Thanks for your input. The real question is: No one will can predict how far and how soon the housing will hit the bottom. But there is a PE or cap ratio for any real estate. The market correction is what is happening now. As I said: I treat house as a roof on the top and not a trading vehicle. We will be lucky to gain from it. As far as a safe 6% return, they are plenty. If you owe credit debt, or 6% mortgage, pay them off.

If you want to mince words, you should improve your grammar a bit. To interpret what you are saying one has to use more than a little bit of rounding.

You said “Renting should be expensive cause renting provides mobility and liquitity.” Mobility and Liquidity are potential but not definite upsides/downsides – which is a pretty easy shorthand for risk.

Where are you getting 6% return tax free? Given the assumptions of no taxes, 6% return on low risk money, and no inflation there is almost no way in hell I would buy, even in the 90s. Unfortunately taxes are 25%+ and inflation exists and they are both going up. 6% is nearly impossible to get right now on lowish risk money.

On the question of how long you would have to hold, I say 5 to 10 years:
I did some analysis elsewhere on how long you would have to hold to be ahead if you bought now: These numbers use real assumptions from a house I am looking at: buying is 1.5x renting all in on a monthly basis (including those nasty tax things), you pay 6% commission on sale, no closing costs (use redfin and that’s a pretty good assumption), 5% down, and a 5% discount rate.

If house prices never go up (not even with inflation) you would have to hold for about 23 years to come out ahead.

If house prices go up at 3% per year (keeping pace with inflation) you would only have to hold for about 5 years to come out ahead.

If you assume prices drop 10% next year, then go up at 3% – 11 year holding period. If you assume 2 more years of 10% drops – 15 year holding period.

From a strictly financial perspective, whether something is a good investment or not depends on 1) rate of return 2) variability/risk in return 3) covariance with other assets you hold 4) time horizon and 5) individual risk preferences. You are looking only at #1 when you say that housing is a bad investment. Given your #5, it may not be a good investment for you, but you can’t generalize from your own tastes.

On the topic of the risks, again it is a matter of taste. There are risks born when renting that are not born when buying and vice versa. From an economic perspective, to say which is ‘riskier’ you would have to come up with a method to quantify the different risks. Thus it becomes a question of an individuals tastes.

Consider the person on a fixed income that doesn’t adjust to inflation and who expects to live 20 or 30 years: for that person, it is highly likely that buying is better than renting even if it is 2x as expensive on a monthly basis.

Consider a person whose work constantly moves and who doesn’t get compensated for the cost of selling their house; that person would probably be better off renting even if renting was more expensive.

If historically the monthly cost to buy has been 1.1x the monthly cost to rent, then historically people have seen buying more attractive than renting. Whether they see it as more attractive because it is less risky, or they see it as more attractive because their additional risks are well compensated, or they see it as more attractive because it is less risky and their risks are compensated cannot be judged based on the available information.

You assertion that “buying is riskier than renting” is flat wrong.

I myself hate flippers as they are short sighted, but consider themselves to be great investors, for whatever reasons. Yet they put extra strain on the market when it is up as well as when it is down.

I think that it works on a case by case basis when it comes to Rent = Mortgage payments.

I bought a house in 2001 that an attorney was renting. My mortgage+tax+insurance payments with 10% down was equal to the rent she was paying. I did some remodeling/restoration work and sold the house to an MD in 2005. His Payments were higher than what I could have gotten for rent. He remodeled a bathroom and recently sold the house for 11% less than he paid for it. This was in Missouri.

On the flip side…I rented a condo on the Kirkland Waterfront from 94-2000. The rent was just barely more than than 75% of the PIT+HOA dues.

I’m currently paying about 45% of my LL’s monthly outlay if I assume he put 10% down. Rents in my complex (2200 westlake) are down about 5-10%. Even more in Cristalla, Bellora, Concord and Madison Towers.

I don’t see rent equaling mortgage payments on desirable properties in desirable locations ever…but I’m sure that when it’s all over, depending on where you are in the PNW…renting could be more expensive than buying…however…I probably wouldn’t like the options to choose from.

