Author Topic: Is the 1% rule ever coming back?  (Read 8285 times)

Jon Bon

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Is the 1% rule ever coming back?
« on: February 23, 2019, 11:20:42 AM »
And did it hold up during the last property bubble?

I have been investing for about 6-8 years now, and  I am VERY in-tune to my local rental situation. A and B neighborhoods have not been selling anywhere close to the 1% for years now. I am starting to see the C neighborhood (with very little chance at appreciation) drop below the 1% rule. Now I realize that some of the completely batshit insane real estate markets (SF, Seattle NYC, etc) the 1% rule might no longer hold true. I am starting to see a departure from the rule in my own city. There was a portfolio of rentals I just saw posted they averaged about between 1/2 and 3/4 percent. That is terrible! Not to mention you are going to get absolutely murdered on property taxes when you pay that kind of money for a house.

Is this what happened in 2002-2007?  I was still in college and not really paying attention to the RE ratios then. Is RE just not worth it to invest in these days? Do I just have to dump it in a very expensive stock market and hope for the best?

TLDR

 RE is expensive and it sucks.


Another Reader

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Re: Is the 1% rule ever coming back?
« Reply #1 on: February 23, 2019, 01:38:11 PM »
The answer is to dump new cash into whatever asset class is on sale when you get the cash in hand.  If no asset class is on sale, the choices are to hoard cash for the next sale, pay off debt, or throw money at paper assets you won't need for decades.  I have not purchased a property since 2012.  I continue to fund the same periodic stock fund purchases I have made since then, pay off mortgage debt, and hoard cash.  You are young, so you will likely have several more fire sale buying opportunities in your lifetime.  Plan for them.

I may sell a property or two and pay off all the mortgage debt, or at least the loans at 5 percent or more.  The return on that will likely be higher than buying a rental property at the peak of the market.

Jon Bon

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Re: Is the 1% rule ever coming back?
« Reply #2 on: February 23, 2019, 03:42:48 PM »
The answer is to dump new cash into whatever asset class is on sale when you get the cash in hand.  If no asset class is on sale, the choices are to hoard cash for the next sale, pay off debt, or throw money at paper assets you won't need for decades.  I have not purchased a property since 2012.  I continue to fund the same periodic stock fund purchases I have made since then, pay off mortgage debt, and hoard cash.  You are young, so you will likely have several more fire sale buying opportunities in your lifetime.  Plan for them.

I may sell a property or two and pay off all the mortgage debt, or at least the loans at 5 percent or more.  The return on that will likely be higher than buying a rental property at the peak of the market.

Damn it I agree with pretty much everything that you said. One should not have to be holding cash because there is nothing else to invest in!

Its just no fun! I LIKE building a business. I like to rehab properties. Its a challenge that I appreciate. Its just annoying as hell to be on hold because of the "everything bubble" prevent anything from being fairly priced.

#comeonrecession

Another Reader

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Re: Is the 1% rule ever coming back?
« Reply #3 on: February 23, 2019, 04:45:08 PM »
The answer is to dump new cash into whatever asset class is on sale when you get the cash in hand.  If no asset class is on sale, the choices are to hoard cash for the next sale, pay off debt, or throw money at paper assets you won't need for decades.  I have not purchased a property since 2012.  I continue to fund the same periodic stock fund purchases I have made since then, pay off mortgage debt, and hoard cash.  You are young, so you will likely have several more fire sale buying opportunities in your lifetime.  Plan for them.

I may sell a property or two and pay off all the mortgage debt, or at least the loans at 5 percent or more.  The return on that will likely be higher than buying a rental property at the peak of the market.

Damn it I agree with pretty much everything that you said. One should not have to be holding cash because there is nothing else to invest in!

Its just no fun! I LIKE building a business. I like to rehab properties. Its a challenge that I appreciate. Its just annoying as hell to be on hold because of the "everything bubble" prevent anything from being fairly priced.

#comeonrecession

Warren Buffett is holding a lot of cash these days.  I believe he mentions in his new annual letter that he has not bought any businesses because the decent ones are wildly overpriced.  He is buying some equities, but not much else.


Enough

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Re: Is the 1% rule ever coming back?
« Reply #4 on: February 23, 2019, 06:04:21 PM »
There are small to medium size city markets in the midwest where you can still get 1.5-2% on class C multifamily properties and get close to 1% on class B SFHs.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #5 on: February 23, 2019, 09:04:52 PM »
I don't even bother to look for rental properties anymore - there's nothing in my whole state that would make sense. Sold the last of my rentals in 2017 as they had appreciated through the roof.

I think we'll see the 1% rule again someday, but it might not be for quite a while, and I wouldn't put any money on seeing another great 2007 style crash again in our lifetimes (even if you're young). I'd expect a more general price stagnation, and maybe some slight declines if the Fed ever raises interest rates meaningfully again, coupled with rental rates continuing to slowly rise. In that scenario you'd creep back up on the 1% rule.

I am of two minds about the everything bubble - on the one hand, I'm much wealthier than I was 10 years ago because I rode that wave up. On the other, there's not much out there that gets me excited to invest. So extra money just gets dumped in VTSAX. Boring. But at this point (FI, still working part time for fun and hence running a significant surplus) boring is probably fine.

-W

Finances_With_Purpose

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Re: Is the 1% rule ever coming back?
« Reply #6 on: February 24, 2019, 12:22:00 AM »
I'm glad I'm not the only one wondering this.  I'm far from a RE pro, but recently evaluated a deal and wow, we're nowhere near 1%, especially in some markets.  I'm befuddled as to why so many folks are throwing money at bad deals...until I realized there's just a lot of dumb money out there.  It's a great time to be renting, I suppose. 

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #7 on: February 24, 2019, 08:30:56 AM »
There's always a lot of dumb money out there, but right now there's a TON because there's an entire generation that has only experienced sub 5% interest rates and double digit appreciation and think it's normal.

-W

Jon Bon

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Re: Is the 1% rule ever coming back?
« Reply #8 on: February 24, 2019, 09:04:14 AM »
Befuddled is a good word for how I am feeling too.  I see houses get listed for stupid prices I would never pay only to be put into contract the next day.

So I guess I will add onto my house for a cost of $50k and get a $150 gain out of it? Wow listen to me! That sounds like a comment right out of 2005.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #9 on: February 24, 2019, 09:19:10 AM »
Around here there are literally places that are $1million that might rent for $3500 a month or so that are *advertised* as "great investment opportunity".

