The relationship between rents and prices is not as well correlated as some believe. I think SteveD has a valid point. When I appraise a investor owned rental property I will usually develop what we call an "income approach" to value. What we do is take the sales prices of rental properties and divide by the monthly rent. This is gives a "Gross rent multiplier" or GRM. Every one of these I have appraised, I get numbers all over the place. Even when the houses are very similar in price. There was even a study done a few years back by VCU that came to the same conclusion. I think a large part of this is due to the motivations of both the renter and the investor. On all these type assignments I ask the owner (borrower) how they arrived at the price they pay and the rent they charge and in 17 years I have never gotten the same answer twice. I imagine it is the same with the renter. Maybe some are more motivated by easy terms, or just don't have the money or interest in buying. I have talked to other appraisers about this and they have had similar experiences. But, you have to wonder when they get this out of whack like they have in some markets.
Crap man -- you bubble guys are going to get me to sell off one of my homes again. I listened to you guys once and it cost my 300K in future porfits. Luckily I got back into the strongest market in the country. Twice. Now, I am thinking about selling at least one home again. .
Jem, I for one have enjoyed your posts and wish you luck in whatever your future choices are. But I think this market gives one pause...(1) Greenspan has just sent the "guidance" letter to banks and S & L's about their lending practices. (2)The yield is narrowing, this may tighten lending as well. (3) Year over year numbers cannot keep growing as they are. When housing goes up 20% one year, the next 25%, and the next 40%....and income and population growth are meager at best...you have to wonder what exactly is happening here. Florida and San Diego are both nice places (neighborhood dependent of course), but were they less enjoyable 5-10 years ago when houses were hard (or impossible) to unload??? Profits are not profits until you book them.
http://www.lewrockwell.com/englund/englund24.html "Houses Are Consumer Durables, Not Investments by Eric Englund Over time, under a 100% gold standard, a house would gradually depreciate in value. A house, after all, is nothing more than a durable consumer good â it is a capital good if it is a rental property. However, when living under a fiat-currency regime, perceptions can be radically altered. For example, not only is a house believed to be an appreciating asset, it is considered to be an investment. Additionally, under conditions of rapid money and credit growth (which, for a period of time, leads to artificially low interest rates), people will come to think of themselves as real estate entrepreneurs â wisely "investing" in a house, to live in, with the confidence that a big payday looms ahead upon sale of same house. Presently, with lending standards so low â to keep credit flowing â the housing boom has become an outright speculative bubble in many parts of the U.S. I would argue, in fact, that a hyperreality has emerged in which real estate is perceived to be a one-way street to wealth. The bust will come, inevitably, and millions of Americans will be wiped out financially â and only the Austrian School of economics provides the correct explanation as to why the housing boom contains the seeds of its own destruction. As Roger Garrison explains in The Austrian Theory of the Trade Cycle, the boom-bust cycle emanates from the Federal Reserve: The Austrian theory of the business cycle emerges straightforwardly from a simple comparison of savings-induced growth, which is sustainable, with a credit-induced boom, which is not. An increase in saving by individuals and a credit expansion orchestrated by the central bank set into motion market processes whose initial allocational effects on the economy's capital structure are similar. But the ultimate consequences of the two processes stand in stark contrast: Saving gets us genuine growth; credit expansion gets us boom and bust. We certainly know, today, that Americans are saving little if any money. Thus, Americaâs housing boom has emerged directly as a result of Alan Greenspanâs easy-credit policies, not from savings. For the time being, the real estate party is in full swing. Americans are clamoring to participate in this ride to "Easy Street." People are willing to take on punishing mortgage debt loads, "knowing" that houses will always appreciate in value and that the higher the leverage, the higher the rate of return. Moreover, as a house appreciates, home equity loans can be taken out to purchase consumer durables such as high-end kitchen appliances, granite countertops, a hot tub, and even a kit to build a backyard barbecue. Once these consumer durables are "attached" to a house, they magically become investments that add value to, and appreciate with, the house. With Alan Greenspan at the helm of the Federal Reserve, Americans have discovered investment Nirvana. Indeed, the house has been transformed into a perpetual wealth creation machine. To be sure, a house is a more enjoyable investment to own than a dot.com or a telecom stock. Just imagine, you can throw a Super Bowl party in your investment. You can sip on champagne while relaxing in your hot tub investment. Neighbors can compete as to who throws the best barbecue bash on the block (oh, it was so wise to invest in that bricks-and-mortar backyard barbecue). It is important, naturally, to keep the yard manicured in order to have the best looking investment on the block â which is important, for curb appeal, should one decide to sell for the highest profit possible. Finally, you can even procreate in your housing investment â try that in your stock portfolio. All the while, the hottest topic of conversation in the neighborhood pertains to how everyoneâs house is increasing in value. Every homeowner is brilliant and, in a sense, has become a real estate entrepreneur. In the boom phase of the trade cycle, it is not predictable as to where the fiat money and credit will flow. In the late 1990s, we saw "Easy" Alanâs money and credit flowing into internet-related companies such as the dot.coms and telecoms. Correspondingly, individual "investors" threw trillions of dollars into the tech-laden NASDAQ with the belief that the internet would lead us into a bold new cyber-world where wealth would be created simply by sharing and transferring information. When this mania ended (as bank credit and venture capital dried up), the NASDAQ bubble burst â in early 2000 â and the once high-flying dot.com and telecom companies came crashing