The Bubble Isn’t Bursting Here!

Yesterday afternoon I received the following friendly mass e-mail from our resident representative and real estate expert, Jennifer Fisser.

This PDF was attached to the e-mail.

Hi Chad:

The bubble isn’t bursting here!

Please see this breakdown of renting vs owning.

I thought you might find it of value.

Hope things are well.



Jennifer Fisser
ZipRealty, Inc.
Licensed in California
Licensed in Washington
Toll Free: 1.800 CALL ZIP x4824
Cell: 206.890.0131
Fax: 206.508.0848
My Profile:

Pick any complete sentence out of that PDF, google it, and you’ll see that this article is being circulated all over the place.

Can you smell the desperation?

“Nearly a full third of households are still renting…but if you are one of them, you could be paying a hefty price. Additionally, the children of the baby boomer generation are close to or at the home buying age, but these “echo boomers” could mistakenly decide to put off the purchase of a home because of all the noise about a “bubble” in home prices.”

Another Darren Meade quote, from his website

“No one should ever have to lose there [sic] home and live on the street, especially when you have already spent half your life building your career”

Irony at its finest.

(Darren Meade, American Chronicle, 08.19.2006)

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  1. 1
    flopfolder says:

    I read that attached .pdf and arggg…. Every concievable catch-phrase and scare tactic rolled into one. What a mess!

    Whenever I see these articles, a question always comes to mind:

    What are today’s first time homebuyers going to do and more importantly, the would-be first time buyers in the next 5-10 years?

    If you believe that real estate will keep appreciating at even historic levels (5-7%), as proposed in such articles, how in the hell are John and Jane Twentysomething going to own anything? Currently, they can’t make payments on 30 yr. fixed loans and are barely able to afford minimal payments with toxic loans.

    These people weren’t priced out of the market, they were never priced in!

    All this “Buy now or be priced out forever!” rah-rah has to be one of the most widespread and dangerous logical fallacies to date. Am I really supposed to believe that America’s youth will never be able to afford homes? Guess they will all be living in cardboard boxes or servant’s quarters on some retired boomer’s palatial estate.

    Unless I am missing something, nothing but a return to fundamentals where income levels support housing prices will fix this problem. Whether it is wage inflation, home price depreciation or some combination of the two remains to be seen.

  2. 2
    SeattleMoose says:

    “how in the hell are John and Jane Twentysomething going to own anything? Currently, they can’t make payments on 30 yr. fixed loans and are barely able to afford minimal payments with toxic loans.

    Greenspan said something interesting the other day (see the one flew over the cuckoo’s next picture/article over at hinting at a possible “solution” to the current affordability problem (couldn’t be high prices themselves…of course):

    “”American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage,”

    I had to read this twice to believe what I was reading. Isn’t this EXACTLY what caused the bubble in the first place (IO only, ARMs, 100 year loans, etc.)?

    How many more “alternatives” does this guy have up his sleeve?

    The inmates are in control of the asylum…..

  3. 3
    SeattleMoose says:

    Here is link to the Greenspan quote.

    The architect of the bubble saying there is no bubble…priceless. Right up there with the Liarreah quotes.

  4. 4
    Grivetti says:

    Heheheheh [/Pee-Wee Herman chuckle]

    So with the currently low levels of unemployment and the beefy gains in job creations, it looks like the housing market will remain vibrant. Although it will be difficult to sustain the double-digit gains that much of the country has seen, price declines are highly unlikely.

    For starters this Meade joker wrote this in August ’06, secondly, his notion of vibrant housing market is that of a dimming 40 Watt bulb, especailly with tales of spiralling RE prices all around the country.

    That and I’m not sure what ‘beefy’ gains really means, beefy? Sorry my friend we’re barely even with where we were after the tech-bust. No we’ve replaced two-bit dot-com CEO wages with McJobs, beefy indeed. That and a good chunk of job growth was started by the Greenspan housing-bubble anyway…

    Therefore, any ‘breakdown’ of Daren Meade’s rent vs. buy calculator is tainted with the same ole’ industry propaganda we’ve been seeing time eternal…

    That and this boner…

    If you are paying rent at $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period! Worse yet, after forking over $100,000, you still would have nothing to show for it.

    Hahhahah! Nice one Daren, you know what I’d do? Move!! Yeah, I know, its a bizarre notion to the house-poor but renters can just pack up and move if they feel they’re getting jacked. Ca-razy! I realize.

