Author Topic: how to make sense of LCOL destination price explosions?  (Read 2774 times)

kenmoremmm

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how to make sense of LCOL destination price explosions?
« on: January 30, 2020, 11:21:20 AM »
i'm looking to move to a comparatively lower cost of living location. i've been eyeing up mountainous areas around british columbia (looking to escape the US for many reasons) and have noticed over the past 3+ years, median home prices have gone up 15-20% annually in many of these locations. articles i read say foreign money, much like vancouver experience.

likewise, throughout the US, where i have been loosely tracking RE prices for the sake of turnkey investing, i see a common theme in almost all regions: hot market, no inventory, revitalization of (insert name here) part of town, high single digit or double digit growth, etc, etc.

everywhere. same story. different city. each one thinks it's special. some got to the party sooner (seattle, san fran, portland). others are now just arriving (midwest, sunbelt, etc).

for my particular situation, i want to move no matter what, hopefully within the next 18 months, so i'm kind of locked in anyway. i'm just curious when/how the explosion ends and what it looks like.

waltworks

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Re: how to make sense of LCOL destination price explosions?
« Reply #1 on: January 30, 2020, 09:26:38 PM »
#everythingbubble

That, and most of the posters here on the forum live in cool hipster places that are up-and-coming because people like the MMM forum members live there/are moving there.

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J Boogie

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Re: how to make sense of LCOL destination price explosions?
« Reply #2 on: February 05, 2020, 11:52:59 AM »
I imagine you're seeing the result of many people having this same idea years before you did.

I imagine the insane liquidity created by central banks means the bubble deflates very slowly. All that cash has to go somewhere.

Might as well rent until it pencils out to buy.


waltworks

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Re: how to make sense of LCOL destination price explosions?
« Reply #3 on: February 05, 2020, 12:13:41 PM »
Agreed with Jboogie. I think the end result is a LOOONG stagnation in prices as rents rise. I doubt we'll see another housing crash like the 2007-10 one in our lifetimes, so folks holding cash on the sidelines will probably wait a long, long time. And I doubt we'll keep seeing double digit appreciation even in super hot markets.

Then again, we haven't had a recession to test any of this yet. Lots of stuff might go on sale when we do.

-W

ctuser1

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Re: how to make sense of LCOL destination price explosions?
« Reply #4 on: February 05, 2020, 12:39:02 PM »
Why not look off a little from the beaten path?

If you are looking for mountains - I see Zillow lists plenty of real-estate below < $300k in Dorset, VT (just as an example of a cool hilly town with plenty of history).

I live in CT, and there are plenty of cheap housing to be had in Litchfield county. That place is a little less happening the coastal part, but you get the beautiful landscapes and fall colors!!

If you need a combination of everything - e.g. Boulder, CO with its mountains AND hip school town vibe, then yes, you got to pay up!!
« Last Edit: February 05, 2020, 12:41:40 PM by ctuser1 »

waltworks

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Re: how to make sense of LCOL destination price explosions?
« Reply #5 on: February 05, 2020, 01:03:45 PM »
Sure, there's "deals" in New England and the mid-Atlantic. Check on the schools, crime rate, net migration patterns, and *property taxes* before you make the leap, though...

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spartana

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Re: how to make sense of LCOL destination price explosions?
« Reply #6 on: February 05, 2020, 03:21:55 PM »
I agree with renting awhile until prices stabilize a bit. I also spent a couple of years recently looking around at property in the cool mountain ski towns and have seen prices inflate pretty fast. Having lived in such a place during the last recession I can tell you those second home/vacation rental places drop much faster then other places where the "real" jobs are when things go south. No one needs to live in their second/vacation home, and often there are fewer short term or long term renters available because fewer people are taking vacations during recessions. And most of the full timers are often long term owners and/or retirees who already own and aren't moving anytime soon. So there are often a big glut of housing stock available for sale at much lower prices then when everyone and their brother is who's flush with money is buying a second home or rental investment property in those cool mountain towns. So both home sales and rental costs go down faster and stay down longer in a housing downturn in those cute mountain towns then in the urban areas.
« Last Edit: February 05, 2020, 03:29:54 PM by spartana »

norajean

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Re: how to make sense of LCOL destination price explosions?
« Reply #7 on: February 05, 2020, 04:12:02 PM »
How about Idaho?

