Checking Up on the “Forced Savings Plan” Myth

Please consider the following excerpt from a post I wrote that was originally published on the personal finance blog Get Rich Slowly (and later here):

…if home buying is like a savings plan, it’s probably the worst savings plan on Earth. Would you voluntarily sign up for a savings plan where well over half of the money you deposit in the first 20 years simply vanishes, and from which you can only withdraw money by relocating and paying a 6-9% fee (not on the amount you have “saved” mind you, but on the total sale price of the home)? Of course not. That doesn’t sound anything like a savings plan.

If your goal is to build wealth, you will be much better off investing your money in the stock market than buying a home.

In the post, I described a pair of examples using real-world homes that I had located on both the rental and for sale markets at the time: comparable 3-bed, 2.5-bath, 1,800 sqft houses in nearby neighborhoods in the Kirkland / Juanita area. The rental was $1,495 a month, and the home for sale had an asking price of $425,000.

It just so happens that I wrote this post in July 2007, the peak month for Seattle home prices according to both the Case-Shiller home price index and the NWMLS King County SFH median. As such, I thought it might be instructive to run a little comparison of how things would have turned out for the hypothetical buyer and renter / stock investor described in the original post. With home prices off over 20% from their peak, and stocks down 34%, who would currently have more equity?

Following is a chart that shows the monthly equity in each scenario. Note that the buyer adds to their equity by paying $322-$367 in principal each month (it increases slightly each month), while the renter / stock investor increases their equity by adding the $1,161-$964 (it decreases slightly due to rent increases) they are saving each month to their investment. The value of the home is based on Seattle’s Case-Shiller index, with a slight increase in value assumed for July and August. The value of the stock investment is based on the S&P 500 index, and rent increases are based on the “rent of primary residence” portion of the CPI for the Seattle area.

Peak Buyer Equity Comparison: $85,000 Down on a $425,000 House

As of the end of August, just over two years into their respective “investments,” our hypothetical homebuyer is left with $537, while the renter / stock investor currently has $84,690 in equity. Here’s a visual of the total amount of money each would have put into their respective investments, and the total amount they have lost in the crash:

Peak Buyer Equity Comparison: $85,000 Down on a $425,000 House

At 25%, the stock investor’s loss is nothing to sneeze at for sure, but it pales in comparison to the 99% loss suffered by the peak homebuyer. Ouch.

But what if we tweak the scenario slightly, in order to stack the deck as much as we can against the renter / stock buyer? Let’s say we set the start date to October 2007, the peak of the stock market, and only run the numbers through February 2009, the low point when stocks were over 50% off their peak. The stock buyer’s losses double to 50%, but as it turns out, the home buyer is still far worse off with a 93% loss.

Of course, the $85,000 down scenario isn’t really very realistic compared to what most people were really doing in 2007. Let’s modify the situation a bit into something more reflective of reality.

Instead of comparing 20% down on a $425,000 house, let’s say the hypothetical potential buyer and renter had just $8,750, which would be a 3.5% down payment on a $250,000 house. Again, to stack the deck against the renter / stock buyer in this scenario, we’ll assume they’re still paying $1,495 a month in rent, even though that would rent a far nicer house in 2007 than $250k would buy.

Here’s the equity matchup for our more realistic scenario:

Peak Buyer Equity Comparison: $8,750 Down on a $250,000 House

Wow. The homebuyer in this scenario presently has negative $39,847 in equity, while the stock buyer has $12,820. Take a look at the invested / lost chart:

Peak Buyer Equity Comparison: $8,750 Down on a $250,000 House

The homebuyer has lost 364% of what they have put in, vs. 22% for the stock buyer.

I think this is an appropriate time to repeat the point I quoted at the beginning of this post. If home buying is like a savings plan, it’s probably the worst savings plan on Earth.

When you actually look at the present equity situation for the people who jumped into the housing market near the peak, stretching their budgets to buy a house that they didn’t even intend to live in long-term, the current record foreclosures start to make some sense.

If you bought a house near the peak thinking that it would be a great “forced savings plan,” you would probably be pretty tempted to hand over the keys, walk away, get yourself into a nice affordable rental, and get yourself started on an actual savings plan—like actually saving money every month. And who could blame you, really.

P.S. – I should add that at this particular moment, I don’t think the stock market is a very good place to put your money. With a P/E ratio on the S&P 500 somewhere in the ballpark of 150, I think stocks are primed to drop back down in the not-too-distant future, possibly by a considerable amount. That’s not investment advice, just my personal opinion.

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

102 comments:

  1. 1
    Hugh Dominic says:

    Tim I think you should create a standard method to measure home ownership value that you can reference. It changes a bit each post. Things missing:

    tax deduction
    cost of maintenance
    cost of sale (liquidation)

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  2. 2
    Hugh Dominic says:

    Oh and the tax on stock, cap gains (or loss).

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  3. 3
    The Tim says:

    RE: Hugh Dominic @ 1 – Tax deduction and cost of maintenance are not missing, I just didn’t feel like spelling out every single bit specifically. Refer to the breakdown in the original post. As far as cost of sale and tax on stock, I did leave that out, because in this case I was just interested in the equity that had built up, and was not concerned with what it would take to extract that equity into a usable form.

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  4. 4

    If the only intent is savings, then buying a house and buying stock are both horrible options. Why not add going to the racetrack and playing the ponies as a way to save money?
    If you want to force yourself to save, you have to minimize the risk. Boring as it may sound, they have these things at the bank called ” savings” accounts. Or a certificate of deposit. Or a money market fund. Both buying house and buying stocks have risks, especially buying homes with a mortgage and buying stocks on margin. Not saying they’re not fun to do, not saying they’re not potentially rewarding, but so is going to the craps table in Vegas or betting on the # 5 horse at Emerald Downs because 5 is your “lucky” number.

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  5. 5
    ray pepper says:

    Exc graphs and I agree.

    “And who could blame you, really.”…This says it all.

    Today CNBC reports that loans taken out in the last 18 months(that have even higher borrowing standards) are showing ever increasing default %’s.

    “The homes that have foreclosed in the last 6 months the banks are getting ready to release on the markets causing increased pressure on housing prices”…. “Loan mods continue to be futile for owners who have lost their jobs”

    They are coming back in a big way and there will be some serious GEMS to be had in the years to come.

    Heres one I toured yesterday going to auction on Sept 12:

    http://www.redfin.com/WA/Spanaway/17303-Spanaway-Loop-Rd-S-98387/unit-4/home/2766976

    High Dues..Ouch…Shaping up for a 50-70k bid..

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  6. 6
    David Losh says:

    Good Morning!

    This is an excellent post as a follow up to the Impulsive Behaviour Disorder.

