One question, I heard the other day that some of the home builders were recording record profits or revenue, I can't remember which. How does this make sense with downward pressure on prices right now?
Excellent question! They have indeed been putting up record profits - but the reason is when John & Jane contract with these companies they put down a deposit. The builder then goes out and builds, fully expecting John & Jane to complete the transaction. In the last year, people have been walking away from their deposits. That deposit money drops right to the bottom line of the builders and the property itself ends up on the balance sheet as inventory. In the last quarter alone 67% of people contracting with KBH walked away, forfieting their deposits. So their profits look good on the surface, but in reality it's all fake.
3.5% is a really good return for property. I find that Property in NZ yields approximately zero ROI, except for the capital gain when you sell it... Which makes it an interesting investment because people view property as an investment that's safe, from which you can get an income to retire on... Those people typically forget to capitalize costs such as the roof needing painted every 20 years (a $20k cost here, which capitalizes to $1k pa).
The other thing about property investment vs. other types of investment is that you can leverage it to make money on the bank's money and also borrow to buy more properties, meaning portfolio growth is massive.
The down side is people and regulation risk. Here in NZ, we have a very leftist government (and citizens) who hate landlords. The last bit of legislation put through was to change tax law so you can't deduct cost of mortgages from rental revenue, meaning that you're taxed on revenue, not profits for this type of business. I sold my rentals partly for this reason (increasing hate towards landlords).
Everything you say about leveraging money & growing wealth is true, provided interest rates do not rise and/or prices do not fall. I strongly suspect those things are changing right before our eyes. If rates continue up, prices HAVE TO fall - and the leverage trade comes crashing down like, well, a house of cards.
Well, you may be right. Property price are certainly crashing here. My home was worth $1.4m not too long ago, now it's worth less than $950k... so it can happen. I believe that where i live, there are more discounts to look forward to. With change comes opportunity...
PS: I love the title of the article and picture choices, btw!
So you honestly believe a 50% median home price drop is coming?
What SD move would that be v. historical records?
What was the peak to trough 2006-2009 drop anyway?
While I def. see the point you are making here. House prices attracting less capital bc of risk free Ts...I feel a 50% across the board housing drop is ...er....out there, ya know.
According to google, the drop in the time period you are talking about was only about 25% (257k to 208k). That was without any significant rise in interest rates. This time will be much worse precisely because of rising rates. House prices are a function of rates - they are inextricably linked. I know it sounds crazy to think 50% off, but where will the demand come from?
The poor credit sloshing around back then was simply "excess" demand which pushed prices up further than they should have been. When those with poor credit got shut out, the prices obviously fell to reflect the cut in demand. 15 years ago, Mom & Pop were the biggest owners of residential housing, the blackrocks & private equity, were the second biggest owners, Sub-prime was a very small slice of the market - and yet they casued a 25% pullback. The difference this time, is the biggest owners of residential real estate, by far, is companies like BlackRock & private equity. Their allegiance is to their ROI, nothing more. They will chase the safer returns of treasuries. If a small slice of the market (sub-prime) led to a 25% decline - what size decline will we get when one of the biggest players exits todays market?
I depends on location of course but I bought a new house in Chandler, AZ, in 2006 for $185k, sold in 2007 for $249k. With the housing crash it went all the way down to $110k on zillow but they didn't sell. Today zillow rates that house as $415k which is of course absolutely insane. If you make $60k per year that's 7 years of gross income to buy the house. Years ago a normal house was 2.5-3 years of average income. In 1981 I bought an older house on edge of town for $30k and was making $7/hour or $14k/year. So priced in years of labor houses are extremely high historically. (In first example I was making $40k/year so at $185k that's 4.6 years of labor. Houses were already overpriced in terms of labor in 2006, then they went up 50% in price the next year!) My dad bought our house in 1956 in Utah for $10.5k, 2.5 years of labor for him. Sorry, I got carried away. ;-)
One question, I heard the other day that some of the home builders were recording record profits or revenue, I can't remember which. How does this make sense with downward pressure on prices right now?
