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Housing Prices

2006-03-15 15:37:56.187539+00 by Dan Lyke 7 comments

I think this came from Rebecca Blood, and it's a little old by now, but a New York Times article on the long-term value of real estate. Like how houses appreciate over four centuries:

But then, volatility is more prevalent in world history than stability, which, as far as Eichholtz is concerned, makes the Herengracht data more, rather than less, widely applicable. "The financial literature has been dominated by America," he said. "And most models are created using post-1950 U.S. data, which give a biased picture of reality. There has been no other country like America, and there has been no other period like that in terms of stability. So I would say that in global terms, Milwaukee is the exception, not Amsterdam."

In a rather upscale neighborhood of Amsterdam, one in which the housing prices doubled shortly after the house was initially built, the house has appreciated 0.2% over inflaction.

[ related topics: Economics Real Estate ]

comments in ascending chronological order (reverse):

#Comment Re: made: 2006-03-15 18:39:43.587145+00 by: ziffle [edit history]

Due to Nixon unhooking our dollar from gold in 1971, our government has been spending with abandon. The dollar is no longer money, it is now currency, with nothing backing it.

Foreign governments hold trillions in US dollars. They reinvest here as its the best place to invest.

Someday they will realize we are no longer a good place to invest and will move the investment, at which time mortgages will increase in cost and drive down home prices. So far foreign money is the reason Greenspan increased rates but mortgages rates stayed down.

So we are in for a big bust, in the near future, further exacerbated by the fact that soon the baby boomers (like me) will retire and want our SS money - estimated to be 60 billion dollars a month. The only way out of this will be to inflate the dollar.

So smart money should hold tight for the bust then when prices drop, buy all you can leveraging in. Then when inflation takes off, you will be looking good because the price long term of real estate will stay even with inflation as your note shows - even if only 0.02% --- and by leveraging you can make 30 or 40% per year and become rich during the long term bust.

The smart investor will make money in both up and down markets.

The bust that is coming will be very painful, and possibly politically damaging, as the Depression was. It will be long. The only long term solution will be inflation connected to letting Capitalism succeed by reducing government controls on everything. Its a big world and all manufacturing has left the US and we will need to create an environment that will draw it back to us, but the RepubliCrats have not a clue.

Two books: 'The Dollar Crisis' by Richard Duncan and 'Who took My Money' by Robert Kiyosaki are great reads about this.


#Comment Re: made: 2006-03-16 02:42:03.122423+00 by: Pete

How does buying debt at 6% or higher (leveraging), to get an asset that appreciates at 0.02%, lead to these cash mountains of which you speak? Does my big payoff come from gouging poor people for rent? Because it sure ain't gonna come from paying 6% to get 0.02%.

#Comment Re: made: 2006-03-16 02:53:06.963304+00 by: Dan Lyke

There's the whole "tax breaks" thing that skews the economics of a house purchase quite a bit, but if you ignore that, then unless you're timing the market, the way real estate makes money is with income properties. Having just spent some time hanging out outside a court room, watching all the last-minute negotiations between landlords and tenants, I'm fairly sure this isn't a hassle free investment, but (and especially over the past decade) it's been a reasonable way to leverage assets.

But I think the other factor is that in Ziffle's market, if you carry debt on a house it's largely because you can be doing something else with that money in the mean time. Or you're house-poor, which is an economic mistake, but a popular one that's lead to the current bubble.

#Comment Re: made: 2006-03-16 13:19:53.073054+00 by: DaveP

If you're worried about the dollar, I think a bigger cause for concern is OPEC talking about having the dollar not be the sole benchmark for oil prices. There's talk of a big decline in the value of the dollar if they were to switch to euros for oil prices.

Am I panicking? Not hardly. But I keep thinking it might not be a bad idea to have some hard money on hand, just in case.

#Comment Re: made: 2006-03-16 20:24:37.389578+00 by: ziffle [edit history]


Well you should attempt to charge the highest rent possible for any property you have for rent, but the market controls what you can charge. Thats the beauty of capitalism. Any high profit market will be flooded by lower priced products filling demand.

As for the return consider this scenario:

Duplex $99,000 (3 bed 1.5 bath each side)

Down payment: $15,000

Mortgage $84,000

Mortgage Payment $650.00

Taxes $200.00

Insurance $ 70.00


Total Monthly Cost $920.00

Income $630 per side total is $1260.

Net per month is $340.00

Net per year is $4080

Principle Reduction Year 1: $1998

Net cash plus Principle Reduction is: 6078.00

Total Return per year is: 6078/15,000 = 40% return

So return is a function of what you get back each year over what cash you put into the deal.

plus you get depreciation which works as a reduction of income of around 3% or $3000 and if you are in a 33% tax bracket thats another $1000 you save of your taxes.

Now this ignores the inflation rate of 0.02%

So thats how it works. Everywhere except California of course.

Ziffle of Mayberry "where cash does flow"

#Comment Re: made: 2006-03-16 20:48:07.162688+00 by: Dan Lyke

Oh, it's also worth pointing out that when the inflation kicks into high gear that won't be 6%, and if the house is keeping up with inflaction...

On the other hand, given that the small return is over an extremely long period, there's a good chance that the current housing price boom will be returned via inflation. It's not that the house prices will rise along with inflation, it's that they'll stay constant while inflaction kicks up to several percent.

What makes California different right now is that that duplex rents for $1800, but costs $800k, and your rent income only covers half a million in mortgage. So you're totally depending on riding the housing prices up.

#Comment Re: made: 2006-03-17 13:23:23.305242+00 by: meuon

Ya'll just made me feel good. The 'Tree House" Nancy and I live in has cost me some money lately, it's a little small sometimes (when we'd like to house guests) but it's paid for. What a great feeling.