    There are two things not calculated, the first is compound interest and second is what you buy. You have to pick houses and stocks.

    A mortgage is debt. All debt is calculated with interest. If you pay off priciple you get to keep the interest as a savings of money you would be spending anyway.

    The mortgage payment is high do to the amount of interest you pay. The savings come in as you pay down the principle balance. Yes if you do it over thirty years you are paying principle with future inflated dollars, but if you pay priciple today with real dollars it diminishes the principle that much quicker.

    So in the short term the savings may not be realized, but over the life of the loan there is some advantage.

    In terms of taxes I can sell my personal residence without tax consequence which skewes your calculations.

    Let me say again it depends on what you buy. There were good deals in 2007 the same as there are today in housing. Stocks are problematic. If you want to talk about a bubble, I don’t see a single stock today that is based on real, tangible, value. Since the 1980s or worse since 1998 it’s my opinion that stocks have been valued on future earning potential. A house is a house, and if you buy well you should have a stable, tangible, real investment with rental income for a future benefit.

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  7. 7
    waitingforseattletocool says:

    Why don’t you run a similar scenario starting in February 2000 ending sometime in 2005?

    You can probably cherry pick many 2 to 5 year periods over the past 50 years to skew any outcome in your favor.

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  8. 8
    Kary L. Krismer says:

    From article: “But what if we tweak the scenario slightly, in order to stack the deck as much as we can against the renter / stock buyer? Let’s say we set the start date to October 2007, . . ..”

    I’m sorry, but this is not stacking the deck as much as you can against the renter. It’s taking a known result–that a leveraged investment will do poorly in a down market compared to a non-leveraged investment–and pretending to be surprised at the result.

    If you want to stack it as much as you can against the renter, go as far back as the NWMLS figures go–1993. Or at least the start of Seattle Bubble. But to do this analysis in a down market is like putting Phyllis Diller in a beauty pageant to see what happens.

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  9. 9
    Kary L. Krismer says:

    By ray pepper @ 5:

    Today CNBC reports that loans taken out in the last 18 months(that have even higher borrowing standards) are showing ever increasing default %’s. .

    That’s because they’re still using credit scores to determine whether to make a loan on a house. I’ve probably been saying for 18 month that needs to change. Lousy tool for the job. I think they’ve tweaked credit scores a bit, and also come up with a new system just for home loans (that I’m not sure anyone is using), but the tweaks are not enough. It’s a flawed system.

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  10. 10
    Kary L. Krismer says:

    By waitingforseattletocool @ 7:

    You can probably cherry pick many 2 to 5 year periods over the past 50 years to skew any outcome in your favor.

    Actually, I’m not sure that he could, at least locally. Prior to 2007 Seattle went about 20 years without a YOY decline. I’m not sure there were any relatively flat years during those 20 where the stock market did really well in comparison, but in any case, because the home investment is leveraged, even a small increase in housing prices would show significant return on a percentage basis.

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  11. 11
    The Tim says:

    By waitingforseattletocool @ 7:

    Why don’t you run a similar scenario starting in February 2000 ending sometime in 2005?

    You can probably cherry pick many 2 to 5 year periods over the past 50 years to skew any outcome in your favor.

    You seem to be missing my point. The point was that in July 2007, I made the following claims:

    Buying a home is not a savings plan. Actually saving money every month is a savings plan.

    If your goal is to build wealth, you will be much better off investing your money in the stock market than buying a home.

    Despite what those in the business of selling real estate may insist, the correction in housing is still in the early stages.

    The purpose of this post was to check in and see how someone who took my advice would be doing today, vs. someone who went out and bought a home because it would be a “forced savings plan.”

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  12. 12
    Kary L. Krismer says:

    By The Tim @ 11:

    The purpose of this post was to check in and see how someone who took my advice would be doing today, vs. someone who went out and bought a home because it would be a “forced savings plan.”

    Well let’s go from the start of Seattle Bubble. You were saying not to buy back then, so let’s go from then.

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  13. 13
    The Tim says:

    By Kary L. Krismer @ 12:

    Well let’s go from the start of Seattle Bubble. You were saying not to buy back then, so let’s go from then.

    Really? Are you certain about that? Could you find me a reference? Here’s what I see when I go back to my earliest posts (emphasis added):

    I do believe there is a speculative bubble in real estate right now. I don’t know it for sure and I could be convinced otherwise, but that’s where I stand right now.

    There has to be a slow-down sometime, and I think it’s coming fairly soon (within the next 3-5 years).

    Given the options and the uncertainty of the current market, not buying right now seems to be the best choice for us.

    You can browse the full archives here. Let me know when you find the post from 2005 where I explicitly said that buying a home was a bad idea for everyone.

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  14. 14
    Steve Putnam says:

    Agree, agree, agree. While there are tax code manipulations (mortgage deduction, cap gain tax exclusions) that make buying a principal residence often a good move (with at least 20% down, that is), stocks and bonds are by far the preferred asset vehicles for those who want to maximize their risk/reward. Who’s wealthier: Warren Buffett or Donald Trump? And, while Warren Buffet’s net worth grows (albeit in a squiggly line as he rides the vicissitudes of equity markets), Trump has actually filed for BANKRUPTCY twice.

    The problem with real estate investing is the highly-leveraged nature of the asset class. Having your equity leveraged 10X (or more) in rising markets is a fun way to make money, but we have recently learned that this leverage multiplier works both ways (as your examples deftly portray).

    Congress realized this back in 1933 when they changed the margin requirements for stocks from 10% to 50%. Most of the 1929 stock market crash was a result of people borrowing vast sums of money and investing in a bubbly asset class. Sound familiar? Starting in 2003, Fannie and Freddie starting pushing for “increased affordability” for houses, i.e. lowering lending standards on the mortgages that they purchased, in pursuit of the mythical holy grail of “home ownership”. Turns out that a lot of us are better off renting.

    Bottom line: our government screwed the pooch on this one. The tax code should be unwound to put renters and owners on an equal playing field. The mortgage tax deduction is a regressive abomination that benefits our wealthiest at the expense of our poor (making the broad assumption that homeowners are usually richer than renters).

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  15. 15
    waitingforseattletocool says:

    I get your point, but it seems you are either just gloating or trying to fill some print space.

    The Seattle housing market is down 20-25% since the original posting. It doesn’t take a verbose posting and fancy charts to understand that buying in 2007 was a bad idea.

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  16. 16
    Kary L. Krismer says:

    RE: The Tim @ 13 – Well, I’ve only been here for about a year, and might have followed a link here a few times before that, but I think having bubble in the site name sort of says something.

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  17. 17
    James Lupori says:

    Ah, the ultra consequential question: what do I do with my personal capital? Buy a house, invest in stocks, stuff my cash in a mattress, spend it all?