Don't get me started on the nightly rental people, either. I've talked to people who think they can just multiply the nightly rate by 365 and subtract their mortgage payment.

Since getting out of the rentals, we've invested in:
-Solar for the house. Not a big amount but a nice 7%-ish return using fairly conservative numbers.
-ADU (basement apartment in our stupidly big basement).
-Lots of index funds.

I'm not interested in sitting on cash waiting for RE unicorns and/or a crash but I could see that being an option if you're super into RE.

-W

sol

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Re: Is the 1% rule ever coming back?
« Reply #10 on: February 24, 2019, 09:23:27 AM »
I think the 1% rule is dead and gone and that's totally fine, because residential real estate investing has turned into something much more like stock investing.  The value is in your capital appreciation, not your quarterly cash flow.

My SFR's are well below 1%, translating to an annual cash return after costs of around 2% of equity, but on the other hand they appreciate at between 5% and 10% per year.  Those numbers look like the stock market, right?  No one complains when the dividend yield on VTSAX drops that low, because you don't buy VTSAX for the cash flow.  You buy it for the growth.  As long as you look at real estate that way, it's still profitable.

Of course, it's harder to sell off a few percent of your real estate portfolio each year the way you can with VTSAX.  I think the premium you used to get for holding an illiquid asset has all but evaporated.
« Last Edit: February 24, 2019, 10:36:57 AM by sol »

Jon Bon

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Re: Is the 1% rule ever coming back?
« Reply #11 on: February 24, 2019, 10:13:07 AM »
I think the 1% rule is dead and gone and that's totally fine, because residential real estate investing has turned into something much more like stock investing.  The value is in your capital appreciation, not your quarterly cash flow.

My SFR's are well below 1%, translating to an annual cash return after costs of around 2% of equity, but on the other hand they appreciate at between 5% and 10% per year.  Those numbers look like the stock market, right?  No one complains when the dividend yield on VTSAX drops that low, because you don't buy VTSAX for the cash flow.  You buy it for the growth.  As long as you look at real estate that way, it's still profitable.eices

Of course, it's harder to sell off a few percent of your real estate portfolio each year the way you can with VTSAX.  I think the premium you used to get for holding an illiquid asset has all but evaporated.

Interesting points Sol.

Taking what you are saying a step further so houses are the new equities if it is less about cash flow and more about speculation. So if that is true is it safe to assume that it would lead to a more boom a bust cycle due do the larger number of speculators? More speculators in the market and less buy and hold investors?

We have been booming for a while, one would think the bust is inevitable. But I have been waiting for the inevitable for years now.


Another Reader

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Re: Is the 1% rule ever coming back?
« Reply #12 on: February 24, 2019, 10:27:58 AM »
Patience, grasshoppers.

I have lived in the SF Bay Area for many decades.  Prices do go down.  Prices go down a lot sometimes, even in commercial and industrial real estate.  Anyone remember the RTC?  In the early 90's, you could buy strip retail centers in secondary locations that were 50 percent vacant on 12-15 percent cap rates based on ACTUAL income, i.e. the 50 percent occupied space.

Right now, all of China wants to invest in US real estate.  India is not far behind.  Everyone that lives here has a job if they can fog a mirror.  Interest rates are still stupid low by historical standards.  It's easy to get a mortgage with W-2 income. 

Everything has to go right to sustain the current fervor.  At some point, it won't.

Waltworks is playing Warren Buffett's hand.  I am as well.  Maybe the impatient young folks should consider doing the same.

Papa bear

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Re: Is the 1% rule ever coming back?
« Reply #13 on: February 24, 2019, 11:25:47 AM »
And did it hold up during the last property bubble?

I have been investing for about 6-8 years now, and  I am VERY in-tune to my local rental situation. A and B neighborhoods have not been selling anywhere close to the 1% for years now. I am starting to see the C neighborhood (with very little chance at appreciation) drop below the 1% rule. Now I realize that some of the completely batshit insane real estate markets (SF, Seattle NYC, etc) the 1% rule might no longer hold true. I am starting to see a departure from the rule in my own city. There was a portfolio of rentals I just saw posted they averaged about between 1/2 and 3/4 percent. That is terrible! Not to mention you are going to get absolutely murdered on property taxes when you pay that kind of money for a house.

Is this what happened in 2002-2007?  I was still in college and not really paying attention to the RE ratios then. Is RE just not worth it to invest in these days? Do I just have to dump it in a very expensive stock market and hope for the best?

TLDR

 RE is expensive and it sucks.

I’m in the same market as you, Jonbon. It’s stupid ridiculous.  I started investing in other markets where there still are some decent RE deals if you put in some work.

But I too, hold too much cash in hopes of finding the next great deal.


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bacchi

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Re: Is the 1% rule ever coming back?
« Reply #14 on: February 24, 2019, 12:11:28 PM »
The 1% rule hasn't worked for central city neighborhoods in my city for probably 20 years. I've always been jealous of those who managed it elsewhere.

I could buy in the 'burbs but I tried that and the "commute" was just too much.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #15 on: February 24, 2019, 12:41:04 PM »
I think the 1% rule is dead and gone and that's totally fine, because residential real estate investing has turned into something much more like stock investing.  The value is in your capital appreciation, not your quarterly cash flow.

I think that's only true in a low-interest rate, full employment environment. Sooner or later the business cycle will turn and those annual capital returns will evaporate or at best stagnate long term.

I mean, realistically, nobody can afford a house *now*. If you double prices every 10 years or so at 7% annual appreciation, there won't be any buyers at all in short order. I guess we could go to a semi-feudal sort of residential RE situation where a few people own all the housing stock, but I think it's more likely housing prices will fall back in line with wages, though I'm agnostic about how that will happen (ie, housing prices could decline, or they could stagnate while wages rise).

There's also a lot of land to build houses on, and plenty of people doing the housing arbitrage thing already and leaving, say, the Bay area. That will only happen more. My sister and her husband are high high-end MDs (Rad Oncology and Derm) and just finished their residencies. They are high achiever types and are being competitively recruited - and they won't even consider the Bay area, or any other hot RE market city - because even making $300k+ a year, housing they'd want to live in is too expensive. If that kind of person won't move to a HCOL area, the writing is on the wall.

If you track lots of the "hot" markets (like Seattle) you'll notice that in the last 9 months or so sales have plummeted and listings have soared. Now, that's from a very low base, so it's still a semi-tight market - but give those trends another year and you'll be looking at competitively cutting prices to attract buyers when you go to sell.