Dicey

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Re: how to make sense of LCOL destination price explosions?
« Reply #8 on: February 05, 2020, 04:29:05 PM »
Quick Dicey story that you might have read elsewhere. A couple of weeks ago, I found a Real Estate flyer from 1999. I did a little research. In 1999, the house went on the market for $299k. It sold for $305k. Just for giggles, I ran the numbers through an inflation calculator at 7% (Avg. historical stock market return). It spit out a current equivalent of about $468k. The same house is now twenty years older and valued at about $850k. Further, if it went on the market now, it would probably be bid higher than that. WTF???

For the first decade of my career, I was a renter. I got a 2BD/2BA with a roommate at market price. When she moved out, I stayed, took over the lease (savings for the win), and got another roommate at a higher rent. Lather, rinse, repeat. Eventually, the roomie was paying 70% to my 30%, and I had the bigger room and control of the lease. I was also a model tenant and my LL's seldom raised the rent. I saved a lot of money in those days, even though I was "throwing it away on rent".

Here's my answer to your question: Rent when the calculators say it's cheaper to rent. Save and invest your money. When the tide shifts and it's cheaper to buy, that's the time to jump in. The tide always turns, given enough time.


waltworks

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Re: how to make sense of LCOL destination price explosions?
« Reply #9 on: February 05, 2020, 08:44:36 PM »
Quibble: $305k appreciating at 7% a year for 21 years is $1.25 million.

-W

Wrenchturner

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Re: how to make sense of LCOL destination price explosions?
« Reply #10 on: February 05, 2020, 10:03:23 PM »
Up here in Canada I'm not sure if house prices will drop due to the #everythingbubble.  Central bankers are complete doves and I think we all see rates going lower and lower.  There is no other direction it seems.  So I don't see any reason for prices to drop, despite cash flow problems being evident.

Either that or we're all just really late in the Euphoria stage and the bubble will break in the next couple years.

I'm still renting either way, for the next year or so anyway.

Paul der Krake

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Re: how to make sense of LCOL destination price explosions?
« Reply #11 on: February 05, 2020, 10:22:32 PM »
Up here in Canada I'm not sure if house prices will drop due to the #everythingbubble.  Central bankers are complete doves and I think we all see rates going lower and lower.  There is no other direction it seems.  So I don't see any reason for prices to drop, despite cash flow problems being evident.
Canada is attracting a ton of overseas money.

It has a stable government, the aura of respectability, ease of doing "business", and lax oversight.

Until one or more of these changes, I expect prices to continue being comically detached from the working masses' reality.

Telecaster

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Re: how to make sense of LCOL destination price explosions?
« Reply #12 on: February 05, 2020, 10:32:39 PM »
How about Idaho?

Depends.  The cool places have been already been pretty much spotted and picked over.  If you are willing to live waaaaaaaaaay out in the sticks there are some options.  Or on the Snake River plain, which is pretty bleak area of the country.*  If you want to live in Priest Lake, Sand Point, Driggs, McCall, or Boise, you are out of luck if you want a LCOL experience.

It is still cheaper than say, Seattle, but there just aren't bargains like there used to be.