    Allow me to share a personal story:

    I paid-off my first house in the mid-1990’s at a time when every “expert” in the world told me that I should “invest” instead. As it turned out, the know-it-alls were dead wrong. I have looked carefully at the advantages of not having a mortgage for many years versus all the losses I would have sustained in the stock market. My decision (at that time) was perfect: years of sleeping well at night knowing that the economy could do whatever it wanted; firing a couple of bosses who thought I was their indentured servant and realizing a lot of personal dreams because my overhead was quite low. It was then, as it is now all about frugality; knowing the meaning of the word “enough” and thinking carefully about one’s priorities.

    Unfortunately, today I would be willing to bet that most Americans have a “net worth” far lower than it was several years ago. They also have a much larger debt burden and face an uncertain future in terms of jobs and economic opportunity. In other words, lots of Americans are essentially bankrupt, immobile and living in the “delusion zone.”

    I appreciate this sort of discussion because it highlights just how unrealistic the “American Dream” can be for a lot of people.

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  18. 18
    pfft says:

    most people I think between maintenance and interest payements don’t even break even on their home.

    the real return is like 2-3%. on a $200,000 home that’s a hot water heater or landscaping! think about the cost after borrowing money! what about after painting, new siding or a new roof! how many people put $30,000 in for a remodel?

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  19. 19
    The Tim says:

    RE: waitingforseattletocool @ 15 – If you want to know why I felt a follow-up was worthwhile, maybe you should go back to the original July 2007 post on Get Rich Slowly and read a few of the comments. Here’s a sampling:

    I hate it when PF Blogs let someone post about how renting isn’t such a bad deal. Renting sucks. How much do the renters benefit when property values rise? They don’t.

    If you own, you have a stake in a market that consistently rises.

    All else being equal, when you rent you’re paying the mortgage, utilities, repairs, etc… AND the landlord is making a profit. It’s hard to see how that can be cheaper than paying for all those things yourself and not having to let someone make a profit.

    I agree with much of what you have said. However I think you need to rethink the investment aspect. The leverage makes a difference because it effectively allows you to multiply your returns.

    This is one of the worst pieces of financial advice I have ever seen. Yes, if you want to get poor slowly, by all means rent instead of buy.

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  20. 20
    Rojo says:

    This is just crazy. How many posts do you need TIM to prove your Point that has been proven for you by real event!

    Do you have nothing more and better to say than keep say “I TOLD YOU SO”.

    It is starting to get a little childish. Grow up and write something that adds value -otherwise just close the golly thing down!

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  21. 21
    The Tim says:

    RE: Rojo @ 20 – The point isn’t to say “I told you so.” When I was considering the comparison, it wasn’t intuitively obvious to me which one would come out on top, since after all, stocks have fallen further than housing. I decided to run the numbers to satisfy my own curiosity, and thought it would make a good post. Sorry to have apparently offended you.

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  22. 22
    waitingforseattletocool says:

    RE: The Tim @ 19

    I should replay all of the real estate untruths my realtors have fed me over the years, in good times and bad.

    Where do we go from here? Is real estate a bad long term investment vs. renting vs. stock market investment vs. bond investment vs. mattress savings? Isn’t there something to be said about asset allocation across a broad range of classes with a long term horizon?

    Peter Schiff was right all along about the housing bubble and the subsequent domestic economic issues, but underestimated the subsequent global economic impact. People that stuck with his investment strategy got absolutely clobbered on the way down.

    You can stay bullish forever or bearish forever and you are guaranteed to be wrong at some point in time.

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  23. 23
    Kary L. Krismer says:

    By The Tim @ 21:

    RE: Rojo @ 20 – The point isn’t to say “I told you so.” When I was considering the comparison, it wasn’t intuitively obvious to me which one would come out on top, since after all, stocks have fallen further than housing. I decided to run the numbers to satisfy my own curiosity, and thought it would make a good post. Sorry to have apparently offended you.

    Let’s see. Your example has the buyer putting 20% down. We’re roughly 20% off the peak. So just off the top of your head homeowner would be at zero.

    The stock investor was down over 50% at the bottom, but you have them add in over $1,000 a month to the investment (increasing the total investment by more than 20%), and the stock market has gone up a considerable amount since the bottom.

    So roughly zero compared to something over 50%. This doesn’t really seem like a situation where you “needed to run the numbers. …”

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  24. 24
    Rojo says:

    Tim, you have not offended me rather more like irritated me. I am not one of the unfortunate ones that bought in the run up to 2007. I bought in 2004 when things were just starting get warmed up. There are however many people I know who read the blog that are getting done with this blog because it is not giving them any new information and it is mostly stroking the egos of few at the expense of others.

    There is no doubt people lost money, sometimes a lot if they bought in 2007. Why need fancy charts to prove it. It is also obvious, higher the leverage, more the loss. If somebody left the money in savings account they would have lost even less!

    For a even analysis and if this was not about your ego only, do another post for people who bought from 2000-2004.

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  25. 25
    Rojo says:

    By Kary L. Krismer @ 23:

    By The Tim @ 21:
    RE: Rojo @ 20 – The point isn’t to say “I told you so.” When I was considering the comparison, it wasn’t intuitively obvious to me which one would come out on top, since after all, stocks have fallen further than housing. I decided to run the numbers to satisfy my own curiosity, and thought it would make a good post. Sorry to have apparently offended you.

    Let’s see. Your example has the buyer putting 20% down. We’re roughly 20% off the peak. So just off the top of your head homeowner would be at zero.

    The stock investor was down over 50% at the bottom, but you have them add in over $1,000 a month to the investment (increasing the total investment by more than 20%), and the stock market has gone up a considerable amount since the bottom.

    So roughly zero compared to something over 50%. This doesn’t really seem like a situation where you “needed to run the numbers. …”

    Exactly my point!!

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  26. 26
    The Tim says:

    By Rojo @ 24:

    There are however many people I know who read the blog that are getting done with this blog because it is not giving them any new information and it is mostly stroking the egos of few at the expense of others.

    Darn, and here I was hoping I had finally discovered the secret to pleasing all of the people, all of the time.

    Seriously though, looking back through the last few weeks of posts, I’m having a hard time understanding how “most” of them could be interpreted as “stroking the egos of few.”

    • Comment of the Week: Impulsive Behavior Disorder
    • What the Heck is the Affordability Index, Anyway?
    • Case-Shiller Tiers: High Tier Flat, Low & Mid Tiers Inch Upward
    • Case-Shiller: Seattle Home Prices Bump Up Slightly Again in June
    • Tacoma Condo Project Foreclosure Auction Reveals Grim Reality
    • Elizabeth Warren: We’re Not out of the Woods
    • July Seasonally-Adjusted Active Supply by Neighborhood
    • Puget Sound Counties Interactive July Update
    • TIME: Renting Still a Better Deal in Seattle
    • etc…

    Most of that looks to me like pretty clean-cut local housing market news and analysis, and I fail to see where the impression of “ego stroking” is coming from.