FWIW…I’m not an 80% off bubblehead…more like 30% (more for people that bought cookie cutter already overpriced new construction condos from a flipper)…although some sellers are in such fantasy land that 30% off asking really wouldn’t sway me to purchase their house/condo.

Actually monthly cost of buying should be less than the cost of renting. Buying a house and renting a house deliver the same basic need, shelter, but buying is much more risky.

The argument that buying is riskier than renting is incomplete at best. Yes a house is somewhat illiquid, and yes a house has transaction costs. But, with rent , you have the risk of price increases, can’t control maintenance, and could be evicted for a variety of reasons. Renting isn’t without risks, and it is difficult to even say that renting is less risky as you can’t readily quantify and compare the different risks; at best you can say that buying and renting have a different risk profile that will be best suited to people with different tolerances.

Buying has risks that renting doesn’t, but the price of renting goes up whereas the price of your mortgage should stay relatively flat (or totally flat if you’re in a fixed product) over time.

At even low rates of inflation (3% is low by historical standards), inflation alone can swing the balance in favor of purchasing IF you hold for long enough. For example: assume rent goes up by 3% each year. If you pay 1.5 times as much to buy as to rent each month, have no appreciation and thus sell for a loss in real terms, pay 6% to sell, buy with redfin (thus taking closing costs to essentially zero), and put 5% down – you would have a positive NPV at a 5% discount rate after about 24 years.

Using the same assumptions and just having the house keep its real price, you are NPV positive at a little over 4 years.

The current market doesn’t justify a 3% per year appreciation assumption, but once the prices finish adjusting it should be a conservative assumption for longer holding periods. It is conservative long term average assumption because it implicitly assumes no increases in real income.

Thus, it is pretty easy to justify spending 1.5x more to buy once you include inflation. This analysis also assumes you include PITI + maintainance + taxes + everything in the 1.5x.

That’s a pretty symmetrical pattern. So it’s not just only looking at at SD and saying Seattle will do the same. It’s the combination of SD being symmetrical and Seattle showing the same tendency for over a year. It’s kind of the same as the 17m lag chart.

That’s pretty weak evidence in my mind, and the same kind of thinking that said in 2004/5/6 things like “Seattle is increasingly like California, if we just catch up to california you can expect to see 35% appreciation over the next three years.” It is technical analysis used to justify your prejudice.

I can make just as strong an argument that seattle is like boston (and on the weather front, a better argument). Based on your lag theory we should expect flat prices over the next 12 months (because that’s what happened in boston).

BackToBasic and deejayoh- thanks for the link/info. That’s exactly the kind of data I’ve wanted.

Monthly costs of buying have never been in line with renting. Buying is always more costly. The last few years have seen the gap narrow because of the competitiveness of banks, investors, funds in allowing a person with Credit Risk of C to get the rate of person with credit risk of A. I can write a case study on how this snowball rolled from ‘02.

As far as back to 1994 prices. Good luck on that, and it is very well wishful thinking.
Whoever thought it was out of whack then just didn’t have a job that paid anything.

Prices IMHO are going to revert to ‘02 ‘03 levels. Some areas less some areas more. I do not see any data that points to anything otherwise.

Even hard hit areas like Las Vegas which has had 40% declines in areas, are seeing 80% MOM sales growth as of September.

Can someone actually find something to support rent and mortgage payments being the same. It doesn’t seem right unless you have owned the property for some time.

Actually monthly cost of buying should be less than the cost of renting. Buying a house and renting a house deliver the same basic need, shelter, but buying is much more risky. Renters should pay more because the owner takes on all of the financial risk. The problem is that for the past several years housing was seen as a risk free investment that delivered enormous returns. Once perceptions turn after 4+ years of nationwide declining prices people (if not people then banks) will go back to carefully weighing the risk and only taking it on when the price is right.
Also, because of the self-feeding spiral that declining prices cause, many believe that investors (real investors, not flippers) will cause a floor in prices. However, investors won’t buy in until they can make a profit on day one. For more on this read. Want to Know When Housing Has Bottomed? Here’s How and More on Catching the Bottom in Housing.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aViXCrX8Ikms&refer=home

LOL, I needed a good laugh!

