Rent and Inflation

JohnnyH · Post by **JohnnyH** » Mon Aug 27, 2012 9:39 pm

I'm not worried about it:

1) There is an excess of housing in US.

2) Populations will follow access to healthcare and jobs.
I strongly feel housing will decline or be flat for the geographic majority of the US. If you are willing to relocate I think you have nothing to fear about housing costs (excluding prop tax) in US... If you are insistent on living in NYC or SF then you will have supply and demand to deal with. To each their own, but I would not sacrifice 10 years of my life to live in a specific place, when most are usually pleasing to me.

___

Strange it's such an emotional issue, for me it was simple. After cash purchase owning (+associated costs) is about 20-35% of what renting would be. These savings will cover the purchase price less than 5 years... Buy ugly, buy at auction, shoot for under 70% of list (or comparable lists).
Rent is pretty much determined by wages (as Jacob has pointed out), housing prices are not... So many people pay 200%+ of what rent would be for the delusion they "own" the place. Insane and rental returns are almost always abysmal in these areas.

OTOH, many people continue to rent when their rent would pay off the house in a few years. Usually this is because they have no access to any credit or cash... Rental returns are usually very good here, but there can be a lot of headaches that come with people who have poor credit and no capital.
@jennypenny: It seems to favor homeowners when everything is rosy. I know of a lot of governments that have attempted to close budget shortfalls (falling revenue) with property taxes alone.

The week after I sold one of my rentals I got a re-appraisal from the county saying my taxes were going up 160%. Good timing me

jennypenny · Post by **jennypenny** » Wed Aug 29, 2012 3:30 pm

http://www.zerohedge.com/news/guest-pos ... me-streams
A related post on potential future problems with ownership of vehicles and homes. He refers to it as "trapped capital."
*note this is a fairly doomy site

secretwealth · Post by **secretwealth** » Wed Aug 29, 2012 4:07 pm

Zerohedge zzzzz
It's a ridiculous article. Sure, cars and houses are resource-intensive, but people will always need transportation and shelter. These may change form, but they're still going to exist, and you can't just paint a picture that owning ALL transportation or ALL real estate is bad because some are more wasteful than others. I agree that a single-family house in an exurb attached to a one-industry city may not hold its value in the long run, but demand for apartments in L.A., New York, London, Hong Kong, and Tokyo will exist for as long as human civilization exists. And if you're investing for the end of civilization, why bother with securities anyway, since their value is only determined by civilization itself?
Sorry to rant--I have little patience for the apocalypse soothsayers, whether Christian, libertarian, secular, or otherwise.

altoid · Post by **altoid** » Wed Aug 29, 2012 5:36 pm

Ok, let me put in my $ 0.02 on this one.
When I first moved to SF bay area and lived on the Peninsula, I never thought I would ever be able to own a place as my apartment was surrounded by 600k and above SFRs. We were paying $1,100 for a 2 bedroom.
In 2009, I bought my condo on the east bay, about 40 miles from my work, and in a not so great neighborhood--heard many horrifying stories. Anyway, the condo is $40k, and I received the first time homebuyer credit of $4k, the mortgage was $185 a month. With HOA and PT, it combines to $600 a month. Meanwhile, to rent a place in SF of similar size will be at least $1,500. It takes about one hour one way on Bart for the commute, in total it is probably 3 hour/day.
So now the condo is paid off, what is my real month expense for owning it? $400 HOA and PT, plus the lost investment income on 36k. Historically I only make 2% a year, so $60 a month is the lost investment income. That is $460.
Now going back to the long commute, is it misery inducing? absolutely. Is it worthwhile? of course, my ERE will come off much sooner!

Ego · Post by **Ego** » Wed Aug 29, 2012 6:48 pm

That's an interesting article Jenny. Secretwealth, just because we'll always need the thing doesn't mean it will always hold its value.
The point is... trend. Which way are we moving? Young people are moving away from the ownership model and toward new models that cheapen the value of the underlying asset.
Better Place is using it in Israel for their electric cars. https://en.wikipedia.org/wiki/Better_Place It is very similar to the subscription model for mobile phones where the company subsidizes the phone and earns money from the ongoing payments. The value is no longer in the device, it's in the use of the device.
The trend is toward fewer people with reliable income streams. They can't qualify for the ownership model so values decline.

