Posted on 10/08/2005 2:35:32 PM PDT by wagglebee
Despite fears in the marketplace about a U.S. housing bubble, about 60 percent of homeowners expect the value of their homes to increase by at least 5 percent annually during the next several years, according to an online survey of 1,001 American consumers.
According to the survey findings, released by RBC Capital Markets, the corporate and investment banking arm of RBC Financial Group, 24 percent of respondents said they expect annualized gains of 10 percent or more over the next few years. About 3 percent of respondents said they expect their home values to decline over the next few years.
About 85 percent of homeowners who responded to the survey said they have experienced real estate gains over the last three years and over 70 percent experienced gains in excess of 10 percent during this timeframe, RBC announced.
Meanwhile, about 10 percent of the respondents said rising home values have affected their spending habits. And over half of those surveyed disagreed with the notion that real estate gains impacted their spending even though 51 percent either sold their home or borrowed against their home equity in some fashion. Ironically, those that disagreed most with the idea that real estate gains had impacted their spending were those in higher income brackets (defined as those making over $100,000) and those that had already experienced the biggest real estate gains, RBC reported.
Ultimately, these two groups were also the most aggressive in extracting equity (approximately 65 percent).
"Not only are most people expecting big real estate gains to continue, the vast majority of people don't believe these gains have impacted their spending. These opinions run contrary to most data in the marketplace regarding the real estate wealth effect," said Scot Ciccarelli, managing director of equity research for RBC Capital Markets.
"We believe these findings raise a major question. In our minds, the question is whether people have spent more freely than they otherwise would have because of their real estate gains and don't even recognize it. If that's the case, a simple slowing of real estate gains, not just a fall in housing prices, could have a significant adverse impact on spending patterns."
About 60 percent said rising gas and energy prices were already causing them to cut back on their spending. "Rising energy prices are essentially creating a flat tax that is affecting lower income consumers at a disproportionate rate and supports anecdotal evidence in the marketplace over the past two years that companies more levered towards higher-end consumers have largely outperformed those that cater to lower-end consumers," Ciccarelli said.
Finally, by a 2-to-1 ratio, people are more positive about their personal financial situation than they are on the broader economy. On average, just under 40 percent of respondents were optimistic about their personal financial situation and just over 30 percent were concerned or pessimistic, the survey found.
On the flip side, 20 percent of the respondents were optimistic about the broader economy while just over 50 percent were concerned or pessimistic about the economy.
"Not surprisingly, those that were the most optimistic about their personal financial situation were those in the upper income categories and those that had experienced the biggest real estate gains," RBC announced.
"This outlook seems to cut to the heart of the American consumer. People seem to be conscious of the macroeconomic headwinds facing them like rising energy prices, the war on terror, and the growing federal deficit and the impact it can have on others. However, they are less inclined to believe they can be affected by these same factors. Ultimately, it is this optimism that keeps the U.S. spending engine intact," said Ciccarelli. "While energy prices are certainly disconcerting, it is this real estate wealth effect that we are most concerned about and should be the primary focus of investors."
Not really. You can still buy a lower quality screen which is $135 lower: that is how that number was arrived at. Again, you can question whether that measurement was made precisely enough, but that is how it is made.
When high-quality goods drop in price or are sold at the previous price, lower quality goods also drop in price. That is what is reflected here.
An even better example is housing expenditures. Everyone is complained, even before the recent price increases, how it gets harder to "make ends meet" and "just pay the mortgage." But an average house built today is 45% bigger than in 1950s, while the average household is almost twice smaller. Are people paying for the same housing? No, they are buying much more and complain that it is hard for them to do so. The same is with TVs and everything else. One does have to consider quality when making comparisons.
Milk with vitamin supplements is not milk that lacks them. If one were previously buying milk for $2 without vitamins and now spend the same $2 for milk with them, one saves on the vitamins, i.e., there is a decrease in expenditures on the basket that consists of milk and vitamins. Into the CPI, this is entered under "milk" and price is adjusted downward. Again, you've got to understand what is being done here and how things are labeled.
