Birdsnest

Home Ownership: Questionable Investing Idea?

Beyond the issue of rent vs. buy is, as the author states, marginal dollar investment - purchasing more home than you need and putting more money into housing say, vs. stocks or even CDs. I keep coming around to the carrying costs of marginal housing. I could put an extra 100K into the stock market, with zero carrying cost, insignificant transaction cost, limited downside if I use a a stop loss, and immediate liquidity. Of, I could put that extra 100K into "more" house, incurring carrying costs of perhaps 4%-5% / year (i.e. property taxes, insurance, upkeep, utilities, obsolesence expense, etc.), plus end-load transactions fees of 6%+, with horrible liquidity, not to mention unforeseen transaction risk (i.e. required inspections for mold, soil contamination etc) upon sale. Those expenses effectively negate any normal-era price appreciation over any carrying period of <10 years. You would do better in a pass book account.

Might the Consumer Banking Revolution Be Coming?

The problem is, and always has been, lobbying. Entrenched power seeks to maintain or increase the profits they accrue from the established system. Thus they work to maintain the status quo, if not to increase their power. And as a result of the existing system they have both the money and ability to lobby legislators to do their bidding. They fight change. In turn, legislators need their money to get relected. In Europe they have no lobbying, and so legislators are able to abide by the needs of the people. In the U.S., the wants of big business always come first and the needs of the people come a distant second. Very sad really. We need to eliminate lobbying through public funding of campaigns.

In Defense of Housing as an Investment

I believe purchased real estate that you live in is almost ALWAYS a bad investment. What are the long term returns? Irrespective of bubble periods residential real estate has tended to appreciate perhaps 2% above nominal income growth and during bubble periods perhaps 10%+ for a limited period of time. These sound good returns. Yet when considering housing returns it is common to simply consider purchase price vs. selling price, some future period later. If I buy at 1x and sell at 2x the naïve view is that I have doubled my money. Leverage is also cited, i.e. I control an asset worth 5x my investment, if not more – the gains are multiplied 5x! Of course, the corollary to this is that expenses are equally as leveraged, and therein lies the rub. The naïve view nearly always ignores carrying costs – e.g. financing expense, property taxes, maintenance, utilities, and transactions fees on that asset sale. In years past, the common wisdom was to move “up” as frequently as possible, into ever larger more expensive homes. This has proven to be a recipe for personal finance destruction. Consider the costs above. First comes financing expense, perhaps 5.25% for a fixed rate mortgage, or perhaps 3.5% after the tax shield. Then there are carrying costs. In most of the country property taxes are commonly 2.5% to 3.5% of the “market” value of the home. Then, maintenance, upkeep, and utility expenses may commonly total another 2% of the market value. Those are fees simply to tread water in an existing home, not to improve it, and are difficult to avoid. They also increase linearly with size. Remember that a structure is still wearing out physically over time, generating expenses, merely sitting there – roofs, siding and HVAC is slowly wearing out, rubber and plastic are degrading, copper is oxidizing, kitchens are become obsolete, etc. So even in “good” years any price appreciation must be scaled back by the sum of 3.5% financing expense plus 4.5% to 5.5% carrying cost. You don’t face these expenses with other conventional financial assets such as CDs. In an era of flat or falling home prices (e.g. now) tack on the above (up to 9%) as ADDED annual loss on top of nominal price. In the more common era of 2% annual gains (roughly 95% of this country’s existence) you have a huge annual loss. Then there are those nasty transaction fees, commonly a 6% commission and a 1% transfer fee, when you are eventually able to sell your highly illiquid asset. If your home has doubled in selling price then that expense is equal to a 14% deduction of your nominal financial gain, exclusive of the added carrying cost loss. Finally, people rarely if ever consider demographics in their housing “investment”. Consider all the aged 35-50 year old families living in recently built McMansions, with 3500 ft2 of space and massive carrying costs. The pure demographic trend is already negative. Ten years from now there will be 5% FEWER people aged 35-50 than today (i.e. people in their peak earning years). Who will be the potential buying pool for your large box? And undoubtedly more large homes will be built in the interim. Who will be buying these big homes 10 years from now, after a decade of likely income stagnation? Who will YOU sell to when there are 5% fewer families in ten years than today? I would submit that 1.) even in “good” times the true financial return from owner occupied residential real estate is massively less than implied by simple selling prices (and generally negative after expenses), 2.) the current pool of recently built large suburban homes will likely stagnate for the next ten years and perhaps never regain their prior price peak, and 3.) the conventional wisdom of frequent move-ups to ever larger homes is exactly the opposite of a sound financial decision. On the other side, rental property which you own but do not live in is a whole different story and can yield attractive returns.