*For example Idaho Falls.  Bleak as shit and the town sucks (sorry, Idaho Falls residents).  But surprisingly close to lots of scenic country, including the Tetons and Yellowstone.   

kenmoremmm

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Re: how to make sense of LCOL destination price explosions?
« Reply #13 on: February 05, 2020, 11:50:45 PM »
OP here:

yes, idaho would certainly be on the list if i wanted to stay in the US, but i'm leaning towards canada for the reasons others have listed. we would be selling (hopefully high) and have enough to buy new house in cash (lot + new construction). i like the idea of no debt (cue up DPOYMC), so this arbitrage, while not the same as going from median home price of $800k to $300k, would still save $20-23k USD annually and eliminate debt.

unfortunately, i view our timing of things to be relatively inflexible. probably not going to happen in 2020, but would need to happen in 2021 so that there isn't significant disruptions for kids as they start school.

Dicey

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Re: how to make sense of LCOL destination price explosions?
« Reply #14 on: February 06, 2020, 01:23:55 AM »
Quibble: $305k appreciating at 7% a year for 21 years is $1.25 million.

-W
Did you start from 1999? I used an online calculator and checked it twice, because I thought it was crazy low, too.

Oh, wait a minute, what I actually calculated and what i wrote were an apple and an orange. I totally mis-spoke, er, wrote. I  calculated the actual rate of inflation from 1999 to 2019, so that's what the numbers reflect, not 305k at 7% for 21 years. Oh and the historical calculator only covers 20 years, not 21.

So it's super late and I am hosting a big event tomorrow morning, for which I must leave at the crack of dawn. I'll revise my original post tomorrow.

Thanks for catching that @waltworks.

Wrenchturner

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Re: how to make sense of LCOL destination price explosions?
« Reply #15 on: February 06, 2020, 07:51:56 AM »
Up here in Canada I'm not sure if house prices will drop due to the #everythingbubble.  Central bankers are complete doves and I think we all see rates going lower and lower.  There is no other direction it seems.  So I don't see any reason for prices to drop, despite cash flow problems being evident.
Canada is attracting a ton of overseas money.

It has a stable government, the aura of respectability, ease of doing "business", and lax oversight.

Until one or more of these changes, I expect prices to continue being comically detached from the working masses' reality.

At some point, cash flow will matter, no?  Regulations and vacancy taxes seem to be creeping up.

waltworks

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Re: how to make sense of LCOL destination price explosions?
« Reply #16 on: February 06, 2020, 08:27:38 AM »
It's actually an interesting comparison. A $305k investment in the S&P 500, starting in January 1999, would be worth around $1.2 million today (about 6.7%/year). The $305k house (in whatever location you're at) is worth on the order of $850k (about 5%/year).

Anecdotally, I bought a condo in CO in 1999 for $155k. I sold it many years ago but Zillow thinks it's worth about $500k now, so 5.75% annual appreciation.

Inflation was around 2.2% or so annually over that time period so the house certainly appreciated quite a bit faster than inflation, as well as wages.

I have a hard time imagining a scenario where RE just appreciates to the point that only 5% of the population can afford it, though. I think you'd see some sort of populist (whether from the right or left, I don't know) response to that situation. If even the upper middle class doctors/lawyers/etc can't afford a house anymore, I doubt that's a sustainable situation.

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ctuser1

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Re: how to make sense of LCOL destination price explosions?
« Reply #17 on: February 06, 2020, 08:58:03 AM »
Real estate investments almost always under-perform on an apples to apples comparison against index funds - and yet make sense for many people due to:
1. Subsidized leverage.
2. Deal seekers who can put in elbow-grease.

Frequently, it is a combination of #1 and #2. Even so, I wonder if it measures up to just index investing for even the best of the lot.

Carrying a fully paid off (or even "half" paid off) RE as "investment" is generally a poor idea. You'll do way better with a liquid stock/bond portfolio.

I don't see a populist insurrection on either side of the isle improving the situation. What's probably required is a level headed right-wing response to remove the subsidized leverage. This sort of politics has not existed in the US last 50 years - so I am not holding my breath for this to get fixed anytime soon!

ctuser1

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Re: how to make sense of LCOL destination price explosions?
« Reply #18 on: February 06, 2020, 09:01:58 AM »
If even the upper middle class doctors/lawyers/etc can't afford a house anymore, I doubt that's a sustainable situation.
Off topic. But I think you overestimate the power of the upper middle class.