    What a howler!

  5. 5
    synthetik says:

    didn’t you guys get the same email? Maybe it’s because I actively look stuff up that I got on her “hit list”


  6. 6
    Alan says:

    “a mortgage of $300,000 could be obtained with a total monthly mortgage payment – including property taxes and insurance – of around $2,200.”

    Maybe he hasn’t seen the prices in the Puget Sound area.

  7. 7
    Eleua says:

    I have looked over this .pdf that Synthetik brought to our attention, and in the off-chance that anyone was waiting for my official pronouncement, here it is:

    Complete Bullshit.

    I think our overeager Realtor is guilty of a logical fallacy wherein she starts with her conclusion and works backwards to arrive at her assumptions.

    This has no limit to the amount of fun you can have. Perhaps I can do the same thing.

    For those of you that like spreadsheets, I have cobbled together a primitive analysis of renting -vs- owning, but I used some different assumptions.

    Rather than assume that real estate only goes up-Up-UP, I looked at it from the other end of the spectrum, and see what renting looks like if we are poised for a mild Japanese style downturn. This would have an initial speculative pop in the first year, and then a slow leak to a soft landing and recovery over the next decade.

    This is LIGHT YEARS away from what I am expecting, but I thought I would split the difference.

    Realtors like the “If” game. IF prices go up… Well, what “if” prices go down, and maintenance goes up? What “if” you are not getting the tax break you think you are getting?

    Read ’em and weep.

  8. 8
    flopfolder says:

    Interesting spreadsheet Eleua.

    Something is wrong with your ownership benefit calc though. It is overestimating things. The “benefit” in year 12 should be ($286,854) instead of ($379k). I haven’t figured out where the problem in the calc is though yet.

  9. 9
    Eleua says:

    I’ll look into it.


  10. 10
    msrelo says:

    In regards to Zip realty as a whole, I signed up just to poke around on their website. Since that day I have been inundated with spam from one of their realtors. It even continued after telling the lady to stop! Finally had to block the domain.

  11. 11
    flopfolder says:

    I think I figured out the problem with your Ownership benefit calc…

    Currently it is the sum of (annual savings from rental – annual cost of owning + home equity).

    Shouldn’t it be: (Cost of owning – cost of renting + equity) or in the case where renting is cheaper than owning (Equity – Savings from Renting)?

    This would put the ownership benefit at ($315,380)

  12. 12
    flopfolder says:

    If I am correct, something interesting occurs if you take the calculations out 30 years. I kept all your assumptions the same after 12 years, except that I had rental prices increase in lock step with home prices at 3% (i.e. roughly the expected rate of inflation).

    When doing so, renting is always “cheaper” on a pure cost basis than owning a home. However, the ownership benefit becomes positive in Year 23. and increases by about the cost of renting each year after that.

    Like I said, interesting spreadsheet. It kind of shows that in order to weather even a modest decrease in home prices, you may have to sit in your house for a very, very long time.

  13. 13
    flopfolder says:

    Another thing: Your rental savings is annualized, whereas changes in equity are cumulative.

    If you make the savings cumulative, then our renter who is earning 6% a year on his saved money will have $336, 966 stashed away in year 12. Our homeownwer would still have negative %54,437 in equity. Meaning that the renter would be up about $391k on the homeowner.

    When looked at this way, even after 30 years the renter would be ahead $465k. Renter would have 1.35 million in liquid savings. Homeowner would have a house with 887k of equity…

  14. 14
    Eleua says:


    So correct. I did factor in the ownership costs twice.

    The “Ownership Benefit” now is the deficit from renting + equity. I get the same number you do.

    Regarding cumulative savings…I’ll have to look at this tonight between innings in the ALCS.

  15. 15
    flopfolder says:

    Should be some good pitching tonight!

    Anyways, I think your spreadsheet brings to light a couple of points that potential home-buyers need to be aware of:

    1) Even a modest drop in prices and a flat market for a few years afterwards means that they will need to sit in their house for a substantial number of years to come out ahead of renting.

    2) Statistics look at the past. Formulaic projections are only as good as the assumptions underlying the projections. It is quite easy to manipulate those assumptions. So, bottom line, be very conservative with your predictions.

    3) Given that even the NAR admits that home prices will cool over the next year or more, purchasing a home now carries with it a number of risks.