-W
« Last Edit: February 24, 2019, 12:45:28 PM by waltworks »

sol

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Re: Is the 1% rule ever coming back?
« Reply #16 on: February 24, 2019, 01:44:26 PM »
I mean, realistically, nobody can afford a house *now*.

We don't need (or necessarily want, as investors) everyone to be able to afford a house.   We only want slightly more buyers than we have inventory at any given time, in any given market, and that's exactly why prices in Seattle have gone so crazy.  It doesn't matter than 70% of the city's population can't afford a house, because the other 30% make so much money they've bid up the prices for the very limited stock of houses.
 
Quote
If you double prices every 10 years or so at 7% annual appreciation, there won't be any buyers at all in short order.

Prices aren't doubling in a vacuum because some outside force decrees it, they are doubling in response to pressure from buyers.  I don't think it makes any sense to hypothesize that you will price out of available buyers, in a market where prices are entirely set by buyers only.  The fact that prices in markets like Seattle have been so crazy is a reflection of strong buyer demand. 

Quote
I guess we could go to a semi-feudal sort of residential RE situation where a few people own all the housing stock, but I think it's more likely housing prices will fall back in line with wages,

Prices might fall in line with wages if there were enough houses for everyone who has wages, but that is definitely not the case in most major metro areas.  The jobs are concentrated in small places with limited housing stock that is close enough to house people who work in those locations.  The concentration of high wages around places with insufficient houses drives up prices, until only the best paid workers can afford them.  It's not fedualism, but it's definitely a reflection of severe wealth inequality.  There's a reason the median house price in Silicon Valley is over million dollars, and it has very little to do with what their minimum wage is.  It's ALL about the super wealthy tech workers competing for limited space close to their jobs.

Quote
though I'm agnostic about how that will happen (ie, housing prices could decline, or they could stagnate while wages rise).

Or neither, as long as there are still enough very wealthy buyers for the limited supply of houses.  I think that in major metro areas, we have to stop thinking about house prices the way we used to, by looking at median wages and interest rates.  Housing has become such a restricted supply in places like San Francisco that medians don't necessarily apply anymore.  The real housing market is a tiny fraction of the total population, just the richest folks competing for the rare properties that come up.  Houses are like luxury goods in that situation.

The converse situation is somewhere like Detroit, where they ended up with way more houses than people who had money, due to local job losses.  Suddenly you could buy three bedroom houses for $5k because there were six empty ones on every block.  It's all local supply and demand relative to available purchasing power.  In Seattle the purchasing power is high and the house supply is low, so prices skyrocket and houses sell quickly to a tiny fraction of people.  In Detroit purchasing power is low to normal but the house supply is huge, so prices plummet because anyone who was even vaguely interested in a house could buy five of them.  In Detroit, minimum wage actually matters.  In Seattle not so much.

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Re: Is the 1% rule ever coming back?
« Reply #17 on: February 24, 2019, 04:14:33 PM »
I mean, realistically, nobody can afford a house *now*.

We don't need (or necessarily want, as investors) everyone to be able to afford a house.   We only want slightly more buyers than we have inventory at any given time, in any given market, and that's exactly why prices in Seattle have gone so crazy.  It doesn't matter than 70% of the city's population can't afford a house, because the other 30% make so much money they've bid up the prices for the very limited stock of houses.
 
Quote
If you double prices every 10 years or so at 7% annual appreciation, there won't be any buyers at all in short order.

Prices aren't doubling in a vacuum because some outside force decrees it, they are doubling in response to pressure from buyers.  I don't think it makes any sense to hypothesize that you will price out of available buyers, in a market where prices are entirely set by buyers only.  The fact that prices in markets like Seattle have been so crazy is a reflection of strong buyer demand. 

Quote
I guess we could go to a semi-feudal sort of residential RE situation where a few people own all the housing stock, but I think it's more likely housing prices will fall back in line with wages,

Prices might fall in line with wages if there were enough houses for everyone who has wages, but that is definitely not the case in most major metro areas.  The jobs are concentrated in small places with limited housing stock that is close enough to house people who work in those locations.  The concentration of high wages around places with insufficient houses drives up prices, until only the best paid workers can afford them.  It's not fedualism, but it's definitely a reflection of severe wealth inequality.  There's a reason the median house price in Silicon Valley is over million dollars, and it has very little to do with what their minimum wage is.  It's ALL about the super wealthy tech workers competing for limited space close to their jobs.

Quote
though I'm agnostic about how that will happen (ie, housing prices could decline, or they could stagnate while wages rise).

Or neither, as long as there are still enough very wealthy buyers for the limited supply of houses.  I think that in major metro areas, we have to stop thinking about house prices the way we used to, by looking at median wages and interest rates.  Housing has become such a restricted supply in places like San Francisco that medians don't necessarily apply anymore.  The real housing market is a tiny fraction of the total population, just the richest folks competing for the rare properties that come up.  Houses are like luxury goods in that situation.

The converse situation is somewhere like Detroit, where they ended up with way more houses than people who had money, due to local job losses.  Suddenly you could buy three bedroom houses for $5k because there were six empty ones on every block.  It's all local supply and demand relative to available purchasing power.  In Seattle the purchasing power is high and the house supply is low, so prices skyrocket and houses sell quickly to a tiny fraction of people.  In Detroit purchasing power is low to normal but the house supply is huge, so prices plummet because anyone who was even vaguely interested in a house could buy five of them.  In Detroit, minimum wage actually matters.  In Seattle not so much.

Sol has it exactly right.  Median income is irrelevant in the most competitive markets.  Only the highest income segment can afford to buy.  And there are more qualified buyers than sellers.

bacchi

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Re: Is the 1% rule ever coming back?
« Reply #18 on: February 24, 2019, 04:56:16 PM »
Tech workers buy million dollar houses on stock grants that vest in a rising stock market. When the market takes a tumble, and it sticks for more than a few months, the grants/options become underwater and can't be used as a down payment.

That's when the market will change. It happened during the dot bomb and it will happen again.

BicycleB

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Re: Is the 1% rule ever coming back?
« Reply #19 on: February 24, 2019, 05:09:30 PM »

I think that in major metro areas, we have to stop thinking about house prices the way we used to, by looking at median wages and interest rates.  Housing has become such a restricted supply in places like San Francisco that medians don't necessarily apply anymore.  The real housing market is a tiny fraction of the total population, just the richest folks competing for the rare properties that come up.  Houses are like luxury goods in that situation.