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  27. 27
    BellinghamREnter says:

    Can I get some personal advice? I’ve followed this site for a long time…

    My wife and I didn’t buy from 2005 until now b/c we thought along the same lines as Tim. We rented for $770 a month and live in Bellingham. Now we are thinking of an offer on a house that is $226k (1980 rambler, 3 bd, 2 ba, 1178 sf, 2 car, .29 acre lot, great location, great schools). We love the house and have $33k to put down and have an income of around $50k. Buy vs keep renting? Even if it goes down in value would we be better off just pulling the trigger? I feel like we made a much better decision waiting but is now the time or keep waiting?

    It had a peak value of $268k in 2006 so we would be getting quite a bit off from peak. I just can’t believe that the house value on zillow in 2002 was $122k!

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  28. 28
    The Tim says:

    By Kary L. Krismer @ 23:

    This doesn’t really seem like a situation where you “needed to run the numbers. …”

    I said “it wasn’t intuitively obvious.”

    intuition: “The act or faculty of knowing or sensing without the use of rational processes; immediate cognition.”

    Yes, if you do some basic math in your head, it’s easy to figure out. I went to a spreadsheet because I wanted to see how the actual numbers panned out, and I posted it to the blog because I realize that many people will not even do the basic math you described, and despite the fact that home prices have obviously fallen, they still mistakenly believe that homes are always a great investment.

    This post is for those people that still insist on accepting cliché’s as universal truths, not for people that such as yourself and Rojo who are willing to do some basic reasoning on their own.

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  29. 29
    Kary L. Krismer says:

    RE: The Tim @ 26 – Tim, I’ll say you’re reasonably fair and balanced, but often in a post there’s one thing that might indicate a bias. But who isn’t bias in some way? No one.

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  30. 30
    singliac says:

    I actually found this post rather enjoyable. I remember Tim’s post on GRS, and it is fun to check in on his predictions. Even now, the general sentiment I hear is that renting is throwing your money away. I have no problem with Tim reinforcing the fact that RE is not always a great investment/savings account/etc.

    And Kary, I can hardly believe it has been a year since you hijacked this blog. I remember the good old days when every other comment wasn’t from you. I double dog dare you not to reply to this comment.

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  31. 31
    Kary L. Krismer says:

    RE: The Tim @ 28 – I think it is intuitively obvious for the reasons stated in the other thread. When you compare a leveraged investment to one that isn’t, in two declining markets, the leveraged investment will do worse on a percentage basis, unless the cash investment was in a market that declined much more than the other market. And in two rising markets, the leveraged investment will do better, absent the cash investment being in a market with spectacular returns. That’s just the nature of leverage–high risk, high reward.

    Now that does raise the issue that others have brought up–why does the government support high risk investing for the average American? I can see why they do it temporarily, but VA and FHA have been going on for decades.

    Looking back I wonder if we wouldn’t have all been better off if the government had just closed the 80/20 loophole, where such transactions didn’t need PMI. Perhaps the PMI providers could have reined in the banks with higher PMI rates as the risks increased.

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  32. 32
    Kary L. Krismer says:

    RE: singliac @ 30 – Whatever.

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  33. 33
    singliac says:

    RE: Kary L. Krismer @ 32 – Hahaha!! Man, I love this blog.

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  34. 34
    Markor says:

    I agree with Ira @ 4 about the risk of both stocks and houses. However, once one has a mortgage (for reasons other than savings), putting all extra money toward the mortgage is a great savings plan. Guaranteed return (means no risk), paperwork-free, tax-free.

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  35. 35
    Markor says:

    RE: BellinghamREnter @ 27

    I just can’t believe that the house value on zillow in 2002 was $122k!

    That pretty much tells you what to do, doesn’t it? Is the economy worse now than in 2002? Are mortgages harder or easier to get now than in 2002? The main reason the price isn’t $122K today, or even less, is because house prices are sticky on the way down. (Think of all the people who can’t sell without getting the bank to agree to a short sale.) The homebuyer credit is also inflating prices. Look at actual past sales prices, though, rather than Zillow values, to see where prices are likely headed.

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  36. 36
    Rojo says:

    By The Tim @ 26:

    By Rojo @ 24:
    There are however many people I know who read the blog that are getting done with this blog because it is not giving them any new information and it is mostly stroking the egos of few at the expense of others.

    Darn, and here I was hoping I had finally discovered the secret to pleasing all of the people, all of the time.

    Seriously though, looking back through the last few weeks of posts, I’m having a hard time understanding how “most” of them could be interpreted as “stroking the egos of few.”

    Comment of the Week: Impulsive Behavior Disorder
    What the Heck is the Affordability Index, Anyway?
    Case-Shiller Tiers: High Tier Flat, Low & Mid Tiers Inch Upward
    Case-Shiller: Seattle Home Prices Bump Up Slightly Again in June
    Tacoma Condo Project Foreclosure Auction Reveals Grim Reality
    Elizabeth Warren: We�re Not out of the Woods
    July Seasonally-Adjusted Active Supply by Neighborhood
    Puget Sound Counties Interactive July Update
    TIME: Renting Still a Better Deal in Seattle
    etc…

    Most of that looks to me like pretty clean-cut local housing market news and analysis, and I fail to see where the impression of “ego stroking” is coming from.

    I am not saying every post is ego stroking but there are many that are and even more are the comments in the blog. The comments are over the top filled with bloated egos who waited this time out – in many cases out of their on financial condition and whatever other reasons they had. Now of course it is all about them seeing the writing on the wall that there was an impending crash coming.

    I was telling my wife in 2007 that we should sell and rent for a 2-3 years but I could not because I could have saved maybe 100K but then lost my marriage! So to each its own. Making comments that have absolutely no bearing on ones particular situation does not make either any sense or add any value!

    If I had the time whole day, I could find hundreds if not thousands of comments here that add absolutely no value than stroke bloated egos of bears on this blog.

    Of course your post are useful – atleast most of them anyway but your bias continues to show, a bias of a strong bear. That bias continues to fuel the non-sensical comments from people like singliac someone with a similar sounding name!

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  37. 37
    Markor says:

    RE: BellinghamREnter @ 27

    On the other hand, perhaps Bellingham is a lot more popular today (CA cash-out influx?), and general inflation since 2002 should be considered.

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  38. 38
    BellinghamREnter says:

    RE: Markor @ 35
    There are 7 offers already but our agent told us if we offered to pay the closing costs it would probably swing our way. I understand that it could go down but If the mortgage is the same as if we rented a house wouldn’t it make sense? It would easily re.nt for $1200/mo.