    4) Squeezing into a home with a toxic loan or some other mortgage magic is only going to amplify those risks and/or limit your ability to respond to life events such as death/divorce/relocation, etc.

    So, until either the cost to rent skyrockets or the the price of homes come down, I will sit on the sidelines building up a horde of cash.

  16. 16
    wreckingbull says:


    Great analysis. I just hope that those who have cashed out (or never cashed in) don’t find themselves an indirect victim of this madness when the value of the US dollar packs up and goes home. I just don’t have the guts yet to move most of it to precious metals or other similar assets, although the voices in my head tell me I should. Those same voices once told me to buy the Flowbee, so they can’t always be trusted.

    As a footnote, I have to say that reading the well-written and well-researched posts and comments in this blog is quite refreshing.

  17. 17
    ctcbelieve says:

    Good work on the spreadsheet Eleua and flopfolder. You make it clear that it all depends on the assumptions that one makes. I’ll comment further on these later.

    One point that is rarely mentioned in determining homeownership benefits is that propopents greatly overstate the tax benefits. This is because when you itemize your deductions (which almost everyone with a mortgage does), you forego the benefit of the standard deduction.

    According to my amortization calculator, a $750,000 mortgage has $44,749.47 in interest payments in year one. For a married couple filing jointly in the 33% federal tax bracket, this is a tax benefit of $14,767.

    However, the standard deduction in 2006 allowed to a married couple filing jointly is $10,300, leading to a tax benefit of $3,399.

    As a result, the real tax benefit is only $14,767 – $3,399 = $11,368. This of course only considers federal taxes and not the effect of state taxes.

    The way to properly account for this in synthetik’s PDF would be to give the renter the $3,399 tax benefit each month. Or, to reduce the tax benefit that the homeowner is given each month.

  18. 18
    Eleua says:


    I didn’t feel like looking up the IRS tables for the standard deductions, so I just ballparked it by assuming a marginal tax rate of 20% on the final dollars.

    In reality, for the vast majority of us, it will be less than that. After the employees of my company bailed out the morons that run it, we were left making substantially less than we had just a few years ago. Add in three kids, and my cumulative tax rate went under 5% for a few years.

    The tax benefit is greatly overstated for the vast majority of us.

    In reality, the assumptions are just educated guesses, so the necessity of getting everything down to the gnat’s ass is pointless.

    When I worked for NASA, we used to say: measure with micrometer, mark with chalk, cut with axe.

  19. 19
    Eleua says:


    I updated the spreadsheet to reflect cumulative savings and the savings on the savings. I also reduced the interest for money saved in a given year by half, in order to reflect the monthly contributions, rather than an annual contribution in January.

    Great catch on both of those. I guess I should not blog/Excel while distracted by other things.

    Either way, the ownership path needs quite a few things to go the owner’s way for it to work. Right now, given the historic run that we have had, I just can think that ownership is the way to go.

    I wonder if Jen would like to see this, or if she would be offended. I’ll leave that up to Synthetik, as he has the relationship with her.

    According to Rain City Guide, I can be quite vitriolic, so I’ll stay close to home.

  20. 20
    synthetik says:

    relationship? I broke up with her last week, remember? :P

    All I did was sign up for a ziprealty account.

    Send away.

  21. 21
    Eleua says:

    revision: I just CAN’T think that ownership is the way to go.

    WOW! For a moment, I was recommending people buy a home.


    I’ll send it to Jen and see what she thinks. My guess is her response will go along the “well, that is your opinion, and real estate just doesn’t have that history, so we shall see” line of Bravo-Sierra boilerplate.

  22. 22
    Eleua says:

    Here is the text of my letter to Jen:

    Hi, Jen,

    My name is (E) and I received a nice rent -vs- ownership analysis that you did. It was very nice and informative. I did notice that your assumptions virtually guaranteed the outcome. I was wondering if you considered what the outcome would be if the market was poised for a mild, Japanese style selloff.

    Feel free to look over the counter argument at

    I would be curious if anyone in your professional circles has given any consideration to what would happen if an equally anomalous bust followed this historic boom.

    I wish you well in the upcoming years.

    All the best,
    (E) from Poulsbo

  23. 23
    synthetik says:

    I think we should sick the Housing Panic people on her…

    I doubt someone of her intellect would understand complicated things such as addition and subtraction.

