Drygulch, "There was no way this family could have sustained it through the Great Depression period with the estate properties intact had there been any debt. If a residential RE crash lies ahead in the next few years I hope and think I am prepared to survive it pretty much unaffected. Basically as a young man I studied my great-grandmother's model and then tried to emulate it."
No argument about debt and sustaining wealth. However, the problem in comparing long ago real estate prices/values to present ones is the difference in financing options. Long ago, if one could secure a loan to purchase real estate, it was for only a fraction of the value. There was no such thing as an appraisal requirement, because the proportion of risk was so small. As time went on, lenders became more liberal, but what really escalated the volume of loans and LTV ratios with the creation of government sponsored enterprises like Fannie and Freddie, and the unfolding of the securitization of the mortgage industry. This has evolved into the current state of "free" money in regards qualifying for real estate loans. Underwriting standards as we knew them just a few years ago are gone, and appraisal standards of practice have been liberalized by the influences of the lenders over that service.
financialsense.com
financialsense.com
Interestingly I read today that China alone is "investing" 48.5 million dollars per day in paper issued by Fannie and Freddie. No wonder Allan Greenspan moans about being unable to influence long term rates.
So, it is the availability of financing that drives the real estate market, and renders useless comparing ancient prices with present ones to identify long term returns and projecting that into the future. It ain't going to work. In fact, my grandparents (both of whom were also of San Francisco pioneering stock) used to quote a favorite saying, "First you own the house, then the house owns you." That's because in their day and their parents day, houses provided no return and were expensive to maintain (although they did invest in other forms of real estate - those that were truly income properties). That was the case with home prices - no returns what-so-ever - for most of this country's history. It's only been since WWII that people in general could sell a home for a ROI. That ROI has been accelerating since. Now it's out of control.
I moved from Los Altos in the Bay Area to Arizona nearly 3 years ago. In the Phoenix metro area it is reported that nearly one house sale in three is now to an investor. So much mortgage money is available people are taking out what they say are loans for second homes, when they are in reality purchasing 3 and 4 and 5 houses at a time. That used to be called bank fraud, but now no one cares. And it makes no sense when the rest of the economy is flat or failing. Something has to give.
See Richard Russell snippet:
321energy.com
More thoughts here... stockhouse.com |