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  39. 39
    Kary L. Krismer says:

    By Rojo @ 36:

    I was telling my wife in 2007 that we should sell and rent for a 2-3 years but I could not because I could have saved maybe 100K but then lost my marriage!

    Your wife will be happy to know you didn’t consider that a win-win. ;-)

    On the divorce situation, that’s particularly bad in a declining market. I don’t have a good feel for it, but I’m not sure the courts had adapted to deal with negative equity, possible short sales, etc.

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  40. 40
    The Tim says:

    RE: BellinghamREnter @ 27
    Do you think the house is worth $226k? Would you be comfortable making the payments on said house for the next 10 years, even if the market value were to continue to decline? What would your monthly payment be if you bought, once you factor in principal, interest, taxes, insurance, maintenance, income tax savings, HOA, etc.? Is that considerably more than you’re paying to rent?

    There are a ton of factors at play here that are unknowns (to me). My advice is to look at the complete picture as best you can, and make a decision based on your personal comfort level and the most educated guess you can make about your future plans.

    Whatever you decide, I wish the best of luck to you.

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  41. 41
    2kt says:

    All of these graphs don’t really show the reality.

    Stock market has not made any money in the last 10 years. Majority of investors are in mutual funds and after taxes and fees had probably lost money. The so-called lucky stock investor that bought at the peak in 2007 most likely sold in panic of March and moved to cash and has recovered only a fraction of losses, if anything.

    For vast majority of people stock market is nothing but a disaster and has been through most of the human history.

    An average individual is much better off buying a home he can afford vs investing anything in a stock market. Paying off that home and passing it to children has a far better chance of wealth building that stock investing.

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  42. 42
    Markor says:

    RE: James Lupori @ 17

    Good story. I too want a paid-off house. It may not turn out to be the best investment but it would give me great peace of mind and that’s worth a lot to me.

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  43. 43
    BellinghamREnter says:

    RE: The Tim @ 40

    Thanks Tim,

    http://www.windermerewhatcom.com/index.cfm?fuseaction=detail&startrow=2&cfid=11595988&cftoken=16979885

    I think it’d probably be around $1500/mo with everything. It’s not too much more than we could rent a house (around $1200 just for rent, excluding w/s/g, etc)

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  44. 44

    It all depends on when you buy or sell either stocks or a home. You don’t realize any profits or loss until that time. With that said, for the people lacking any financial dicipline, buying a home may be their only way to attempt to create savings (and perhaps they shouldn’t be buying if they have no financial dicipline).

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  45. 45
    Markor says:

    RE: BellinghamREnter @ 38

    Consider that as house prices fall, rents may follow. My rent just got reduced 20%. The Tim is right that you should be comfortable making payments if the house value continues to decline, even to wipe out the whole bubble (leaving just general inflation). Lots of people are jumping into the market now, in part because of the homebuyer credit and also because they’re tired of waiting and the current prices look cheap compared to the peak prices. More patience could be worth a lot.

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  46. 46
    The Tim says:

    By Markor @ 42:

    I too want a paid-off house. It may not turn out to be the best investment but it would give me great peace of mind and that’s worth a lot to me.

    Exactly. Agree 100%.

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  47. 47
    Garth says:

    It reads like an ego stroke because the scenario is so contrived, it seems the numbers used were designed to match the thesis of the article, rather than being an analysis of any real numbers.

    Take a 10 year look 1999 – 2009 and the average home buyer in Seattle is much smarter (if smarter is determined by profits) than the average S&P investor and much much smarter than the growth stock investor, or financial sector stock investor, even after a housing bubble.

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  48. 48
    Rojo says:

    By BellinghamREnter @ 43:

    RE: The Tim @ 40

    Thanks Tim,

    http://www.windermerewhatcom.com/index.cfm?fuseaction=detail&startrow=2&cfid=11595988&cftoken=16979885

    I think it’d probably be around $1500/mo with everything. It’s not too much more than we could rent a house (around $1200 just for rent, excluding w/s/g, etc)

    BellinghamREnter,
    I don’t think it is a good idea to post links to an active listing and ask whether it is appropriately priced or if it is a good idea to buy it. I smell trouble both for you and any this site. Then maybe I am extra careful!

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  49. 49
    The Tim says:

    By Garth @ 47:

    It reads like an ego stroke because the scenario is so contrived, it seems the numbers used were designed to match the thesis of the article, rather than being an analysis of any real numbers.

    Yes, I contrived these numbers in July 2007 just so I could write this article two years later. That makes perfect sense.

    The July 2007 post was based on real life examples I found in the Seattle housing market at the time. I made some assumptions, most of which were quite generous to a potential buyer. I just thought it would be interesting today to go back to that article, take the scenario I laid out in July 2007, and see where it would put someone today. How is that “contrived”?

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  50. 50
    cc12 says:

    Agree the time period from 2007 to today is somewhat abitrary and not particularly relevant, but people should cut Tim a little slack. He does a fine job. According to Case Shiller, the Seattle metro is now essentially back to where it was when this blog was started. What does that mean? Have we bottomed or are we just back at square one? Is there irrational exuberance out there today? Has the psychology changed? These are the questions I am curious about and come to find answers to on this blog.

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  51. 51
    meadows says:

    RE: BellinghamREnter @ 27

    Well I have lived in Bellingham 22 years and Mrs. Meadows and I raised our sons here. Owned 2 homes. I think there is significant more downside for Bellingham prices, and a lot of deals coming up on rentals, but if you can afford your MITI stuff, have a good, stable income, can make a fat DP, LOVE the house and don’t plan to move for a good # of years, then go for it. Become a “homemoaner”

    But you are prob’ly drinking the local realtor koolaid re the 2010 BC Olympics and the slight bump-up in spring/summer sales. O and Bellingham’s still “special.”

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  52. 52
    meadows says:

    I don’t understand how anyone who has followed Tim’s blog for several years can fail to be impressed by his desire to ferret out RE facts. When all the tee-vee, papers, pundits, bankers and realtors on the local and national level were swimming in groupthink about new paradigms (financial instruments!) and ever increasing RE prices there were only a few calm heads making factual assessments.

    Why, when confronted with facts, does the belief-based person become annoyed? The dismantling of belief in favor of rational facts is inevitable.

    “The truth will out.”

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  53. 53
    John Smith says:

    Rojo, I thought you bought a house in Kirkland in 2007 and started renting your previous house in Seattle at that time as well???

    By Rojo @ 24:

    Tim, you have not offended me rather more like irritated me. I am not one of the unfortunate ones that bought in the run up to 2007. I bought in 2004 when things were just starting get warmed up.

