Sure. I'd be very interested in any feedback. You can twiddle cell B8 to see the effect of holding for a different amount of time. With this example the crossover point for a 30 year fixed mortgage is actually 25 years out. However, rates are a little lower today than when I made this spreadsheet. I included 5/1 ARM in the model, and it breaks even with renting much sooner. Of course, it also adds a great deal of interest rate risk which is almost impossible to model. Martin
Marty: This is the latest data from your neighborhood, the Bay Area -- http://www.dqnews.com/RRBay0505.shtm Look what you're missing out. A nice 20% gain in one year. Your lame excuses don't exonerate you as being a loser in the real estate game. If you're a good trader, you know the importance of get in with the flow when you can. That's how a lot of people, including myself made a ton of money from the Internet bubble years. A nice big bubble come only once in a lifetime. Grab the opportunity when you can.
Actually, I don't. I'm not a trend follower. I do know the importance of transaction costs and liquidity! Martin
13:28 Greenspan says there is speculation in some home markets; sees considerable unlikelihood of home price decline 13:26 Greenspan does not perceive there is a national bubble; may be some regional housing bubbles - Bloomberg
I do not think it makes sense till you are financially sound to really buy, meaning you're actually paying all or most of the balance and you are financially ready for new set of monthly payments. You also have to be willing to commit cause selling a house and then buying a new one has a lot of costs and fees associated with it. People think that just because you buy, you never have to worry about a "rent" payments when in fact you get more liability and more monthly bills. The average Joe Shmoe always preaching how buying/financing is cheaper than renting and what's the last time Average Joe Shmoe was right about money? It's not as simple as that. If the house is cheap, then it's an obvious buy but is RE cheap right now? I can think of 2 areas in the Northeast where it's a good buy and there are risks & inconverniences involved to which you have to be committed.
Did anyone look through my spreadsheet? There are people here with much more experience in real estate and I'd like your feedback. I can't help but notice that the real estate bulls got mighty quiet! Martin
I am not up to speed on your local market, which could indeed be in a blowoff phase. However, I do question your basic assumption, namely that evidence indicates real estate will not appreciate in the long run. My experience is exactly the opposite, although obviously the long run could take a bit longer if you buy at the peak of a bubble. The problem facing may people is that they feel the threat of being priced out of their local market permanently. It's not like the stock market where you can buy 100 shares instead of 200 if something goes up and stays there. In addition, every political body in the country has as its number one objective preventing any decline in house prices. So basically, it's a gamble either way.
Shiller's Irrational Exuberance (second edition) has some interesting info on real estate. Its fascinating that around 90-95% of the appreciation in real estate comes from inflation. That is to say it is an illusion. Shiller strips this component out and shows that on avg. real estate goes up around 0.5% per year! Next time you're in B&N pick up the 2nd edition and flip through the new chapter on real estate.
Fortune Magazine ran an article in the current edition (which actually made the cover) about the recent explosion in real estate prices. It seems that the run-up in prices in CA, AZ, NV, FL and now TX is being caused by a small group of speculators who buy 10 or 20 properties each and hold on for 6 - 12 months, and then sell, and move on to the next "hot" market. There is a whole industry catering to these people; they track the trends and then inform them of the next place to invest. It evens quotes one of the buyers who says that he sees the same people buying at different developments. Las Vegas has started to cool off becuase the "fast" money is moving to other markets. I believe that these people, along with the home builders (who raise prices weekly, according to Fortune) are the root cause of the rise in real estate prices. I think a lot of people are going to get burned.
I looked through your spread sheet. Just thought I'd mention though that it would be a mistake to categorize me as a "real estate bull". A more accurate description of me would be to say I'm not a "real estate bear". Now my comments. I was unable to get your spreadsheet to work. Admittedly, I didn't try very hard so maybe it does in fact work. But I gave up fairly quickly because it was clear that it applies to an area of California most likely. And though it may be belaboring a point, California does not represent most of the US. Therefore, your numbers and assumptions are invalid to start with. You know, you remind me of some of the guys that I knew when I was younger. These guys could tell me why you were a "sucker" to save money in a savings account or money market fund when it was obvious to all that you could make better returns doing all sorts of other things. The funny thing is to now look back in hindsight to see how many of these guys don't have a dime. They failed to save, and their "better mousetraps" did not work out. Now, I don't mean to put you down for your opinion. You are obviously a smart guy. And they were too. But sometimes just taking a simple approach gets you ahead in the long run. It's the old story of "Would you rather be lucky or smart?". Let me give you an example. You dismiss principal payments as "paying money to yourself" and therefore don't count it in your analysis. Frankly, I believe you're correct...you're paying yourself. But don't ever forget that it's the method by which you pay the house off. So that in year 30, the house is free and clear. The only payments expended at that point are taxes, insurance and repairs. Now make some comparisons to see how the renter comes out. How much rent are you paying in year 30? Now compare this to 0. How does it look to you? Then you discount appreciation. Yet I have posted several times on this board statistics that show in the last 50 years or so that statistics of this type have been kept, that there has never been a nationwide decline in the median house price. Further, I suspect that if we had the data, we would discover that California may have surpassed all of the other states in terms of appreciation. Now personally I don't care how California did, but you live there. I used to live there at one time. I can tell you that prices relative to rent have never made any sense in California. That a small percentage of the average income earners could afford the median house. Yet over time you were nuts not to buy a house....even at the peak of the last bull market in 1989 (in California). While principal repayment may be paying yourself, it still gives a huge equity at the end of a period of time, even assuming no appreciation. Would a renter have this equity? History says no. People don't save in this country, at least up to now. Therefore, the forced "savings" of their home is one of the few sources of savings that the average guy has. It's about the only way the average guy "pays himself". You assume that rent, house prices, etc etc all rise at the same rate. But of course we know that is not true. Each of these markets has it's own set of market dynamics. Let me give you just one scenario: interest rates rise, and house prices fall (this is your scenario), except that they don't fall very far relative to the amount that interest rates rise. If this is the case the new buyer may not be able to buy for a payment level then that he could buy at today. And because of this, the pool of renters increases, putting upward pressure on rents. In a scenario such as this would a renter have benefitted? Either way, even if I could prove without question that it was better to rent than to own, I could not get my wife to go along with that type of proposal. And frankly, I doubt that you could get most homeowners to go that direction either. We prefer to be owners versus renters. OldTrader