It’s possible that the Seattle-lag will have the effect of keeping prices from correcting to CA,NV levels. However, even if homes don’t fully correct, their is no such thing as a v-shaped recovery in the housing industry. Thus, anybody who feels rushed to buy a home before a very long lull in price depreciation is most likely going to get burned on the investment aspect of the purchase.

Homeownership rates recently reached record highs due to easy loan availability. This bubble-level of lending to buy houses will not happen again in our lifetimes because regulatory bodies will not allow for it. Thus, the bidding war that ran prices way up beyond historical rent:own and income:price ratios will not be present in the marketplace in the future. So even if prices don’t fully correct, there is no hurry to jump in and buy anytime within the next 5 years. And even the biggest bulls among us should never buy a house prior to supply reaching favorable levels. IMO, at best, prices will stabilize around 2013, and we will see a sideways market from there. It’s a supply/demand issue, and demand is not likely to outstrip supply anytime in the near future.

Why do I believe 2013 is the soonest we will see price stabilization? Partly because that’s when we finish off the next wave of massive mortgage defaults. Interestingly, the data supports a lag in defaults in 2009, so a lot of people could get the false idea we are out of the woods right before the big slaughter takes place.

2nd wave

Also, before house prices even stand a chance of stabilizing, the banks have to start lending mortgages again to Joe and Jane average citizen. So far, none of the money the govt. has pumped into the banks provides them with incentive to not hoard the money.

Will every mortgage come with a built in principal reduction?

There are just too many homes for sale in most metro areas and not enough people to qualify for them to satisfy the new requirements.

Inflation of housing prices doesn’t seem to be in the cards because that would require inflation in salaries and everything else and I just cannot see that happening here. Further wage inflation simply means more jobs going overseas to cheaper workforces.

I expect to see decent non flip homes in desirable areas of Seattle proper selling for between $200-250K when we finally hit bottom.

But then, I see SFO homes in places like Millbrae, San Bruno and Burlingame selling for $250-300K when this finally all unwinds.

What makes you think that anything short of inflation will have house values increasing again any time soon? The banks are currently learning the very important lesson that lending money to people who cannot pay it back is dangerous.

Look at house values in California or Japan in the 90s to get an idea of what the next 10 years will look like.

Let’s assume the bailout begins to “work” and the rest of the country bottoms out next year. Prices start to climb elsewhere, and suddenly the difference between current prices and the speculated bottom for Seattle will not be attained.

Yes, it has taken longer to correct, but these people will come back in droves and prices will remain artificially inflated. We may not fall down as far as the graphs show we COULD go if Seattle follows the trend.

What I’m trying to say is that when things pick up around the country, this will be one of the first places to recognize that and the greed will prevent the full correction.

Another way to judge the fundamentals is to look at people’s propensity to spend on housing in the rental market. The ratio between rent and buy (that is, the monthly cost of each), should stay relatively constant over time. I don’t have numbers on this, maybe someone else does?

Is below – as posted earlier

http://seattlebubble.com/blog/wp-content/uploads/2008/01/price-to-rent-ratio-small.png

You bring up a valuable reminder though. Going forward from where we are now, no one can accurately foresee what unknown factors may affect the economy and housing prices. I still don’t see any positives on the horizon though, so the assumption has to be we continue down.

“Neither of these methods are perfect, but they are certainly better than saying “the graph in san diego was symmetrical, so it should be in seattle too.”

Well TT, the fact is that Seattle have rewound 14m appreciation in 13 months. That’s a pretty symmetrical pattern. So it’s not just only looking at at SD and saying Seattle will do the same. It’s the combination of SD being symmetrical and Seattle showing the same tendency for over a year. It’s kind of the same as the 17m lag chart. everyone who doesn;t like it or wishes it wasn’t happening is attacking it with fundamental differences without being able to produce a prediction that is even remotely as accurate as what can be taken from the charts. So sorrry if I don’t believe that price drops will end today as one of your predictions is.

http://seattlepi.nwsource.com/business/39369_boeingweb.shtml

Kind of funny that we could look back at that year and say it was the beginning of the Seattle housing bubble. Shows you how much our prognosticating is really worth.

