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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (5721)	10/1/2002 6:13:19 PM
From: David Jones	Read Replies (1) \| Respond to of 306849

...Real estate prices are not listed every day in the newspaper like stocks.... Sure they are, my local paper on saturdays lists addresses and sale price for all homes that go through standard escrow. ...When it comes time to sell a property, very, very few people could give you an accurate total of: their maintenance costs... Just anyone that itemizes and I don't know anyone that rents out property that doesn't. ...People don't understand the concept of compounding... You may have me there but my accountant does.

To: Elroy Jetson who wrote (5721)	10/1/2002 11:10:14 PM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 306849

People's estimates of the tax benefits routinely exceed their true savings by a wide margin. People do not easily recall the unpleasant and exaggerate the delightful. also, most people do not deduct the high commissions and title fees involved in real estate sales. It doesn't seem real to most people that over this same 12 year period they could have made 178.8% on a US treasury bond, plus as it turns out an additional 45% in capital gains on the face value of the bond as interest rates decline over the past 12 years in 1990 (or today, or 1980, or 1970...), almost nobody would have recommended buying 100% US bonds before buying a home. especially 30 yr bonds as in your example. for one thing, bonds are taxed, and this will significantly reduce the 178% return. in contrast, a home purchase and payments to equity have a "zero coupon" yet real return--in that one gains living benefit in the home and does not pay tax on gains (except in RE taxes, which are not an equity tax but an asset tax [and which even renters must pay indirectly]). futhermore, taxes on RE cap gains do not exist (except after extremely high levels of gains--500K free profit to a couple is just astounding when you think about it, compared to the rest of the tax code) due to the socialization of RE expenditures, in contrast to the marginal taxation on bonds. further, one must always consider the starting point and whether it is data mining. e.g., picking 1990--a bubble "peak" in CA real estate (i.e., a lousy year to buy RE), but a decent year to buy LT bonds--shows bonds in a good light. but if one were to pick a year in say, the 1940s, one would find that the 30yr bond had a negative real return which resulted in its being nicknamed "certificate of confiscation in the high-inflation 70s and 80s. in contrast, RE appreciated significantly in the 70s and 80s, especially in CA. so one must be careful about data mining. simply put, there are periods where RE will do better, periods where fixed income will do better, periods where equities will do better, and periods where they will all do lousy (like now, imho). my personal feeling is that buying a house and paying off the mortgage is a prudent practice which should be encouraged. after a mortgage is paid off, one could invest in stocks and such. naturally, such an approach would discourage people with 100K incomes from buying 750K "starter homes". unfortunately, there are many structural biases to RE inflation (i.e., easy credit and low taxes, not to mention an RE bubble), so whereas one could buy a decent starter home for a reasonable price in 1990, it seems there are fewer places where one could do that today. if i were starting out today, i would be inclined to rent. however, the alternative places for investment are not too attractive--interest rates on bonds are very low, which is dangerous from an inflation perspective. meanwhile, stocks remain ridiculously expensive. so there are three bubble markets and it is not so easy to find a place to invest. i would probably just save up cash in CDs and short-term T's until all three markets (bonds, equities, RE) crash. then take my pick as to which one has the best ex ante expected returns. in general, i think people probably do OK in RE because they hold RE longer than they hold stocks. the public is very bad at investing. Bianco has calculated that mutual fund holders did worse than holding 90-day T-bills since the beginning of the 1990s. this is due to the high expenses of mutual funds, and the tendency of the public to buy and sell at the worst times (and to chase performance, which is often a recipe for disaster). in contrast, if a person buys a house and lives there for 20 yrs, that is a level of "buy and hold" which rarely obtains in the equity markets. one must draw a distinction between the numerical return on an index like the DOW or SPX, and the actual returns realized by investors in aggregate. in this sense, i think people in general are much less likely to shoot themselves in the foot with a RE investment (or LT bonds for that matter) than in stock mutual funds (the equity vehicle of choice for most retail investors). however, this "efficiency" issue is entirely separate from the issue of whether equities, RE, and bonds are "bargain-priced".