Comments on: Buying a House – A Risky Proposition?

By: Chris P

Chris P — Wed, 23 Dec 2009 15:51:50 +0000

While there are many benefits to ownership to consider, I think most people are simply fooling themselves at the present time.

First off, housing has basically had a 60 year bull market, which in my opinion makes the current juncture MORE dangerous. No uptrend or downtrend lasts forever. Similarly, the stock market has had a nice 75 year run from 1932-2007; does that guarantee the next 75 years will be the same? No.

So now after ~60 years of rising home prices, the next step is – more rising prices? Doubt it. Not in the intermediate term anyway. Yes, eventually hyperinflation will return but maybe 10-15 years away? right now there’s about 50 times more debt in existence than currency, even including the Fed’s recent actions. A debt collapse means there will be a scramble for cash to pay off outstanding debt(temporarily dollars will become rare), meaning prices for everything will go down. Really, who out there actually has a significant amount of CASH in the bank, or better yet on hand? Everyone has “wealth” tied up in stocks/bonds, which can collapse in value instantly; or housing, which will be highly illiquid in the next crisis, and subsequently also fall in dollar value.

Fundamentally speaking, housing was WAY overvalued relative to incomes back in 2003, BEFORE the final bubble in 2002-2007. Nominal prices are now only back to 2003 levels, but the average income has languished or decreased – so it is STILL WAY OVERVALUED. Just to get back to the 1970-2000 mean for housing vs. income means another 30% drop from here. To get to undervaluation, where most bear markets end, would be perhaps a further 70% drop.

Anyway, I’m glad you boomers were able to make all your money in housing over the great bull of 1970-2006. I plan on buying at the bottom, from you, at 20% of peak prices and doing the same. Maybe you should consider selling now and renting for a few years? Note that we’re in a temporary recovery, so home prices can bounce for 1-2 more years. Let’s see where things end up in 2020 if this “recovery” is just a mirage. Just follow the stock market and it’ll tell you where housing is going.

By: p bear

p bear — Fri, 18 Dec 2009 03:46:10 +0000

bullshit .. this is all bullshit ..

you bought a home because your wife said:

“I want a house .. NOW!
I’m sick and tired of moving every few years,
new schools, new friends, new phone numbers ..
now Axel .. buy a house now,
and no, I don’t care what it costs. “

By: Chuck

Chuck — Fri, 18 Dec 2009 03:34:55 +0000

Axel, I think you are catching a falling knife on this one. I would love to own an Eichler home in the Silicon Valley area, but California laws/taxes are only going to get worse. It appears Inflation is the direction, but I am convinced we are going to see a deflationary collapse. This time the bubble was just too big to re-inflate. All the money pumped into the system is not getting to us commoners on main street. If only I was a Banker and not an Engineer. I am a die-hard gold/silver investor and think that will help no matter what happens. The book “The Fourth Turning” has me convinced the next 10 years will be “soup kitchen” time. Cheers

By: Axel Merk

Axel Merk — Wed, 16 Dec 2009 05:43:37 +0000

First of all, you are a great audience, your comments are very thoughtful. A common theme in the comments is that if inflation were to become an issue, purchasing power would decrease and may not push up home prices - at least not until inflation is a very serious problem. Two comments on this:

On the one hand, it is correct and a basic problem I eluded to in my article: the Fed may be able to induce inflation, but it is rather difficult to control where it will hit. Currently, freshly printed dollars mostly support commodity prices and investments abroad rather than making it to where it is needed most. It's one of the reasons the Fed directly purchases mortgage-backed securities (MBS) to stimulate the housing market; a rather ill-guided effort in my humble opinion as it is doubtful that buying MBS is more effective than buying government bonds (I have a problem with that too, but that's a different story).

On the other hand, I frequently discuss how monetary (interest rate) policy that has been pursued this decade contributes to a widening of the wealth gap. A credit driven society may be more efficient using former Fed Chairman Greenspan's words (when leasing rather than buying a car, for example, your monthly paycheck gets you much further), but it is far less shock resistant. If you have no debt and encounter a crisis, you swallow, find a job and move on. But if you have debt and encounter a crisis (say, lose your job), it is increasingly difficult to make it back onto your feet. A credit driven society is also far more interest rate sensitive, giving the Fed far less flexibility in combating inflation as any tightening nowadays is likely to have far greater consequences than it would have had 25 years ago.

What does this mean when translated to residential real estate? It may well mean that real estate in more affluent areas may be less affected by an inflation induced erosion of purchasing power. More provocatively speaking, we may be on a path to a Latin American society with a diminishing middle class.

Axel

Axel Merk
Author of Sustainable Wealth – order now.
President and Chief Investment Officer, Merk Investments

This report was prepared by SustainableWealth.org, and reflects the current opinion of the contributor. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any investment security, nor provide investment advice. SustainableWealth.org is a trademark of Merk Investments, LLC.

By: Nate

Nate — Wed, 16 Dec 2009 02:29:36 +0000

Real estate in prime areas might be a good bet in a time of high inflation (I’ve always heard you should “buy beachfront”), but one counter-argument is that higher financing costs — due to inflation — will be a drag on the most heavily-leveraged investments such as real estate.

