In the run up to 2008, DGuller and I argued through a zillion threads about whether there was a housing bubble. I thought not, he thought so. When the market collapsed, I admitted I was wrong and we moved on.
But was I wrong?
The Case-Schiller index for the US (tracking single family home prices) hit 184 in 2006 before falling to a low of 134 in 2012. That is a decline of 27%, and most of the fall was in 2008-2009.
However, the index is now about 222. Over the last 14 years, that means if you bought at the very top of the market, you would currently be sitting on about 20% gains, or about 1.3% a year.
Looking at the chart I'm linking to, from 1987 to current day, the change in the index was from 64 to 222, or about 3.8% per year. So in a worst case scenario, if you are bought a home at the very peak of the "bubble", you are unperforming the long term average, but your returns are 1.3% rather than 3.8% if you still hold the home. In a very worst case scenario, if you bought your home in 2006 and sold it about 5-6 years later, you would have lost about 27%, which is of course bad but whether that counts as a bubble really depends on definitions.
https://fred.stlouisfed.org/series/csushpinsa
Our arguments pre 2008 centered on elite locations like NY and SF. Looking at NY, it is less positive for my side of the old argument--we still haven't reached the 2006 peak.
https://fred.stlouisfed.org/series/NYXRSA/
But in SF, things have more than recovered.
https://fred.stlouisfed.org/series/SFXRSA
I appreciate the propaganda effort to convince us you are not using a sock puppet.
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.
Quote from: The Minsky Moment on October 15, 2020, 11:20:09 AM
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.
A comparison to the S&P 500 is not reasonable--historically housing has severely underperformed the S&P 500.
Doesn't it depend on the location?
So there wasn't a bubble in certain urban locations like NY or SF because it reflected the level of demand and supply which is still driving prices. But there was a bubble in certain types of property and certain locations. This is similar to Ireland where the Dublin property market has entirely recovered and is very hot because there aren't enough properties for the number of people who live there, but you still have ghost estates of suburban houses built by developers in the Celtic Tiger days that can't be shifted.
That "bubble" wasn't, in my view, a housing bubble but a financial bubble and housing was just one of multiple asset types impacted. It's the one we feel because it has more real life impact, but we felt the impact of the other ones too. It reflects the needs of China but other emerging markets to have dollar assets, the Atlantic links between American banks and European banks which were dramatically overextended (even more than the Americans) and a lot of hubris: that we were and the markets, products, tools, regulators we had developed were too sophisticated for this.
So to an extent the bubble wasn't the housing - there's suddenly a glut of houses and not enough demand - but a product of the financialisation for want of a better word of housing. It's a little more consequence than effect.
In hindsight, it may have been less of a bubble and more of a realignment. I think that a growing inequality is resulting in many people having more money than they know what to do with, and that results in very low interest rates and ballooning asset prices. I agree that comparing returns on real estate and stock market is not fair, because you use a lot more leverage to invest in real estate than you do investing in the stock market.
Quote from: alfred russel on October 15, 2020, 11:26:03 AM
Quote from: The Minsky Moment on October 15, 2020, 11:20:09 AM
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.
A comparison to the S&P 500 is not reasonable--historically housing has severely underperformed the S&P 500.
OK but you've already established that housing has performed far worse in the last 14 years than the usual return.
If you wait long enough, sure things will start to smooth out.
Quote from: The Minsky Moment on October 15, 2020, 11:35:49 AM
OK but you've already established that housing has performed far worse in the last 14 years than the usual return.
If you wait long enough, sure things will start to smooth out.
2.5% worse per annum.
Or to put it another way, if prices are flat for 10 years (by about 10 years they had recovered), is that indicative of a bubble?
I guess it goes to the definition of a bubble.
If you are 14 years out, and annual returns are still 1/3 of typical, then yes that is indicative.
Quote from: The Minsky Moment on October 15, 2020, 12:55:29 PM
If you are 14 years out, and annual returns are still 1/3 of typical, then yes that is indicative.
Again, I think it's a mistake to leave the leverage part out of it. If I had an asset that appreciated at a rate of 3.5% per year, with absolute dead certainty year after year, and I could borrow as much as I want at 3%, I would definitely like that asset way more than S&P 500, even if S&P 500 would return 6%. Real estate isn't going to go up and down nearly to the same degree that stocks will, so risk appetite being equal you can load up on much more leverage. In fact, pretty every everyone who buys a house buys it on the margin.
That's an argument about the relative desirability of asset classes not whether RE was a bubble.
As for asset class comparison the long term return on the S&P 500 has been about 10% annually. It is more expensive to leverage but it is a far more liquid investment than residential housing and lot less lumpy.
Quote from: The Minsky Moment on October 15, 2020, 03:42:10 PM
That's an argument about the relative desirability of asset classes not whether RE was a bubble.
As for asset class comparison the long term return on the S&P 500 has been about 10% annually. It is more expensive to leverage but it is a far more liquid investment than residential housing and lot less lumpy.
Yes, it's a different argument to some extent (though you're claiming it was a bubble because the returns since then are bad), but I'm still stuck on how you're defining RE underperforming the stocks. I'm not talking about whether it's expensive to leverage, I'm talking about the difference in riskiness allowing for different leverage ratios.
Leverage can multiply the returns of any investment, but if the underlying returns are risky enough, then leverage can wipe you out before you can cash in on your gains. That's why you can't just compare which asset is a better investment based on their expected returns, at least not according to what I learned in modern finance.
Riskier assets can be leveraged less than safer assets, for the same level of risk appetite, so you have to risk-adjust the returns before you compare them. It doesn't look to me like you're risk-adjusting the returns when you're comparing S&P 500 performance against RE performance and concluding that the latter is a worse investment.
Quote from: The Minsky Moment on October 15, 2020, 03:42:10 PM
That's an argument about the relative desirability of asset classes not whether RE was a bubble.
As for asset class comparison the long term return on the S&P 500 has been about 10% annually. It is more expensive to leverage but it is a far more liquid investment than residential housing and lot less lumpy.
They are fundamentally different categories. The S&P 500 involve equity investments in large for profit american corporations. A single family home generally involves land and a depreciating building, which people use as an investment vehicle, a savings vehicle, and a place to live.
You can compare the expected appreciation of a single family home to the S&P 500 if you want, but the land involved seems more analogous to a commodity such as gold and the building a durable good such as an automobile.
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.
Quote from: alfred russel on October 15, 2020, 03:52:14 PM
They are fundamentally different categories. The S&P 500 involve equity investments in large for profit american corporations. A single family home generally involves land and a depreciating building, which people use as an investment vehicle, a savings vehicle, and a place to live.
I agree they are fundamentally different categories, for the reason you say. Viewed purely as a speculative investment vehicle, however, it is a dubious asset category.
Quote from: DGuller on October 15, 2020, 03:55:18 PM
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.
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.
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.
Quote from: The Minsky Moment on October 15, 2020, 11:20:09 AM
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.
Quote from: Malthus on October 17, 2020, 10:35:33 PM
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.
Quote from: jimmy olsen on October 18, 2020, 01:26:30 AM
Quote from: The Minsky Moment on October 15, 2020, 11:20:09 AM
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.
The value of a stock is what someone will pay for it. If a stock is selling, it is not over-valued.
Quote from: grumbler on October 21, 2020, 08:44:52 PM
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.
Quote from: DGuller on October 21, 2020, 11:18:03 PM
Quote from: grumbler on October 21, 2020, 08:44:52 PM
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.