Incidentally, in your list of grievances you naturally, as do most people, discount all the falling prices --- for computing, gas for twenty years, air travel. You notice what hurts and take what benefits you for granted. The CPI does not do that, which is why you doubt disbelieve it.
The CPI is "program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services."
Correct. Note the "representative basket" in the description. What do you have against substitution? When prices change, you change your consumption bundle. When price of meat falls, you buy less potatoes and more wine. Since the majority of people do that the representative basket changes. Substitution must be taken into account.
But monetary inflation has a direct impact on the prices the consumer pays. Once again, a nonsensical manipulation of notions. Prices ARE monetary in this economy.
Why shouldn't house prices be in there? They are, via rent equivalents, as you mentioned earlier.
Since 2/3 of us own rather than rent, one has to bring to a common denominator costs of ownership and costs of renting. That is what the equivalent does.
: Why not taxes? I answered that question earlier. If you did not understand or I failed to make it clear, ask. Mere recitation of questions does not help.
Two reasons here. Firstly, by being representative, the basket is not designed to include everything: vacations in Europe and yacht ownership are excluded because they are of no concern to a typical consumer. You can extend the list. To point to a particular item and ask why it is excluded is most likely to elicit the same answer.
Second, the basket is designed to measure the cost of private goods. The government provides public goods and pays for them via taxation. Taxes are therefore excluded.
Moreover, precisely because taxes are well-measured, there is simply no need to measure them again. Economists do aggregate the CPI data and taxes when they consider real and discretionary incomes. You confuse model building with measurement. It is one of the basic notions in measurement is not to confound what can be handled separately and aggregate AFTER measurement is performed.
Maybe you ought to go and study economics I agree. And I've been doing that for a couple of decades by now.
because you obviously don't have a clue as to how the CPI can be manipulated.
AS I expected, you are (at least somewhat of) a conspiracy theorist. Because something can be manipulated it does not follow that it is manipulated.
: Further, there are other time series data that are routinely compared fot the CPI. Any serious contradictions would've been detected. For you, this process is a black box and you are understandably puzzled by what comes out. If you were to open the box, you would be smiling at your present suspicions. Which is why I suggested to you earlier to acquire some depth. You clearly have breadth, having been exposed to a great deal of information and raw data. That is admirable. But to understand what those MEAN one needs depth. And it is very sad to see that you, a clearly intelligent person, put your foot in your mouth when you speak about basics.
Finally, did you notice that, while ostensibly answering my suggestion, which you quote in the beginning of your post, you don't even address it at all. Offer an inflation measure for a BASKET of goods if you have it --- that was the request. Instead, you recite inflation in individual commodities. Which once again underscores that you criticize (Fed's, mine) answers to the question you don't understand.
You also don't understand why inflation is evil Where have I given you evidence for that conclusion.
Nowhere at all.
and is the bane of all economies with fiat currencies. Great! Thank you. That is what I suspected from the start: you've read conspiracy theories about the Fed and how it is anti-American, and simply retain information that seems to corroborate that conclusion. You are not looking for the truth: you look for support of your irrational and uninformed beliefs. We part our ways here.
Whether inflation is 1% or 10% it's still a tax on your savings and is morally wrong.
Where did we move from measurement of inflation to whether it is necessary and, even further, to the moral aspects of it? Once again you reveal that you are not seeking the truth but merely pounding your victimized chest, feeling morally superior to everybody else. Tens of thousands of economists --- are they also in cahoot with the government? You have no clue how idiotic your statement is. There are dozens of the professors that visit the Fed Banks every year and work on the same data. Those same people work their for years full time. The University of Minnesota Econ Department has a particularly close research relationsjips with the Fed Bank in Minneapolis. All these people are also stealing from you; they all are covering up for the government?