The converse situation is somewhere like Detroit, where they ended up with way more houses than people who had money, due to local job losses.  Suddenly you could buy three bedroom houses for $5k because there were six empty ones on every block.  It's all local supply and demand relative to available purchasing power.  In Seattle the purchasing power is high and the house supply is low, so prices skyrocket and houses sell quickly to a tiny fraction of people.  In Detroit purchasing power is low to normal but the house supply is huge, so prices plummet because anyone who was even vaguely interested in a house could buy five of them.  In Detroit, minimum wage actually matters.  In Seattle not so much.

Median income is irrelevant in the most competitive markets.  Only the highest income segment can afford to buy.  And there are more qualified buyers than sellers.

Oh, wow, these are really insightful. This explains stuff that's happening for years but I didn't put my finger on exactly why. This is why. Suddenly it's obvious. @sol, @Another Reader, great posts.

chasesfish

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Re: Is the 1% rule ever coming back?
« Reply #20 on: February 24, 2019, 05:15:08 PM »
The 1% rule was dead in 2006 and 2007 on most single family rentals.

Biggest game-changer in the last three to four years has been extremely low bond yields.  Since mid 2011, the US 10 year treasury can barely break 3% before it gets pushed back below that amount.  This has dragged the return down on all assets, including rental real estate. 

Debt being cheaper drives down the cost of capital for a real estate investor and in turn, prices increase.  I've wanted to buy for a while, but the only place that makes remote sense is my hometown of 100,000 people, 1% population growth and no real industry to speak of.  That carries different downside risk than these single family rentals selling for 0.5% or less in Dallas Fort Worth, a market with 6% population growth

Paul der Krake

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Re: Is the 1% rule ever coming back?
« Reply #21 on: February 24, 2019, 05:26:30 PM »
Tons of high income tech workers who, quite wisely, rent in Seattle and San Francisco. Not sure what happens if a significant number jump on or off the home ownership train.

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Re: Is the 1% rule ever coming back?
« Reply #22 on: February 24, 2019, 05:44:38 PM »
Tons of high income tech workers who, quite wisely, rent in Seattle and San Francisco. Not sure what happens if a significant number jump on or off the home ownership train.

The young, single ones are fine renting.  When they marry and start having kids, home ownership usually becomes a priority.

sol

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Re: Is the 1% rule ever coming back?
« Reply #23 on: February 24, 2019, 07:04:17 PM »
This explains stuff that's happening for years but I didn't put my finger on exactly why. This is why. Suddenly it's obvious.

This is one of those unforeseen consequences of wealth inequality.  If wages continue to bifurcate, with a small fraction of the people making even more crazy enormous amounts of money while the bulk of the population continues to see net negative income growth, then this situation could theoretically get even worse.  Median wages could stay exactly the same, and yet house prices could continue to grow at 10% per year for decades because it's only the runaway top end of income earners that matter to house prices.


YttriumNitrate

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Re: Is the 1% rule ever coming back?
« Reply #24 on: February 24, 2019, 07:15:59 PM »
The area I am familiar with is West Lafayette, Indiana (Big ten college town), and from time to time I see a solid 1% property that would be appropriate for my target demographic of highly educated employees of the university. These listings are few and far between, and they don't stay around for long. I suspect that things will change in a few years.

Paul der Krake

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Re: Is the 1% rule ever coming back?
« Reply #25 on: February 24, 2019, 07:31:41 PM »
This explains stuff that's happening for years but I didn't put my finger on exactly why. This is why. Suddenly it's obvious.

This is one of those unforeseen consequences of wealth inequality.  If wages continue to bifurcate, with a small fraction of the people making even more crazy enormous amounts of money while the bulk of the population continues to see net negative income growth, then this situation could theoretically get even worse.  Median wages could stay exactly the same, and yet house prices could continue to grow at 10% per year for decades because it's only the runaway top end of income earners that matter to house prices.
More likely, you will just see the wealth segregation patterns continue. A dozen red hot real estate markets with sky high costs and high paying jobs, and a slew of medium-sized towns around them. Endless internet conversations on whether it's better to be in the red hot zone or outside of it. I mean, this already describes every major metro area in the world, it's just a matter of radius size and how stark the contrast can be.

Finances_With_Purpose

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Re: Is the 1% rule ever coming back?
« Reply #26 on: February 24, 2019, 10:03:29 PM »
There's always a lot of dumb money out there, but right now there's a TON because there's an entire generation that has only experienced sub 5% interest rates and double digit appreciation and think it's normal.

-W

Right.  I get a kick out of what realtors bill as "investment opportunities."   

I'm old enough to still understand how deeply bizarre this all is and lately I'm feeling older and older as so many folks around me don't realize it at all because this is their only experience. 

Jon Bon

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Re: Is the 1% rule ever coming back?
« Reply #27 on: February 25, 2019, 05:24:04 AM »
I agree with Sol and others who think the 1% rule is not really applicable in the middle of the biggest cities in country, NYC, SF, Toronto etc.  Places like that the 1% rule has become the 1/2% rule or worse. I am not sure if it will ever come back there (if it ever was?) just due to the very high concentration of wealth in a small area.

The change that I have seen that is a bit concerning to me is when the 1% rule has failed in the mid sized cities. I am talking metro areas around 1-3 million people. These are decent sized cities but the RE market in them has fundamentally changed. We don't have Amazon HQ2 to blame/credit the RE run up on SFH and investment properties. Is this going to swing back to 1% in mid-sized cities?

Personally I don't think it will while we have sky high valuations on nearly every asset class. The term I have seen thrown around is the "Everything Bubble" Which honestly feels kind of accurate. So I guess I will just have to be patience and bide my time (and cash)




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Re: Is the 1% rule ever coming back?
« Reply #28 on: February 25, 2019, 06:41:03 AM »
I agree with Sol and others who think the 1% rule is not really applicable in the middle of the biggest cities in country, NYC, SF, Toronto etc.  Places like that the 1% rule has become the 1/2% rule or worse. I am not sure if it will ever come back there (if it ever was?) just due to the very high concentration of wealth in a small area.

The change that I have seen that is a bit concerning to me is when the 1% rule has failed in the mid sized cities. I am talking metro areas around 1-3 million people. These are decent sized cities but the RE market in them has fundamentally changed. We don't have Amazon HQ2 to blame/credit the RE run up on SFH and investment properties. Is this going to swing back to 1% in mid-sized cities?

