Real Estate and investing

[Guest]

I'm aware that the bubble is going to come to an end in a few years, which cheers me gladly as this should coincide with me having the money and looking for a nice large house. I'm also aware that real estate is driven by local markets, and that it will deflate in some places sooner and remain in other places longer.

I'd like to know what the savvy APS members are thinking about the market, investments, and ownership. I'm also wishing I'd bought google stock back when it was 85 dollars.

[The Rabbi]

What makes you think there is a bubble in real estate today?

[The Rabbi]

People have been doing that for a long time already.  What makes you think it is different now?

[...has left the building.]

Working as a financial professional has taught me to not discuss investment theories because any angle can be proven somehow since it is all speculation to some degree or another. But what the hell...

Which market are you talking about? Real estate? FOREX? Stocks? Bonds? CDs? Rare autos? etc.? Investments are such a wide-ranging thing that the markets are all vastly different in attractiveness.

Regarding the bubble, it isn't everywhere, some places in the U.S. are still very undervalued. The bubble is regional at best, but more metro-area defined than anything.  

What makes you think there is a bubble in real estate today?

You can tell when EVERYone invests in real estate...when it hits Joe Blow that its a great idea to invest in "X", that means you should have sold your shares/ownership/etc. of "X" months ago.

[Justin]

You can tell when EVERYone invests in real estate...when it hits Joe Blow that its a great idea to invest in "X", that means you should have sold your shares/ownership/etc. of "X" months ago.

+1

[Monkeyleg]

Daniel Flory is obviously the expert here, but I've seen real estate bubbles and busts in various areas nationwide over the last few decades.

I wish I knew years ago what I do now. Is that a caveat emptor enough? If I knew 1% then of what I know now, I'd be financially secure.

There are several factors in play.

In some areas, real estate prices are ballooning, and beyond what prices will sustain when that bubble bursts. It's happened in CT, CA and other states. The Connecticut bubble in the late 1980's was remarkable.

Low-interest rates have brought renters into the buyers market. That's fine, as long as they're buying what they can afford. My mortgage payment is $535 a month. When I see 30-something's buying a new home with a $1500+ payment (plus taxes and insurance), it scares the hell out of me.

I also see every day (I get the details of financing) people taking out home equity loans that are near the full value of their homes. That's nuts.

What's even more nuts is that those "appraised" values may not even reflect the fair market value of the homes. Many states have experienced budget crunches during the last four years. One way to raise taxes without having to admit to raising taxes is to raise the asessments  on homes. We're seeing that here in Milwaukee. Back-door tax increases that make most homeowners think their homes have suddenly sky-rocketed in value.

Looks like some folks are going to take a big hit.

[Justin]

It's happened in CT, CA and other states. The Connecticut bubble in the late 1980's was remarkable.

I don't know the details about it, but evidently the savings and loan scandal in the 80's decimated the real estate market in Colorado Springs.  I've heard stories from people who were here when it happened of whole blocks being auctioned off for $100,000 or so.

[brimic]

My philosophy has always been to run in the opposite direction that the rest of the pack of lemmings are running. In the early 90's when the stock market was supposedly stagnant, I started dumping money into mutual funds. By the late 90's, everyone was getting into the stock market and buying overpriced crap, I ran the other way, selling off 75% of my holdings in 1999 for a tidy profit. Everyone lost money in 2000-2001, and while I sat on a pile of cash in a bank account. I used the money I made to put a downpayment on a house before the rates started getting really low- my first loan was at 8%, I've refinanced it down to 5.25% since. I wouldn't buy a house right now where I live, and wouldn't even think of buying artificially inflated houses in less desirable loactions, no way, no how.  I don't think values are going to come down, but they probably will flatten out, unless as Monkeyleg pointed out, municipalities keep manipulating values to increase tax collections.

[brimic]

Tinfoil helmet time.

This was told to me by one of my colleagues who belongs to some sort of weird stockpicking/life insurance/financial scheming cult. He told me the worst place to put your money is into a house. Having more than 40% equity makes your property attractive for foreclosure because the bank can at that point turn a profit on it, more equity=more gain to them. Keeping less than that amount means that they will probably lose some of their investment. Best to take out home equity loans and put them into a stock picking/life insurance scheme that will yield a higher rate of return than what you would lose on interest.   He drew up a convincing picture of how assets should be invested versus the typical holdings of a household in equity, 401ks, etc. He's a little flighty, but he has a PhD in chemical engineering and isn't exactly dumb, but I'm far from ready to sign on to cult that he belongs to.