Silly beyond belied. And based on complete ignorance. What's worse, not only will you not change your mind --- you will not even acquire doubt in your position in the face of contrary arguments and easily verifiable facts.
What a waste of your intelligence.
EP: Taxes you pay are your expenditures on public goods (defense, etc.)
Sometimes it is, but most of my tax money goes towards socialist, wealth-redistributing, vote-buying scams.
Here you reveal that you do not understand what public goods are and rave against them nonetheless. Your complaint, with which I completely agree, that the government should not make public some goods that are private; that our government is too big. I agree with that. But that was not the point and remains irrelevant to the present argument: once these goods are provided by the government, they ARE public. And therefore beyond the scope of the CPI.
EP: As I also mentioned earlier, the scientific method requires one to reserve judgment until evidence is gathered.
foobeca: I'm not writing a scientific paper or dissertation here.
You confuse pursuit of truth with the public recognition of the results of that pursuit. When you receive a Ph.D., you receive recognition by society for your accomplishments. When you publish a paper in a peer review journal, you receive recognition and acknowledgment for new the truth you have uncovered.
None of that has anything to do with the pursuit of the truth itself: that you do within yourself, and whether you'll be paid for that is irrelevant.
And that is what scientific method refers to: pursuit, not the sale, of truth.
I've give you numerous examples of contradictions WITHIN your own statements. Internally inconsistent models cannot possibly be correct and result in correct predictions. That does not bother you; as I said earlier, you do not betray even a shred of doubt. Well, be stubborn in your delusions; it's your choice. Perhaps, it gives you are feeling of superiority over tens of thousands of hardworking economist: you are so much smarter than all of them combined --- and, most importantly, even without doing any work, not even understanding basic notions! Great. Enjoy.
I am sorry, but I cannot spend any more time on this discussion.
I did not sat that. Reread the post and perhaps the preceding ones.
Inflation is measured by a representative basket of goods. Inflation was and still is, remarkably low. It will rise, of course, in the near future due to energy costs, but that is not what was discussed.
Again, by pointing to components of inflation, you cannot judge overall inflation.
Inflation is very real in the housing, food and energy sectors, just because color televisions are cheaper than ever does not equate to no inflation. After many years of "no inflation" I am paying prices I never dreamed I would see,
This effect is purely psychological: we all tend to discount progress as given but notice more what hurts. You did not write about "low computer prices that you never dreamed of," although they were, and are, falling like a rock for 50 years. Nor did you speak of longevity that "you never dreamed of." Was it not achieved because medical care, nutrition and other niceties of life became more accessible --- cheaper by definition --- for most people?
Don't confuse your own observations with scientifically collected evidence. You own observations, even today, tell you that the Earth is flat. Your own observation tell you nothing abut the existence of atoms. The CPI measure inflation in an albeit imperfect but scientific way. And it is to the CPI that I was referring.
However, for the close to 50% of new home buyers who have been able to afford these prices only with "interest only" mortgages, many of them will own it only as long as the "interest only" period lasts. After that, they will be faced with either a balloon payment, cramming the remaining principle PLUS interest in the remaining years or cramming the remaining principle PLUS interest in the remaining years PLUS a variable interest rate.
At that time, they will have to choose between having enough money for food or foreclosing.
Your analysis does apply to me because both of my houses, in southern California and in the Pacific Northwest, are paid for.
I have enough cash reserves to get into this real estate market big time but I have not touched it.
The only way I would profit is to find a greater fool and put him in a situation that will probably destroy his finances. If I fail to find a greater fool, I would lose losing a considerable sum myself.
It is not good value.
You mean you had a 401K that turned into a 001K?
Okay, you said that "high inflation" is absent. I respectfully disagree. If you want to be technical the word inflation does not actually refer to increased prices anyway, its original meaning in economic terms is an increase in the money supply, rising prices are therefore only the symptom of inflation and inflation is only one reason for prices to rise, there are other reasons. I totally disagree when you say that the effect is purely psychological, it is not purely psychological when I see prices of necessities going steadily higher without a corresponding increase in incomes.
