Good point. Hmmm....well housing does poorly in a high interest rate environment. So what investment does "OK" enough to return 7% during "normal" times, but kicks butt during high interest? Banks? Utilities? SM
That's what i'm trying to figure out (in general) I'm thinking about high profit high dividend value companies like MO and VZ that I can also write covered calls against... I could get my yield up to 10-15% with any decent amount of luck. Energy transportation is very high yielding right now... 7-9% But none of the analysts like them because they believe the market may be oversaturated with too many ships/etc. by next year.
More people rent, rent prices go up (duh)... http://www.washingtonpost.com/wp-dyn/content/article/2006/07/04/AR2006070400969.html Rents Rise as Apartment Market Is Squeezed
Interesting article, thanks. Here in the Orlando area people are beginning to have a difficult time finding affordable rentals since so many rentals converted to condos. Of interest though is the fact that two large condo projects were quietly cancelled due to the expected glut of condos in the area.
http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?GT1=10022 By SmartMoney I have something un-American to confess: I rent an apartment despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer. I normally write about stocks for SmartMoney.com, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former. Stocks versus houses: Returns Shares of businesses return 7% a year over long periods. I'm subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation, or "real," returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.) Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book "Stocks for the Long Run," he finds that real returns averaged 7% over nearly seven decades ending in 1870, then 6.6% through 1925 and then 6.9% through 2004. The average real return for houses over long periods might surprise you: It's virtually zero. Shares return 7% a year after inflation because that's how fast companies tend to increase their profits. Houses have their own version of profits: rents. Tenant-occupied houses generate actual rents, while owner-occupied houses generate ones that are implied but no less real: the rents their owners don't have to pay each year. House prices and rents have been closely linked throughout history, with both increasing at the rate of inflation, or about 3% a year since 1900. A house, after all, is an ordinary good. It can't think up ways to drive profits like a company's managers can. Absent artificial boosts to demand, house prices will increase over long periods at the rate of inflation, for a real return of zero. Robert Shiller, a Yale economist and the author of "Irrational Exuberance," which predicted the stock-price collapse in 2000, has recently turned his eye to house prices. Between 1890 and 2004, he says, real house returns would've been zero if not for two brief periods: one immediately after World War II and another since about 2000. (More on them in a moment.) Even if we include these periods, houses returned just 0.4% a year, he says. The average pundit, planner, lender or broker making the case for ownership doesn't look at returns since 1890. Sometimes they reduce the matter to maxims about "building equity" and "paying yourself" instead of "throwing money down the drain." If they do look at returns, they focus on recent ones. Those tell a different story. Between World War II and 2000, house prices beat inflation by about 2 percentage points a year. (Stocks during that time beat inflation by their usual 7 percentage points a year.) Since 2000, houses have outpaced inflation by 6 percentage points a year. (Stocks have merely matched inflation.) Stocks versus houses: Valuations But though stock returns have come from increased earnings, house returns have come from ballooning valuations, not increased rents. The ratio of share prices to company earnings (the price-earnings ratio) has remained relatively steady. It's about 16 today, close to both its 1940 value of 17 and to its 130-year average of about 15. Not so the ratio of house prices to rents. In 1940, the median single-family house price was $2,938, according to the U.S. Census Bureau, while the median rent was $27 a month, including utilities. That means the ratio of prices to annual rents was 9. By 2000, the ratio had swelled to 17. In 2005, it hit 20. We can adjust for the size of dwellings, but it doesn't make much difference. The ratio of single-family house prices to three-bedroom apartments is 19. In SmartMoney's hometown of Manhattan, where more detailed data is available, the ratio of condo prices per square foot to apartment rents per square foot is 22. Video: Should you rent or buy? Two main events have caused house valuations to inflate since World War II. First, the government subsidized housing by relaxing borrowing standards. Before the creation of the Federal Housing Authority (FHA) in 1934, homebuyers who borrowed typically put up 40% of the purchase price in cash for a five- to 15-year loan. By insuring mortgages, the FHA permitted terms of up to 20 years and down payments of just 20%. It later expanded the repayment periods to 30 years and reduced down payments to 5%. Today, down payments for FHA loans are as low as 3%. Aggressive lenders offer loans with no down payments or even negative ones so that homebuyers can borrow the full purchase price plus closing costs. Some require little documentation of income, assets or ability to pay. That means more Americans can win loans for homes, and they can win them for far more expensive homes than their incomes had previously