Upper middle class got a giant middle finger during the last round of tax cuts and jobs act as their SALT deduction was capped to $10k and gazillions of them holding expensive houses now pay higher taxes due to that. Do you think the owners of the current government (i.e. billionaires) care?

The upper middle class, just like all other classes, exist at the pleasure of the oligarchs.

Wrenchturner

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Re: how to make sense of LCOL destination price explosions?
« Reply #19 on: February 06, 2020, 10:19:18 AM »
If even the upper middle class doctors/lawyers/etc can't afford a house anymore, I doubt that's a sustainable situation.
Off topic. But I think you overestimate the power of the upper middle class.

Upper middle class got a giant middle finger during the last round of tax cuts and jobs act as their SALT deduction was capped to $10k and gazillions of them holding expensive houses now pay higher taxes due to that. Do you think the owners of the current government (i.e. billionaires) care?

The upper middle class, just like all other classes, exist at the pleasure of the oligarchs.
I think his comment was regarding everyone in the upper middle class AND LOWER.

Oligarchs keep their heads attached at the stability of the masses.

Investors can keep buying up overpriced properties, but the show won't go on forever.  Assuming that capital appreciation can continue, eventually other elements of the economy will break under the load.  Probably inflation related.

Paul der Krake

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Re: how to make sense of LCOL destination price explosions?
« Reply #20 on: February 06, 2020, 10:35:15 AM »
Up here in Canada I'm not sure if house prices will drop due to the #everythingbubble.  Central bankers are complete doves and I think we all see rates going lower and lower.  There is no other direction it seems.  So I don't see any reason for prices to drop, despite cash flow problems being evident.
Canada is attracting a ton of overseas money.

It has a stable government, the aura of respectability, ease of doing "business", and lax oversight.

Until one or more of these changes, I expect prices to continue being comically detached from the working masses' reality.

At some point, cash flow will matter, no?  Regulations and vacancy taxes seem to be creeping up.
Like all markets where there is a wide array of hidden forces at play, it's hard to say what the inflection point will be. The Canadian housing market doesn't need to be the be the perfect place to hoard foreign cash, it just needs to be better than the next alternative. And even that is a simplification! It's complexity all the way down! Aren't markets fun?

waltworks

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Re: how to make sense of LCOL destination price explosions?
« Reply #21 on: February 06, 2020, 10:40:12 AM »
Real estate investments almost always under-perform on an apples to apples comparison against index funds - and yet make sense for many people due to:
1. Subsidized leverage.
2. Deal seekers who can put in elbow-grease.

Frequently, it is a combination of #1 and #2. Even so, I wonder if it measures up to just index investing for even the best of the lot.

Carrying a fully paid off (or even "half" paid off) RE as "investment" is generally a poor idea. You'll do way better with a liquid stock/bond portfolio.

I don't see a populist insurrection on either side of the isle improving the situation. What's probably required is a level headed right-wing response to remove the subsidized leverage. This sort of politics has not existed in the US last 50 years - so I am not holding my breath for this to get fixed anytime soon!

Good point on the leverage. You could have ended up with a huge profit on that $305k house, only putting down $60k of your own money.

My instinct is that the solution needs to come from 2 policy changes:
-Reduce or remove the gov't subsidy for RE loans. This would have to happen incrementally, obviously.
and more importantly:
-Reduce or eliminate restrictive zoning that prevents dense/affordable housing from being built.

Both of those will be very hard to pull off as there are entrenched groups that will lobby very hard against them.

I'm not sure if I see either of those solutions as right or left wing. You could make an intellectual case for both from both a free market and utilitarian/progressive standpoint. Of course, that probably means that both conservative and progressive people will hate the ideas.

