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Tuesday, April 17, 2007

Drive By Commenting

Comments like this one crack me up:

I am not sure what I have stumbled in on. This is the first time I've seen this blog. It seems as though this site is a place where people are trying to convince themselves that the Seattle real estate market is going to fail and that it will be a glorious day of vindication for some (most of the contributors) and crow eating (the rest of society).

There are very few examples in the recent past of real estate being a bad investment over the long haul. It can be risky to buy if you know you need to sell in a couple of years. But if it is a place to live and you are planning to be there awhile it is probably the smartest investment you'll make.
Wait, are we talking about the "recent past" or are we talking about "the long haul"? Also, Seattle Home Owner, could you please explain to me exactly how one can cash in on "the smartest investment you'll make"?

A house is a place to live, period. A home is not a winning financial investment, except during times of irrational exuberance such as the period we are now leaving behind us.

45 comments:

Nick said...

Well the guy does have a point, this blog is incredibly biased. But it has some great insider knowledge as well if you can read it with the right perspective.

Love the blog, sorry for the driveby.

Matthew said...

The sad thing is he went to all that trouble to create a Google blogger account for 1 post!

Foolish Trolls!

Deejayoh said...

There are very few examples in the recent past of real estate being a bad investment over the long haul. It can be risky to buy if you know you need to sell in a couple of years.

If you are 30 years old, this is entirely logical. If you are old enough to have seen the "will the last person leaving seattle please turn out the lights" billboard, it seems comical. just depends on your perspective, I guess.

However, "buy low, sell high" is pretty sound investmentment advice eternally. So if you think you are buying low, I say - have at it

But if you are so sure that's what you're doing, you really don't need to be reading a blog called "seattle bubble", now - do you?

or perhaps you are not so sure?

Lake Hills Renter said...

I've always found the drive-by commenting thing strange. I've seen in all different kinds of forums and blogs, usually the more emotional the topic the worse, and the housing market has certainly become religion to some in the last few years. Seems to me to be more about hear yourself speak rather than engaging in dialogue.

As far as bias goes, of course a blog dedicated to the local housing bubble is going to take a side. There's some strong opinions here to be sure, but I've found the signal-to-noise ratio here to be much better than many other places I've visited, including HBB. This site is chock full of good insight and data, even if you have to wade through the mud to get to it sometimes.

Sven said...

Good point Lake Hills Renter. I've been following this blog for about two years now and I've noticed that in the last six months, the noise ratio has increased considerably (shug, seattle hotty, et al.). I've also noticed that many of the regulars have gone into seclusion either due to the increased noise or life cutting back on time spent on the blog.

As the collective insight on this forum gets to be more and more of a reality, I believe the noise ratio will only increase. Thankfully, this blog is archived.

synthetik said...

this blog is incredibly biased

how so exactly? I supposed if you are a delusional homedebtor and -want- to believe in prices that appreciate forever as you float into retirement, then you could easily interpret data and numbers in a different way.

Lionel said...

What he fails to mention is that if you time it wrong, you can lose your shirt. I have a good friend who lost about 400K in the matter of a few months during the last downturn in LA. He made the mistake of buying the house next door to his at the peak, then couldn't sell his original home for quite a while as he followed the market down. He rents now.

Shawn said...

This blog is biased. It is biased toward sanity and logic.

"From 1890 through 1990, the return on residential real estate was just about zero after inflation." Shiller.

Seattle Home Owner said...

I made a u-turn and decided to make another drive by. Market timing whether in stocks or real estate is risky. However, buying and holding is an excellent long term strategy in both. Back when we saw the "will the last person leaving Seattle please turn out the lights" billboard people were saying all of the things you are saying. The market is at the top, it's going to tank, put your money somewhere else, etc. If you were crazy enough to have bought a house at the worst time in 1970 before the billboard was up you would have paid about $21,000. If you held it for 10 years you would have more than doubled your money. If you still have it your are very happy. The bottom line is, you have to live somewhere and the incentives to live somewhere that you own are huge. Between the potential appreciation and the tax write offs not owning a home will cost you in the long run. With that being said, if you do not think you can stay in one place for longer than at least 5 years you are right. You could lose money. Since 1950 there are very few places in America that did not have apprection over a five year span even if it dipped temporarily. Market timing is risky and that's what it sounds like you are trying to do. Chances are if you buy now and hold you'll make money and even if the market drops for a few years you will most likely make it back. Alternatively, you can wait for the market to tank keep paying your landlord and hope to get a good deal in the future. However, if you are like the people that have been waiting since 1999 because they thought it might drop like it seems to every 10 years, you may watch your ability to afford a house go out the window and be kicking yourself later.

