Seth Jayson strikes again.
Monday, August 27, 2007
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54 comments:
I don't know if "strikes" is the right word or if calling it the way it is would be more appropriate. I agree his tone is a little biting, but he does make some good points.
Mark Zandi, Moody's Chief Economist:
http://www.marketwatch.com/tvradio/player.asp?guid={7AE3CA10-3E79-4840-87A0-6FDC5F3862FA}
The "experts" are calling it now. For those of you wanting an affordable house, Zandi says the prices will bottom out at the end of 2008.
I suspect that Moody's is a far more reliable source than any contributor to this blog. Forbes, Business Week, Credit Suisse, and virtually the entire Who's Who in the finance world are now in full agreement. The US is in a full blown housing recession.
Experts can't seem to agree as to whether this recession will spill over into other areas of the economy.
The latest Case Shiller numbers are out...
DC is down 7% YoY.
The entire article. Washington is number 3 in declines behind Tampa & San Diego.
http://www.marketwatch.com/news/story/us-home-prices-fall-record/story.aspx?guid=%7B02A14CEF%2D2941%2D4404%2D8056%2D418DDA9F0330%7D
Hey, it was only fantasy until it happened!
Keith,
If "it happened" (i.e., the bubble burst), why aren't you out buying now?
Still fanaticizing that you can pick up that which you feel yourself "entitled" to for pennies on the dollar?
If it "happened", then go buy yourself a home ...
Lance yesterday, regarding my posts:
"I'll just be ignoring his posts from here on in."
How can Lance claim to know anything when he can't even predict his own actions over the next 24 hours?
The Old Housing Tracker numbers are up. I use those because they give us a longer time series.
Median price: 405
Down from the median price of 485 on this day two years ago, a decline of 16.5%.
It was just fantasy until it happened!
Even if the median price stays flat over the next month (doubtful..it will most likely keep falling), we'll reach a 19% nominal decline in median price over two years, given the September 21st, 2005 median price of 499,900. With inflation, that's getting very near to David J.'s prediction of a 25% real decline.
And this is just as the very beginning of the brand new market realities caused by higher jumbo spreads and resetting ARMs.
Wow.
And Keith, why can't you explain why you are not out there jumping at the chance to buy "for pennies on the dollar" if it happened?
kh was so correct in their description of you ... LOL!
Lance yesterday, regarding my posts:
"I'll just be ignoring his posts from here on in."
And if I were in the market for a house, I'd certainly consider some listings I've seen.
There's one place listed at 365K and the ad claims it has a tenant willing to stay at $2700 a month. I'd want to check this claim out of course, but if that's true, that's either one dumb tenant or a pretty good price. (135 times monthly rent ain't a bad price.)
So the deals are just starting, and if you plan on being around a long time, buying certain places wouldn't kill you, but waiting till next summer is almost surely even better. Waiting longer than that does get a bit risky. There may be more room for the DC market to fall beyond 08, and there's always the effects of reduced defense spending (which greatly affected DC in the 1990s) in 2010 and beyond, but nobody's trying to time the market exactly around here. We're just using fundamentals such as rents and prices to determine when prices are seriously out of whack. That's just good financial sense.
Keith,
It's nice to finally hear something sensical come out of you --- Except for the "rent is a fundamental" part ... Rents don't drive real estate prices .. It's the other way around. Property is a cost of renting something out. As such, the price of property (albeit over the long run) is a driver (or "fundamental" determinant) of rent.
"As such, the price of property (albeit over the long run) is a driver (or "fundamental" determinant) of rent. "
Nice to see that you are trying to learn what "fundamental" means lance.
The problem with your theory is that you have it completely backwards.
Prices are not determined by costs, they are determined by supply and demand.
The market doesn't care if you can make a profit. Many many businesses lose money because they are unable to sell their product for what it costs them to produce. The market is indifferent to their plight.
There are huge numbers of people losing money trying to rent out houses they own right now. The rate they are able to charge for their house has nothing to do with what their costs are.
Sure, I suppose they could put out an ad saying that this particular house is only for rent at 50% above the going rate because that is what it would take for the owner to break even... but of course that house would simply sit empty until the would-be landlord lowers the price to the market rate and takes their loss, or goes bankrupt.
Those "investors" who purchased near the top of the bubble and are now unable to rent out their properties for enough money to cover their costs are simply going to lose money like the bad business people they are.
If a taxi driver overpayed badly for a car and is now unable to make money at normal market rates for a taxi, what do you think will happen to that person?
They aren't going to magically get to raise their rates above market rates to compensate for their poor business sense. More likely they will go out of business.
Leroy said:
"Prices are not determined by costs, they are determined by supply and demand.
The market doesn't care if you can make a profit. Many many businesses lose money because they are unable to sell their product for what it costs them to produce. The market is indifferent to their plight.