-W

havregryn

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Re: how to make sense of LCOL destination price explosions?
« Reply #22 on: February 06, 2020, 10:47:38 AM »
It's actually an interesting comparison. A $305k investment in the S&P 500, starting in January 1999, would be worth around $1.2 million today (about 6.7%/year). The $305k house (in whatever location you're at) is worth on the order of $850k (about 5%/year).

Anecdotally, I bought a condo in CO in 1999 for $155k. I sold it many years ago but Zillow thinks it's worth about $500k now, so 5.75% annual appreciation.

Inflation was around 2.2% or so annually over that time period so the house certainly appreciated quite a bit faster than inflation, as well as wages.

I have a hard time imagining a scenario where RE just appreciates to the point that only 5% of the population can afford it, though. I think you'd see some sort of populist (whether from the right or left, I don't know) response to that situation. If even the upper middle class doctors/lawyers/etc can't afford a house anymore, I doubt that's a sustainable situation.

-W

The problem is that the solution seems to be to just let people carry debt for their houses through generations and pushing interest rates down to negative if need be. Seen in Sweden, Switzerland, maybe other places too, it's just these I know first hand.
Literally no one would ever be able to buy property in Stockholm (except sporadic millionaires) if they had to pay it off in 30 years with 4% interest, which you guys seem to take for granted (me too until I started living in these places). Interest is something like 1,29% and up until recently you only paid interest (so if your place cost a million $ your monthly payment is 1075$ and a third of it you get back on your taxes). Then of course the prices went so crazy that everyone felt it was unsustainable so they made it mandatory to pay off something like 50% of the principal over 50 years. There was a brief dip in the prices and then interest rates went further down to push the prices back up.

I say this with utmost dread because we now live in Luxembourg where anything that would work for us costs 1,5 million euros. I can't resign myself to a mortgage of that size, but to be perfectly honest, I no longer believe these prices are ever coming down. We are already seeing a shift in this direction, 10 years ago it was unthinkable to have a mortgage longer than 20 years, now 40 is the new deal...100y mortgages are the next thing and prices will keep up with that. I am pretty sure I should be taking all the loans someone would give me and buying properties left and right for my kids, but I just can't get comfortable with that because I want to believe there will eventually be some corrective mechanism to make this stop. But I think that's my inner idiot talking, this is obviously working for the places that have done it already, and Luxembourg is especially well positioned to keep this bubble growing and growing.


Wrenchturner

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Re: how to make sense of LCOL destination price explosions?
« Reply #23 on: February 06, 2020, 01:49:10 PM »
I don't think this situation can go on for several decades, let alone generations.  Maybe another decade.  Continuing to inflate debt by 10+% a year only to produce maybe 5% of real growth is going to break in the near term.  Maybe I'm wrong.  I can't see 200+ year mortgages. 

waltworks

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Re: how to make sense of LCOL destination price explosions?
« Reply #24 on: February 06, 2020, 03:33:39 PM »
Extending the mortgage term only drops the payments so much - at some point, it's just an interest-only loan, for all practical purposes.

I also don't see people spending their entire income, over generations, just on housing. There is a hard cap on what 95+% of the housing in the US can ever cost, and that's tied to wages. We might not have hit that limit, but it's there somewhere.

As a thought experiment, if a house in any random city/town in the US costs 100x your annual wages in 20 years, why wouldn't you just buy some land (there's a LOT of it) and build a new house for 2% of that amount? Lots of people would just relocate to empty land and create new towns from scratch if the economic incentive was that great. House construction isn't particularly more expensive today in real terms than it was 20 years ago (though some codes are stricter, like for hardwired smokes and such).

NY penthouse condos for billionaires is a different story, obviously, but even there - if the prices continued up exponentially forever, even those folks couldn't afford them anymore. Exponential growth is crazy. At some point housing becomes basically the entire economy if it grows lots faster than GDP as it has for a while now.

