Jas has been telling me this since I met him in 1998. I tried to get a mutual friend to move here (Los Altos) but Jas talked him out of it. My argument was he'd save on private school payments to more than offset higher taxers, etc... My house in Los Altos roughly doubled at the peak and is up 50 or 60%, give or take from 1998. Our friend's house in Sunnyvale is back to about what it was then plus he had to pay for private schools for two kids.. probably much more than the cost to move and upgrade neighborhoods while my mortgage payment all that time was less than the cost to rent my home. The payment on my house has been less than renting a nice 2b/2b apartment here for over a decade too.... before tax savings. If my house falls 75%, it will probably be "break-even" with renting had I taken Jain's advice, sold my house, paid massive capital gains taxes and rented. Owning a place you like to live is wise. If it goes down in value and you still like living there, so what? I might pay it off or keep a loan for an inflation hedge.
FWIW, I sold real estate twice in the past few years near the top and only own my home now and a small amount in an REIT index fund recommended in my newsletter. Homes are not a good investment here because renting is still cheaper but the tax breaks to own make them valuable.
FWIW2, the BEST market timing indicator on the planet is bottoms occur when Jas makes many emails with too many references to certain religions that I refuse to post at the same time he calls those of us smart enough to cash in on Cisco options or whatever to buy homes in Los Altos names. Ding - ding - ding.... I sold a bunch of equities in April and in the last week I've started to buy back SOME and they are all up as I type.
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As of 5/28/10, the explore portfolio is up 0.5 YTD vs. DJIA down 2.9%!
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| Subject: | FWC: IMF Economist Argues Home Prices Still Have Far To Fall |
|---|---|
| Date: | Fri, 28 May 2010 10:58:38 -0700 |
| From: | Jas Jain |
IMF Economist Argues Home Prices Still Have Far To Fall - Real Time Economics
"Loungani said his analysis of prices and rents in U.S. metro areas suggests that many markets on the West coast and in parts of the Northeast could yet see prices plummet a further 30-40%."
I agree. In the expensive zip codes in Silicon Valley I expect a price drop of 80% from the peak prices reached in 2007, $600-$1,000 PPSF. They have been supported by the stock prices of the leading tech companies, but during the depression (we are closing in on the double-dip recession) all the stock options gains would evaporate and there would be no support for high-end home prices. Expect PPSF to fall to $150-$200 in Los Altos and Palo Alto within four years because by then depression would be in full swing after govts having exhausted all their stimuli. I know it is hard for sillies to imagine that. This may be the last time for people to sell homes at pretty good prices in these areas.
Jas
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IMF Economist Argues Home Prices Still Have Far To Fall - Real Time Economics
- May 27, 2010, 4:29 PM ET
IMF Economist Argues Home Prices Still Have Far To Fall
Dour predictions about the housing market aren't the norm anymore, as many economists have grown optimistic that home prices will begin rebounding strongly next year.
But International Monetary Fund economists Prakash Loungani has found plenty of reasons to remain glum.
Loungani, at a National Economists Club luncheon in Washington Thursday, presented his analysis of housing busts since 1970 in the countries that make up the Organization for Economic Cooperation and Development. His prediction: Home prices will fall much farther and for much longer.
On average, the previous housing slumps lasted 18 quarters, with prices dropping 22% from peak to trough. By contrast, the current housing slump has lasted only 14 quarters, during which prices have dropped just 15%.
But the latest boom was so much bigger than the previous ones that it's logical to anticipate an even more brutal downturn, Loungani argued. Prices rose 113% over 41 quarters, compared with 39% average price increase over 39 quarters seen in the previous booms. Loungani likened the current cycle to a rollercoaster which has roared up a steep hump and now needs to come down again.
"A lot of adjustment has taken place in house prices, so we shouldn't discount that. But it's true that we shouldn't declare victory too soon. We've now had a fresh shock from what's happening in Europe," he said after the luncheon.
Loungani marshaled other evidence that home prices are still inflated. He found that prices in OECD countries in 2009 were substantially out of whack with rents and incomes in those countries compared with average values from 1970 to 2000. In the long run, he argued, incomes and rents will act as weights on home prices, bringing them back to earth.
Price-to-rent and price-to-income ratios were well above historical values in all OECD countries except Japan, Germany and Switzerland, according to Loungani's analysis. New Zealand, Australia, the Netherlands and Belgium saw the biggest misalignment with historical price-to-income values, while Canada, Sweden, Norway and Australia saw the largest gaps in price-to-rent values.
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3 comments:
I'm with Jas on this one. I'm an attorney in Palo Alto and a few of my cohorts have bought area homes recently, at prices approaching $1k per foot. How can anyone justify a $1 mln mortgage on a starter home? Kirk mentions the excellent public schools, which is certainly the Realtors' drum beat around here (not that any of them knows how to spell). But the children of renters get the same education. So I guess buying a house is just a bid to join the ranks of the self-satisfied who bought back in 1998. Sorry folks, I think that train has left the station. With front-mounted air bags to deflect suicidal teenagers.
"I'm an attorney in Palo Alto and a few of my cohorts have bought area homes recently, at prices approaching $1k per foot. "
Well, if they paid $1,000 per square foot, then they could be in for a rude awakening.
Los Altos, with much more land under our homes, is selling for about $700/sq ft. Palo Alto is selling for $718 to $800 per sq ft according to today's SJ Mercury Dataquick survey.
TWO rules of thumb for making money in real estate, or doing well with a home purchase, are
#1 buy when the market is significantly off a peak value. I bought mine in 1994 when prices were off 20 to 25% the 1989/1990 peak.
#2 never buy the most expensive home in the neighborhood. In fact, you do better to buy the least expensive one since any remodeling will get you towards the more expensive ones... while if you buy the most expensive one, you are buying someone else's remodel and thus the new stuff ages and becomes less valuable... relative to the rest of the neighborhood as they remodel and catch up. My house was owned by an 88 yr old... well maintained but no major upgrades. The guy selling an IDENTICAL remodeled house across the street hated me with a passion because he had to drop the price of his home $100K to sell it after I bought.
Hi Kirk,
Thanks for publishing my thoughts, and for adding yours! I don't know exactly what my cohorts paid, but $800 per square foot approaches $1k in my book...
Anyway, this isn't about schadenfreude. May my young colleagues strike it rich! May they hit the motherlode of home price appreciation, and feel perennially like Kings as they drive up to their glorified garden sheds at the end of each grueling workday.
But how much higher can a house without beachfront sell for? Honestly, how much higher than $800 per square foot can one expect, absent some serious debasement of the currency? Sure, the weather around here is "nice," (so nice that you almost don't need a roof at all). But at a certain point, arbitrage kicks in and folks move to a different part of the country, weather be damned.
So, bay area Realtors: You had better hope that there are lots more price-insensitive Chinese seeking a pied de terre in this small slice of paradise!
I'm not xenophobic...I'm just describing it like it is. Pick up a newspaper and scan the home sales section--the Chinese are snapping up the lion's share of these shacks.
Foreigners always buy at the top.
Los Altos, Palo Alto, Mountain View, Menlo Park...these are small cities sustaining huge numbers of realtors--there is nearly 1 realtor working in these zip codes for every 100 inhabitants. Just because that trend has continued for many years--defying a 50% meltdown in global asset prices--doesn't mean it will continue forever.
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