There are huge numbers of people losing money trying to rent out houses they own right now. The rate they are able to charge for their house has nothing to do with what their costs are."
I think you missed the part where I said longterm. Taking sales of property as an example, shortterm you may have a few people having to rent for less than what it cost them to buy, but longterm supply and demand right themselves by no more supply being produced. In this case, the halt in building projects is that stopping of futher supply. And longterm ALL costs associated with producing a product get passed on PLUS profit. Now come on, do you really think landlords (or any seller) is in it for "charity"?
"I think you missed the part where I said longterm."
You missed the part where I said you had it backwards. Let me repeat this for you again in an effort to prevent you from failing a 101 level Econ class should you ever find yourself in one.
Costs DO NOT determine price. Price is a function of supply and demand.
"Taking sales of property as an example, shortterm you may have a few people having to rent for less than what it cost them to buy, but longterm supply and demand right themselves by no more supply being produced."
Here you are completely misunderstanding what is taking place. There may or may not be more supply produced, but regardless of how much is produced, price will STILL be determined by supply and demand. This is extremely basic stuff.
"In this case, the halt in building projects is that stopping of futher supply. And longterm ALL costs associated with producing a product get passed on PLUS profit."
lol... you have a very very optimistic view of how business works. Long-term you always get to make a profit? What a wonderful business plan! Can't fail then can you?
So you are saying that if I went out and overpaid badly for some farmland I am still entitled to turn a profit right? Obviously the price of corn would have to rise because, “long-term ALL costs associated with producing a product get passed on PLUS profit,” right?
Clearly it doesn’t matter what I paid for that farmland since obviously I get to pass those costs on to the consumer and tack on a profit…
I have an alternative theory of how this will play out...
The "investors" that bought in the last couple years paid FAR more than most of their competition and are thus likely cash flow negative on their "investment." Now with the bubble popping even the investors that bought after them will pay less. The investors who had the poor business sense to buy at the top of the bubble are likely to lose large amounts of money on their investment for quite a few years.
Maybe they will eventually give up and take their loss in one lump and move on. Maybe they will keep shoveling money into the pit until inflation bails them out... regardless of what happens they are going to lose huge amounts of “real” money and, the rent they are able to charge for their property will be determined by SUPPLY AND DEMAND and will have nothing to do with how much they have paid.
Think of it this way if it helps you understand... the people who bought during the bubble years are providing the same product but have higher costs. The lower cost suppliers will happily turn a profit year after year charging what the market will bear while the bubble buyers lose money. Sorry lance, business doesn't usually work well for people without business sense.
"Now come on, do you really think landlords (or any seller) is in it for "charity"? "
Do you think anyone will pay above market rates to prevent a landlord from losing money? At this point the landlord has two choices... rent their house out at a loss, or sell it at a loss.
Leroy, you are right of course.
Now here's the scientific reason why Lance won't be able to see how right Leroy is:
"People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities."
You both can rationalize your wishful thinking all you like. The bottom line is that rents have already started rising ... quickly.
http://promo.realestate.yahoo.com/renters_lose_more_ground.html
(courtesy of kh)
You both can rationalize your wishful thinking all you like. The bottom line is that rents have already started rising ... quickly.
Renters Lose More Ground
By Broderick Perkins, Realty Times
July 20, 2007
In the vast majority of markets tracked by RealFacts, renters who didn't lock in rents for the long term are now pinned squarely behind the eight ball with little room to maneuver.
Apartment rents have been rising for more than a year in most markets and second quarter numbers reveal landlords are tightening the vise as year-to-year rent increases get larger.
The only remaining "in" for renters, perhaps, are falling occupancy rates in select markets -- a limited and temporary condition.
Wherever possible, renters renewing contracts or moving in for the first time, especially those who plan to sit on the owner-occupied housing market fence for some time, should negotiate for the longest lease feasible. Concessions are rare as many landlords have shut the door on move-in bonuses.
In the second quarter 2007, all but one of the 29 major metros in RealFacts database reported annual rent growth, with 10 of the 29 metros reporting annual rent growth of more than 5 percent.
However, most metros, 20 of them, revealed year-over-year occupancy declines. That's likely an ending trend as the rental market continues to absorb supply spilled over from unsold listings in the owner-occupied sector.
RealFacts keeps tabs on more than 12,000 rental communities of 100 units or more in metros in 15 states, most of them west of the Mississippi River, but also in Florida and Illinois.
The firm also keeps tabs on rental units by category, from studios, one-, two- and three-bedroom apartments to three- and four-bedroom town homes.
The big rental money makers were San Jose, CA, and Seattle, WA , both enjoying a 3.1 percent increase in rents from just the first to second quarter this year.
San Jose had the data base's greatest average annual rent increase -- 11 percent. Seattle enjoyed a 9.9 percent average annual rate of rent increases.