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Telecaster

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Re: how to make sense of LCOL destination price explosions?
« Reply #25 on: February 06, 2020, 05:09:42 PM »
As a thought experiment, if a house in any random city/town in the US costs 100x your annual wages in 20 years, why wouldn't you just buy some land (there's a LOT of it) and build a new house for 2% of that amount? Lots of people would just relocate to empty land and create new towns from scratch if the economic incentive was that great. House construction isn't particularly more expensive today in real terms than it was 20 years ago (though some codes are stricter, like for hardwired smokes and such).

I was going to post almost the same thing.  At some point, people have to live somewhere.  Housing prices cannot outstrip wage growth long term.  Economically not possible. 

Paul der Krake

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Re: how to make sense of LCOL destination price explosions?
« Reply #26 on: February 06, 2020, 08:29:02 PM »
As a thought experiment, if a house in any random city/town in the US costs 100x your annual wages in 20 years, why wouldn't you just buy some land (there's a LOT of it) and build a new house for 2% of that amount? Lots of people would just relocate to empty land and create new towns from scratch if the economic incentive was that great. House construction isn't particularly more expensive today in real terms than it was 20 years ago (though some codes are stricter, like for hardwired smokes and such).

I was going to post almost the same thing.  At some point, people have to live somewhere.  Housing prices cannot outstrip wage growth long term.  Economically not possible.
Sure, but that may not reverse within your lifetime. Not ending up on the streets is a pretty strong incentive for people to cut costs elsewhere.

havregryn

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Re: how to make sense of LCOL destination price explosions?
« Reply #27 on: February 07, 2020, 01:15:50 AM »
Extending the mortgage term only drops the payments so much - at some point, it's just an interest-only loan, for all practical purposes.

I also don't see people spending their entire income, over generations, just on housing. There is a hard cap on what 95+% of the housing in the US can ever cost, and that's tied to wages. We might not have hit that limit, but it's there somewhere.

As a thought experiment, if a house in any random city/town in the US costs 100x your annual wages in 20 years, why wouldn't you just buy some land (there's a LOT of it) and build a new house for 2% of that amount? Lots of people would just relocate to empty land and create new towns from scratch if the economic incentive was that great. House construction isn't particularly more expensive today in real terms than it was 20 years ago (though some codes are stricter, like for hardwired smokes and such).

NY penthouse condos for billionaires is a different story, obviously, but even there - if the prices continued up exponentially forever, even those folks couldn't afford them anymore. Exponential growth is crazy. At some point housing becomes basically the entire economy if it grows lots faster than GDP as it has for a while now.

-W

But interest only mortgages are quite a thing in some parts of the world and the vast majority of people getting them have no idea what they mean.
I can't tell you the number of times I've heard "buying is sooo much cheaper than renting" in Sweden. Because yeah, pretty much no matter what you buy with an interest only mortgage when gross interest is 1,2%, your monthly payment is going to be (way) less than renting a similar thing.
I'd guess that 80% of buyers don't even understand the logic behind their purchases.
Often on mom's groups I see people asking stuff like "does the bank give us our deposit back when we sell?" and other people answering "yes, of course". To them buying a place is you give bank some money, they give you a place, you pay some little money every month, ten years later you sell with a huge profit, boom, you're the genius, renters are morons. And this has worked for decades now and it's not going anywhere. The only thing threatening it is that really, the interest rate only has a little bit more to go before it's negative (however, we've already seen that too in Denmark so...)  (https://www.cnbc.com/2019/08/12/danish-bank-is-offering-10-year-mortgages-with-negative-interest-rates.html)

A guy I know recently bought a 2 bedroom apartment in Stockholm for 900 000$. He and his wife are high earners, which in Sweden means they take home about 7000$. This really puts them high up there, most households can't get their hands on that kind of cash monthly. Yet 900k for an apartment is the going rate in the fancy areas where self respecting high earners absolutely have to live.