I regard the current official CPI as being fairly meaningless. I believe I could come up with a better one but I am far too busy working overtime to pay the ever rising prices for life's basic necessities. What really counts is how many hours one must work to pay for food, shelter, clothing and medical care, the basic necessities, I and most of those I know are either working more hours for the same result or cutting our standard of living compared to twenty years ago.
This is a common misundersanding. The definition of inflation is a rise in prices. An increase in money supply is (i) not inflation itself but a cause thereof, and (ii) it is a cause provided that output remains the same. If money supply rises together with output, it does not cause inflation.
I totally disagree when you say that the effect is purely psychological, it is not purely psychological when I see
What YOU and I see is subjective. That is what I said. You can be a professional economist, but your individual experiences are nothing more than anecdotal evidence.
Sorry I have to disagree with you on both points.
Well in your example that was a loss 33 1/3 %.
I know many .com investors that would be tickled pink to have only lost 33 1/3 %
OTOH the typical purchaser of a 600k home financed the overwhelming majority of it thus making their real losses (due to the magic of leverage) in the thousands of percent at a minimum........
In the greater Boston area, no I have not heard of any rental properties being vacant for years; none at least, that someone was actively trying to rent. In Aroostook County, yes there are plenty of abandoned properties.
Thank you. I am sorry for not making my post clear, but I was not thinking of the current state of affairs. Real estate goes through booms and busts just like stocks and commodities. In 1980s, condominium prices in Boston fell by 30%; at around the same time, if I recall correctly, there were plenty of commercial rental properties in Chicago, including prime locations, that stood vacant for a long time.
The point was that people do not hear about it much for various reasons and perceive real estate to be a superior investment. It is not. It is a lousy investment that carries a greater risk, higher transaction costs, and has always underperformed a stock portfolio over long periods.
The definition of inflation is a rise in prices.<<<<<<<<
Sorry, you are wrong, the ORIGINAL definition in economic terms was an increase in money supply, as I said, regardless of what current colloquial usage may be. It is rather the reverse of the situation with "schizophrenia" which most people now understand in its correct meaning but forty years ago most people thought it referred to "split personality".
Think of it this way, what is the "inflation" of a tire, certainly it is the pumping of air into the tire. The fact that the car may rise a few inches on that side is the result of inflation, not inflation itself.
I am sorry too, but much what was ORIGINALLY thought of inflation, unemployment, etc. has been refined.
But, more specifically, you surely will not argue that that "definition" presupposes constant output. Which is why it was replaced by a more price one. The one I gave applies universally.
Economics, especially during its long literary period that lasted up until Arrow and Debreu, is notoriously bad in giving definition. Witness, for instance, the marginal rate of substitution, which is not marginal anything (what economists actually mean is the rate of marginal substitution).
I could give other examples of "definitions" whose meaning was replaced while retaining the original word: market failure comes quickly to mind. The way it is used now is rather different from the original one. You are unquestionably correct that your definition was widely used. It is now understood as being imprecise --- one of the reasons of which I mentioned earlier (constancy of output).
In my entire life, I've never, ever seen anyone have a gun put to their head and forced against their will to take out a loan requiring payments of $5000 a month. Maybe it's happening without my knowledge, but I don't think so.
There is still this thing called "personal responsibility". No family should even think of taking out such a loan unless they're pulling in around a quarter of a million bucks a year in salary. And I don't think a family would even qualify for such a loan in the first place unless they were pulling in around this much. There are a lot of wealthy people in this country. Anyone who takes on this kind of burden and can't afford it is just an idiot.
It is now understood as being imprecise --- >>>>>>>>
Nope, it was too precise! What is preferred now is foggy language as in "a living breathing document" for one example having little to do with the matter of economics.
This an expression of some kind of grievance that has nothing to do with the issue at hand.