RealFacts projected an annual rent growth of 12.4 percent for both cities if conditions continue, a likely scenario given the owner-occupied housing markets tighter money trend forcing more people to rent. Both metros also reported strong occupancy rates, 95 percent for Seattle and 97.3 for San Jose.
In average annual rent increases elsewhere, Austin, TX; Portland, OR; Salt Lake City, UT; and the California metros of Fresno, Los Angeles, Oxnard, San Diego and San Francisco all had annual rent increases of more than 5 percent.
The highest rents were also recorded in California with the Los Angeles market, averaging $1,589; Oxnard, averaging $1,525; San Jose, at $1,522; San Francisco, $1461 and San Diego, at $1,328, rounding out the top five. Seattle rents came in at $1,044 a month, on average.
RealFacts reported that occupancy slipped a bit in many markets, but levels remained strong with every major MSA enjoying occupancy rates of 91.5 percent or more. All 11 of the quarterly occupancy declines were less than 0.5 percent, further demonstrating the overall stability of the markets. Thirteen of the 20 annual occupancy declines were 1.5 percent or less.
Nineteen metros reported occupancy rates between 93 percent and 96 percent.
Tulsa, OK, stood out, posting a 4.7 occupancy gain for the quarter, pushing it's rate up to 96.6 percent.
For annual occupancy growth, Salt Lake City was the leader with a 2 percent increase to 96 percent. Tulsa's annual occupancy rate increase was second at 1.8 percent. San Jose, with a 97.3 percent occupancy rate, had the data base's tightest rental market.
I'm having no problem at all low-balling renters right now...talk about supply & demand!
Look for a property that been for rent for 2-3 Months and guess what - when you offer 2-300 less than what their asking in rent, they'll take your offer. Houses that aren't selling are being dumped daily to rent, as a last resort. Check out PWC or Loudoun - all rents are down from last year!!
Nice article lance... nice to see that you are trying to support your argument with actual data this time.
Now, unfortunatly this article doesn't do anything to support your theory that businesses always get to turn a profit because no matter how much greater their costs are than their competitors the market must rise to a point where they will turn a profit...
Leroy said:
"Now, unfortunatly this article doesn't do anything to support your theory that businesses always get to turn a profit because no matter how much greater their costs are than their competitors the market must rise to a point where they will turn a profit..."
Except I never said that. You did. I simply said that longterm rents are driven by the underlying costs of making rentals available. Perhaps I should have added "in the aggregate" to that ... But I thought you could understand that without it being specifically pointed out to you. Apparently you can't. So, to be clear, in the longterm all costs incurred in the aggregate to provide rental stock get pushed off to the consumer. In addition profit also gets charged. Is that that really difficult to understand? Do you really think you're paying less for things than they cost to produce? That's assanine if you do.
so, to get back to my original statement, (total) rents don't drive (total) prices but vice versa ... (total) prices are the determinant of (total) rents. And any attempt to base what prices "should be" based on what rents "are" is putting the cart before the horse.
"Except I never said that. You did. I simply said that longterm rents are driven by the underlying costs of making rentals available."
...and I have explained to you that this is NOT the case. There is nothing in business that says you will turn a profit.
Rents are driven by supply and demand, period.
"Perhaps I should have added "in the aggregate" to that ... But I thought you could understand that without it being specifically pointed out to you."
Perhaps you should attend a community college where entry level economics classes are offered.
"Apparently you can't"
Apparently you didn't...
"So, to be clear, in the longterm all costs incurred in the aggregate to provide rental stock get pushed off to the consumer. In addition profit also gets charged."
In the "longterm" lance, nobody is guaranteed a profit.
This really seems to be getting you all twisted around.
Think of it this way... good farm land can produce 100 units of grain per year. That grain can be sold for ~$10 per unit right now.
How would you value that land?
Most businesspeople would look at the cost of the land, the cost of operations and upkeep, the cost of obtaining financing for a purchase, and then compare that against their anticipated return to determine if this was a business venture they wanted to pursue.
If they determined that the land is 30% or more overpriced for what it is able to produce... then they won't buy it.
Now in the lance school of ecnomics things are different.
In your world grain prices are determined by how much you bought your land for. So if the land is 30% too expensive based on current market rates... then that just means that grain prices are going to rise in the "long term."
What a brilliant insight! As long as grain prices have to rise to support your business's profitability regardless of how badly you overpay then you can never lose!
Going back to the real world for a second... the "fundamental" determinant of the farmland's value is its ability to produce grain profitably.
If for some reason grain prices rise and remain elevated, then the land will become more valuable for good fundamental reasons.
If for some reason the land becomes more productive while grain prices stay steady then the land will become more valuable for good fundamental reasons.(perhaps you improved your irrigation)
If some dummy down the street overpays badly for a piece of similar land... does that change what your land is worth based on fundamentals?
Does that change the price of grain?
