Mostly not - out of the hundreds of receipts I submitted in 2001, the IRS only recognized the dry cleaning bills.
You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
Short Housing
- Thread starter topguntrader
- Start date
<b>RE: real estate equity is up:</b> But, this is just a totally artificial byproduct of low interest rates on mortgages.
Consider the example of a family that can afford a $1500/month mortgage. At 8% interest, they can buy about $225k of house (depending on downpayment, taxes, insurance, etc.). Then, interest rates drop to 6.5% and all of a sudden the same monthly payment buys them a $275k house. Needless to say, sellers can charge more because buyers can pay more. This effect snowballs because the person who sold their $225k house for $275k used their 50k of interest-rate created equity on top of greater mortgage-based buying power to buy a $325k house.
Its all a big game of musical chairs until the interest-rate music stops. Then when the people with the $325k homes try to sell, they discover that nobody can afford their place! Can you say POP!
It's just crazy that people can feel wealthier by being even deeper in debt!
-Traden4Alpha
Consider the example of a family that can afford a $1500/month mortgage. At 8% interest, they can buy about $225k of house (depending on downpayment, taxes, insurance, etc.). Then, interest rates drop to 6.5% and all of a sudden the same monthly payment buys them a $275k house. Needless to say, sellers can charge more because buyers can pay more. This effect snowballs because the person who sold their $225k house for $275k used their 50k of interest-rate created equity on top of greater mortgage-based buying power to buy a $325k house.
Its all a big game of musical chairs until the interest-rate music stops. Then when the people with the $325k homes try to sell, they discover that nobody can afford their place! Can you say POP!
It's just crazy that people can feel wealthier by being even deeper in debt!
-Traden4Alpha
Originally posted by Traden4Alpha
<b>RE: real estate equity is up:</b> But, this is just a totally artificial byproduct of low interest rates on mortgages.
Consider the example of a family that can afford a $1500/month mortgage. At 8% interest, they can buy about $225k of house (depending on downpayment, taxes, insurance, etc.). Then, interest rates drop to 6.5% and all of a sudden the same monthly payment buys them a $275k house. Needless to say, sellers can charge more because buyers can pay more. This effect snowballs because the person who sold their $225k house for $275k used their 50k of interest-rate created equity on top of greater mortgage-based buying power to buy a $325k house.
Its all a big game of musical chairs until the interest-rate music stops. Then when the people with the $325k homes try to sell, they discover that nobody can afford their place! Can you say POP!
It's just crazy that people can feel wealthier by being even deeper in debt!
-Traden4Alpha
I've been appraising real estate for about 15 years. Sold RE before that. There is a good deal of truth in what you say and I agree with your point, but this market has some good fundamentals too. One is household formation, due in part to recent (past 10 years) wave of immigration. The other is very low inventories. Also, builders are a little more cautious in their speculative building (i.e. not pre-sold) so that also contributes to less supply. But if you look at how a typical buyer approaches a purchase, its more like a car purchase..."how much down and how much a month". The fed seems to feel that any increase in appreciation due solely to declining interest rates in minimal. I would disagree. If rates begin to rise you will likely see a decrease in sales leading to more supply. Once supply overcomes demand, prices will flaten out or drop. There is already some anecdotal evidence of a slowdown at the higher price levels.
Last year was my best year due to all the refi activity and I thought this was over. After all, anyone who bought a house over the past few years already has an interest rate around 7%. But now we are seeing another twist....people aren't refinancing to lower their rate/payment, there are doing so to extract equity.
And some of that equity is an illusion.
I think there is a bad psychology at work in housing now. People think that housing is a financial asset which MUST appreciate at 10%/yr unlike stocks which are now bad and risky. Of course they'll lever the heck out of themselves to possess such an asset. But what happens when houses don't go up every year or fail to go up every year by 10%? What happens when people think that it is probably not a good idea to pledge 45% of their income to feeding the house?
I have a question for you Jim since you have experience at this.
I live in so cal and had a house in escrow at $251,000. The appraised value seemed to "magically" come in at $253,000. Since my mortgage broker chose the appraiser I am just wondering if these values are being artificially inflated so loans can be done.
What do you think?
I live in so cal and had a house in escrow at $251,000. The appraised value seemed to "magically" come in at $253,000. Since my mortgage broker chose the appraiser I am just wondering if these values are being artificially inflated so loans can be done.
What do you think?
Perhaps you can gain insight into the US RE market by looking at the Cdn one. We've had our discount rate increased from a low of 3.75 to 4.25 right now in an orderly 25 bp increments.
The RE market has responded a bit sluggishly. So far the stats coming in show a marked decrease in housing start/permit rates. Prices have not come down (yet) but neither have they continued their spiral upwards from last year. There is no question that interest rates affect the RE market.