    ***

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  54. 54
    Kary L. Krismer says:

    RE: meadows @ 52 – Courtesy the Talking Heads:

    Facts are simple and facts are straight
    Facts are lazy and facts are late
    Facts all come with points of view
    Facts don’t do what I want them to
    Facts just twist the truth around
    Facts are living turned inside out
    Facts are getting the best of them
    Facts are nothing on the face of things
    Facts dont stain the furniture
    Facts go out and slam the door
    Facts are written all over your face
    Facts continue to change their shape

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  55. 55
    waitingforseattletocool says:

    RE: meadows @ 52

    So now that tee-vee, papers, pundits, etc. have flipped in the other direction (ok well not all, but KOMO TV for example), what should we believe?

    It just seems to me there is almost a perpetual bear bias on this site. If the bubble doesn’t keep bursting, you can’t keep deriving advertising fees.

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  56. 56
    meadows says:

    RE: waitingforseattletocool @ 55

    If you watch CNBC for entertainment puposes only, as I do, you’ll see plenty of “this is the bottom” belief-based cheerleading which uses cherry-picked trends to re-inflate the bubble. Ain’t gonna happen. This dead cat ain’t gonna bounce.

    My suggestion as a compulsive trend identifier/observer is to detour around KOMO TV and most other MSM as shallow sources for economic reporting… the point is not “what do we believe?” but how do we gather information and identify probable trends based on a wide array of sources?

    It’s daunting but do-able w/the help of the internet toobz. O and Tim’s cool charts.

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  57. 57
    Tim says:

    I live in Bellingham as well and am struggling to see how prices don’t fall significantly here. Prices do seem to be very sticky here.

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  58. 58
    waitingforseattletocool says:

    RE: meadows @ 56

    Okay, no argument here.

    I’ll just sign-off this post by saying this was undoudtedly the most “no duh” postings The Tim has ever had.

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  59. 59
    Maybe I'm stupid? says:

    Hi guys, I love these analyses on renting vs buying (and am tending to side more with Tim) but I have a slight mix of these two situations and can’t figure out whether I’m maximizing my retirement.

    I have a townhouse I bought in ’05 but I want to rent an apartment closer to work ASAP. My mortgage+HOA is ~$600 (I bought the house jointly so the numbers are small).

    I hoped to rent my room for $600/mo and rent me a place in Seattle for $1100/mo. My brain is very small so- from my perspective- it seems this is just costing me $500/mo ($1100 – $600) in money I could have put into mutual funds. Are there other costs I’m missing?

    If I sold the place now I’d probably have 0% ROI over 5 years but that would free up the cash for mutual funds. Should I keep the house and rent it out or should I sell it now?

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  60. 60
    Kary L. Krismer says:

    By waitingforseattletocool @ 55:

    It just seems to me there is almost a perpetual bear bias on this site. If the bubble doesn’t keep bursting, you can’t keep deriving advertising fees.

    I don’t know, but I really don’t suspect this site is advertising driven.

    But with ad-block, I can’t even tell the P-I site is advertising driven.

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  61. 61
    deejayoh says:

    By Kary L. Krismer @ 54:

    RE: meadows @ 52 – Courtesy the Talking Heads:

    Facts are simple and facts are straight
    Facts are lazy and facts are late
    Facts all come with points of view
    Facts don’t do what I want them to
    Facts just twist the truth around
    Facts are living turned inside out
    Facts are getting the best of them
    Facts are nothing on the face of things
    Facts dont stain the furniture
    Facts go out and slam the door
    Facts are written all over your face
    Facts continue to change their shape

    Whoa. I can’t believe you pulled that one off the hard drive… Nice!

    Crosseyed & Painless

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  62. 62
    Masaba says:

    RE: The Tim @ 49

    Tim, no one is saying that you were not correct in 2007 that it was much better to put your money into stocks than to buy a home as an investment. I think that the part that people do not agree with (including me) is that a home is ‘the worst savings plan on Earth.’ This statement implies that this is ALWAYS true, not just in the scenario that you have shown (ie. 2007 to present). As many people have tried to get you to admit, the intuition is that if you ‘run the numbers’ for other periods of time, the home will come out ahead. Therefore, since your metric of performance seems to be overall equity after a fixed time period, the house would not always be ‘the worst savings plan on Earth.’

    With that said, your point is valid. The RE industry touts a home as a great forced savings plan where you can build equity and ‘move up’ later. They seldom mention the huge risk of a leveraged asset if it actually goes down in value. Furthermore, people also seldom think about ‘throwing money away on interest’ the same way they do ‘throwing money away on rent.’ In actuality, though, the home owner may be spending a lot more on interest than a renter is on rent.

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  63. 63
    Scotsman says:

    RE: waitingforseattletocool @ 55

    “It just seems to me there is almost a perpetual bear bias on this site”

    Maybe the world is truly “headed to hell in a hand-basket.” That being the case, a “bear bias” would be entirely appropriate as it only reflects reality. Did the idea that facts, not hopes and wishes, control the economic future of housing ever enter into your analysis?

    Show me three bits of positive economic data that I can’t disprove through either facts or context and I’ll listen to the rest of what you have to say.

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  64. 64
    Scotsman says:

    I’ve said for many years that a home is probably the worst form of savings plan. But if it’s the only one you’ve got, after 30 years it’s still better than the alternative of no plan at all. For many folks, even if they only get 1/4 of what they paid into it, in effect a negative interest rate, it’s still better than zero. And that fact alone is why homes have the reputation the do. Most folks are so bad at financial planning that 1/4 of something is still better than all their other alternatives combined. Holy crap, what an indictment.

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  65. 65
    waitingforseattletocool says:

    RE: Scotsman @ 63

    Well, I’ll start with one bit versus three … look at the number of new listings compared to prior years that come on line each month in the NWMLS stats . Nothing is every made about that on this website. Just run a scenario where sales are flat or down at the new listing rate to project where inventory will be.

    A year or so from now, whether prices are up or down or flat, people are going to be asking what happened to all the inventory.

    And then all the bears on this website will respond by saying it is all bank owned.

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  66. 66
    waitingforseattletocool says:

    RE: Scotsman @ 63

    Number two … new construction residential inventory in King County is down 25% from the peak. I don’t have an exact number on new King County starts but I ASSUME it is down at least as much.

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  67. 67
    waitingforseattletocool says:

    Number three … new construction residential inventory in the Puget Sound region is down 35 % from the peak.

    Won’t these three factors lend to some stabilization in the local housing market?

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  68. 68
    Kary L. Krismer says:

    I think reduced inventory has been mentioned a few times here. Personally I think high inventory was mentioned too much other places (maybe here too), because it was somewhat just a sign that people would be willing to sell at very high prices. Also, as I’ve mentioned on the inventory front before, inventory is much lower than back then because there are relatively few FSBOs compared to then.