Does that change the ability of your land to produce grain?
The answer of course is that it does not change the price of grain, and it does not change the ability of your land to produce grain.
In the long-term.... it STILL doesn't change the price of grain, or the ability of your land to produce grain.
Your neighbor will probably just lose his shirt and someone more competent will buy the land at a reasonable price.
"Is that that really difficult to understand?"
lol
"Do you really think you're paying less for things than they cost to produce? That's assanine if you do."
Anyone that bought a GM car in the last couple years did...
Seriously lance... it is depressing trying to explain these things to you. I know that everyone hasn't had equal educational opportunities, but it is still sad to see a grown man so ignorant when there are so many educational institutions available in this area.
Seek help,
http://tinyurl.com/22wmnt
"so, to get back to my original statement, (total) rents don't drive (total) prices but vice versa ... (total) prices are the determinant of (total) rents. And any attempt to base what prices "should be" based on what rents "are" is putting the cart before the horse. "
And going back to my original statement...
It is, and always will be, supply and demand.
If rents rise, the value of rental properties will increase.
If rents fall, the value of rental properties will decrease.
This isn't a day to day thing, but over any significant period of time that is what will happen.
Your whole theory seems to be based around the idea that buying RE always makes sense.
So what if the fundamentals don't justify the asking price?
That just means rents have to rise right? Otherwise people would lose money, and people hate to lose money!
Rents just HAVE to rise!
What if a huge amount of supply is produced?
lance: It doesn't matter, rents have to rise otherwise people who bought too high will lose money.
What if a huge amount of demand disappears because of some change in the area?
lance: It doesn't matter, rents have to rise because otherwise people who bought too high will lose money.
Step 1: Buy a rental property at any price.
Step 2: ?????
Step 3: Profit!
Leroy,
LOL ... You still haven't a clue, have you?
And you still believe that what you pay for a property is determined by what it can be rented out for ... ? (Since, of course, renting out a property is the only use possible.) Fine ... keep renting and paying off your landlord's mortgage. And be prepared for much bigger jumps in your rent.
"Leroy,
LOL ... You still haven't a clue, have you?"
I am taking this as you giving up on defending your hopeless argument.
I will repeat it for you another time:
Supply and demand.
"And you still believe that what you pay for a property is determined by what it can be rented out for ... ?"
Not in all of the market of course, but in large portions of the market that is the case. Most residential properties provide primarily shelter, a place to live, it is something that can be valued in the market.
"(Since, of course, renting out a property is the only use possible.)"
Of course it isn't the only use possible.
You could bulldoze the house and then you might have a nice .25 acre farm! Or maybe you could run a daycare center out of your house. Or a small business... or perhaps you could try to rent out your house's attic as storage space to a neighbor. A creative mind could devise many different ways to use a house...
The problem comes in finding a way to use a house that turns a profit. If you have an idea that will use a house or condo more profitably than renting it out, you are free to do so and your business may very well prove to be profitable. Most of the time however, your best bet for generating income from a residential property is to rent it out. Regardless of which path you pursue... I advise you not to overpay with some misconceived notion that the market will automatically rise to reward your bad judgment, because it doesn't work that way.
"Fine ... keep renting and paying off your landlord's mortgage. And be prepared for much bigger jumps in your rent."
Oooh, scary! I need to be prepared for "bigger jumps" in my rent. I guess I had better run out and buy just as fast as I can!
You may or may not believe me lance, but I am renting for less than my landlord is paying on the mortgage.
She tried to use that as a justification for raising my rent when her arm reset to a higher rate and I pointed to the nicer house across the street advertised for rent at the price I was currently paying.
I told her that either we signed another year long lease at the current rate, or I will simply carry my stuff across the street(I wouldn't even need to rent a truck) and she can take her chances finding someone to pay her higher rate.
So now she loses money every month, not huge amounts, but she is in the red. That is how the market works... no one cares if she loses money. It isn't my problem.
Meanwhile... I am saving thousands of dollars a month that I will be putting towards a downpayment while the neighborhoods I am interested in are racing each other down cutting their prices. I am quite satisfied with my decision to delay purchasing a couple years. It will save me hundreds of thousands of dollars over the next couple decades.
Leroy said:
"So now she loses money every month, not huge amounts, but she is in the red. That is how the market works... no one cares if she loses money. It isn't my problem."
Yes, keep believing that. You took advantage of her once, it's unlikely she'll allow you to do that to her again when your lease comes up next year. And good luck hoping that that house across the street is available again at that price.
It sounds like you are dealing with a very inexperienced landlord ... probably someone who bought to speculate ... or perhaps moved in with her fiance ... and ended up being a landlord by default. If it were me, I would have thrown your ass out in half a second ... if for no other reason that I would rather take a shortterm loss than have someone in my property who has the gumption to think they can tell me what to do with my property. And it would have been fun watching you drag your meager belongings across the street ... dodging traffic as you did so! LOL
"Yes, keep believing that. You took advantage of her once, it's unlikely she'll allow you to do that to her again when your lease comes up next year."
