trend influenced by interest-only purchasers could be only a few
rate hikes away from being reversed. But looking say 10+ years from now
I wouldn't rule out some new trends in home ownership...as the low
savings rate takes its toll and people regard home equity as idle and
usable wealth.

-Tad

anoop <ghanwani[at]gmail.com> wrote:

- quote -

Remember that bust is defined strictly here as a period when home prices
at some point had gone -15% within 5 years. It's possible that some
locales which saw no red had long problematic declines that weren't
quite that severe. Boston/Cambridge is a good example. Doesn't show up
as red on that chart, but you can bet anyone who bought there in 1990
was not at all happy until the recent boom picked up around 6-7 years
ago. It was only marginally better there than in other areas of the
northeast which showed up as "busts".

Remember also that a 20% loss wipes out a 25% gain.

- quote -

I'm not sure, but note that this number indicates the acuteness of the
boom, not it's overall size. It shows the maximum 3 year increase in
prices, not the total run-up. So a really long boom with a max 3-year
increase of 50% might actually have caused greater overvaluation than a
short spiky one. The other thing is that this chart just shows prices,
not the severity of overvaluation. Some of these booms might have been
matched with a similar boom in population or income, both of which drive
up the natural price of housing in an area in a sustainable way. The
crazy thing about the current situation in the bay is that it comes at a
time when that area is *losing* population and has stagnant income
growth. The previous booms have happened during times of fast
population growth and booming regional economies -- both things that
tend to make higher prices sustainable.

There's a sense in which the current real estate boom really is
different, and not in a good way. Florida is the one place that might
not be crazy. It makes sense that those prices are moving to anticipate
the reality of an aging population and a huge number of people reaching
retirement age in the next 5-15 years. Also, FL real estate has
historically been very cheap relative to the rest of the country, but
there aren't obvious reasons for that. Well, I can't really understand
why anybody would want to live there, but the population growth
indicates that's just me. I know someone selling a house in Port St.
Lucie who expects to get around $275K for a really nice ranch: 2000 sf,
fabulous kitchen, screened-in pool area in the backyard, etc. This is
an area that's tabbed as way over historical norms.

That house would sell for at least that where I live (which is no more
built up), and easily *twice* that in towns as close to the beach as she
is (about 1-2 miles). I suspect that in PSL at least, the historical
norms may have been more off than the current prices are.


Michael