You are welcome, of course, to maintain your previous opinion. I have nothing to contribute further, however.
Thank you for your post.
What is you source for this? This runs contrary to standard advice from the likes of Lynch, Malkiel and Tobias...and most other experts on the subject of personal finance.
How are you holding it? I a REIT? A single family rental? In a multifamily that you occupy? If you manage (to include depreciation) a multifamily as a second job, my experience has been that it is fairly lucrative. If you are living in the multifamily, it is even easier, again in my experience. I have never read anything to the contrary, and I believe I am fairly well read on the subject. This also jibes with the experience of my accountant, who's been watching this as a financial advisor since the end of the Korean War.
Now if you are buying on speculation, such as what is going on in California with the interest only loans and the second mortgages to provide the down payment...that is dangerous and a drop in the market will burn those people.
Meldrim - you're out of the loop. I can tell you about a lot of Boston-Cambridge properties that have been vacant. I can tell you about even more units that are renting for 40% less than they rented for 5 years ago. I had places that went for 5k a month. I am very lucky to get 3k now. Places that used to rent for 3k now rent for 1900. and less. They'd be empty if I didn't lower the rent drastically.
Meldrin: What is you source for this?
I do not have data handy, but you can probably find them on the Web. Just look at the return of stocks over the last 25-50 years and real estate prices. This is a very INCORRECT comparison: it does not include (i) costs of house ownership and (ii) risk adjustment.
But even those data will show you that tocks outperform real estate.
Price of the real estate keeps up with overall inflation --- about 2% over the course of American history. The difference between sale price and purchase price is not even your return: you pay interest on the mortgage, real estate tax, and the cost of upkeep.
By comparison, stocks return about 5-8% above inflation, and there is NO COST of ownership. These facts you can find in most text on corporate finance.
Consider now liquidity. How long does it take you to get out of a $250,000 investestment and how much does that cost? In the case of a stock, less than 1 minute and $10, respectively. In the case of a house, it is several months and about 10% of the price --- about $25,000. Have you heard of anyone considering that a cost? Of course not: everybody tells you, "I bought it for this much, sold for that much; I made a killing." How much of interest did he pay in the interim? Real estate taxes? Upkeep and repairs? And, taxes, commissions and fees on both sides of the transaction. If you take those into account you will discover that he lost money. More precisely, he PAID to live in that house and enjoy that house, just like he paid for a car, apples, and cloths. None of this is an investment (although you hear nonsense like, "Of course I could buy a cheaper car but decided to INVEST into a Mercedes 'cause it is well built and will last longer").
The profitability of home-ownership is a myth: people use and perpetuate it to justify their NON-financial attachment to it. Home-ownership is about consumption. How are you holding it? I a REIT? A single family rental? In a multifamily that you occupy?
Aha, now you ARE talking about investment into real estate OTHER than your own house. All of the above are legitimate investments/speculation, with a varying degree of risk due to differences in diversification.
If you manage (to include depreciation) a multifamily as a second job, my experience has been that it is fairly lucrative.
I have no doubt about that. But now you are talking about a JOB, not an investment. You will find it lucrative as a (first or second) job only if your foregone opportunities are smaller. Do you think a 20-year-old kid that designed web sites in 1990s and charged $150/hour would find that job lucrative? Probably not. What about an attorney who charges $300/hour? An experienced nurse that makes $120,000/year, i.e., about $60/hour. Of course not: all these people would rather take a second job in their respective profession and thereby make more money.
Most importantly, observe that we are now talking about a JOB choice, not an investment.