Heh... you think paying market prices is "taking advantage" of her? You really do believe that anyone who buys a house at any price is entitled to make a profit don't you? I really thought you were playing dumb there for a while.
As for next year... next year she will get market rates from someone else most likely. I expect to have purchased by that time. Do you think the next renter is likely to pay more than they need to to cover her mortgage? I suspect not...
"And good luck hoping that that house across the street is available again at that price."
In this case it was a literal house across the street, but if it wasn't that house it would be another house nearby. The fact remains that what she can charge for her house isn't determined at all by what she paid, it is determined by the market.
It is supply and demand lance.
"It sounds like you are dealing with a very inexperienced landlord ... probably someone who bought to speculate ... or perhaps moved in with her fiance ... and ended up being a landlord by default."
She is getting experience quickly now isn't she?
She is a realtor by day. She bought the house as some kind of of investment and has never lived in it. I am not sure what her long term plan is. She is lucky to have purchased in the earlier bubble years and is not in nearly as much danger as she might be.
She decided to continue to rent to me because she realizes she has no better choice. She is aware what the going rate on a house like her's is. I can't blame her for trying to get more than that from me, but she can't very well blame me for pointing out that I don't need to pay what she was asking and will take my business elsewhere.
"If it were me, I would have thrown your ass out in half a second ... if for no other reason that I would rather take a shortterm loss than have someone in my property who has the gumption to think they can tell me what to do with my property."
lol, lance lance lance... why do I suspect you live a very powerless life?
Here are a few things to help you appreciate the situation.
First, she didn't, and doesn't, have the power to "throw my ass out in half a second." Our discussions were taking place with more than a month remaining on the lease.
Second, I wasn't telling her what to do with her property. I was offering her a choice. Sign another year's lease with me at the same price, or try to find someone else to pay some higher price. She simply recognized she couldn't do better than what I was offering.
Third, the fact that you would take an unnecessary loss because someone put a scuff mark on your ego speaks volumes about just how little you understand business.
The fact is that she doesn't have the power to raise the rent to what it would take to cover her mortgage. She can try of course, but in the end she has to choose between losing money slowly renting at market rates, or losing money quickly by having her house sit empty. So long as she is going to chose to lose money slowly she might as well do it renting to me because I am low maintenance, pay on time, and she won't have to go to the time and effort to replace me.
"And it would have been fun watching you drag your meager belongings across the street ... dodging traffic as you did so! LOL "
Meager belongings?
You don't know a thing about me lance. I am in no way in any kind of financial hardship. I am well paid. My wife is well paid. We are currently renting because that is the prudent financial decision.
You might as well call me fat...
The fact is that your ego drives you to engage in arguments you aren't equipped for. Having made a fool of yourself over these last several posts you are now resorting to this childishness instead of admitting that you were simply wrong.
Leroy, you're fat.
Worse, yet, you are not meeting your moral obligation to give your landlord enough money every month to cover her mortgage.
Her right to have her mortgage payment completely covered by a renter is in, like, the Bible or the Constitution or something.
Shame on you.
Leroy, and your landlord is weak. She's probably fat, too.
She should have told you to buzz off, so she could have lost a ton of money every month, instead of just a little.
And then, she could have told her bakruptcy attorney, "Hey, I wasn't gonna let some little renter push ME around!" And that'd show all those bubbleheads. Yesiree.
Leroy,
Just admit you were wrong.
Claiming that what a place rents out for solely determines what it is worth is mypotic. (I.e., that sales price is a factor of monthly rent.) It's myoptic because it is based on the false assumption that one gets exactly the same thing from the place when they rent than if they bought it. It is also mypotic because it doesn't account for varying costs based on lower or higher interest rates on a mortgage.
The extras one gets when one buys vs. rents are numerous. Anyone who owns their own home understands the differences ... and the pluses received ... so, I won't get into it ... especially since you wouldn't understand. I mean, you can't miss (or comprehend) that which you've never known/had.
Additionally, having the right to inhabit a place for a month or a year is not the same as having the right to own it indefinitely. For one thing, your costs aren't fixed in the least. A homeowner's costs are for the most part. You could find your rent doubling or tripling in the next year without any advance warning. A homeowner, even a mortgaged one, would be very unlikely to see that happen.
Your formula of rent being a factor of purchase price also falls apart when it runs into the obvious (to others, but not to you) fact that lower interest rates mean lower monthly costs which translates into different ratios than when interest rates were higher. I.e., A house that is nominally more expensive may actually be cheaper on a monthly basis when one is looking at out-of-pocket monthly expenses.
