It's called capitalism. It's why we are all here. There is no such thing as risk free, no not even the 30 day T-Bill. Some people will make money, others will lose it. Obviously buying a five million dollar house in some shittown in Califnornia may not be as good as an idea as buying a $90,000 house in Omaha, in a good neighbourhood.
Real Estate will not meet the same fate as Tech.
- Thread starter The Kin
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It's called capitalism. It's why we are all here. There is no such thing as risk free, no not even the 30 day T-Bill. Some people will make money, others will lose it. Obviously buying a five million dollar house in some shittown in Califnornia may not be as good as an idea as buying a $90,000 house in Omaha, in a good neighbourhood.
So was the dot-com bubble. Just not enough intrinsic value.
Tell Amazon, EBay, Yahoo, and Google that there is no intrinsic value in doing business on the Internet.
In economic terms, the intrinsic value of an investment is the discounted value of future net earnings that one can expect to receive from the investment. The intrinsic value of a speculative dot-com stock may be very difficult to estimate with any accuracy but that does not mean it doesn't exist, as investors learned in 2000 and 2001.
Sure there are differences between houses and dot-com stocks. Nonetheless, in both cases, you have a bubble when investors buy based on the expectation of future capital appreciation without regard for the intrinsic value of the investment.
Martin
Quote from Sparohok:
So was the dot-com bubble. Just not enough intrinsic value.
Tell Amazon, EBay, Yahoo, and Google that there is no intrinsic value in doing business on the Internet.
In economic terms, the intrinsic value of an investment is the discounted value of future net earnings that one can expect to receive from the investment. The intrinsic value of a speculative dot-com stock may be very difficult to estimate with any accuracy but that does not mean it doesn't exist, as investors learned in 2000 and 2001.
Sure there are differences between houses and dot-com stocks. Nonetheless, in both cases, you have a bubble when investors buy based on the expectation of future capital appreciation without regard for the intrinsic value of the investment.
Martin
I can agree with this. Not all real estate is created equal.
Hey man, you started the thread. You said discuss. I discussed. What's your issue?
By an astonishing coincidence, I actually live in Shittown, California and from where I sit there is a real estate bubble. I didn't say there's a bubble in Omaha. That's why I said, "In many markets...."
Investing is about capturing future earnings. In my neighborhood the real net earnings on rental properties is negative, i.e. less than the risk free rate.
Martin
If you include opportunity cost when calculating "discounted value of future net earnings," then the intrinsic value of most of the dot-coms was negative.Quote from Sparohok:
So was the dot-com bubble. Just not enough intrinsic value.
Tell Amazon, EBay, Yahoo, and Google that there is no intrinsic value in doing business on the Internet.
In economic terms, the intrinsic value of an investment is the discounted value of future net earnings that one can expect to receive from the investment. The intrinsic value of a speculative dot-com stock may be very difficult to estimate with any accuracy but that does not mean it doesn't exist, as investors learned in 2000 and 2001.
Sure there are differences between houses and dot-com stocks. Nonetheless, in both cases, you have a bubble when investors buy based on the expectation of future capital appreciation without regard for the intrinsic value of the investment.
Martin
To my way of thinking, purchasing equity in a company with no prospect of earnings, as was born out by subsequent developments, is throwing money away, after some trivial allowances for "book" value.
During this period, the Bank of Japan (BOJ) cut the discount rate in half from 5 percent to 2.5 percent. Following the economic stimulus, asset prices in the real estate and stock markets inflated, creating one of the biggest financial bubbles in history. The government responded by tightening monetary policy, raising rates five times, to 6 percent in 1989 and 1990. After these increases, the market collapsed.
The Nikkei stock market index fell more than 60 percent-from a high of 40,000 at the end of 1989 to under 15,000 by 1992... The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession-by 80 percent from 1991 to 1998 (Herbener 1999).
http://www.gold-eagle.com/gold_digest_02/powell120602.html
The Nikkei stock market index fell more than 60 percent-from a high of 40,000 at the end of 1989 to under 15,000 by 1992... The Nikkei fell below 12,000 by March 2001. Real estate prices also plummeted during the recession-by 80 percent from 1991 to 1998 (Herbener 1999).
http://www.gold-eagle.com/gold_digest_02/powell120602.html
Oh, I agree. Most, but not all.
Opportunity cost is included in discounted present value by definition. That is what discounted means. The discount rate is the time value, or opportunity cost, of money.
In my neighborhood, the intrinsic value of virtually all houses is negative. That's why I think there's a bubble.
A quick run through of the numbers. A $750,000 house I looked recently at earns $2300/month in rent and pays $100/month association fees and $7000/year in property taxes. I'll ignore transaction costs and use 5 year treasuries (4.13%) as the risk free rate. The house earns $19,400/year, but the money used to buy it costs $30,975/year. That's a case study in negative intrinsic value.
Martin