Mike said...

Seattle Home Owner is either a realtor or a troll. He even used the "you'll be priced out forever"line.

Sure buddy, everyone is going to be priced out forever. Seattle is well on it's way to becoming a playground for the rich and famous.

The Tim said...

Thanks for dropping by again, SHO. However, you didn't answer my question:

Seattle Home Owner, could you please explain to me exactly how one can cash in on "the smartest investment you'll make"?

T,V & Mr.B said...

SHO Your quote is intersting here...
"Chances are if you buy now and hold you'll make money and even if the market drops for a few years you will most likely make it back."
the people who bought at peaks have rarely made their money back with inflation. People who bought at the peak in 1891, had to wait 96 years before they made their money back. that is a little long to wait.
You statement is not factual at all.

glad you made a u-turn, but if you have been reading this blog at all over any length of time, you would realize that 90% of the things you said, are inherently incorrect.

Terry said...

seattle home owner

Two points:

1) We have never, ever before seen real estate appreciation in this country at the rate we have experienced recently. You seem to be saying that we should ignore the very real possibility that home prices are unsustainable at the current level. Is that correct?

2) What about affordability? Right now the median for Seattle home prices is about 6X the annual median family income. Are you suggesting that people continue to buy thru "creative" loans, if they can still get them?

Ouch! said...

Seattle Home Owner,

Gosh, thanks for filling me in on the true scoop. Now I finally understand that all the bubble watchers who sit on the sidelines are only hurting themselves and will be priced out forever, while members of the current homeowners club will be the only ones able to buy homes in the future. This makes complete economic sense now. As long as you're going to be living in a place for 5 years, it's always a good time to buy. I will ignore the unprecedented upswing in prices and call a local real estate agent ASAP. Oh, wait a minute. Perhaps there's a chance that I could get a better deal in the future when it's more of a buyers market. Naw, that never happens....

flotown said...

Seattle home owner:

Everything you state is conventional wisdom. Stick around here long enough and you'll see how each of the points you raise can be countered surprisingly easily. I've gained a new perspective checking our this blog

meshugy said...

However, if you are like the people that have been waiting since 1999 because they thought it might drop like it seems to every 10 years, you may watch your ability to afford a house go out the window and be kicking yourself later.

Hi Owner...

That's an excellent observation...thanks for your input.

Deejayoh said...

Drive-by-guy

your post contains so many platitudes that I can only assume you to be a troll.

not worth my time

Benjamin said...

I was among the people who in 1999 thought that Seattle Housing was far too expensive, and who would throw that much money at a house. Of course, at the time I was also 18. I guess according to some, what that means is I screwed up, missed the train, and now I'm bitter and wrecking their high.

I believe this is a good analogy of the housing bubble. You know the girl who never married in her 20s, then in her 30s everyone tells her if she doesn't marry soon she'll be an "Old Maid" Forever! So she marries the next thing that moves, and starts telling any of her peers how much better it is now that she's married. Two years later they divorce. Yep, that same viral advertising is what drives the housing market.

Comrade Chairman Greenspan said...

'If you are 30 years old, this is entirely logical. If you are old enough to have seen the "will the last person leaving seattle please turn out the lights" billboard, it seems comical.'

I'm 30 but can read history, so file it under 'comical'.

FB said...

Folks,

If you look at the well-distributed Shiller graph, you will see that our situation today is ABSOLUTELY NOTHING like the situation in 1974 or even 1999.

Take some time and think about this SHO. Your comment may have made sense in 1974, or even 1999, but we are in a very different situation now, something we have all been trying to point out.

Seattle Home Owner said...

Wow! This is trippy. It sounds like I need to answer a few of the comments.