Bottom line is that your methodolgy (i.e., basing what something "should" sell for based on what it rents for) is flawed in two ways. Firstly, it is comparing apples to oranges (i.e., leasing for a limited time to owning forever) and secondly, it conveniently overlooks the fact that even if you were buying the same thing, it would be the monthly out-of-pocket (and post tax benefit) cost that needs to be compared to rents ... and not the "nominal" purchase price that only a cash buyer would have the priviledge of enjoying.
"Just admit you were wrong."
Uh huh...
Let me just note in advance that I don't think you even remember what you are trying to argue.
"Claiming that what a place rents out for solely determines what it is worth is mypotic. (I.e., that sales price is a factor of monthly rent.) It's myoptic because it is based on the false assumption that one gets exactly the same thing from the place when they rent than if they bought it."
Nice strawman lance...
I never said that was the sole determinant, but it is a major determinant, and the available data shows that in the applicable portions of the market rental prices and purchase prices correlate well.
You are doing nothing to support your theory that rental prices must rise to a level that would allow investors that overpaid to turn a profit.
"The extras one gets when one buys vs. rents are numerous. Anyone who owns their own home understands the differences ... and the pluses received ... so, I won't get into it ... especially since you wouldn't understand. I mean, you can't miss (or comprehend) that which you've never known/had."
Heh, there is a really excellent argument lance.
I mean that, really.
Of course it doesn't do a thing to help you out when it comes to discussing economics, but that is really the beauty of it. By embracing a completely emotional argument you don't have to deal with complicated stuff like economics and instead you can justify paying whatever price you want based on the intangible benefits you gain. With an argument like that you can't possible lose can you?
BTW, You are doing nothing to support your theory that rental prices must rise to a level that would allow investors that overpaid to turn a profit.
"Additionally, having the right to inhabit a place for a month or a year is not the same as having the right to own it indefinitely. For one thing, your costs aren't fixed in the least. A homeowner's costs are for the most part."
You appear to be trying to compare the merits of owning versus renting. This also doesn't do anything to support your original argument that the rental market must rise so that investors that over payed won't lose money.
"You could find your rent doubling or tripling in the next year without any advance warning. A homeowner, even a mortgaged one, would be very unlikely to see that happen."
You think it is likely that rents in this area are going to double or triple next year without any warning?
lol... keep it coming lance. This is turning out better than I expected.
Please note though, that you are doing nothing to support your theory that rents must rise to prevent investors from losing money.
"Your formula of rent being a factor of purchase price also falls apart when it runs into the obvious (to others, but not to you) fact that lower interest rates mean lower monthly costs which translates into different ratios than when interest rates were higher."
My "formula" of rent being a factor of purchase price?
Lance, I am not theorizing here, I am explaining. The rental market and the purchase market are linked. This is extremely basic basic stuff, and in no way does that relationship "fall apart" when interest rates change, the balance just shifts slightly.
What I don't get is how you think this supports your theory that rental prices must rise to a level that would allow investors that overpaid to turn a profit.
"I.e., A house that is nominally more expensive may actually be cheaper on a monthly basis when one is looking at out-of-pocket monthly expenses."
That is a heck of a revelation.
It of course does nothing to support your theory that the rental market must rise to a point that prevents investors that overpaid from losing money.
"Bottom line is that your methodolgy (i.e., basing what something "should" sell for based on what it rents for) is flawed in two ways."
Bottom line... I don't know why you spent this whole post doing nothing to support your original argument.
Claiming that what a place rents out for solely determines what it is worth is mypotic. (I.e., that sales price is a factor of monthly rent.) It's myoptic because it is based on the false assumption that one gets exactly the same thing from the place when they rent than if they bought it. It is also mypotic because it doesn't account for varying costs based on lower or higher interest rates on a mortgage.
I think you mean myopic. There's no "t".
Leroy said:
"What I don't get is how you think this supports your theory that rental prices must rise to a level that would allow investors that overpaid to turn a profit."
Nice try ... but that was your strawman.
What's been being discussed is Keith's assertion that: "We're just using fundamentals such as rents and prices to determine when prices are seriously out of whack."
But nice try with your strawman. So, I guess you're admitting that "using fundamentals such as rents and prices to determine when prices are seriously out of whack" is flawed for two reasons? (1) trying to compare renting for a very short period to buying for a long period and (2) it's the monthly out of pocket costs and NOT the nominal price that should be compared ... ?
In the area I live (between Great Falls and Reston) there are more houses to rent than one could imagine. Townhouses/SFHs have rental signs peppered amongst the "For Sale" signs. There is so much unsold property that owners are renting to recover even a percentage of their costs.
My landlord is a seasoned professional in rental properties. He and I chatted last week about the fact that he doesn't expect to cover the costs of his note, taxes and insurance each month. He is renting at a loss because the other rental units in the complex are renting for at the most $100 more a month. He couldn't sell the "albatross" after being on the market for 11 months. He wants me to stay because the unit is still in pristine condition. He is fearful that other renters would trash the place.
