Was there a U.S. Housing Bubble in 2008?

[The Minsky Moment]

Yeah, another thing ignored is that your house pays out a dividend, in the form of shelter provided or rental income earned.  Even if it doesn't appreciate at all, it still gives you returns just on that basis.  That said, the S&P 500 index probably doesn't account for dividends, but I think percentage-wise the house's dividends are much greater than the average stock dividends.

Yes you get the the value of the imputed rent but then you also have to take into account the costs of upkeep and maintenance, both in cash and in non-cash labor.
If you find that doing DIY work is a form of leisure then I suppose residential housing can be a fine investment.

[DGuller]

By the way, just to be sure we're clear, I definitely think that equities are a better investment.  I eschewed buying a property because I didn't think it was a good deal, and because I don't have a fetish for homeownership.  I certainly made out okay by having more money to invest in equities instead.  I just think that the case against investing in housing is way overstated when you ignore the fact that regular people get into housing at 5:1 leverage (which is considered conservative), whereas they probably don't get into equities with any leverage.  Had I bought property, I would have probably not made out as well, but it certainly wouldn't be anywhere near 1/3 return that you're implying.

[Malthus]

This is all way too sophisticated for the average person - the reason housing is such a good investment *for the average person* is purely a factor of their naïveté and lack of discipline when it comes to investing.

The average person could easily "do better" by renting, then investing aggressively in equities the money they would otherwise be spending on mortgage - and equities are of course far more liquid. But by and large, they don't. Why?

Pretty simple - the average person lacks the will and ability to aggressively save the money every month for investing. Rather, they are more likely to increase their discretionary spending to soak up that money. Plus, if they wanted to leverage a large amount of cash to invest - how would they do that, without any security?

The same person will aggressively save to pay for a house. Why? Because the bank demands a mortgage payment every month, and bad things happen if they are not paid. In contrast, no-one is pressuring our renter/equites investor to invest a set amount each and every month without fail. So the temptation is to get lax, to spend on other things. That dream vacation vs. The mortgage payment has a different dynamic than that dream vacation vs. your monthly investment in equities that no-one is making you do.

Again, the property buyer has less of a problem borrowing a lot of cash to invest up front, because his asset is not liquid - there's security.

Renting and investing in equities can certainly put the savvy and disciplined investor ahead, but it is difficult for the average person to take advantage of that.

[jimmy olsen]

20% return since 2006 is pretty awful given that a far more liquid investment in the S&P 500 index returned over 150% the same period.

To the extent the case for the 2008 non bubble is based on housing prices in the Bay Area, it's a weak case.  That is an anomalous market with extreme demand and constrained supply.

Stocks are wildly over valued. They've gone up during a pandemic that has tanked the economy.

[alfred russel]

This is all way too sophisticated for the average person - the reason housing is such a good investment *for the average person* is purely a factor of their naïveté and lack of discipline when it comes to investing.

The average person could easily "do better" by renting, then investing aggressively in equities the money they would otherwise be spending on mortgage - and equities are of course far more liquid. But by and large, they don't. Why?

Pretty simple - the average person lacks the will and ability to aggressively save the money every month for investing. Rather, they are more likely to increase their discretionary spending to soak up that money. Plus, if they wanted to leverage a large amount of cash to invest - how would they do that, without any security?

The same person will aggressively save to pay for a house. Why? Because the bank demands a mortgage payment every month, and bad things happen if they are not paid. In contrast, no-one is pressuring our renter/equites investor to invest a set amount each and every month without fail. So the temptation is to get lax, to spend on other things. That dream vacation vs. The mortgage payment has a different dynamic than that dream vacation vs. your monthly investment in equities that no-one is making you do.

Again, the property buyer has less of a problem borrowing a lot of cash to invest up front, because his asset is not liquid - there's security.

Renting and investing in equities can certainly put the savvy and disciplined investor ahead, but it is difficult for the average person to take advantage of that.

Rent versus buy is not a one way street.

I was strongly behind the "rent" strategy you mention, but then in 2007 and early 2008 housing prices were falling. I thought the dynamic had shifted. I was in a solid apartment complex run by an apartment chain, and bought a condo in a place that used to be run by the same apartment chain but they coverted to condos.

I was paying in rent about $1300 a month, and paid $98k for my shitty condo, which the previous owner paid $125k for. My mortgage payment + HOA dues was way less than my previous rent.

It turned out I still bought before the crash, and lower income condos in Atlanta got absolutely crushed, and at the bottom of the market several floorplans in my condo complex sold for $35k. So despite the cash flow positivity on rent vs. buy, I was seriously underwater and it seemed like a terrible investment.

Today the market has recovered and the value is about $140k. So it seems like a good financial decision again. Although I am going nuts in a small place in the era of covid and my next door is a literal crackhouse.  I also hated living here and left it abandoned for 2.5 years while I moved into a highrise in the middle of the city, so that was dumb too.

[Napoleon XIV]

20% return since 2006 is pretty awful given that a far more liquid investment in the S&P 500 index returned over 150% the same period.

To the extent the case for the 2008 non bubble is based on housing prices in the Bay Area, it's a weak case.  That is an anomalous market with extreme demand and constrained supply.

Stocks are wildly over valued. They've gone up during a pandemic that has tanked the economy.

Eh, yes and no.  In the first place, the pandemic has not hurt everything uniformly.  Some companies are prospering specifically because of the pandemic and thus their increase in value may well be justified.  Others are prospering because they're just not affected by the pandemic and an increase in value may thus be justified on a relative basis to those that are harmed (i.e. just a plain old shift/rotation of cash).  Then you've got the crazy amount of monetary and fiscal stimulus that is just pumping up everything that isn't a raging dumpster fire because, well, money's got to go someplace to get a return.  Is that making things bubbly?  Dunno.  Maybe in some things.  You also have to remember that the indices are composed of and dominated (because of weightings) by companies that have been beneficiaries of the above factors (among others).  It's not a coincidence that of all of the indices the Nasdaq is doing the best.  So even if the indices are showing great returns, it by no means means that every constituent (or even a majority of constituents) are actually up.

[grumbler]

The value of a stock is what someone will pay for it.  If a stock is selling, it is not over-valued.

[DGuller]

The value of a stock is what someone will pay for it.  If a stock is selling, it is not over-valued.

I think that's a way to avoid the issue with tautology, by defining value to be the price.  When people say that assets are overvalued, what they mean is that the selling price is way higher than the fundamental value.  Most assets have some fundamental value, due to the income stream that they provide, which means that you can derive benefit from these assets regardless of what people buying and selling them think they're worth.  If the value of the asset is defined by what someone is willing to pay for it, then tulips at one point had a value of $50,000.

[The Brain]

The value of a stock is what someone will pay for it.  If a stock is selling, it is not over-valued.

I think that's a way to avoid the issue with tautology, by defining value to be the price.  When people say that assets are overvalued, what they mean is that the selling price is way higher than the fundamental value.  Most assets have some fundamental value, due to the income stream that they provide, which means that you can derive benefit from these assets regardless of what people buying and selling them think they're worth.  If the value of the asset is defined by what someone is willing to pay for it, then tulips at one point had a value of $50,000.

FWIW my impression is that there's a better way to define "overvalued" than talking about "fundamental value" or income stream. Seems more relevant to me to talk about some kind of risk or unaccounted for circumstance that relates to how value for that kind of asset is determined, which points to a significant drop in value in the not-too-distant future. Otherwise assets that have little or no associated income stream, or have an income stream but it's not the primary reason people value the asset, will always be overvalued, which I don't think is the case if "overvalued" is to be a meaningful term.