Seattle Home Owner, could you please explain to me exactly how one can cash in on "the smartest investment you'll make"

Sell your home when it is worth more than you owe sometime in the future.

For the guy who keeps bringing up 1891, all I can say is I wish to god I bought property in 1891. I could have given someone a couple of gold nuggets for thousands of acres. Try running the numbers for the past half century I bet they will look better to you.

1) We have never, ever before seen real estate appreciation in this country at the rate we have experienced recently. You seem to be saying that we should ignore the very real possibility that home prices are unsustainable at the current level. Is that correct?

Absolutely not. The market could well take a downturn. In the last half century when the market turned down it came back up. We certainly do not know. Therefore, we take a risk. The risk is that we may pay a lender some monthly payments and maybe even a chunk of our money as a down payment. We hope that in the long term the market rises. Maybe it falls, but if you are willing to invest in stocks you are already used to that risk. The nice thing about a house is you can live in it. Otherwise, you just pay out monthly for nothing. No chance of a return, just payments to someone.

2) What about affordability? Right now the median for Seattle home prices is about 6X the annual median family income. Are you suggesting that people continue to buy thru "creative" loans, if they can still get them?

No. I agree that there is an affordability problem in a lot of markets across the US. If you get creative and bite off a big loan and there is a turndown you would be more at risk than if you put 20% down. Leverage is a risk reward scenario. The more you leverage yourself the riskier it is and the potential reward is higher. So, if you can not afford to buy you should not unless you are into that kind of exposure.

What's a troll in blogspeak? I assume you're not calling me a green chunky goblin looking thing. I am a little chunky so you got me there. Is it someone who disagrees with the prevailing opinion of a site?

I was among the people who in 1999 thought that Seattle Housing was far too expensive, and who would throw that much money at a house. Of course, at the time I was also 18. I guess according to some, what that means is I screwed up, missed the train, and now I'm bitter and wrecking their high.

I wouldn't say you are a screw up just a little less wealthy.

I believe this is a good analogy of the housing bubble. You know the girl who never married in her 20s, then in her 30s everyone tells her if she doesn't marry soon she'll be an "Old Maid" Forever! So she marries the next thing that moves, and starts telling any of her peers how much better it is now that she's married. Two years later they divorce. Yep, that same viral advertising is what drives the housing market.

It's also like the guy who waits for the perfect woman. He dates great gals but none of them are quite right. One day he is 65 and lonely. I can probably think of other analogies as well. Bottom line is you might be right and you might be wrong. If you are wrong you lose money. If you are right you make no money.

T,V & Mr.B said...

SHO
"If you are wrong you lose money. If you are right you make no money."
Tell that to the people who are losing their house right now. Tell that to the people who are upside down. Don't worry, Their house will be worth more in the future. It's just they won't be living in it.

Seattle Home Owner said...

T,V & Mr.B

I am not saying everyone should buy nor am I saying that it is perfect. There are risks in investing. There are people losing there houses in boom times and bust times. However, their can be great rewards as well.

Terry said...

seattle home owner

...Chances are if you buy now and hold you'll make money and even if the market drops for a few years you will most likely make it back....

Given your point that buying real estate for the long term is generally low risk (as an investment), I would tend to agree, except for the fact that appreciation of real estate the last few years has been unprecedented. Never before have home prices been so inflated in this country. Some say that the bubble we are experiencing now is close to being analogous to Japan’s real estate bubble in the late 1980’s. After Japan’s real estate bubble burst in 1990 there was seventeen straight years of depreciation.

Please don’t say, "That can’t happen here because we are different."

The Tim said...

SHO,

First off, I want to thank you for actually coming back to engage us in a conversation. While I do enjoy the occasional "drive by comment" where the author "sets us straight" and never comes back, I also enjoy it when someone with a dissenting view actually takes the time to discuss things without antagonism and smarmy remarks.

Now, to address your response:

Sell your home when it is worth more than you owe sometime in the future.

Okay, great. But then where will you live? If you buy another home to live in, you just end up rolling all that profit back into the new home. If you go back to renting, you're downgrading your living arrangement in order to liquefy your "investment." Not a problem that anyone invested in the stock market has ever faced.