  24. 24
    Eleua says:

    We know that RE agents can multiply by .06.

  25. 25
    synthetik says:

    oh, snap.

    …crackle n’ POP

  26. 26
    RottedOak says:

    It’s worth noting that whenever realtors (TM) talk about “historical” housing price appreciation they: 1) don’t adjust for inflation, and 2) include the huge run-up of the last few years in calculating the average. (OK, to be fair, most of them probably never calculated the appreciation; they just parrot what some other “expert” told them it was.)

    Using housing price data from Robert Shiller, I took 1950 as a baseline to calculate historical appreciation. The total appreciation through 2005 equates to about 5% per year (not 6-7%), but most of that is inflation. Adjusted for inflation, the 1950-2005 appreciation is about 1.1% per year. If you take out the unusual increases of the last few years and use 1950-2001, it is closer to 4.6% unadjusted/0.4% adjusted.

    So much for “historical appreciation” of 6-7%.

  27. 27
    Robert says:

    I wish someone could do the following experiment:

    1. Pick a recently sold home in an established Seattle neighborhood, originally built in the 1930’s timeframe. Sale Price is “X”
    2. Rebuild, from scratch, exactly the same house, as close as possible, but with modern materials, codes, and techniques, the same house. Build cost is “Y”

    Would X be more than Y? ABout the same? Less?

    Just curious.

  28. 28
    Darren Meade says:

    Hello All:

    I’m pleased to see my article posted on Amercian Chronicle has seemed to stir some debate.

    It is also pleasing to see Robert Shiller being qouted by some of the responses.

    Let me begin by stating that I used a $300,000 priced home in my Buy vs. Rent scenario, as the article went out nationally.

    The purpose of the article was to try and help people begin to build their personal wealth.

    It would be helpful in your replies, if you would state if you are a home owner or not.

    The reason I ask, is I was able to ask that question to Robert Shiller and other reknowned ‘Bubble Poppers’.

    The interesting point is that they have not sold either their primary residences or vacation homes.

    Real Estate is still a sound investment, depending on your local job growth and unemployment rates. If you are planning on holding a property for more than 2-3 years, I’d also check the quality and growth plans of the local school district.

    Each article that I write is based on all financial data of the markets. Currently we also predict rates will be cut by summer 2007.

    Here are some interesting financial facts from last week –

    1. FOUR-YEAR RUN – Today is the 4-year anniversary of the low point in the 2000-02 bear market. 4 major domestic stock indices all hit bottom on 10/09/02, including the large-cap oriented S&P 500. Since then, the total return of the S&P 500 is up +87% or +16.9% per year (source: BTN Research).

    2. YEAR-BY-YEAR RESULTS – The +87% total return achieved by the S&P 500 over the 4 years since it bottomed at 777 on 10/09/02 has not occurred in even increments. In year # 1 after bottoming, the index gained +36.0%, followed by +9.9% in year # 2, then +8.6% in year # 3 and finally another +15.0% was gained in year # 4. All numbers are total return performance results (source: BTN Research).

    3. COMING BACK – The NASDAQ Composite index also hit its bear market bottom on 10/09/02. From that date 4 years ago, the NASDAQ has more than doubled, climbing +106% or an annualized +19.9% per year. The NASDAQ is a 35-year old index, beginning on 2/08/71 (source: BTN Research, NASDAQ).

    4. HOW LONG DO BULL MARKETS LAST? – The median duration of bull stock markets since 1900 has been 27 months or 2 ¼ years (source: Leuthold Weeden Research, WSJ).

    5. A LONG, SUCCESSFUL BULL MARKET – The best performing bull market for the S&P 500 in the last 70 years lasted almost 9 ½ years. From a low on 10/11/90 to a high on 3/24/00, the S&P 500 gained +417% (source: BTN Research).

    6. WHAT BUFFETT THINKS – On 9/30/05 (i.e., just over a year ago), Warren Buffett predicted the S&P 500 would likely return less than +10% per year over the subsequent 7 years (2005-2012). The total return for the S&P 500 for the 1-year ending 9/30/06 was +10.8% (source: Fortune, BTN Research).

    7. WHERE THE MONEY IS GOING – In the period from 4/2003 to 5/2006, the amount of new money deposited into stock mutual funds exceeded that amount going into taxable and tax-free bonds funds in 36 out of 38 months. In the last 3 months however (6/2006 to 8/2006), the amount of new money going into bond funds has exceeded the amount deposited into stock funds in each month (source: ICI).