Quest for the Droid Crowds: Not So Epic

Funny. I was in my local Apple store this past Sunday. It was in the middle of a home pro football game. It should have been barren. The mall traffic was very light. You literally could not move in the Apple store. There must have been seventy people inside, with ten Apple people helping. It was packed to the gills with people buying phones, laptops, etc.. EVERY single time I have ever walked by that store it is the same way. Verizion can only dream, and I don't even own a single Apple product.

Conservative Property Index Predicts We're Less than Halfway Through Fall

I’ve come to the conclusion that real estate that you live in is almost ALWAYS a bad investment. What are the long term returns? Over the long haul residential real estate has tended to appreciate 1-2% above income growth, and in bubble periods perhaps 10%+ for a limited period of time. Sounds like a good returns eh? Yet when analyzing housing returns people commonly only consider purchase price and selling price, some number of years later. If they buy at 1x and sell at 2x they think they have doubled their money. They nearly always ignore carrying costs – e.g. property taxes, maintenance, utilities, and transactions fees on that asset sale. In years past, the common wisdom was to move “up” as frequently as possible, into an ever larger more expensive home. Yet consider the carrying costs above. In much of the country property taxes are commonly about 3.5% of the “normal” market value of the home. Also, maintenance and heating bills commonly may total another 2% of the market value. Those are fees simply to tread water with an existing home, not to improve it, and cannot be avoided. Remember that any home is still is still wearing out physically, creating costs, just sitting there over time – roofs and siding are wearing out, rubber and plastic is degrading, copper is oxidizing, kitchens are become obsolete, etc. So even in good years any price appreciation must be scaled back by 5-6% for asset carrying costs. You don’t face these costs with other financial assets. In an era of flat or falling home prices (e.g. now) tack on the above added annual loss. In the three years since the start of the downturn add on close to a 20% added carrying cost loss. Then there are those nasty transaction fees, often a 6% commission and a 1% transfer fee. If your home doubles in value then that expense is equal to a 14% deduction of your nominal price gain, excluding the added carrying cost loss. Even with homes appreciating at bubble levels of 10%+, real annual gains were probably in the range of 4-5% -- for a very illiquid asset. In non-bubble years annual gains are probably in the range of 1%. Finally, people never consider demographics in their home investment. Consider all the age 35-50 year old families living in recently build McMansions, with 3500 ft2 of space and massive carrying costs. Consider the pure demographic trend. Ten years from now there will be 5% fewer people aged 35-50 than today. Who will be the potential buying pool for your large box? Undoubtedly many more large homes will get built in the interim. Who will be buying these big homes 10 years from now, after a decade of income stagnation? Who will you sell to when there are 5% fewer families that today? I am convinced that 1.) even in “good” times the true financial return from residential real estate that you live in is far less than implied by simple selling prices, 2.) the current large pool of recently built large suburban homes will likely stagnate for the next ten years and perhaps never regain their price peak, and 3.) the conventional wisdom of frequent move-ups to ever larger homes is exactly the opposite of a sound financial decision. On the other side, rental property with cash flow which you rent but do not live in is a whole different story.

Hyper-Inflation or Just Hype?