Also, nothing is ever certain. What happens when you buy a home intending to hold it long term, taking out some form of adjustable-rate and/or interest only, zero-down loan, because hey, you're in it for the long term, and thanks to the miracle of unending appreciation, you can just refinance later... Home prices start to drop, the economy goes into recession, you lose your job, and then your interest rate resets. Now you're stuck with a loan you can't afford, with a balance greater than your home is worth. Maybe you get offered another job across the country. Whoops, you can't afford to move, because you would have to pay off a chunk of the loan out of pocket. But you can't stick around, because you can't find a job...

That's an extreme scenario (one that I predict will happen with increasing frequency in the not-so-distant future), but even just a few of those factors can combine to screw over people who stretch their budgets in order to buy a house out of fear.

Home ownership is a nice goal. It is nice to have a place to call your own, where the only person you answer to is yourself (well, and the HOA, and City Hall, and the county...). But don't fool yourself into thinking that home ownership is some sort of gold-bricked path to wealth. Historically speaking it has been at best a break-even proposition. You simply cannot use the last 10 years as a measuring stick while ignoring the bulk of history on this matter.

The Tim said...

After Japan’s real estate bubble burst in 1990 there was seventeen straight years of depreciation.

Read all about it. All the "they're not making any more land" arguments sound pretty ridiculous when you realize that Japan had that big of a crash.

No land is immune to the laws of economics.

Deejayoh said...

What's a troll in blogspeak?

A troll is somebody who posts incendiary remarks just to see the results - not addding anything to the conversation. Since you've come back to debate, I'll retract my previous comment.

I think your comments about buy and hold, market timing, etc make sense if one believes they are investing in a market that is driven by fundamentals. However, if one believes they have sufficient insight to identify that they are participating in a speculation-driven mania (a la NASDAQ 1999) then it makes no sense. There is plenty of research to show that manias always end with crashes - and the last people in are always the biggest losers.

Most of the conversation here is to that point - are we in mania/speculative bubble (most of us believe yes we are, with a few exceptions) and if so - how/when will it impact the Seattle RE Market?

Given your comments, I'm curious whether you believe:

a) we aren't in Real estate bubble - so the generic buy and hold advice still holds?
b) that Seattle is immune to effects of a bubble?
c) even if we are in a bubble, it's better invest and just ride it out than to try to time it?
d) some other view I haven't considered?

I'm interested in where you're coming from. Most of the other stuff you've pointed out I already heard from David Lereah.

Seattle Home Owner said...

Deejayoh

Yes we could be in a bubble. What does that mean? Well maybe prices drop significantly. Maybe they drop a little. Maybe we go 4 years and then they drop. Maybe we are not in a bubble and because of the growth of our area we continue to appreciate. If you or I knew the answers we would be rich. It is the same in stocks. Why is Google worth billions? They don't even make anything. They could go bust. If they do investors will lose money. Why are people less afraid of that? With a house or stock you are betting that our economy will grow. As long as there is growth it is a safer bet. The beauty of a house though is you can also live there. Our economy is so complex. You can't make simple statements like this is unprecedented so therefore it is bad. It might be, it might not be. My only point throughout all of this is that the rewards outweigh the risks. Not for everyone but for the majority of us. And if I had to pick a letter it is C. Market timing is riskier in my opinion than getting in and riding it out over the long haul for both stocks and real estate. Therefore, my assumption is that even if we are on a bubble we will overcome it eventually. Maybe its longer than five years maybe not. In the end only time will tell.

Deejayoh said...

SHO -
thx for the response. I get where you are coming from. From your nickname, I guess it's safe to assume you own today. In my case, circumstances (aka divorce) dictated that I sell my house last June. I spent a bunch of time thinking through whether or not to jump back in. I almost did. Had a townhome under contract. When they did not finish construction on time, I got cold feet - pulled out, and rented.