allowed. Two-thirds of American households own homes today, up from 44% in 1940, even though the percentage of Americans living alone has tripled during that time. The ratio of house values to incomes has risen 260% in just under four decades. A second event helped boost house demand in recent years. Share prices plunged in 2000. The Federal Reserve, fearing that the decline in stock wealth would cause consumers to stop spending, reduced the federal-funds rate, the core interest rate that determines the cost of everything from credit cards to mortgages, to 1% by summer 2003 from 6.5% at the start of 2001. Since most of the cost of financing a house over 30 years is interest, monthly house payments shrank and demand for houses soared. In some markets a string of big yearly increases in house prices led to panic buying. Stocks versus houses: Conclusion For house returns over the next 20 years to match those over the past 20, the government and private lenders would have to "up the ante" by relaxing borrowing standards further. Given the recent attention paid to swelling foreclosures, that seems unlikely. I suspect real returns will turn negative over most of the next two decades, but that house prices won't necessarily dip. Since 1963, they've done so in only two years versus 18 for stocks. That's because homeowners mostly just stick it out rather than sell during soft markets. But if house prices remain flat, they produce negative real returns due to the creep of inflation. According to calculations made by The Economist in summer 2005, house prices would have to stay flat for 12 years with annual inflation at 2.5% for the ratio of prices to rents to fall from its 2005 perch to merely its 1975-to-2000 average. So to sum up why I rent: Shares right now cost 16 times earnings and over long periods return 7% a year after inflation. Houses right now cost 19 times their "earnings" and over long periods return zero after inflation. And they look likely to return less than that for a while. Questions and objections In what follows I've tried to anticipate and address questions and objections: "You can't live in your stocks" or "Renters throw money down the drain." Rent is the cost of owning shares with money you would otherwise spend on a house. Houses have ownership costs, too: taxes, insurance and maintenance. Rent costs about 5% of house prices each year if we apply the price-rent ratio of 19. House incidentals often cost around 2%. If you have $300,000 and a choice between spending it on a house or shares, you'll pay $6,000 a year in incidentals if you buy the house or about $15,000 a year ($1,250 a month) in rent if you buy the shares. But the shares will return $21,000 a year after inflation while the house will return zero. (My numbers work out even better than these. I pay a smidgen less than $1,250 a month for rent, while house prices in my neighborhood are far higher than $300,000.) Note that houses and shares have transaction costs, too. Homebuyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell. Share buyers pay $10 trading commissions, which are negligible for buy-and-hold investors. continued at link: http://articles.moneycentral.msn.com/Banking/HomebuyingGuide/WhyRentToGetRicher.aspx?GT1=10022
Well, that Smart Money doesn't understand leverage. This one does. I know that a 5% down payment leveraged at 1 to 20 will give a return of 80%. While I understand that renting is cheaper and you can invest the difference, I also know that rents will increase about 4% a year, whereas payments on fixed rate mortgages stay flat, and then dissappear. My father-in-law lives in a $400,000 house. His payment is a few hunder dollars. Can't imagine what his rents would be if he'd taken the author's advice.
You and your kin live a Simple Life. It's never about "investing the difference"... Since NO "investment" will EVER outperform leveraged real estate. The choice is usually very different. It is: (A) Capitalize a business that will give you wealth and FREEDOM. (B) Lock yourself forever into a safe, stationary piece of property... A place where you can live and die in comfort. The best way to kill your potential for real wealth... Is to spend your life locked into some property. Most people like your kin... Are "equity" rich, but cash poor for the rest of their lives... And SMUG AS HELL.
Also... The ** psychological makeup ** of a Pro Trader and a Real Estate Investor... Are 100% opposite and incompatible. You can be very successful at one or the other... not both. If everyone bought property INSTEAD of capitalizing a small business... The economy would grind to a halt... And we would all be freezing in the dark. Also... This is a trading forum... Not a Real Estate investment forum.
What I find ignored in the rent vs. buy equation, is when my job changes locations, I (a renter) can move easily. Homeowners often commute 1-2 hours each way, since they are locked into their home. My commutes are usually 20 minutes each way, because I usually rent a couple of miles from work. So how does losing 3 hours daily of your life on trains and subways figure into the equations??? I had 3 homes, and I see ZERO value of doing it if you have a job that moves you around more than once every 5 years (such as contractor/consultant, etc.)
"Homebuyers pay around 1% in closing costs when they buy and 6% in broker commissions when they sell." Simply not true. Many homesellers are selling themselves, not all realtors are getting 6% of every home they sell, and not every title co. is getting 1% of the full selling price of every home sale they transact. Ya can't just plug in #'s and expect facts when the #'s aren't factual.