    Also, on the inventory front, I just wrote a piece today over at SREP about how in King County there are now over 1000 SRF active short sales, and over 1,000 SFR pending (any state) short sales, but less than 100 short sales actually closing per month. If you take those short sales away, as being sort of pointless exercises, the inventory is even less.

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  69. 69
    waitingforseattletocool says:

    RE: Scotsman @ 63

    Number four … absorption rate (based on sales, not pending) stands at 3.9 months in the state of California. This is down from probably close to 15 months at the worst point.

    Median price in San Diego county is now about $380K after five straight months of increasing sales price.

    Spring bounce … I mean spring / summer / almost fall bounce.

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  70. 70
    waitingforseattletocool says:

    RE: Kary L. Krismer @ 68

    I don’t think that explains the drop in inventory of NEW residential construction.

    Rate this comment: Thumb up 0

  71. 71
    Kary L. Krismer says:

    RE: waitingforseattletocool @ 70 – No, there they just quit building, or slowed it.

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  72. 72
    ray pepper says:

    RE: BellinghamREnter @ 38

    7 offers already???????????????

    Don’t walk ……..Run away from it!

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  73. 73
    ray pepper says:

    great blog this time…Tim getting ripped……………Kary getting ripped…………….Come on bring it on boys!

    I say you all join our soccer team at StartFire on Sunday Nights. We can settle it on the field. I never played soccer but must lose weight. I’m 219 and only 5’2 and doctor says ITS TIME..Exercise…Lose weight or die…Die = 500 Realty slow demise. Can’t have that………….Can we?

    http://www.starfiresports.com/league.asp

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  74. 74
    Scotsman says:

    waitingforseattletocool posts #65-70

    Inventory numbers are all just noise in the machine. Home prices are driven by disposable income (both individual and regional pool averages), lending standards, borrowing costs, and inflation/deflation expectations. None of these factors are moving in a direction that supports stable, let alone rising home prices. Sure, the spring bounce, government incentives, and cyclical pause in the downward trend have produced what looks like a reversal of fortune for housing. But it can’t and won’t last. Incomes continue down, unemployment growth, though slowed, continues with millions of jobs lost and more to come. Interest rates are already seen as abnormally low- they won’t be headed lower. Lending standards? Don’t make me laugh. The natural “stickiness” of home prices will fool many people until both banks and owners are forced to sell.

    I’m an optimist- but this will get much, much worse before it gets better, and the turn-around will be much more solid than a blip up or down in inventory or new construction numbers.

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  75. 75
    waitingforseattletocool says:

    RE: Scotsman @ 74

    so now inventory doesn’t matter … throw that out as a metric just like we threw out pending sales as a metric

    what do we throw out next because it doesn’t matter, closed sales?

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  76. 76
    The Tim says:

    By waitingforseattletocool @ 65:

    … look at the number of new listings compared to prior years that come on line each month in the NWMLS stats . Nothing is every made about that on this website.

    I guess it doesn’t strike me as important breaking news that fewer people are anxious to sell their home when they know they’re likely to get less for it. That just seems like exactly what we would intuitively expect to see when prices are falling.

    That being said, I have discussed new listings on here before. Last year when we were hitting record high inventory levels (just before the NWMLS changed the definition of “active listing”), I pointed out that although “active listing” inventory was quite high, new listings were more or less only as high as they were during the boom.

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  77. 77
    waitingforseattletocool says:

    RE: The Tim @ 76

    and as exactly what we would expect to see as a stabilizing factor

    sorry i missed that post from 14 months ago

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  78. 78
    waitingforseattletocool says:

    RE: The Tim @ 76

    fwiw, it seems the number of new listing is about 600 homes fewer per month (4200 fewer on average Jan-July) than in the boom years.

    doesn’t seem insignificant

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  79. 79
    Scotsman says:

    RE: waitingforseattletocool @ 75

    You can’t use short term indicators to predict long term trends. You’ve got to separate fundamental drivers from the short term natural variability in any market. I don’t see small changes in pendings or inventory as being indicative of what’s going on in the macro environment. Others may see it differently.

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  80. 80
    David Losh says:

    I had two buyers in 2007, one listened to me, and the other did not. The guy who did bought a positve cash flow of a house with a divable lot. It was listed at $650K reduced from $699K. We offered $500K.

    Rather than give the bank a gift of money down they made the purchase through an investor with 5% down. They put another $45K against the principle balance after closing. They haven’t touched it since, but will sell the 8,000 sq ft lot to put more money against the principle.

    The person who wouldn’t listen to me, the one who was soooo smart, cancelled her contract with me, for a lower priced home, because it wasn’t closing on time, and bought a bigger home, that I didn’t agree with, from a discount one man shop. The value dropped like a rock. She also wouldn’t listen about selling the present home in South Everret. That’s down about $40K conservatively.

    It depends what you buy, how you buy. Not all property is pretty and not all times are especially good. However a guy bought a pre foreclosure in March and is netting a $27K after tax profit, this year. His out of pocket and recouped was $24K. He took over payments to make the bank happy.

    Now that being said I would never recommend any one buy today when I know that the market will tank again in October, but there will be deals to be had this year. It just depends.

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  81. 81
    Boomer7 says:

    @ BellinghamREnter

    Sorry if I missed something but that house you linked to is listed for $300k — not $226k??

    Rate this comment: Thumb up 0

  82. 82
    Hugh Dominic says:

    Tim, unlike the others I like the post and scenario. A few suggestions to make it better:

    * run it for the preceding, rolling 7 years since that has been the recent average home loan lifespan
    * you have to factor in liquidation and tax. If you start the model with pre-tax cash dollars, you have to end it that way too
    * include common index fund mgmt fees

    Other than that I think this is a good model to compare the results of two very common wealth building strategies. With one massive exception, next post.

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  83. 83
    Hugh Dominic says:

    This model, and irrational behavior model, the fed, and wall street all miss an important adjustment factor: risk. An investment plans performance is supposed to be evaluated with consideration of risk. You’d need a phd to assess it though. And you’d need a phd to screw it up so completely that you destroy the economy with the mistake.

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  84. 84
    Hugh Dominic says:

    Btw I have tracked all my home expenses and benefits since I bought it in 1997. Based on my likely sales price, less liquidation costs, my annual return would be 6.5%.

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  85. 85
    one other option says:

    I put all my money in certificates of deposit. Steady 2-4% over the last few years.

    As a side note, a house, if bought cheaply, is an acceptable savings plan if the interest cost, property tax, insurance, and maintenance are approximately equal to or lower than rent. This way, the principal payment is truly savings since the value of most houses will never go to zero. True, further depreciation could occur, but provided a sensible price is paid (not a bubble price), then there is always the rent-free living once the mortgage is paid.