Anyway, bottom of that article shows the historical employment levels at Boeing up to 2001.

Also, I disagree with the idea that we need to consider the time of a particular catalyst as the start of the bubble (whether it’s 80/20 loans, or interest rates, etc.). A bubble starts when asset values themselves become unsustainably high, regardless of the cause(s).

Am open to empirically based opinions of when the bubble started. According to Case-Shiller, Seattle home prices were booming in 1997-1999, not booming from 2000-2002 before picking up in 2003 and accelerating from 2004.

Seattle is overvalued by 50% according to historic norm. So do expect 40% drop in a long period of time assume buying/rent=1.1. Housing price is very sticky. So I will rent until mortgage/rent=1.0 and use the 50% saving do other safe invest.

You need to look at the fundamental drivers of housing prices – Income and Mortgage Rates primarily, and other factors after that. Incomes have gone up since 1994, by about double (this includes a substantial chunk of inflation), and interest rates have fallen by about 1/4. Unless the market over shoots its fundamental bottom on a cataclysmic scale, we won’t see prices back at the 1994 level.

Another way to judge the fundamentals is to look at people’s propensity to spend on housing in the rental market. The ratio between rent and buy (that is, the monthly cost of each), should stay relatively constant over time. I don’t have numbers on this, maybe someone else does?

Neither of these methods are perfect, but they are certainly better than saying “the graph in san diego was symmetrical, so it should be in seattle too.”

Based on the above factors, I am expecting either: 1) another 10 to 15% drop in prices and no appreciation for 1 to 2 years or 2) prices stay where they are now, and no appreciation for 2 to 5 years.

Back then we were a Boeing economy, and now we have Amazon, Microsoft, etc driving the economy.

FWIW, Boeing still employs far more people that Microsoft and Amazon combined.

Employees in WA as of 2008:
Boeing: 76,849

Microsoft: 39,311
Amazon: 18,400 (worldwide)

If we assume that 50% of Amazon’s employees work in Washington (for MS it’s 43%), then the total between the two is about 48,500, or 63% of the total number employed by Boeing.

Just thought that was worth pointing out.

I think that Deejayoh made a lot of my backup points for me. Look at how many people worked at MS 20 years ago, and how many work there now. Back then we were a Boeing economy, and now we have Amazon, Microsoft, etc driving the economy. Slightly more diverse, definitely more college educated jobs.

Can you make the claim that Miami or Scottsdale had this kind of change in the economy? San Diego went backwards in this regard, by all accounts (military pulling out). San Francisco had a slight growth spurt as well, and the floor of the prices there will reflect that there like I predict it will here.

Like I said, I think prices will fall at least 30% from peak, so I am not a housing bull. Just pointing out that there are too many people here that make good money and want a nice place to live for housing to go below a certain price, especially in Redmond.

http://seattlebubble.com/blog/wp-content/uploads/2008/01/housing-vs-income.png

Home prices went up in the 90’s rapidly because income went up. Remember Microsoft? Adding a few thousand millionaires in the space of a couple years actually does matter. Now that income growth has come down, I expect we will get back to the historical relationship between incomes and home prices. Maybe we will overshoot by a bit – but how much? You have to remember that in the intervening 7-8 years incomes have grown (just not as much as home prices) and will continue to rise even as home prices correct. So that tempers the down side.

I also looked at Price/Rent ratio and it says pretty much the same thing. Prices started getting out of whack in 2001/2002
http://seattlebubble.com/blog/wp-content/uploads/2008/01/price-to-rent-ratio-small.png

I’d love to see some evidence to back up claims the bubble started in the 90’s – other than WAGNERs. By what metric? If prices track incomes you can’t claim affordability. And please don’t trot out the “3X median income rule”. Home prices have never been 3X median income in Seattle and never will be. The long run average is more like 6-7x incomes. And that is simply because the median income recipient is very unlikely to own a house (50% home ownership in Seattle folks)

My $0.02