Now the same place just finally sold for - asking price was $55k less than my contract price. Plus my rent is 30% cheaper than a tax-shielded mortgage. So, yes market timing is risky, but if you're smarter than the average bear - it can be very rewarding! Picking tops and bottoms is murky, but I think it was none other than Warren Buffett who said "it's better to sell a year too soon than a day to late"

That said, if I hadn't had to sell - I am sure I wouldn't have. and I probably wouldn't give much thought to housing bubble. But I also wouldn't be doubling down - and I also would be pretty ignorant to the impact of artificially low interest rates and loose lending standards on our economy, or the fact that our GDP growth is primarily fueled by consumer and gov't debt, and I'd probably believe it when Ben Bernanke says we aren't headed for a recession.

Now I think I'm better informed and have actually put those economics classes to use. That's the value of this and other blogs.

uptown said...

SHO -

You're just too damn funny! I hope you're not an investment adviser. You don't seem to understand the concept of "buy low and sell high".
I, for one, do not like to wait for a decade before I can afford to move, just because I bought a house at the peak of a market boom.

Terry said...

seattle home owner

Even though I disagree with you in that I personally believe the risks outweigh the rewards right now, as I sincerely believe that a severe market correction is due, I appreciate you sharing your opinion. It is thru discussion that we can all learn if we remain open to other's perspectives.

flotown said...

Question for the board:

Can real estate prices really fall very steeply (in the next ten years) with so much institutional money sitting on the sidelines waiting for a good deal to buy?

I just read an article in Urban Land talking about 100s of billions $$ waiting for higher cap rates while invested in low-risk instruments. Funds that have less of a need to hedge against inflation won't invest in real estate with 6% yields. That said, if prices were to fall and deals to be had they would step in. In the commercial markets, this theoretcially provides protection from cap rate increases for developers. I'm wondering if it might have a residential corollary but I don't know enough about the workings of the secondary mortage market.

T,V & Mr.B said...

SHO,
Many of the things you say are true as The Tim mentioned in a normal housing situation. You said, If we all knew the answers, we'd be rich.

Well, I think the bubblers here do have a better concept of what is going on at the moment.

You say timing the market is tricky. It really isn't. When one can see the obviousness of over-inflated houses, they shouldn't purchase. When one see decline, or at least stable fundamentals, then purchase.

I moved to San Diego in 1991. things were just starting to wane then with Iraq etc... I decided to wait. for 3 more years home values decreased. Decided things were a bit more stable in 95. Decided to buy. Sold in 2006 for 165% more than what I bought it for. I am no genious, but I could certainly see when things weren't right. Like now. Could buy, wont buy.

Deejayoh said...

Can real estate prices really fall very steeply (in the next ten years) with so much institutional money sitting on the sidelines waiting for a good deal to buy?

Good question. RE prices are going up from too much capital chasing too few deals. Many economists refer to it as "liquidity bubble", which is driving many asset classes.

If something happens that impacts global liquidity (a la LTCM 1998) then maybe that money is not there. I have read that fundings of REITs are already plummeting.

FB said...

And if I had to pick a letter it is C. Market timing is riskier in my opinion than getting in and riding it out over the long haul for both stocks and real estate.

In its simplistic state, this is a very true statement.

However, lets bring it into the reality of Seattle. Here is the choice I have.

1. Rent for $1200/month, save $4000/month in diversified investments

2. Buy same house for $4000/month (PITI + maintenance), save $1200/month in diversified investments. (This really means only fund my 401K, and have no other savings)

Add to this the fact that I would be buying at historic high prices (by an order of magnitude). See prior Shiller graph.

I don't know about you, #2 does not have me sleeping too well at night. I just don't buy your take on risk/reward. Prices have just become too high in relation to rent and salaries. Your comments certainly do apply to the markets of '99 and '71, as prices were still based on fundamentals (rents and wages). That just is not the case today.

meshugy said...

1. Rent for $1200/month, save $4000/month in diversified investments

If you're going to do these sorts of calculations, you should use some more realistic figures. At best you'd save a few hundred a month. A $1200 rental would be a very small house in Seattle....there's no way you'd have a mortgage that's $4000 a month for an equivalent property.

E-sidedave said...

When one can see the obviousness of over-inflated houses, they shouldn't purchase.

I don't agree with that blanket statement. There are many other factors at stake when deciding to buy.

Using myself as a personal example, we (wife & I) were fortunate enough to be able to afford a median-priced home in 2005 that cost 2x my salary (unlike in San Diego where we moved from). We were tired of renting, moving, being at the whim of landlords who may try to raise our rent, decide to sell, etc. We had moved 6 times in 4 years for various reasons and were just plain tired of it.