Personally I don't think it will while we have sky high valuations on nearly every asset class. The term I have seen thrown around is the "Everything Bubble" Which honestly feels kind of accurate. So I guess I will just have to be patience and bide my time (and cash)

Too many people worldwide chasing too few income-producing assets in relatively safe locations.  Many come from countries that are not safe for asset ownership historically and have decades or centuries of low rates of return.  The US looks like an investors' paradise to those folks accustomed to thinking of building wealth patiently over generations and hoping it isn't confiscated in the process.

Jon Bon

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Re: Is the 1% rule ever coming back?
« Reply #29 on: February 25, 2019, 10:24:27 AM »
Too many people worldwide chasing too few income-producing assets in relatively safe locations.  Many come from countries that are not safe for asset ownership historically and have decades or centuries of low rates of return.  The US looks like an investors' paradise to those folks accustomed to thinking of building wealth patiently over generations and hoping it isn't confiscated in the process.

Ok sure, I agree with that.

But it is not new. The US has been a great place to invest from about 1945-present. There have been really crappy governments confiscating their citizens processions for 1000's of years. Obviously China is a big player here today, but wasn't this the same case in the 80's and Japan?

This really reminds me of a book: https://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152640




Paul der Krake

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Re: Is the 1% rule ever coming back?
« Reply #30 on: February 25, 2019, 10:32:47 AM »
Too many people worldwide chasing too few income-producing assets in relatively safe locations.  Many come from countries that are not safe for asset ownership historically and have decades or centuries of low rates of return.  The US looks like an investors' paradise to those folks accustomed to thinking of building wealth patiently over generations and hoping it isn't confiscated in the process.

Ok sure, I agree with that.

But it is not new. The US has been a great place to invest from about 1945-present. There have been really crappy governments confiscating their citizens processions for 1000's of years. Obviously China is a big player here today, but wasn't this the same case in the 80's and Japan?

This really reminds me of a book: https://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691152640
The difference is that you didn't have millions of people in the upper crust of questionable countries all trying to GTFO at the same time, and a globalized economy where anyone with $500 can jet across the world.

waltworks

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Re: Is the 1% rule ever coming back?
« Reply #31 on: February 25, 2019, 10:35:48 AM »
It's really similar to the 90s Japan thing, actually. Remember when all of NYC was going to be owned by Japanese people and companies?

Yeah, not so much. Things will come back to earth, this time *isn't* different.

-W

afox

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Re: Is the 1% rule ever coming back?
« Reply #32 on: February 25, 2019, 04:35:44 PM »
The sentiments in this thread appear to be based on the idea that the supply side of housing is fixed. Not all economists agree and many are working to change public policy to increase the supply of housing. For example read/listen to this story on planet money about bay area housing prices: https://www.npr.org/templates/transcript/transcript.php?storyId=633224790

The city I live in has a problem with housing affordability and the local government is working to increases supply by both literally expanding the physical boundaries of the city and changing zoning and other measures to create infill and also by selling publicly owned land parcels to housing developers.

Does anyone suggest that an increased supply would be purchased by the wealthy with little affect on prices?




YummyRaisins

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Re: Is the 1% rule ever coming back?
« Reply #33 on: February 25, 2019, 05:35:30 PM »
Does anyone suggest that an increased supply would be purchased by the wealthy with little affect on prices?

That probably depends on how much pent up demand remains. Are we talking wealthy investors or affluent first time buyers?

Most of the development I see is still targeting relatively high earners that were priced out of Boston and chose to commute in. SFHs that are priced Right are gone in a couple of days. Multifamily units being marketed as good investment opportunities are nowhere near satisfying the 1% rule.

sol

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Re: Is the 1% rule ever coming back?
« Reply #34 on: February 25, 2019, 09:33:56 PM »
Does anyone suggest that an increased supply would be purchased by the wealthy with little affect on prices?

In some places you can build more houses, sure.  Can you build them faster than the growth of the ultra-rich house-hunting population?  In San Francisco, where the city is bounded on all four sides and literally has no more land?  How about in cities where the only available land is a two hour commute from the urban core?

Big cities concentrate high paying jobs in densely packed skyscrapers.  If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous.  Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times.  This is the problem Seattle already has, for example.  You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.

FINate

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Re: Is the 1% rule ever coming back?
« Reply #35 on: February 25, 2019, 10:22:05 PM »
Does anyone suggest that an increased supply would be purchased by the wealthy with little affect on prices?

In some places you can build more houses, sure.  Can you build them faster than the growth of the ultra-rich house-hunting population?  In San Francisco, where the city is bounded on all four sides and literally has no more land?  How about in cities where the only available land is a two hour commute from the urban core?

Big cities concentrate high paying jobs in densely packed skyscrapers.  If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous.  Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times.  This is the problem Seattle already has, for example.  You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.

There's plenty of room to build more housing in SF, could easily build up. Of the ~49 square miles of city-proper, huge swaths are two story SFHs. The Sunset and Richmond are prime examples. The houses are close together, but the density could easily double or triple with the type medium-rise housing that's common in Europe.

The fact is that the SF Bay Area has chronically underdeveloped housing. The California Legislative Analyst Office has a very good summary of the problem: https://lao.ca.gov/reports/2015/finance/housing-costs/housing-costs.aspx. Each local jurisdiction fights to prevent new housing, preferring development in neighboring cities, with the net effect that very little gets built. Classic tragedy of the commons.

It's true that developers prefer to build for the top end of the market, this is often the only way projects pencil out, especially when neighbors are persistent in advocating for lower density. High end homes depreciate, deteriorate, eventually go out of style, and as they get older they become more affordable moving down the income scale. But, we've built so little over the past few decades that this pipeline has stalled. More about this from the LAO again: https://lao.ca.gov/publications/report/3345

Many people work in the downtown highrises, but in SF there's a very large number of people who choose to live in SF while commuting to the big tech companies in the suburbs (Mountain View, Sunnyvale, Cupertino). They want the city lifestyle and for them the burbs are boring, yet that's where most of the highest paying jobs are. And people are desperate for any kind of living situation that they can afford. It's quite common for folks in tech to live in vans and box trucks at or near their place of employment, witnessed this myself.