If the average engineer in California is anything like me, they’re probably looking at their paychecks, which have declined or stagnated in real terms over the past few years, and wondering how they can afford to borrow half a million dollars to buy a place 5 times their salary. If we get high inflation, the rising cost of food, education, energy, taxes (bracket creep), etc., will make it even harder to afford to own a home. With less job security due to the crappy economy and long-term trends such as offshoring, owning expensive real estate is a risky proposition for me.

I would love to buy a place here in LA, but I value the flexibility that renting affords. Perhaps certain areas like Palo Alto and West Los Angeles will always be special, due to the presence of high-income jobs for an elite segment of the population. However, I’m not sure I’m willing to risk everything I have for a leveraged bet on real estate.

By: Curt Weil, CFP

Curt Weil, CFP — Wed, 16 Dec 2009 00:28:03 +0000

Axel – good, thought-provoking article.
By the same reasoning, choosing to rent is accepting the risk of further deflation in housing prices, which may not be a bad choice. Comparing cost to rent vs. the cost of capital to buy (net of tax benefits,) makes renting very attractive right now, as you well know. Adding in the personal costs that you mention, however, tips the scales a bit.
This is not dissimilar to the buy vs. lease decision on cars, or more appropriately, buying a used mid-size car vs. a new luxury vehicle.
In any case, thanks for putting your thoughts in print, and stirring my neurons.

By: Jason

Jason — Tue, 15 Dec 2009 23:34:49 +0000

I didn’t know Axel was a Kalifornicator! I work in computer chip manufacturing, and people I know who can live where they want leave Kali for Colorado as soon as they can. I lived in Los Gatos and had an office in Santa Clara in the mid 1990’s. In 2000, I bought a palatial mansion in Middle Tennessee for less than 10% what a similar house would cost in the Bay Area or LA. Actually, the build quality and land I got is unobtainable in Kalifornia. Tthere is no state income tax in TN.

My TN house price is unchanged in 10 years after agent commission is paid. I don’t regret not buying / living in Kali.

There are now more semiconductor chips made in Texas than Kalifornia.

You don’t live IN Kali, you live THRU it, most people are passing thru.

By: w anderson

w anderson — Tue, 15 Dec 2009 21:27:29 +0000

I can not believe that anyone rents. I do believe buying house for cash if you can for the mortgage is a rip off. I bought a studio a little after 9-11 for a student son at NYU for $117000 because the dorm rent was $16,000 a year. We have had it since and one or another son has used as a place to stay . He live in Chicago now but commutes to a job on Wall Street Monday through Thursday. I own three other houses and I am over 59 1/2 so no cap gains on the first. If stay for a while in the second then no cap gains for that one. It a million in no cap gains. Then, I have a loser bought at the peak. After it is rebuild and landscaped I will break even when I sell those. By paying for each house in cash and keeping the house modest they have all appreciated to about a total of 1.7 million with no cap gains on a million plus the improvement are deductible. It is hard to find a better investment. I bought and sold two other properties and made about $400,000 with cap gains to pay. I like rebuilding them and have made a fortune with very little tax. The next house will be a 1.7 million mini mansion on Hawaii where I will retire. I hope my children can sell it and I hope housing price do not rise to quickly after the recession.

By: Gary

Gary — Tue, 15 Dec 2009 19:51:14 +0000

Hi Axel:
Enjoyed your article about your home purchase. I lived in San Carlos for 20 years before moving to Washington State (no income tax). Never could afford Palo Alto. My daughter rents in Sausalito. Question – how did you hedge your down payment?

Regards,
Gary Harris

By: Bud Conrad

Bud Conrad — Tue, 15 Dec 2009 19:28:10 +0000

Axel,
That’s putting your money where your mouth is! Buying a house in overpriced Silicon Valley when all the stories in the news are that Option Arms coming due, and Commercial Real Estate is entering collapse and Jumbos are impossible to get are going to cause another housing crash. If the Fed raises rates next year, of just stops buying MBS, there could be a slowing of demand and prices fall.You were smart to rent during this housing collapse.

But buying real estate is completely in the direction of your long term opinion that fiat currencies will continue to debase (inflate) because houses are real rather then paper assets. You are also getting a tail wind of low rates induced by $1.55 Trillion of Fed mortgage related purchases. And there are tax advantages to housing investment for the owner occupied that are added benefits.

The key market question is whether the housing price collapse is now over. I have been negative on housing prices since at least 2006 when I could see the impending subprime as the first brick in the wall to crumble with disastrous follow-on for the bankers that took years to unfold. Now I am still a little negative about houses from the continued expectation of slow economic growth. I am more ambivalent now than I have been for about 4 years. Maybe that’s why I never wrote the chapter for my book even though there is lots of good data, and it was the pivot of the initial crash. My personal view is that I’d rather live here than a lot of places, and am willing to pay the higher price.

[Moderator's note: Bud Conrad is Chief Economist at Casey Research and author of the forthcoming book Profiting from the World's Economic Crisis]