We wanted to paint walls, make home improvements, put down roots, record our kids' height on the wall in the kitchen. We wanted a place we can grow old in. (And throw away those cardboard packing boxes once and for all!)

Coming to Seattle (where my wife grew up), we were aware of a possible housing bubble, but we still felt we should go ahead and buy.

1. Our home cost 2x my salary.
2. We could put 20% down (though if you read my previous posts you'll see that we didn't).
3. We got a 5.5% fixed rate loan.
4. We have no plans to move. Ever. (I know, I know, everyone says that.)
5. We are starting a family and want some stability (wife especially).
6. If we had to move, the rent we could charge would cover the mortgage (+ or - a couple hundred dollars).

I understand that we are not average buyers and that our incomes allow us more options than many others; however, not everyone in Seattle makes the median income nor does every homebuyer buy for purely financial reasons.

I'm not not saying everyone should buy now. Case in point--an upholstery guy was at our house a couple months ago to do some cleaning. We got talking about the housing market and he was saying how badly he wanted to buy a house. He told me how a mortgage broker said he could get him a home loan even though he didn't have any money down and his credit wasn't that good. I spent a good 30 minutes explaining to him why he probably should NOT buy a house at this time. I even gave him the URL for this blog.

I usually enjoy this blog, but the bias that gets to me is how, for the most part, the bears here are making blanket statements that NO ONE should buy a house now. There are many kinds of people with various financial situations and making blanket statement like that aren't benefiting anyone. I believe people should be educated before making what is often the biggest purchase of their lives and this blog does a pretty good job of that, if one can weed out the other noise.

Mike said...

At best you'd save a few hundred a month. A $1200 rental would be a very small house in Seattle....there's no way you'd have a mortgage that's $4000 a month for an equivalent property.


How is comparing the mortgage payment to the rent an apples to apples comparison?

Last I checked, there's no way to avoid property taxes, and you can only avoid doing maintenence if your ultimate plan is to tear the house down. (now we know why this pencils out for M - his house is like a 1989 Toyota Corolla that he is driving until it dies)

FB said...

If you're going to do these sorts of calculations, you should use some more realistic figures. At best you'd save a few hundred a month. A $1200 rental would be a very small house in Seattle....there's no way you'd have a mortgage that's $4000 a month for an equivalent property.

You need to open up your eyes dude.

I live in a 2/1 which I rent for $1200.

It zillows for $493K
T&I is $452/month
P&I is 2,955/month
Put the standard of 1% of value/year (it needs work) for maintenance, and I would say I am just about right on the money.

Where do you get 'a few hundred bucks' Do you just make this stuff up?

Lionel said...

I found a ncie house in Montlake for 1050. Found a 4 bedroom craftsman in Ravenna for 1350, just missed it by a week. Craigslist isn't the only way houses are rented. Try the UW rental board.

Matthew said...

I live in a condo that I pay 1200 a month in rent. A similar condo next to me just sold for 383,000.

flotown said...

"6. If we had to move, the rent we could charge would cover the mortgage (+ or - a couple hundred dollars)."

Median price home that could be rented out and almost cover its mortgage. !LOL! please tell us more

Lionel said...

I imagine the rent I'm paying (just under 1700) covers the PITI of my house, but only because the owner bought it a while ago. If it were to sell (450K or so), I don't think the rent comes close to covering PITI.

E-sidedave said...

flo-

$400,000 -- roughly median price in spring 2005

- 20% down (we have the cash to pay off the 2nd, if necessary)

= $320,000 financed at 5.5%

$1800 payment + $300 taxes/ins = $2100. That is what comparable homes are renting for here on the east side. My apologies if my definition of "median priced" for spring '05 is incorrect.

flotown said...

In seattle, a $400,000 home gets you the most run down 2 (maybe 3) BD, 2 Ba home on the block. Rents in Greenlake/Ballard for $1400-$1600. Guess it depends on your perception of "a couple" hundred. Good for you for capturing 1 1/2 years of upside of one of the most scorching real estate markets in history.