I know less about what's going on in Seattle, but from what I can tell they are at least building denser and as quickly as they can to meet demand. Good for them. Wish I could say the same for the Bay Area. Things have truly reached crisis level here, and it's a crisis of our own making. If tech so much as sneezes the housing market here is going to catch a cold. Housing here is, as they say, priced for perfection.
« Last Edit: February 25, 2019, 10:26:49 PM by FINate »

sol

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Re: Is the 1% rule ever coming back?
« Reply #36 on: February 25, 2019, 11:32:30 PM »
There's plenty of room to build more housing in SF, could easily build up.

"Building up" can definitely increase the housing supply, which is not the same thing as increasing the supply of houses.  People aren't complaining about the skyrocketing price of apartments, but of houses.  With yards for their dogs, and space for a garden, and a garage where they can store their tools. 

Seattle has plenty of apartments, and ten new blocks going up at any given moment.  Those are not the problem.

FINate

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Re: Is the 1% rule ever coming back?
« Reply #37 on: February 26, 2019, 12:58:19 AM »
There's plenty of room to build more housing in SF, could easily build up.

"Building up" can definitely increase the housing supply, which is not the same thing as increasing the supply of houses.  People aren't complaining about the skyrocketing price of apartments, but of houses.  With yards for their dogs, and space for a garden, and a garage where they can store their tools. 

Seattle has plenty of apartments, and ten new blocks going up at any given moment.  Those are not the problem.

That may be true in Seattle, but the problem in the Bay Area is with all types and levels of housing. The shortage of apartments and houses is severe and very real. For many this is a matter of survival not preference. People want to live in the city and close to work, would live in multi-unit housing (rental and owner occupied) if available. We just refuse to build enough of it. What does get built, after way too many years of permits and appeals, fills up quickly. The irony in all this is that we have (had?) an opportunity to build dense compact cities, the kind that would greatly reduce GHG emissions. But instead we've created urban sprawl 90 miles into the Central Valley in the name of preserving the "character" of neighborhoods.

Even the tech workers are giving up on the idea of ever owning (https://www.businessinsider.com/san-francisco-expensive-tech-workers-cant-buy-homes-2018-8). For the past couple of years now surveys indicate that about half of Bay Area residents want to relocate (https://sf.curbed.com/2019/2/20/18233498/poll-2019-leaving-san-francisco-oakland-silicon-valley). Many don't because the jobs are still here, but that's also starting to change as tech companies figure out that lower cost and lower tax/regulation locales are attractive.
« Last Edit: February 26, 2019, 01:01:39 AM by FINate »

Linea_Norway

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Re: Is the 1% rule ever coming back?
« Reply #38 on: February 26, 2019, 01:01:18 AM »

In some places you can build more houses, sure.  Can you build them faster than the growth of the ultra-rich house-hunting population?  In San Francisco, where the city is bounded on all four sides and literally has no more land?  How about in cities where the only available land is a two hour commute from the urban core?

Big cities concentrate high paying jobs in densely packed skyscrapers.  If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous.  Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times.  This is the problem Seattle already has, for example.  You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.

Why don't they build a superfast train to a place further away? A commute wouldn't be so bad if it were fast. A train is even something you could work on (if you are lucky enough to have a seat).

FINate

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Re: Is the 1% rule ever coming back?
« Reply #39 on: February 26, 2019, 01:20:32 AM »

In some places you can build more houses, sure.  Can you build them faster than the growth of the ultra-rich house-hunting population?  In San Francisco, where the city is bounded on all four sides and literally has no more land?  How about in cities where the only available land is a two hour commute from the urban core?

Big cities concentrate high paying jobs in densely packed skyscrapers.  If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous.  Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times.  This is the problem Seattle already has, for example.  You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.

Why don't they build a superfast train to a place further away? A commute wouldn't be so bad if it were fast. A train is even something you could work on (if you are lucky enough to have a seat).

California was working on High Speed Rail for about the past 10 years. But the plan was a political hot mess.  To get buy-in from both the North and South end of the state the plan was to connect SF and LA, a route traversing difficult mountain passes and tricky geology. And then to make it more palatable to cities on the eastern side of the Central Valley, the route detoured further out of the way to hit these population centers. Then, instead of going over the Altamont Pass which already has a rail grade, they decided to run it down the congested Bay, sharing the corridor with CalTrain (again, for political support) and then through Pacheco Pass. These things made it way more expensive and way less attractive compared to air travel. The project ballooned from $33B to $77B and was way behind schedule and underfunded when the Governor finally hit the breaks on it.

In any case, jobs in the Bay Area are spread out all over the place and local transit options are not very good. We put the cart before the horse with HSR, would have been better off investing in getting the local and regional transit up to par first, then build out HSR gradually.

afox

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Re: Is the 1% rule ever coming back?
« Reply #40 on: February 26, 2019, 09:14:40 AM »
Quote from: sol

"Building up" can definitely increase the housing supply, which is not the same thing as increasing the supply of houses.  People aren't complaining about the skyrocketing price of apartments, but of houses.  With yards for their dogs, and space for a garden, and a garage where they can store their tools. 

Seattle has plenty of apartments, and ten new blocks going up at any given moment.  Those are not the problem.

Yes, building up doesn't increase the supply of SFHs but it certainly can make the SFHs cheaper.  The frugal might choose to forgoe that 1/4 acre lawn and buy an apartment and recreate on a public lawn.  Is it possible that the situation in seattle could be even worse if it were not for that increasing supply of apartments?

Also, replacing SFH's with apartment buildings is a drastic infill measure and one not typically taken. More typical changes to increase infill are adjusting zoning so that duplex's or triplex's can be added in neighborhoods zoned only for SFH's and changing the "floor area ratios" (lot size/home size basically) requirements so that homes can be built on smaller lots or large lots can be subdivided.
« Last Edit: February 26, 2019, 01:23:16 PM by afox »

Telecaster

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Re: Is the 1% rule ever coming back?
« Reply #41 on: February 26, 2019, 10:56:08 AM »

Yes, building up doesn't increase the supply of houses but it certainly can make the houses cheaper.  The frugal might choose to forgoe that 1/4 acre lawn and buy an apartment and recreate on a public lawn.  Is it possible that the situation in seattle could be even worse if it were not for that increasing supply of apartments?


That's my personal belief.   Rents and housing prices in general went berzerk here for a few years with shocking annual price increases.   Tons of new apartments have come online in the last few years (with plenty more in the pipline) and just this year rents and housing prices stabilized.   

It has radically changed the character of some neighborhoods though.   