For inflation to persist wage increases have to manifest or the price increases just won’t “stick”. People will simply not pay the higher price (other than for primary foodstuffs and heat – and even then people can cut back to subsistence levels). Any persistent price increase and primary demand will plummet due to stagnant nominal wages. Significant wage increases can only occur when employers are forced to pay due to shortages of labor or particular skill sets. At 10%+ unemployment no one has any bargaining power for wage increases. Your employer (any private sector employer that is) can go out tomorrow and replace you with someone cheaper. Who has any form of job security today? They retain you merely because it would be disruptive to replace you. No one is indispensable. It will take a decade of consistent job growth to simply drive down the unemployment rate to anything approaching full employment. Employers all around me are cutting hours or nominal wage rates. 401K matches are being eliminated. People are trying to rebuild their balance sheets. They will be buying only needs and not wants. Other than necessities you have to convince them to buy. As for necessities, people continue to trade down. I only see deflation or flat prices in this environment for years to come.

Household Net Worth Still Almost 20% Higher than in 1999

Hmmm, so household net worth is 20% higher than 10 years ago eh? Let's see, that works out to a +1.9% annual rate of growth. Hmmm, that seems lower than inflation to me? Let's look it up... why yes it is! Inflation (CPI) has moved from 166.6 to 215.3 over the same period, or an average annual growth of +2.6% and total growth of 29.3% (and many believe the CPI undercaptures inflation -- plus, it presumes one is simply treading water with regard to one's "basket of goods' consumption, never gaining in standard of living). So... +29.3% in CPI, vs. +20% (give or take) in net worth. That sounds like MORE than a lost decade to me. Probably more like 15 years.

All You Need to Know about the First-Time Homebuyer Tax Credit

Q: Do you have to live in the home as your primary residence or can you rent it out?
Q: Could I gift a downpayment and continuing payments to my small child as a means to capture the credit on, say a, $80K home?

Snap-On: The Future Looks Promising

Agree with jacflash; he is dead-on regarding the dynamics of the pro mechanic and the need for massive margins to support the existing SNA business model. As for my meager insight, my father-in-law happens to be a Snap-on dealer. One added factor is financing, briefly noted by jacflash. Much, if not most, of the financing for those red tool chests full of very pricy tools is bourn by the franchised dealers themselves, rather then secondary financing. Dealers often extend their own installment credit to their customers as many of the mechanics have sub-prime credit histories and are more transient. Write-offs happen to be soaring at the moment as mechanics find themselves between jobs or with lowered incomes due to lower repair volume. I would guess that many of Snap-on’s dealers are unlikely to make it through this cyclical trough. This could lead to a more junior set of dealers upon eventual cyclical recovery. There is a great deal of relationship building in the pro tool industry which is difficult to build yet easily destroyed.

Snap-On: The Future Looks Promising

Not sure that I agree with your thesis regarding growth in tool sales as auto dealers close and technicians move to aftermarket repair shops. Auto mechanics typically own their own tools and take them with them to their new job. This is simply a locational transfer of existing tool stocks and not really an opportunity for incremental sales. Indeed, total automotive tool use is probably more function of total aggregate miles driven (down) adjusted for long term shifts in auto quality (better), adjusted for DIY leakage (up sharpley, driving down aftermarket repairs and maintenance). These combined factors would seem to me rather negative for Snap-on.

One in Ten Americans Receives Food Stamps?

dcb: about your comment regarding joining the marchers in Europe, that is a noble intent. It is a shame that it would never happen here, as an incensed populace can do much to motivate otherwise sedentary leadership. A wise man once observed that in Europe, government is afraid of the people, but unfortunately but in the U.S., the people are afraid of their government.

The Fed Wasn't to Blame for the Housing Bubble?

The housing bubble was caused by the mortgage industry, and co-dependent Wall Street securitization, which facilitated individuals taking on far more mortgage debt relative to income than in earlier times, via exotic financing vehicles (various adjustable and extended term loans). Home sellers naturally continued to increase their asking prices, since bidders were able to meet ever higher transaction prices, because they were backed by loans ever more structured to provide greater capital at low initial periodic payments. As the payments eventually ratcheted up beyond the carrying ability of more slowly increasing household incomes, the inevitable conclusion was a popping of the bubble. To eliminate future housing bubbles simply limit mortgage loans to conventional (fixed rate, less than or equal to 30 year terms), with reasonable down payments (15%+), and demonstrable income (no more no doc loans).