For many people, however, what I said is not true: they don't make that much money and possess no corresponding skills. But most of us can still paint the wails and snake a plugged up toilet --- and that is the primary reason why "investment" in real estate (other than own house) makes sense for many people. But those on TV that sell these "programs" are also dishonest: when you buy and maintain real estate, you are dealing with a "job-investment" bundle. It is not fair to say, "I purchased it for $50,000, sold for $90,000 and made $40,000." THe last number is NOT your profit: it is a combination of profit and salary that your paid yourself. Now, if you are bored one day, try to assign going-rate salaries to everything you do: $200 for snaking a toilet, a couple of grand for a paint job, etc. If you do, don't be surprised to find that you make a killing on the JOB associated with that "investment" and not on the investment itself.
So, in most of these cases, people do not compute costs correctly.
I have never read anything to the contrary, and I believe I am fairly well read on the subject.
I have no doubt about that. Have you taken a course or two --- in college, university of by self-study -- in finance, especially corporate finance and investments? If not, you can read all you want about real estate and never find correct information. Moreover, accountants are married to accounting costs and also make mistakes when computing economic costs: they all have been told in the very first course that these are not the same, but since they don't deal with economics, they forget. no This also jibes with the experience of my accountant, who's been watching this as a financial advisor since the end of the Korean War.
Just ask that advisor to compose and give you a spreadsheet showing two strategies, starting from the time of Korean War. One is to purchase own house and invest the remainder into a diversified portfolio (S&P500, for instance). Make sure that all costs of ownership are included here (that's were mistakes usually are). Even more importantly, since an average family moves nowadays every 5 or so years, do not assume that you lived in that house for 50 years: assume that you sold and purchased at least three times, and include the corresponding transaction costs.
The second strategy is to rent a comparable footage and invest the remainder into S&P500. This one is most straightforward. You can go for subtleties such as reinvestment of divididends, But even if you exclude not only reinvestment of dividends but even the dividends themselves, this one will win HANDS DOWN. Now, for INVESTMENT in and management of real estate (as opposed to consumption of own house), ask your friend to compare three strategies. In one you purchase a diversified portfolio of real estate (a portfolio of REITS is probably best, but they were created only and take a second job as a part-time plumber or electrician, say.
In the second, you spend the same amount (all this at the time of Korean War) on a purchase a multi-unit building and repair/maintain it yourself.
In the third, you do not purchase real estate at all: you invest the same amount into $&P500 and take a second job as a plumber or electrician.
Compare the value of these portfolios in 2005. By comparing the second and the first, you will find that most what looks like the "profit" from your multi-unit investment is actually wages from working on it. That is, it it is not profit as much as it is wages. You will also find that the thirds strategy wins hands down. This is funny, because we did not even adjust for risk: the third strategy give both a higher return AND lower risk due to diversification and high liquidity.
Now, if you choose not to go through this exercise, observe at least what is being compared to what. Real-estate books bundle wages you receive by working on your own "investment" with profit from that investment. And that is what make real-estate look so glamorous in the eyes of those that do not know finance (that, unfortunately includes most accountants).
Finally, I'll offer yet another perspective. You hear about mergers and acquisition made by large companies all the time: company XYZ purchase for $4 billion company ABC. Clealry, they have the money (a combination of their own assets plus credit). Why do they the stock in another company? If real estate is sooooo much better, as how-to books suggest, why can't Exxon-Mobile buy a few billion worth of real estate in a matter of a couple of weeks? That includes single-family houses, by the way, since they are supposedly such great investments. You never see that done, precisely because stocks are a much better investment, on average, than real estate.
Purchase and resale of real estate works for most people only because and when this is a second job that pay more than the primary job (or no job at all: recall the testimonials, "I was laid off and this is when I heard Carlton's course...") That is the difference between individual people and companies; that is why it sometimes works for the former and never for the latter.
In sum, one has to count money carefully when comparing investments. Nones of the real estate books on the market and most accountants don't. The answers to your questions are in finance, not accounting.
$1,000,000 will get you a 2 BR 2 BA between 1100 and 1600sf in a just OK building in Manhattan.
Remember when a million dollar home looked like a million dollars?
566 sf condo $675,000
http://www.corcoran.com/property/listing.aspx?Region=NYC&ListingID=819860
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