FINate

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Re: Is the 1% rule ever coming back?
« Reply #42 on: February 26, 2019, 12:51:12 PM »
That's my personal belief.   Rents and housing prices in general went berzerk here for a few years with shocking annual price increases.   Tons of new apartments have come online in the last few years (with plenty more in the pipline) and just this year rents and housing prices stabilized.   

It has radically changed the character of some neighborhoods though.

The Bay Area is learning rather painfully that it's impossible to stop change. Sure, you can preserve the superficial look of a neighborhood, but this comes at an enormous cost to society which invariable bubbles up as change in other ways. People end up doubling or tripling up in units, garages and garden sheds get rented out, kids live in common areas w/o a quiet place to do homework and sleep. Parents commuting multiple hours each way because this is the only way they can afford to make it. It sucks to see so many families and those other than ultra high income get priced out as they struggle to make ends meet.

Cities are (or should be, IMO) about people, not buildings. Architecture is important, but if a city refuses to adapt and instead becomes a museum it then loses its dynamism. It becomes a fake city that's only good for the monied class to bitterly cling to as they protect "what's theirs."

Jon Bon

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Re: Is the 1% rule ever coming back?
« Reply #43 on: February 26, 2019, 02:28:36 PM »
I think I agree with what your are saying.

To me it is kind of the same idea as the high speed train (fantasy?) mentioned above. It is hard to build big things in the country. Its is 10x harder to build big things when someone else owns the land, or even has an interest. Sure the bay area needs 5x the current housing stock to make prices reasonable but that is just not happening. The individual has a lot of power in the states, private property rights are very strong. Regulations and courts can slow down or kill nearly any project given enough persistence.  I am not saying this is good or bad, I just think it is how things are now. I can't recall the first time I heard the word NIMBY but it is most definitely a thing.

So I dont think there is doing to be a high speed train or lots of new housing in SF. IMO the 1% rule is never coming back to the high income metros BUT what about the rest of the country. It was here just a few years ago, it has to com back right? The question is when and how.


seattlecyclone

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Re: Is the 1% rule ever coming back?
« Reply #44 on: February 26, 2019, 03:45:24 PM »
There's plenty of room to build more housing in SF, could easily build up.

"Building up" can definitely increase the housing supply, which is not the same thing as increasing the supply of houses.  People aren't complaining about the skyrocketing price of apartments, but of houses.  With yards for their dogs, and space for a garden, and a garage where they can store their tools. 

Seattle has plenty of apartments, and ten new blocks going up at any given moment.  Those are not the problem.

We're building lots of apartments, sure, and rents are stabilizing as a result, but that's after several years where 10% year-over-year increases were the norm. A lot of people here are complaining about the price of apartments, having been forced to move farther and farther from the city center as their wages failed to keep pace with market rents.

A house with a yard is a fundamentally different product from a fifth-floor apartment, and it's true that the supply of the former will not be increasing in Seattle. I fully expect the price of detached houses to keep increasing as the city keeps gaining more and more well-compensated people who will bid the prices higher than ever before, making such houses more and more of a luxury item.

However at the same time there's also a growing political movement to make it legal to build more apartments and townhomes and duplexes in more places, so that people who have no hopes of ever buying a "house" here will still have the opportunity to have some sort of housing in nicer, walkable neighborhoods close to where the jobs are.

Just last week we had a final public hearing for a very controversial but (in my opinion) rather modest set of zoning changes, adding a story or two of allowed height to most areas where apartments are already allowed, and allowing small-scale apartment buildings in a small sliver of the land currently zoned exclusively for detached single-family homes. The opinions on this law seem to break very strongly across generational lines. One blogger took a tally of people who spoke up at the hearing. Every single person opposed to the changes appeared to be over 50 years old to the blogger's eyes, while the vast majority of people speaking in favor of the changes appeared to be under 50.

Based on this I do have some concern about the long-term viability of sol's strategy of just expecting real estate to keep appreciating indefinitely, and for cash flow to be a secondary factor.

See, right now most of my neighborhood is zoned exclusively for detached single-family homes. This has pushed land prices way, way up because the law limits the number of homes in my neighborhood to basically the number that is already there. I've seen run-down houses purchased by developers for over half a million dollars and demolished in favor of a larger, fancier one. These aren't huge lots by any means, it's just that each one comes with a golden ticket: the right to live in a pretty nice neighborhood.

What if the land use rules change, and we print ten times as many tickets to live in my neighborhood? This doesn't seem like a very far-fetched outcome if we just wait a couple decades. Many of the people who spoke out in favor of single-family zoning at last week's hearing will be dead, and the Overton window will have shifted as a result. If this happens we might see a situation kind of like the price of taxi medallions in a post-Uber world. Where before the mere right to drive people around for money was a valuable thing because of the limited supply, now it's practically worthless.

I'm not saying that land will become valueless in a more liberal zoning regime, but whatever portion of the current land value is tied to the regulatory scarcity of housing could evaporate. How much is that? I'd love to see a good analysis on that front.

FINate

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Re: Is the 1% rule ever coming back?
« Reply #45 on: February 26, 2019, 05:42:56 PM »
IMO the 1% rule is never coming back to the high income metros BUT what about the rest of the country. It was here just a few years ago, it has to com back right? The question is when and how.

As far as I can tell the 1% rule departed HCOL metros long ago. The dynamic in these so-called "superstar cities" (http://www.toddsinai.com/pdfs/superstar_cities_2013.pdf) is different from areas where demand is lower and/or supply is more elastic. Structures are depreciating assets, they degrade and are always decreasing in value. Yet in a superstar city the overall property value often increases or at least holds its value. This is not just from the value of the unimproved land, but also the value of having gone through the permitting and approvals process to arrive at a legal dwelling.

In cities without supply constraints the value of the land and permits is quite a bit lower, so the depreciation of the physical building dominates the equation. I think this is why most investors in LCOL areas pay more attention to the 1% rule - it better yield a higher percentage to make up for the depreciation.

When I purchased my investment property in a HCOL it was pretty close to the 1% rule, but that was during the aftermath of the Great Recession when everyone was negative on real estate and it was trendy to rent rather than own (anyone else remember the news stories about this back then?).

In any case the missing 1% rule in LCOL metros is, IMO, related to an expectation that properties will continue to appreciate. We've had a good run so far, but I'm skeptical about future gains, including superstar cities. I don't pretend to know what the next black swan event will be, or when it might happen, but one thing that comes to mind is the possibility of an increase in mortgage rates that would limit purchasing power and depress prices.

soccerluvof4

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Re: Is the 1% rule ever coming back?
« Reply #46 on: February 28, 2019, 02:40:28 AM »

In some places you can build more houses, sure.  Can you build them faster than the growth of the ultra-rich house-hunting population?  In San Francisco, where the city is bounded on all four sides and literally has no more land?  How about in cities where the only available land is a two hour commute from the urban core?