jennypenny · Post by **jennypenny** » Wed Aug 29, 2012 7:54 pm

The trend is definitely away from ownership. I find it funny that the same debate is going on in the prepper world. (There really are a lot of similarities between prepping and ERE.) There was a time that the first bit of prepper advice was to own your own land, but there are many different theories now.
@SW--Your NYC bias is showing. People who live in Detroit, Cleveland, northern Las Vegas, and many other places already know what "slow doom" feels like. Those cities may hold on, but may never be what they once were (ever been to Bethlehem or Allentown?).

arebelspy · Post by **arebelspy** » Sat Sep 01, 2012 7:25 pm

When you say "the trend is going away from ownership," that's absolutely false.
SOMEONE will own it. It just won't be the person using it.
It'll be the owners who control things. The others, who are happy with the benefits of renting (namely, that it's flexible) will do so at the cost of paying those owners for the priviledge.
I'll definitely be a renter again someday. But I'll do so while owning a lot of other property that others pay me to use.
The trend is going towards paying the owner to use.. But not away from ownership. Just the ownership is collecting in the hands of the few. I'm not sure this is a good thing, as many tout.

Ego · Post by **Ego** » Sat Sep 01, 2012 10:24 pm

arebelspy, sure, someone's got to own it.
Much of the current housing recovery is being fueled by an influx of Real Estate Investment Trusts into the single-family home market. These REITs are buying large blocks of foreclosed homes and turning them into rentals. This should concern current rental-owners for three reasons.
Economies of scale: REIT have huge economies of scale. They can out-compete small-time rental owners in every aspect; maintenance, leasing, renovations, turnover costs... you name it.
Low-expectation money: The people investing in REITs are willing to accept a much smaller ROI than the rental owner has to pay in financing costs. Investors look at REITs as an alternative to a .025% return in CDs. Again, the REIT has a lower cost basis from the start.
Renters in the neighborhood cheapen the value of neighboring properties.
Here is an interesting but pessimistic article about this fundamental shift in where we live.
"But there is a second major shift underway, which is a planned transfer of large number of homes into the hands of private equity landlords. Fannie and Freddie are now piloting programs for bulk sales of foreclosed home. Historically, they’ve sold them individually or in geographically dispersed packages, but since February, Fannie has been experimenting with selling homes in large volumes."
http://www.nakedcapitalism.com/2012/08/ ... ciety.html

arebelspy · Post by **arebelspy** » Sat Sep 01, 2012 10:45 pm

I see it as the opposite.. Easier to compete with those large investment REITs, as they will underperform, offering you lots of opportunity to easily add value.
As that article points out, there is no large scale management in place for SFRs. They will likely undermaintain and lower their ROI. Sure, their investors may accept that, but that also means you can beat that ROI by being competent. You say economies of scale, I say giant bureaucracy.
And again, they're owning the property because it's profitable to do so. It's profitable because people are paying them for that service. I'd rather be the one getting paid than the one paying, in general.

Ego · Post by **Ego** » Sat Sep 01, 2012 11:42 pm

@arebelspy: "And again, they're owning the property because it's profitable to do so."
I disagree. They are exploiting two unique situations:
1) There is a massive amount of money searching for safe, liquid investments. So much money, in fact, that it skews markets. It's the same Boomer-cash that prompted the creation of mortgage backed securities. These REITs are just looking for something to buy so they can create the investment this cash is demanding.
2) Financial institutions need to get dead-wood mortgages off their books. They need someone who can buy them in one-fell-swoop. They don't want to piddle around selling them one at a time. So the REITs get them at a taxpayer funded discount.
This is precisely the type of investment that created the housing bubble / foreclosure crisis in the first place. I wouldn't want to be holding shares in these (or a comparable underlying asset) when reality sets in.

arebelspy · Post by **arebelspy** » Sun Sep 02, 2012 4:42 pm

While I agree that there may be money searching for yield, I don't think that automatically makes any investment that money is put into a bad investment solely because that money was invested. I don't think that logically follows at all.
Guess we'll have to agree to disagree.

secretwealth · Post by **secretwealth** » Sun Sep 02, 2012 5:06 pm

I have to side with arebelspy--I don't really see any evidence that there's a "massive amount of money searching for safe, liquid investments" and, even if that were true, I don't think transforming SFHs into rentals is at all safe, and I don't think REIT managers see it as safe either. And, even if that were the case, I'd imagine a REIT operating at scale could produce both a better yield and a better product than individual homeowners.