    8. ANOTHER DOUBLE-DIGIT QUARTER – If the year-over-year average growth in earnings per share (EPS) for the S&P 500 companies for the recently completed 3rd Q 2006 (compared to EPS from the 3rd Q 2005) exceeds +10%, it will be the 18th consecutive quarter of double-digit earnings growth, an ongoing all-time record streak. EPS year-over-year growth for the quarter has been projected at +14.9% (source: S&P, Barron’s).

    9. NEXT YEAR – 2 US senators (Lindsey Graham and Charles Schumer) who had been threatening to back legislation that would have implemented 27.5% tariffs on all Chinese imports coming into the USA have decided to table the issue until 2007 at the urging of President Bush and Treasury Secretary Henry Paulson (source: AP).

    10. HOPE RATES DON’T RISE – Greater than 1 in 4 new mortgages placed in the first 6 months of 2006 were either interest-only mortgages or option ARMs (adjustable rate mortgages). The option ARM is a more complicated financial transaction that may involve additional risk when rates rise (source: Inside Mortgage Finance, WSJ).

    11. WORKING TO LIVE – 35% of Americans who own homes spend at least 30% of their income on their housing costs (source: Census Bureau).

    12. CONCERNED ABOUT BENEFITS – 43% of US employees believe their employers may reduce their defined benefit pension plan, their defined contribution retirement plan or their retiree medical benefits within the next 3 years (source: Watson Wyatt).

    13. I THINK I WILL – Although more than 6 out of every 8 working Americans (77%) believe they will continue to work in some capacity even in their retirement years, only 1 out of every 8 currently retired Americans (12%) is working for pay (source: Pew Research Center).

    14. WHO MAKES WHAT – The top 20% of American households based upon gross income earned represent 50% of the nation’s total income, i.e., 1/5 of the nation’s households make ½ of the nation’s income (source: Census Bureau, WSJ).

    15. WHO PAYS WHAT – Single individuals and married couples with adjusted gross incomes of at least $100,000 represent 10% of all tax returns but this group pays 73% of all federal income tax, i.e., 1 out of every 10 American taxpayers is responsible for nearly $3 out of every $4 of federal income tax collected by the government (source: IRS, 2004 tax year data).

    For those that would like a detailed financial history of the housing market and economy, please contact me at anytime.

    Kindest Regards,
    Darren Meade

  29. 29
    Darren Meade says:

    One of the Bench Mark publications I review is Kiplinger Reports.

    The following is their most recent update on the market:

    Total home sales will probably decline about 4% next year after a drop of 9% this year. Sales of new homes, roughly 15% of the market, will decline at a bit faster rate than sales of existing homes through 2007, keeping home builders’ profits under pressure. Faced with a rising tide of order cancellations, builders are already tossing in bathroom upgrades, extra landscaping, club memberships and anything else they think might help ease their inventory backlogs.

    The slowdown in sales has increased the inventory of existing homes for sale to the equivalent of 7.5 months’ supply, which is the highest since 1993, and compares with an average of 4.5 months last year. The current figure is below the nine months of inventory seen during the 1990/91 recession and the 10 months seen during the recession in the early 1980s. The median sales price is down 1.7% over the past 12 months and is likely to be flat for the year and probably flat again through at least the middle of next year as the economy’s growth rate remains sluggish. In some markets in California, South Florida and the Washington, D.C., suburbs, the average price will probably decline.

    The housing market will get some underlying support from still-modest mortgage rates. The benchmark 30-year fixed-rate mortgage stands at 6.3%, up from 5.7% one year ago. But it has dipped a bit recently, and we don’t expect it to go up much because of the slow pace of economic growth. From time to time, inflation worries will send rates a bit higher, but they’ll fluctuate between about 6.4% and 6.8% the rest of this year and about the same in 2007.

    Meanwhile, housing starts are tumbling after a brisk beginning of the year. Starts dropped 6% in August to an annual rate of just under 1.7 million, down 19.8% over the past 12 months. We expect starts to decline about 10% this year and about 9% in 2007 before leveling off. The long-range outlook remains favorable, with the annual rate likely to average around 1.8 million starts. Population growth, fueled in large measure by immigration, will provide steady housing demand in the years ahead.

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