Big cities concentrate high paying jobs in densely packed skyscrapers.  If all of those people want a quarter acre of lawn and a two car garage, suddenly you need miles and miles of residential neighborhoods stretching in every direction and the traffic gets horrendous.  Building more homes doesn't always help, if you have to build them so far away that people can't deal with the transit times.  This is the problem Seattle already has, for example.  You can find comparable houses for half the price if you're willing to drive an extra 60-90 minutes in rush hour traffic, each direction, but most people would rather just pay the extra $400k and not deal with that.

Why don't they build a superfast train to a place further away? A commute wouldn't be so bad if it were fast. A train is even something you could work on (if you are lucky enough to have a seat).



They took this to the eleventh hour about 5 years or so back in Wisconsin. Were going to build a light rail or whatever they call them from Milwaukee to Madison. The problem is then you need to get from either end still to your destination so do you leave a car? not to mention the arguments of which towns along the way there might be a stop or two. Was only about 60miles but the arguing got so bad that the money that was funded they just let California have it and all I hear now is they built or tried to build a train to nowhere. I do think we will see more and more rail getting laid down. Know this is off topic but never-the-less.

Seadog

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Re: Is the 1% rule ever coming back?
« Reply #47 on: March 07, 2019, 10:47:20 PM »
I've literally seen a few properties in Toronto and Vancouver which are renting in the 0.1% range. An order of magnitude off of what's considered prudent.

Most people are lemmings who can't think for themselves, follow the crowds, and are slaves to the short term. This in turn often self-induces a feedback loop both proving everyone right, and exacerbating the situation, and more people pile in.

"30% YoY gains? I'm in! No matter what I pay, it doesn't matter since it will be worth more next year, and I get a "free" place to live. Look at you Zoidberg! You're finally becoming a crafty consumer"

Then unfortunately you get to a point where society simply runs out of money. When the average home in Vancouver takes 100% of the average person's income to buy, further price gains simply can not be effected as no one can afford to buy. So you see people moving to what they can afford, below average homes at average prices which is where I think we are now in Canada. Everyone getting into 500 sq ft condos, and prices escalating, because that's literally the only thing people can afford. Meanwhile all homes at the average level or higher are crashing.

Then eventually you get the opposite effect. "Prices are falling along with the sky! Get out no matter what! At any price! Sell for whatever you can because it will be worth less tomorrow!" Then this opposing self reinforcing loop takes hold.

Eventually you get to a point where the mustachians with cash look at the numbers and say "you know what? Even if prices fall another 20%, its prime location in a world class city returning 1.4%/mth, even if I never sell or look at the property value again, this is a 500k investment that will return 12% per year forever" Prices start to climb, more people start to think that Hey maybe RE isn's so bad after all and the cycle repeats.

Unfortunately RE is funny in that the vast majority of consumers are financially illiterate and turn to Home flipping TV shows for investment advice. Prices are very very sticky, people get hugely emotialy attached to their homes, will pawn the TV and kids vs losing the home to the bank, and the only people willing to sell for less than they bought are doing so because they literally have no other choice. This means the RE cycle is loooooooong.

Contrast this with the stock markets. The vast majority of people are there to make money, much less emotional attachment, and you can go from insanely overpriced to a bargain you can't ignore in a year or two. 

I too am eagerly awaiting a return to pricing sanity. I rent now because the numbers make more sense, despite having the stache to buy a house cash. I'm Warren Buffet in 1999 lamenting tech stocks that have returned 100%+ several years running despite no profits. It's damn frustrating to hear gloats from people up to their eyes in debt who indeed have make a tax free 500k cap gain about how I'm just a 'bitter priced out renter who lacks the courage to get rich' but alas, I'll stick with the numbers. I heard the same thing from co-workers at an old job about bit coin 18 months ago.
« Last Edit: March 07, 2019, 10:53:41 PM by Seadog »

sol

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Re: Is the 1% rule ever coming back?
« Reply #48 on: March 07, 2019, 11:49:16 PM »
Then unfortunately you get to a point where society simply runs out of money. When the average home in Vancouver takes 100% of the average person's income to buy, further price gains simply can not be effected as no one can afford to buy.

As we have previously discussed in this very thread, I'm not sure that it matters what the average person can buy when there are 10x as many people as there are houses.  When a city only has enough houses for it's wealthiest 10%, then only the income of the wealthiest 10% matters to house prices.  The 90% are irrelevant, and thus so is the average.

And increasing wealth inequality only makes this problem worse, right?  Society as a whole may very well run out of money and ten million people may be literally starving in the streets, but if your neighborhood only has 2,000 single family houses with garden space and you have 2,001 billionaires who want them, then you're going to continue to see ever-escalating bidding wars.  The vast majority of the population can sit and spin, bc they just don't matter.

The larger a city's population gets in relation the number of available detached single family residences, the smaller the percentage of top income earners becomes that are even in contention to buy, sliding up into an ever-smaller corner of the income distribution's top-end tail.  In economically successful major urban areas, populations tend to swell even as the city's richest folks get more and more relatively richer than all of those new people, feeding this runaway feedback loop on house prices.   

Places like Seattle aren't even that bad yet!  Average house prices are still less than 8x the median family income in Seattle.  Some California cities like Palo Alto, by contrast, have median home prices that are well above 20x their median income, because they have a minority of super-wealthy residents who compete for limited housing supply.  Vancouver BC is somewhere in between (about 13.5x).  Those prices have been bid up that high by buyers, not by average households, but by strong competitive demand from the wealthiest households competing for limited properties. 

CanuckExpat

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Re: Is the 1% rule ever coming back?
« Reply #49 on: March 08, 2019, 06:08:11 PM »
The other question is: Why should the 1% "rule" come back in any location, LCOL of not? I'm not saying it won't, or that it will, but what makes you think it will, a sort of reversion to the mean?

The 1% rule was never a rule, but a guideline to help you screen profitable rental properties. In a changing world, maybe that rule changes. Any market will be priced at what a willing buyer and a willing seller agree at, no more, no less.

In a world with low interest rates, all assets should be priced more, that is part of the purpose.