Excellent question! They have indeed been putting up record profits - but the reason is when John & Jane contract with these companies they put down a deposit. The builder then goes out and builds, fully expecting John & Jane to complete the transaction. In the last year, people have been walking away from their deposits. That deposit money drops right to the bottom line of the builders and the property itself ends up on the balance sheet as inventory. In the last quarter alone 67% of people contracting with KBH walked away, forfieting their deposits. So their profits look good on the surface, but in reality it's all fake.
3.5% is a really good return for property. I find that Property in NZ yields approximately zero ROI, except for the capital gain when you sell it... Which makes it an interesting investment because people view property as an investment that's safe, from which you can get an income to retire on... Those people typically forget to capitalize costs such as the roof needing painted every 20 years (a $20k cost here, which capitalizes to $1k pa).
The other thing about property investment vs. other types of investment is that you can leverage it to make money on the bank's money and also borrow to buy more properties, meaning portfolio growth is massive.
The down side is people and regulation risk. Here in NZ, we have a very leftist government (and citizens) who hate landlords. The last bit of legislation put through was to change tax law so you can't deduct cost of mortgages from rental revenue, meaning that you're taxed on revenue, not profits for this type of business. I sold my rentals partly for this reason (increasing hate towards landlords).
Everything you say about leveraging money & growing wealth is true, provided interest rates do not rise and/or prices do not fall. I strongly suspect those things are changing right before our eyes. If rates continue up, prices HAVE TO fall - and the leverage trade comes crashing down like, well, a house of cards.
Well, you may be right. Property price are certainly crashing here. My home was worth $1.4m not too long ago, now it's worth less than $950k... so it can happen. I believe that where i live, there are more discounts to look forward to. With change comes opportunity...
PS: I love the title of the article and picture choices, btw!
So you honestly believe a 50% median home price drop is coming?
What SD move would that be v. historical records?
What was the peak to trough 2006-2009 drop anyway?
While I def. see the point you are making here. House prices attracting less capital bc of risk free Ts...I feel a 50% across the board housing drop is ...er....out there, ya know.
According to google, the drop in the time period you are talking about was only about 25% (257k to 208k). That was without any significant rise in interest rates. This time will be much worse precisely because of rising rates. House prices are a function of rates - they are inextricably linked. I know it sounds crazy to think 50% off, but where will the demand come from?
I disagree. Last go around MUCH more and poorer credit was sloshing around out there.
No NINJAs etc this go around. But yep 20-25% wouldn't surprise me.
Has there EVER been a 50% drawdown in residential housing market in USA?
The poor credit sloshing around back then was simply "excess" demand which pushed prices up further than they should have been. When those with poor credit got shut out, the prices obviously fell to reflect the cut in demand. 15 years ago, Mom & Pop were the biggest owners of residential housing, the blackrocks & private equity, were the second biggest owners, Sub-prime was a very small slice of the market - and yet they casued a 25% pullback. The difference this time, is the biggest owners of residential real estate, by far, is companies like BlackRock & private equity. Their allegiance is to their ROI, nothing more. They will chase the safer returns of treasuries. If a small slice of the market (sub-prime) led to a 25% decline - what size decline will we get when one of the biggest players exits todays market?
Thanks for the thoughts, appreciate it.
i can see that. true.
I depends on location of course but I bought a new house in Chandler, AZ, in 2006 for $185k, sold in 2007 for $249k. With the housing crash it went all the way down to $110k on zillow but they didn't sell. Today zillow rates that house as $415k which is of course absolutely insane. If you make $60k per year that's 7 years of gross income to buy the house. Years ago a normal house was 2.5-3 years of average income. In 1981 I bought an older house on edge of town for $30k and was making $7/hour or $14k/year. So priced in years of labor houses are extremely high historically. (In first example I was making $40k/year so at $185k that's 4.6 years of labor. Houses were already overpriced in terms of labor in 2006, then they went up 50% in price the next year!) My dad bought our house in 1956 in Utah for $10.5k, 2.5 years of labor for him. Sorry, I got carried away. ;-)
I appreciate your well thought out articles. Sounds like REK will do quite well.
Agree… I intend to take full advantage..