[Art Eatman]

brimic, it seems to me that the whole deal involves a rather cold-blooded, practical view about "overhead".

If you've found the house where you want to live until you die, that's fine; buy it and pay it off--assuming you have no qualms about your long-term income and the affordability, etc.

Otherwise, if you move from town to town, job to job, it's a whole different deal.  For a given house, which costs less:  Renting, or buying?  Factor in the interest deduction in this.  I grant that if you can buy when prices are rising, the profit potential is there, but no boom lasts forever.  Repeat after me, "No boom lasts forever."

If buying costs $1,500/mo, PITI, and renting is $1,000/mo, that's $500/mo available to invest.  I leave it to the student to figure what compound interest does to $500/mo over some 25 or 30 years; 6% is not unreasonable...

Art

[...has left the building.]

I'm a firm believer in technical analysis and certain types of obvious signs in the market. Investing is FAR easier than people make it out to be. Why is it so complicated? Because people that sell info/funds/etc. regarding investments WANT you to be confused. That is what makes them an expert and you their client.

My personal approach is to start small, high-risk, and high-return. For example, when was the last time I posted on THR that I bought a new gun? I haven't bought one in well over a year. Why? Because I will take that $500-1500 and put it into a FOREX account. I would have demoed the account and insured profitablity, then start out with say $500. After I get out of this phase where I have enough capital (say $30K in the bank and at least $250K net worth) then I will look at more traditional and most importantly, SUSTAINABLE, means of investment such as business ownership or real estate investing. I'm trying to reach that phase by the time I'm 30, then I can build my business from age 30-55ish and retire.


brimic- Your investment style is called a "contrarian", there are entire funds devoted to this style out there on the markets. Contrarianism is very interesting and is much more prevelant than you may think. In the tech bubble,  pets.com wass worth more than Toyota...in the words of that one comedian "Here's your sign!" Regarding that gent's investment cult, they're correct to some degree. But my approach would be for different reasons: have that equity in your house in case you hit hard times and have to borrow against it as a last resort. You should have a HELOC set up even in fat years just in case something goes awry. But I would NOT advise the average person to put them into the markets. Unless, it is a clear arbitrage opportunity like getting a 5 year fixed mortgage at X Bank for 5.25% and finding a secure bond (such as a muni) that pays out 7.00%, even then you have to decide if the return is worth the risk. I would say no.

Art- I'm currently renting for that exact reason, even though my buddies give me a hard time about "throwing my money away".

[Art Eatman]

Dunno where or when I got the idea that debt was a tool, just like a wrench or a gun.  Debt was never a way of life for me.

I've always joked that I worked 8 to 5 for somebody else, and 5 to midnight for me.  The extra money I made from "messing" with cars, guns and coins let me get set up to "retire" (more like Drop Out) by age 45.

There is a second rule to real estate beyond "Location, location, location."  It is, "Find out where people are going, and get there first."  

Right now, and for I don't know how long, the big movement is some variant of "Five acres, five miles from town."  Find an area where such a movement is just beginning and look it over.  Legwork and "homework", of course.  Sure, you can't get there first, but second isn't bad.

Art

[Paddy]

Debt is only a 'tool' when it is used to acquire an appreciating asset.  For example if you buy a $200,000 house with 10% down.  Say the property appreciates at 5% per year.  That's $10,000 the first year.  But you've only got $20k in the property and you made $10 on your $20.  That's a really good return. Leverage.

That illustration is somewhat oversimplified; there are costs of acquisition, mortgage payments, taxes, etc.  But you get the point.

[...has left the building.]

Debt can be an effective tool when not buying appreciating assets directly, for example: a commercial line of credit that allows your business to obtain raw goods. Semantics maybe...

[Paddy]

Or goods for resale.  I think new vehicle dealerships regularly borrow to buy inventory.  It used to be called 'flooring', and the interest expense is just another cost of doing business (as are taxes), and included in the sales price.

[...has left the building.]

I work in commerical business and we still call it flooring for auto dealerships but short term working capital for other entities. But maybe we're using the old "flooring" term because I'm in the time-warped Midwest :p

[The Rabbi]

Daniel Flory is obviously the expert here

ROFL.

Anyway, the point of my questions to is to say that people are saying the real estate market is a bubble.  In 18 months the real estate market will crash (it might be more, it might be less) and the same people who were waiting on the sidelines for the crash will now be convinced that real estate is a lousy investment and they will be looking for CD's or collecitbles or whatever.  The "secret" of investing success is knowledge and discipline.  It isnt so secret but very few people are able to do this.  And even with that you can screw up too.  Warren Buffett, the most succesful investor in history has just lost a bundle betting on the value of the dollar going down.  It has increased.  He is honest enough to aknowledge his mistakes every year in  the annual report.