down to earth. It was all an illusion fueled by the Federal Reserveâs loose money and credit â with a notable clustering of entrepreneurial and investor error associated with internet-related companies. Hence, in 2000, the economic bust (recession) descended upon the U.S. Alan Greenspan, of course, would not tolerate a recession. Accordingly, the Federal Reserve went on a money and credit creation binge and eventually brought short-term interest rates down to 1% (in 2003). The Federal Reserve, in total, cut interest rates 13 times between 2001 and 2003. With interest rates so seductively low, Americans went on a borrowing and spending spree which pulled Uncle Sam out of the recession â at least for now. As Murray Rothbard explains, in The Austrian Theory of the Trade Cycle, Americaâs debt-driven "prosperity" is a mirage built upon the opiate of easy credit. Alan Greenspanâs multiple interest rate cuts, as Dr. Rothbard conveys, is nothing new in the field of central banking: ⦠the point is that the credit expansion is not one-shot; it proceeds on and on, never giving consumers the chance to reestablish their preferred proportions of consumption and saving, never allowing the rise in costs in the capital goods industries to catch up to the inflationary rise in prices. Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. Sadly, there will be a comeuppance. In this case, a clustering of errors will be exposed on the part of the high-flying housing developers, lenders, and homeowners. Mortgage lenders, eventually, will find that homeowners cannot handle such crushing debt loads, especially as rising interest rates cause defaults on interest-only and adjustable rate mortgage loans. As mortgage payment delinquencies and defaults rise, bankers and other mortgage lenders will begin to see the error of their easy-credit ways. This is where boom turns to bust, as described by Dr. Rothbard: It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom⦠Not to forget the housing developers: at this juncture, they will be caught with too much inventory on hand right when housing prices and demand are on the decline. Just as night follows day, bust follows boom â as long as central banks exist. The housing bubble is merely another manifestation of the Federal Reserveâs reckless manipulation of money and credit. Presently, most Americans believe that houses are a sure-fire investment while adherents of Austrian economics know they are nothing more than consumer durables caught up in a speculative frenzy. When the housing bubble bursts, millions of Americans will find themselves buried alive in debt while living in their financial tombs. June 8, 2005"
This has to be the dumbest article I've read this year. I'm printing it out just for future laughs. Then again, according to the link above, the author is the publisher of " The Hyperinflation Survival Guide by Dr. Gerald Swanson." A good market for that book would be in South America, any third world country or anyone who lives in fantasy land.
Florida real estate is given me an orgasm. I've sold two of my condos this week because prices became ridiculously high. It was even enough to compensate for lost utility as I planned to move into one of them. (Capital appreciation was not my objective)
Adjustable Rate Mortgages and the Housing Bubble http://angrybear.blogspot.com/2005/06/adjustable-rate-mortgages-and-housing.html An interesting analysis.
I think one thing that is not appreciated about the dotcom bubble was the incredible build out of the internet backbone. I think it was allowed people and businesses to move to areas that they previously only considered vacation spots. I think most of California and Florida have benefited immensely from this change. Prior to the internet boom. People on the east coast considered california to be a joke for a business career if you were not in the entertainment industry. This created strong demand for homes. In a small way it also allowed Greenwich to become the hedgefund address of status. Prior to the internet people lived in greenwich but worked in Manhattan. Prior to the internet business people considered san diego a backwater. This trend may now be hitting Florida. We shall see.
http://www.thehindubusinessline.com/2005/06/18/stories/2005061801270600.htm Beware housing bubble June 17 THERE is a need to make sure that all the stakeholders in the housing sector - development authorities, regulators, housing finance companies, banks and developers - work together to check the speculative angle in rising residential property prices, Mr Deepak Parekh, Chairman, HDFC, has said. Writing in the company's 2004-2005 annual report, he noted that it was probably for the first time in history that so many countries across the world were simultaneously witnessing a housing boom. "In this scenario I cannot help but be reminded of what Stephen Roach, Chief Economist, Morgan Stanley, said recently, "Housing is an asset class as prone to excess as stocks, bonds, currencies and commodities. If it feels like a bubble, acts like a bubble and looks like a bubble, it probably is one." "At the risk of sounding overcautious, I would like to draw your attention to pointers that support the idea that housing markets could be more prone to bubbles than stock markets. One of the reasons is imperfect information. No two homes are alike nor are there exchanges where prices are recorded. There are no organized futures or options markets for properties, so it is a market with no place for short selling. "Moreover, rising property prices encourage banks and financial institutions to lend more, since collateral values increase. But when prices fall, banks pull out, amplifying the bust." He said that today, warning signs are flashing in many global housing markets. Property market surveys have revealed that the ratio of housing prices to average disposable incomes is touching unsustainable levels.
Roach is incorrect. If a house has a "certificate of occupancy" it will have a value. It may be low but there is always a value there. Try that with a busted company, Enron bonds, etc etc. They all can and do with relative frequency go to ZERO. And, even if the house has no value, the land underneath has some residual value. Wall Street keeps warning about the impending doom of a housing bubble because they now realize that the late 90's bubble burned so much money that most of those people will never come back to "investing for the long term" with the likes of Wall Street crooks. As people get more comfortable with real estate and commissions come down there will be more and more of the investor type of landlord for rentals, flippers, "re-hab" and so forth. Will there be some stupidity in real estate? Of course. There always is in any market. SteveD