When I told him that I would be moving into a house with my gentleman friend right after the new year, he expressed regret. We will have the dog so a condo is a no go.
My landlord isn't worried about the money because he has had other rental properties for almost 10 years and they are turning a profit. He wanted to flip the condo I am in, but he paid about $150 more than the current market value. Bought at the height. Nice man, but overshot on this one.
These comments are something else.
My experiences as a landlord, which may not be representative, since 1999 are as follows:
Rents peaked in 2001 right before the bubble went nuts. There was a lot of downward pressure on rents after that because everyone was buying. Tenants were hard to find.
Starting in 2005, however, I could start raising my rents again. All the new construction was condos and there wasn't much affordable housing in the Orange line corridor. Now when I advertise on Craig's List for my Rosslyn places, I get 30 e-mails a day. When renters try to negotiate by telling me that they could get cheaper rent in Shirlington, I tell them to go live there.
The point of all this is that my ability to rent, and charge a high price, appears to be related to the affordability of housing. Thus, cost of housing and rents appear to be somewhat inversely correlated--at least in the Metro accessible areas of Arlington. I think the Rental market reflects the demand for buying property, which is pretty low right now given all the supply.
Kcwood,
Losing good tenants is always bad. The margins for rental real estate are pretty tight and substantial money must be spent in sprucing up the place for the next group of tenants.
Rentals are tough because you can be making money but have a negative cash flow. The rent money used to repay principal is income. Luckily, you also get depreciation, which should protect this income from tax, but also must be repaid with penalty when the property is sold. Depreciation can also reduce your personal income tax burden, unless you are AMT worthy, when it can only be used a carry over passive loss.
Long story short, if you can handle the cash flow problems, you can make some money renting, even at current prices.
spunky said: "Check out PWC or Loudoun - all rents are down from last year!!"
I'd rather not. In fact, I've been in this area for 25 years and am not sure where Prince William County is.
If rents are falling and cheap, are there decent rentals on the metro for $1,400 or less? Where?
I know a guy who's moving into this area and he found a place at M Street SW for $1,600 including utilities.
Are there places in Rosslyn, Crystal City, for that or a little less.
"But nice try with your strawman. So, I guess you're admitting that "using fundamentals such as rents and prices to determine when prices are seriously out of whack" is flawed for two reasons? (1) trying to compare renting for a very short period to buying for a long period and (2) it's the monthly out of pocket costs and NOT the nominal price that should be compared ... ?"
Actually lance, I entered this exchange to comment on one of your specific assertions, not Keith's original statement.
I am really not sure who you think you are convincing here. You just look lost trying to argue about things you clearly don't understand.
Leroy said:
"I am really not sure who you think you are convincing here. You just look lost trying to argue about things you clearly don't understand."
LOL ... That's right, I'm the one who doesn't understand. You understand everything, which is why you've done so well for yourself that you have to spend your time wishing for a market free fall to get you in to the house you feel you deserve as a matter of right. You've very smart. LOL
"You understand everything, which is why you've done so well for yourself that you have to spend your time wishing for a market free fall to get you in to the house you feel you deserve as a matter of right. You've very smart. LOL "
Wow, what color is the sky in your world?
Naptime lance, you are getty cranky.
@ Bill
You are quite right. My landlord didn't share what the difference was between my rent and his expenses. He simply isn't sweating it. He wasn't realistic about the asking price of this place last year. I think he knew deep inside that it wouldn't move. It is truly gorgeous by some people's standards, but I would never buy it even if it were a good price. I don't buy condos.
This is a 3 year-old complex. The majority of units in my building (which was the first building finished) were sold pre-built. Those owners must have much lower payments than those who bought at the end of the boom. That has my landlord between a rock and a hard place. I live in what was the model unit so it was one of the last, if not the last, to sell in the entire complex.
I was told by the Condo Association President that about 20% of the units here are rented. I am sure that the original buyers who bought for investment purposes were hopeful they would make a large profit in 2 or 3 years. It just didn't work out that way.
KCWOOD said:
" I am sure that the original buyers who bought for investment purposes were hopeful they would make a large profit in 2 or 3 years. It just didn't work out that way. "
And that's the way it is. Speculators were making big bucks for a while there because there was always that risk looming over them that the boom would come to an end and price increases would level off. And of course those who got hit by the leveling off now need to implement other strategies ... If they can hold off on taking the cash out now, they really just need to hold on until prices start rising again. Eventually everything sorts itself out.
Bill said of 2001: "There was a lot of downward pressure on rents after that because everyone was buying. Tenants were hard to find."
Bill said of 2005: "I could start raising my rents"
And of 2007, he said: "I get 30 e-mails a day."
Two Florida land booms ago, a guy told me that exact same thing but from the tenant's perspective. "Why rent when I can buy so cheap."