What I'm saying is that there are very different notions of normal behaviour around real estate around the world, which of course doesn't mean any of it is likely to apply to the US, but it does kind of expand the scope of possibilities of what "has" to happen when it all gets out of hand.
My bet is now on the "weird shit happens to let people continue buying" side and not on the "prices will drop significantly and markets will normalize"...sadly, because I feel the prices where I am are already too high for me to feel comfortable stepping up my involvement in this market to buy something that can house all of my kids.

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Re: how to make sense of LCOL destination price explosions?
« Reply #28 on: February 07, 2020, 10:36:48 AM »
Owner-occupation is a pretty recent concept in many societies - my grandparents in the UK were renters all their lives, despite being some sort of middle-class - a teacher and a carpenter/builder/architect.  They both had financial investments, though, I think.   It was my parents' generation, in the 1960s onwards, that were the ones to own their own homes, followed by my generation.  It seems to me that this is cyclical: we are moving back from wealth being more equally spread in the second half of the 20th century to going back to a smaller class of wealth owners - which is where all we MMMers hope to be, right?

Not owning your own home has its advantages, particularly in the ability to pick up and move as necessary or economically advantageous, and renting can be cheaper than owning.  Perhaps it's the social norm of owning being a good and natural thing that needs to start to be challenged.

ChpBstrd

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Re: how to make sense of LCOL destination price explosions?
« Reply #29 on: February 09, 2020, 08:43:57 PM »
Are we all old enough to have seen a bubble before? If the investment doesn't cashflow, it is waiting for the last buyer to capitulate and then it's all downhill. Don't let the market stay irrational longer than you can stay rational. This could go on for a month or a decade, but it will end in tears.

Right now, RE speculators are in the bargaining stage; pushing up prices in select formerly-LCOL areas because they recognize the insanity of HCOL areas. At some point, they follow this logic and attempt to sell their HCOL investment properties.

Do the math on whether you will be wealthier or poorer if you rent for the next 5 years. Let the math make the decision, not FOMO. When it is cheaper to rent than to own the same property, that's a sign the landlord is paying cash out of pocket each month in order to keep their RE speculation going. They all plan to sell when it's obvious the multi-year price spike is over.

Interest-only mortgages on million dollar/euro single family homes and condos? Good f***ing god! It's as if no one is aware half the millennial and Z generations will already be carrying a student loan mortgage through middle age, or that demographic graying is going to drastically slow down household formation. I drive through some neighborhoods and think "baby boomer habitat" because these sorts of houses are about to become a cultural impossibility. There's a reason mortgage REITs like TWO, AGNC, and NLY are yielding 10%+.

FWIW, I'm a homeowner in a true zero-percent-trendy LCOL area, and spend $13k per year to own a 3BR/2BA detached house 5 miles from downtown, and that's with a 15y mortgage. It would cost me about $300/mo more to rent here than to buy here. I would pick the exact opposite strategy if I lived in a real estate market where it cost $300 LESS to rent than to own. You should too!

Lucky13

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Re: how to make sense of LCOL destination price explosions?
« Reply #30 on: February 09, 2020, 11:09:19 PM »
everywhere. same story. different city. each one thinks it's special. some got to the party sooner (seattle, san fran, portland). others are now just arriving (midwest, sunbelt, etc).
Specifically which LCOL areas are you referring to? Or what criteria are you using? You mention Seattle, San Fran, Portland but they typically aren't considered LCOL and are are 3 of the biggest metro areas in the Western U.S. outside of Los Angeles.

I'm not sure you'd consider Everett, WA as LCOL (it's the largest city in the county just north of Seattle) but I just checked the YOY home price increase and it's estimated at 3%. Going farther north to Bellingham WA, estimated growth seems to be closer to 5% which is interesting. But both are well below your 15-20% claim. Unless you meant to say that's over 3 years and not the annual increase.