    This, of course, was the old-fashioned idea, before houses turned into financial instruments.

    I’m still a renter, because it makes more sense right now, but here is what I think will happen:

    Before, easy credit allowed even the weakest financial players to compete for housing.

    Now, the weak are gone, and many of what WOULD have been the strong have made themselves weak by competing for houses during the bubble. Additionally, many of the would-have-been-strong also bought into the HELOC craze, and are weak from that.

    Therefore, I expect housing to trend (however briefly) BELOW the historical trendline, making a house a good investment for the first time in a decade.

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  86. 86
    cbo says:

    Meh. This post adds nothing of value to the conversation. Way to cherry pick your data to support your argument.

    Did you know that 75% OF ALL STATISTICS ARE MADE UP? I read that somewhere.

    Buy a house, pay off your 30 in 15, sit back and enjoy semi retirement while the renters keep renting.

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  87. 87
    Costco Mike says:

    By cbo @ 86:

    Meh. This post adds nothing of value to the conversation. Way to cherry pick your data to support your argument.

    Did you know that 75% OF ALL STATISTICS ARE MADE UP? I read that somewhere.

    Buy a house, pay off your 30 in 15, sit back and enjoy semi retirement while the renters keep renting.

    Way to support your argument with solid date…

    =)

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  88. 88
    bellinghamREnter says:

    RE: Boomer7 @ 81

    It must have slipped up, it’s the wrong house, although almost same description and one built in 1980! And… we already made a full price offer with $55k to put down, sooooo… We’re only financine $180k. That can’t be too risky is it? I mean it’s in a great location, great schools, and not like we’re seriously overstretching.

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  89. 89
    Scotsman says:

    RE: bellinghamREnter @ 88

    Um, what does it matter at this point?

    Still seeking validation? Pick one:

    “Great job- the wife will be happy and no stinky landlord will ever push you around. Plus, you’ve climbed the first rung of the housing ladder. Congratulations- enjoy!

    Or:

    Must be nice to be rich and able to throw away a couple hundred grand. You could have had private education for your kid for what that coming $80K loss financed over 30 years will cost ya!

    That should cover it. Here’s the good news- in 3 years or less you’ll know for sure whether you should become a financial adviser! ;-)

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  90. 90
    Matt says:

    I’m late to the discussion, but I just had to comment (forgive me if someone already mentioned this, but I didn’t see it)… the original post misses the point. If you buy a home and only put 20% down, your investment is heavily leveraged. Of course any losses (or increases) in value will be magnified. It’s the same thing with any investment or business. The more leveraged you are, the more the ROI will be magnified.

    Since the market has been down over the last 2 years, a leveraged investment is going to lose more money than an unleveraged one. And in an up market, the leveraged investment is going to look a lot better than the unleveraged one. That’s just the nature of the beast, it doesn’t prove that one investment is better than the other. You could do the same comparison between buying stock and buying stock options (calls). Over the last couple years, you could have easily lost all your invested money buying stock options, while if you just bought stock straight up, you’d still have 50% of your money. Does that prove options are a horrible investment? Hardly.

    So, the post demonstrates that in a down market, unleveraged investments preserve more capital than leveraged investments. So?

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  91. 91
    Hugh Dominic says:

    What if Tim ran the analysis over time and answered the question, “in what years did it make more sense to put $85k into a home instead of the s&p?”

    then see how many of the years fell one way vs. The other.

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  92. 92
    waitingforseattletocool says:

    RE: Scotsman @ 89

    How on god’s green earth can you project 30 years into the future what the heck is going to happen in the real estate market? Or are you just generally predicting the demise of the world?

    Perma-bears are guaranteed to be wrong at a minimum once, over 30 years I’d say you’ll be wrong at least 3 times.

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  93. 93
    Kary L. Krismer says:

    RE: Hugh Dominic @ 91 – Actually, the house would win more years if you put even less into it–at least if winning were based on percentage return.

    2-3 years ago apartments made little or no sense under any scenario if you put too much money into them. Turns out though, it was that they didn’t make sense given what actually happened no matter how little you put into them either.

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  94. 94

    Very interesting topic. Recent experiments conducted by behavioral economists would disagree with one major assumption — would the renter really invest the excess money or would they spend it. I’m afraid the research shows most would spend it. As poor a savings vehicle a home might be it still accounts for the majority of American’s net worth at retirement. Why? Because they were forced to put the money away. Frederick Hayek, the nobel winning economist said, “The two best places for individuals to save money is in their home and permanent life insurance.”

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  95. 95

    […] of home-ownership. On Monday, he shared a follow up on his site in which he explored what he calls the “forced savings plan” myth. It’s true that over the past two years stocks have outperformed real estate — even […]

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  96. 96
    Nate says:

    I think discussing 2 long term investments after 2 years and coming to a ‘conclusion’ is idiocy. This is why people make mistakes, they are too micro about stuff.

    Long term, meaning LONG. Not 2 years. >20 at least. Come back in 2027. But until then I guess every 2 years you can keep posting ‘something.’

    -Nate

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  97. 97
    David Losh says:

    RE: State Farm Insurance @ 94

    Insurance is the next big bail out. Remember 9/11 and Hurricane Katrina.

    Pay your insurance premiums and take you chances. More to the point, the insurance industry is all about profit and billable hours. Buyer get screwed every time. We tolerate insurance scams because it’s the law, we have to buy it.

    The insurance lobby has high jacked Congress with it’s free money. Need more money? Raise premiums, the suckers have to pay, it’s the law. Don’t want to pay out big claims? Have the government cover it.

    We all pay the insurance extortion protected by our own government policing actions.

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  98. 98
    Markor says:

    RE: David Losh @ 97

    I tend to agree. I’d never risk my money on a whole life plan. Odds are high the insurance company will just shrug and point to the gov’t when you try to withdrawal.

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  99. 99
    Markor says:

    RE: one other option @ 85

    Good points.

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  100. 100
    cheapseats says:

    RE: State Farm Insurance @ 94 – “The two best places for individuals to save money is in their home and permanent life insurance.”

    OK, I was about to rail on against this then saw your name. In general I can see the argument on why some believe that a house is a decent long term investment, but I have always felt like non “term life insurance” was a scam… Like hey pay extra for your house every month, we will set it aside in a bucket called equity.

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  101. 101
    Ben says:

    P/E ratio on the S&P 500 is no where near 150. It’s around 14 right now.

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  102. 102

    […] “Stop throwing away your money on rent!” “Owning your home is like a forced savings plan!”If we’re thinking clearly, applying logic and common sense to these claims, it’s […]

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