Folks have been yelling "Bubble!" since 2002. There's an ever increasing pool of desperate renters to offset the shrinking pool of desperate landlords.
From what Bill says, that balance tipped over in 2005. Rents are rising and that sets the stage for the next real estate boom.
I'm not guaranteeing that the boom has started, that would be keyboard slapping. We'll know after-the-fact, about 2009 or 2010.
Lance is right. It is a good time to buy real estate, IF.
IF, you buy at the right price.
IF, you do your homework.
IF, you have the financial where-with-all to ride out setbacks.
IF, you don't keyboard slap.
A little luck and patience helps too.
Hearing bubble-heads scream, "Real Estate is Plunging!!!" causes some to say, "Where?"
When I look around Alexandria, I don't see any pullbacks. If prices fell back to 2004 levels, the smart money would be buying everything in sight.
That cash-on-the-side has kept the bubble-bust outside the beltway. This is not a prediction, this is simply what's happening.
"Speculators were making big bucks for a while there because there was always that risk looming over them that the boom would come to an end and price increases would level off. And of course those who got hit by the leveling off now need to implement other strategies"
lol...
Leveling off? You think 7% down, as of June, is "leveling off?"
"If they can hold off on taking the cash out now, they really just need to hold on until prices start rising again. Eventually everything sorts itself out."
Yeah, same thing with YHOO right? Give it a little time and it is sure to bounce right back where it belongs!
"Folks have been yelling "Bubble!" since 2002. There's an ever increasing pool of desperate renters to offset the shrinking pool of desperate landlords."
I can't speak for Arlington... but most of the area is experiencing nothing of the kind.
"From what Bill says, that balance tipped over in 2005. Rents are rising and that sets the stage for the next real estate boom.
I'm not guaranteeing that the boom has started, that would be keyboard slapping. We'll know after-the-fact, about 2009 or 2010."
You think the "next boom" is going to start a year after the previous boom?
That tells me you haven't spent much time studying history. Even in a relatively mild normal downturn it takes at least 5+ years for the market to recover.
"Hearing bubble-heads scream, "Real Estate is Plunging!!!" causes some to say, "Where?"
When I look around Alexandria, I don't see any pullbacks. If prices fell back to 2004 levels, the smart money would be buying everything in sight."
The vast majority of local market watchers have always predicted that the bubble would burst first in the outer areas before working its way in. RE is an extremely slow moving market and you aren't going to see a dramatic change in the market overnight. Besides, PWC IS part of Northern Virgina. The people interested in buying in that area couldn't care less if you are interested in living out there.
"That cash-on-the-side has kept the bubble-bust outside the beltway. This is not a prediction, this is simply what's happening."
The bubble is only just beginning to burst. The credit bubble only finally popped in Aug of this year. It won't be until October and November that that will show up in sales data and even then prices will drop slowly.
I don't think my experiences can be used as a predictor for Arlington (I never predicted an upcoming boom--I think we are going to see 1989-1997 market all over again), but are rather useful in getting a snapshot for what is happening there right now.
People are renting instead of buying. Thus, my rents have gone up as prices have fallen. This is true even as desirable buildings like Lexington Square and Tower Villas are experiencing substantial drops in prices. Now, 2BR/2BA places can be had for less than $500K in those buildings.
Kh,
I rent two older 2BR/1BA garden apartments next to the Iwo Jima in Rosslyn for $1800/Month with all utilities incl (cable, internet & phone too). I rent a newer 1BR (W/D in unit) for $1350 in Clarendon (it's about 150 yds from Whole Foods).
Bill, the Clarendon place sounds very nice, it wouldn't be available, would it?
I need to check with the fellow to find out whether he's taken a lease on the M st SW place.
kh
My places are occupied.
bill said:"My places are occupied."
Thanks. I think that fellow took the lease on the 1 bdrm in SW. I just checked his last email and it was $1,695/month!! Yikes!!!
He doesn't actually say outright that he signed but it's likely.
I sent him a link to Clarendon, which I believe would work better for him than SW, slightly longer tube ride but cheaper and better services.
bill said: "I think we are going to see 1989-1997 market all over again)"
That's fine. That was my hi-probability worse case, although if prices fell 10 or 15%, big whoop.
So far, I've been wrong. Alexandria says that my place went up .8% between 2006 and 2007. The Post says 2007-to-date is a bang up year.
It'll be interesting to see how this plays out.
I gotta admit that in 2004, 2005, and 2006, when the bubble-heads were yelling, I did wonder why the builders and their financial backers didn't scale back a little, get ready for a flat period.
We're now 2 or 3 years into it the Post is reporting price rises, I'm sweating a tax increase.
I'll go by W Glebe road, check out those used-to-be $850 TH, see if the sign still says $600's. They haven't built anything, it was just a sales trailer, a fence, and a sign last month.
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