« Last Edit: February 09, 2020, 11:11:05 PM by Lucky13 »

kenmoremmm

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Re: how to make sense of LCOL destination price explosions?
« Reply #31 on: February 10, 2020, 12:31:17 AM »
everywhere. same story. different city. each one thinks it's special. some got to the party sooner (seattle, san fran, portland). others are now just arriving (midwest, sunbelt, etc).
Specifically which LCOL areas are you referring to? Or what criteria are you using? You mention Seattle, San Fran, Portland but they typically aren't considered LCOL and are are 3 of the biggest metro areas in the Western U.S. outside of Los Angeles.

I'm not sure you'd consider Everett, WA as LCOL (it's the largest city in the county just north of Seattle) but I just checked the YOY home price increase and it's estimated at 3%. Going farther north to Bellingham WA, estimated growth seems to be closer to 5% which is interesting. But both are well below your 15-20% claim. Unless you meant to say that's over 3 years and not the annual increase.

by my original post i meant: first there was a boom in the coastal cities. the story was gentrification. revitalization of downtown. investments. sizzling RE market. scarcity of properties. etc. then that moved to the center of the country (dallas, indy, denver, etc). now it's in the smaller tier cities too (memphis, CO springs, etc). same story, each city. each one thinks it's special and unique.

BicycleB

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Re: how to make sense of LCOL destination price explosions?
« Reply #32 on: February 14, 2020, 01:11:08 PM »
It's actually an interesting comparison. A $305k investment in the S&P 500, starting in January 1999, would be worth around $1.2 million today (about 6.7%/year).

@waltworks, how did you calculate this?

I tried it by taking the current S&P 500 index divided by S&P index from january 1 1999 (used a value of 1249 for this per https://www.multpl.com/s-p-500-historical-prices/table/by-year). This gave a ratio of about 2.7x, so 2.7 x 305k = about 825k in Excel. That's really close to the $850k value Dicey found for the house that she looked at. Roughly 4.85% appreciation using formula 2.7^(1/21), I think.

Were you including dividends in the stock calculation? I can see that stock would produce dividends, but a house used as an investment could produce rent; I am supposing that an apples-to-apples comparison of stock vs a house would be index to index and price to price, unless you calculate some sort of income value for the house similar to a stock's dividends. Am I thinking about this the right way?
« Last Edit: February 14, 2020, 01:17:19 PM by BicycleB »

waltworks

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Re: how to make sense of LCOL destination price explosions?
« Reply #33 on: February 14, 2020, 01:42:05 PM »
It's actually an interesting comparison. A $305k investment in the S&P 500, starting in January 1999, would be worth around $1.2 million today (about 6.7%/year).

@waltworks, how did you calculate this?

I tried it by taking the current S&P 500 index divided by S&P index from january 1 1999 (used a value of 1249 for this per https://www.multpl.com/s-p-500-historical-prices/table/by-year). This gave a ratio of about 2.7x, so 2.7 x 305k = about 825k in Excel. That's really close to the $850k value Dicey found for the house that she looked at. Roughly 4.85% appreciation using formula 2.7^(1/21), I think.

Were you including dividends in the stock calculation? I can see that stock would produce dividends, but a house used as an investment could produce rent; I am supposing that an apples-to-apples comparison of stock vs a house would be index to index and price to price, unless you calculate some sort of income value for the house similar to a stock's dividends. Am I thinking about this the right way?

I included dividends. You'd have to decide how to calculate a lot of stuff to really make it accurate - ie maintenance and Capex costs, rental income, financing/mortgage costs (if any) and so on. I guess you could just do 50% rule and take half of the rent out up front for expenses, then credit the rest as profit.

I don't think there's an apples to apples way to compare them, really, without having specific numbers for all of that stuff. Houses are much more complex than stocks!

But in general I'd say you're right that the comparison I did isn't fair to the house.

-W