Also, in response to some who say that a bubble can't be formed in real estate (because of barriers to entry/exit, non-transferability, etc.) go to your local library and view microfiches for any newspaper in the early 80s!
The RE market has responded a bit sluggishly. So far the stats coming in show a marked decrease in housing start/permit rates. Prices have not come down (yet) but neither have they continued their spiral upwards from last year. There is no question that interest rates affect the RE market.
Also, in response to some who say that a bubble can't be formed in real estate (because of barriers to entry/exit, non-transferability, etc.) go to your local library and view microfiches for any newspaper in the early 80s!
-Apartment rents are actually dropping for the first time I can remember in my life. I now live in a high end apartment building and I only moved here after the rent dropped $400/month in the past year.
-Small "starter" Condo's and townhouses are being built on spec. Condos built two years ago were sold before they were finished, but these new ones are not getting sold, many are just half built with no interiors and no work going on.
-Unemployment has been rising for several years and wages are stagnating. Consumer debt levels are historically very high.
-ONE BIG POTENTIAL POSITIVE: there is a possibility of a return to higher inflation. We've got historically low interest rates, the CPI is starting to go up, and Gold has been showing strength. We could have seen the bottom of the cycle in inflation.
So its still a mixed bag, but I'm leaning bearish on the fundamentals.
-Small "starter" Condo's and townhouses are being built on spec. Condos built two years ago were sold before they were finished, but these new ones are not getting sold, many are just half built with no interiors and no work going on.
-Unemployment has been rising for several years and wages are stagnating. Consumer debt levels are historically very high.
-ONE BIG POTENTIAL POSITIVE: there is a possibility of a return to higher inflation. We've got historically low interest rates, the CPI is starting to go up, and Gold has been showing strength. We could have seen the bottom of the cycle in inflation.
So its still a mixed bag, but I'm leaning bearish on the fundamentals.
I also live in so cal, and my neighbors just sold their house for $500k. They bought it 3-4 years ago for $325k. Quite a deal. Imagine if you put that money in the S&P. You'd basically be flat. I'm not sure how the housing bubble will end, but when ever you have an investment that appears like money growing on trees, you know you're in a bubble that is unsustainable. No one sees any downside in real estate. "It just goes up 10-15% a year". That's dangerous thinking. Not many people thought the Nasdaq would collapse on it's way to 5,000.
Then the real estate bulls tell you, well "this time it's different". Supplies are tight. The bubble is only in selected areas. We have an increase in demand for housing (i.e. immigration). I don't think it's ever "different this time".
It'll pop in one of two scenario's over the next 12-24 months:
Deflation takes grip (i.e. Japan in the 90's). Too much debt, incomes fall, unemployment rises, etc. Supplies stay tight, but demand falls faster.
Inflation goes up. With low interest rates, gold going up, etc, inflation hits 4-5% maybe after the economy comes back. The FED raises interest rates to combat inflation. Higher mortgage rates take out any remaining buyers, and the market collapses.
I wonder which scenario would be worst.
Then the real estate bulls tell you, well "this time it's different". Supplies are tight. The bubble is only in selected areas. We have an increase in demand for housing (i.e. immigration). I don't think it's ever "different this time".
It'll pop in one of two scenario's over the next 12-24 months:
Deflation takes grip (i.e. Japan in the 90's). Too much debt, incomes fall, unemployment rises, etc. Supplies stay tight, but demand falls faster.
Inflation goes up. With low interest rates, gold going up, etc, inflation hits 4-5% maybe after the economy comes back. The FED raises interest rates to combat inflation. Higher mortgage rates take out any remaining buyers, and the market collapses.
I wonder which scenario would be worst.
Ddog,
If I may throw in my 2 cents,
That environment was the same in the last big upsurge in the RE. IMO, it all comes down to the way the services are funded, i.e., at the end of the process. The appraiser, processors and the like all get paid at closing if I'm not mistaken. This breeds the.... "lets get it out the door" mentallity.
The ones that are even harder to understand is the property goes on the market for say 300K here in Mission Viejo, CA. Within 6 hours bids were flying in for 300-325K. It's sheer insanity. A 320K offer is accepted and miraculously it appraises for the sales price when not one home in the area sold for that price recently. Hard to understand what the foundation for an appraisal is under those circumstances.
If I may throw in my 2 cents,
That environment was the same in the last big upsurge in the RE. IMO, it all comes down to the way the services are funded, i.e., at the end of the process. The appraiser, processors and the like all get paid at closing if I'm not mistaken. This breeds the.... "lets get it out the door" mentallity.
The ones that are even harder to understand is the property goes on the market for say 300K here in Mission Viejo, CA. Within 6 hours bids were flying in for 300-325K. It's sheer insanity. A 320K offer is accepted and miraculously it appraises for the sales price when not one home in the area sold for that price recently. Hard to understand what the foundation for an appraisal is under those circumstances.