Investing Intelligently

I have to agree with the Van Housing Blogger, “I just can’t get enough of this graph“:

It’s great to see a graph that goes back so far and that also factors out the effects of inflation. Look like the annualized performance of homes since 1890 is: (real return). Since 1950 it would be (real return).

Here’s an comment to the Van Housing Blogger’s post by “rentah”. He/she says:

As freako has pointed out in prior threads, we need to know more about the ‘equivalent standard house’ to which Shiller refers. If it’s gotten smaller over the years because of increased density, or if it is now on less land, the Shiller analysis underestimates real RE returns.

I’m reiterating this even though I really like the Shiller graph and my own bias is that people overestimate how good an investment RE actually is, largely because they don’t have any other investments to speak of.

David Chilton is that you? That last part sounds a lot like the Weathy Barber, the fact that for some people their home is their only investment, or in some cases their own “good” investment that they have ever made.

“rentah” continues:

Regarding RE returns these next 5 years, well, the graph alone doesn’t tell us whether the crash will come in those 5 years, BUT the fact that we already know how much US housing has slowed, suggests the spike would be shown to have already turned on an updated chart, and when needle-spikes turn, they CRASH.
>50% correction coming up, Vancouver not exempt.

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I found this great, long, article Lights Out in Georgia at the Vancouver Housing Market Blog. I skimmed over the Sonnypage posts and got the general feeling of it. It was interesting to see the real estate’s total shift of opinion from the beginning, “There will be no recession in 2006″, to the end “our worst second quarter ever in our twelve years.” I really liked Mish’s analysis at the bottom of the page. Here’s an excerpt:

The “strong economy” was (and still remains) an illusion. What we had was an economy totally propped up by homebuilding and real estate transactions. 40% of all home buying in both 2004 and 2005 was for second homes or for “investments”. In addition people were all too quick to spend that increased “wealth” from home price appreciation (and then some), going deeper and deeper in debt.

The economy has not crashed (yet) because homebuilders are still building. That supports jobs. But when those houses don’t sell (and they won’t - without enormous discounts) all this “paper wealth” of homeowners is going to vanish overnight. As soon as someone drops their price by $100,000 every house in the neighborhood will be repriced. Comps will drop like a rock. Consumers used to seeing nothing but rising prices are in for a rude awakening. Their house will no longer be an ATM. Consumer spending is 75% of the economy and it has only one way to go and that is down. There are going to be a lot of people hurt badly in the recession of 2007.

Popularity: 9% [?]

According to Bill Fleckenstein’s “The housing bubble has popped” article, the U.S. real estate bubble has finally popped. He gives many funny, I mean sad, stories about people stuck with homes they paid too much for, like one man in Stuary, Florida:

Concerned about his real-estate investment apparently going sour, he can’t afford to reduce the price to what homes now sell for in his neighborhood — which is about $100,000 less than he’s asking. Says the salesman: “If I got in a jam, I would have to drop the price, but I am not at that point.” His game plan: Rent the house, so as not to “lose my shirt.”

That’s the mentality often seen in manic markets — the belief that you can’t possibly lose, and, when the price goes against you, you don’t have to deal with it, because it will come back. This fellow (and millions more like him) is going to find out that his belief is a mistaken one, in the same way that folks did when the stock bubble burst.

Fleckenstein says the market is no longer leveling off, but is sliding downward:

We’re seeing signs of sales slowing and inventory accumulating, which are all quite classic, even though the timing of when this would begin was not possible to predict in advance.

Closer to home, Vancouver Housing Blog has an article going over some of the Mortgage Math for the new development in the old Woodward’s building (the “W”). First he calculates how much it would cost per month to mortgage a 2 bedroom:

The price range for 2BRs is supposedly 489-795K. Let’s just take the midpoint of these two prices to get a number to work with: $642K. Say you had a downpayment of 10%. You’d be financing $577.8. Take out a 5.25% 5-yr mortgage at ING direct, amortized over 25 years. Monthly nut? $3462.47. Using the 32% of gross monthly income rule, this means you would need an annual income of $129,842.63 to afford the mortgage.

Then comes the shocker, or not-so-shocker if you are like me and have been scanning MLS and noticing that you are completely priced out of everything:

Around half of today’s West Side inhabitants could not afford to buy at the W if they were first-time buyers and had to qualify based on their current incomes.

This can’t go on forever. Gotta love the working on the W’s website: “The smart money gets in early.”

Popularity: 11% [?]

After seeing two articles in the past couple weeks discussing whether or not a house is an asset or a liability (”Personal Residence: Asset or Liability,” and “Your House: Asset or Liability?“), and seeing some of the interesting comments written below one of the articles, namely the latter article, I had to chime in.

Last time I checked, a house was an asset. I can not even imagine what a house as a liability would be like. Kind of like an asset with a negative value. One possibly scenario would be if there were an infinite supply of houses and zero demand. But even that would only make a house free it would not lead to the house having a negative value. I can not do the mental gymnastics of considering a house as a liability.

I just had to pull up Gnucash to make sure I was right. I opened up a new file and created a default “chart of accounts” for fixed assets (which includes a home), homeowner expenses, and a home mortgage loan. Here’s what you get:

There is “house” right there under “fixed assets.” You will also notice “mortgage loan” there under liabilities. Some people seem to get confused by this distinction, as at least 2 commenters on Consumerism Commentary did:

RS said:

I agree that your home should be considered a liability…as long as I am paying my mortgage every month, then it is a liability to my cash flow.

mbhunter said:

I side with Kiyosaki on this one. My home is a liability because it costs me money. A rental with a positive cash flow is an asset. I don’t even consider my equity in my net worth.

Oh no, Kiyosaki is rearing his ugly head again. Fortunately someone stepped in to set them straight:
Sean said:

This line of thought (house being a liability) drives me absolutely batty every time I stumble across it. Your house is not a liability; your mortgage is a liability. An asset isn’t necessarily a money generating piece of property…

On Consumerism Commentary’s article, a professor is quoted as saying in “Ballooning equity doesn’t mean you’re rich“,

The right mind-set is to look at your house not as an asset, but as a liability, until you’re finally going to sell it and drastically change your living style. Obviously a house, something you have, is an asset, but the argument is by treating it as a liability. This way as your house’s value increases over time, you’re not lured into changing your lifestyle.

This does not make any sense to me, how you can treat a house like a liability one day and an asset the next.

Popularity: 11% [?]

All Things Financial thought it would be neat to “show you what $300,000 USD will buy you in various parts of the country.” So far there is one other Canadian entry in Ottawa, where $350k can buy you a nice house.

I searched MLS.ca for any houses in Vancouver West for under $350k but no luck. I did not think I would find anything. I have searched before and one usually cannot find anything half-decent for less than $600k or $700k. I checked Vancouver East and there were only 2 houses out of 452 that were around $350k. I do not think it would be fair to say that you can find a house for $350k in Vancouver East when there are only 2/452 at that price range. Looks like you can only get an apartment/condo for that price.

I did a search for anything in Vancouver West between $325k and 375k. I then looked for something that I would actually like to buy, something in Kitsilano for example. Well there isn’t much selection actually. It turns out that if you have $350k your best bet is somewhere downtown. There’s far more selection at that price range. Here’s the one I’ve chosen:

It offers a bit more square feet (723) than some of the others, probably because it is a bit older than many of the apartments for sale downtown; however, the strata fee of $265 is a bit higher than some of the others. It does offer “huge indoor pool, Jacuzzi, gym, squash court, entertainment room.”

Popularity: 13% [?]