[The Rabbi]

Some observations on the supposed bubble might be in order:

Virtually every home buyer is actually not buying a home for $200k or $300k or whatever.  they are buying the home for $1200 a month or $1500 a month or whatever their payment is.  That is because virtually every home is financed.  Home prices move opposite to interest rates.  So the unprecedented low rates have made for unprecedented high prices.
When rates go up (and they are starting too), home prices will move down again because that same $1200 a month will buy less.  Fewer buyers mean longer sell times and finally lower prices.  This is basic econ.  But the net result will be that no one is going to get a bargain.  They will pay the same $1200 a month they were going to pay.  They might get a little more or less since the rate-price relationship is not absolute.  But the net result is no one will luck into a bargain in the crash unless they just have $200k in cash sitting around.
I have been an investor for 30 years, and a real estate investor for 12, more if you want to count the first house I bought in the last bubble that I lost $50k on.  I call it tuition.

[...has left the building.]

Dick,

Thanks for the compliment, I hadn't noticed it earlier but I am FAR from an expert.

ROFL.

What was that for? I don't consider myself an expert but I am immersed in financial matters daily, that is the best that I can claim. If you have a problem with me, PM me. I'm chalking your response up to ego...

[The Rabbi]

Because of this:

My personal approach is to start small, high-risk, and high-return. For example, when was the last time I posted on THR that I bought a new gun? I haven't bought one in well over a year. Why? Because I will take that $500-1500 and put it into a FOREX account. I would have demoed the account and insured profitablity, then start out with say $500. After I get out of this phase where I have enough capital (say $30K in the bank and at least $250K net worth) then I will look at more traditional and most importantly, SUSTAINABLE, means of investment such as business ownership or real estate investing.

The logical extension of this strategy would be to buy lottery tickets every week, small investment, big risk, big reward.  Investing in foreign exchange is just slightly more sophisticated.
I dont think working in finance makes someone an expert on investing.  It might help.  Then again, it might not.

[...has left the building.]

I can even smell the arrogance on that last post. Nice. I'm curious to see what your approach to investing has been?

Edited because it isn't worth arguing with you over.

[...has left the building.]

Thanks Blackburn, I was hoping that I wasn't out of line.

[Felonious Monk/Fignozzle]

Daniel's helped me out on some specific questions of my own;
Rabbi's been equally helpful from time to time.

If your strategy is working for you (that goes for ANY of you), you DESERVE to be somewhat proud, and I'd like to learn something from you.  
Hopefully, being proud of your accomplishments  won't spill over into arrogance, which alienates your friends.

Can't we all just get along?

[...has left the building.]

Felonious Fig, I'm glad something I said helped you out. In my experience, investments are even more of a caustic subject than politics and religion. People tend to think that simply because their strategy worked for them, that must mean it is the only path. Hence, I was reluctant to post on this thread at all. Maybe if we can leave the ad hom attacks at the door, we can all learn something from each other.

The Rabbi- There is a vast difference in debt now vs. debt 20 years ago- the prevalence of interest-only mortgages, balloon mortgages, and 100-125LTV financing. If you said 20 years ago that you bought your home with 0% down, that you don't pay principle, and that you have a second that is up to 125% of the value of your house, people would look at you like you've lost your mind. But that type of debt structure is very common in today's market. Many of the newer real estate investors abuse these loan products. So I'm inclined to agree with Blackburn: "This is not sustainable."

[The Rabbi]

I dont know how common it is.  I know from working in the mortgage market that 125's come and go as the market wants.  I think any bank making those loans needs to have its head examined, or its books in any case.
Again, there is wise use of debt and leverage and foolish use of those things.  If someone bought his house with zero down and no principle 20 years ago AND he took the extra principle he wasnt paying and dollar cost averaged into a low cost index fund he would probably have more than enough to pay off his loan and his house would be worth about 3 times what he paid for it.  But that takes discipline and most people lack that.
I do not insist on my approach to investing.  But I do insist that a lot of what I see posted is stuff that has "worked" for 18 months maybe.  When the environment changes the model doesnt work anymore.  What I recommend is not just what has worked for me but what will work for different people in different situations.
Investing is not quick and sexy.  It is slow and takes time and there is no magic formula.