Real Estate Lessons from an Economist that Died Over 100 Years Ago

[Vindicated]

I found this article about real estate cycles, and wondered if any mustachians actively follow this cycle.  The cycle is region specific.

It really makes a lot of sense.  When I bought my home, there were homes EVERYWHERE for sale.  Now, homes are selling super fast.  Also, there are construction projects for condos and homes everywhere.  I've been thinking, "They're building too much.  There is no way this many will sell."  So, I'm kind of wondering if we should sell, move to an apartment for a few years, and buy then the cycle hits the recession phase again..

https://betterdwelling.com/real-estate-lessons-from-an-economist-that-died-over-100-years-ago/#_

[surfhb]

Why not just keep saving and buy an investment property or 2 when the downturn occurs?  ;)


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[StephenP]

Keep in mind that these cycles tend to be longer than most people think. 18 years is the average for the US, so if you're going to sell at what you perceive as peak, you should consider if renting an apartment fits your family lifestyle for an extended period of time. Might not be a big deal if you're a single person, but it might be if you have a family. So that's another factor to consider. Sometimes we need to factor in emotional aspects of life when buying.

You also might want to do some math on how saturated your market is too. i.e. in Toronto, the fact that they've started building 4 units per person projected to move to the area every year for the past five years is just one thing to consider. This didn't seem like a problem to market participants that sent the market up another 56%, which some people are probably kicking themselves over. The fact that high-ratio mortgages started to look saturated at the end of last year however, may be an indicator that this will change in the near term. So just because you're seeing overbuilding, doesn't necessarily mean there's going to be a top soon. You should search for something that will trigger the change in mindset for the local market.

Also worth considering, if you liquidate your primary residence and are waiting for cheap property to start appearing, what's your inflation hedge to ensure that the money you just made doesn't decay in value? 

P.S. I wrote the article you're referencing, so there's a definite bias towards cycle perspective. Not necessarily advice, but things to look for when considering your market. Long time lurker, first time poster. 

[Vindicated]

Nice!  Small world.

I am leaning more toward just saving and waiting for inventory to rise and prices to drop.  My home was purchased for $118k 4 years ago, and is only up to $130k now.  So, even if prices drop, I won't lose much.  However, my future target homes have increased from $180k 4 years ago to $220k now.  So, I stand to gain more by staying where I am, and waiting it out.

This is all assuming that the cycle will follow its pattern, and that it won't take 15 years for the market to drop.

Does this mean I'll hold back on buying that $220k home for now?  Maybe for a little while.  But there is no way to know for sure if it's going to increase to $300k, and the market correction only brings it down to $280k.  So, perhaps I should just live life :)

[BlueHouse]

I found this article about real estate cycles, and wondered if any mustachians actively follow this cycle.  The cycle is region specific.

It really makes a lot of sense.  When I bought my home, there were homes EVERYWHERE for sale.  Now, homes are selling super fast.  Also, there are construction projects for condos and homes everywhere.  I've been thinking, "They're building too much.  There is no way this many will sell."  So, I'm kind of wondering if we should sell, move to an apartment for a few years, and buy then the cycle hits the recession phase again..

https://betterdwelling.com/real-estate-lessons-from-an-economist-that-died-over-100-years-ago/#_

It can work if you are also willing to live within your means and work as usual during that time.  You'd effectively be waiting for "the dips in the real estate market" to buy.  I have a former neighbor who did just that, used interest-only loans and geographic arbitrage for the past 30 years.  He and his wife had retail-type jobs that could work anywhere and just looked for the next market that they thought would explode, moved there, worked in low paying jobs, had interest-only mortgage loans, and waited for appreciation.  Their last home was sold for close to $1M (after they bought it for under $400k) and then they moved to Vegas.  I think they bought a less-expensive home there (or maybe two) back in 2008 or 2009 and are waiting for the home values to grow again.   I'm pretty sure they have a decent nest egg now for a couple who lives pretty high on the hog, without degrees, and work has never come first in their lives.

[mm1970]

Nice!  Small world.

I am leaning more toward just saving and waiting for inventory to rise and prices to drop.  My home was purchased for $118k 4 years ago, and is only up to $130k now.  So, even if prices drop, I won't lose much.  However, my future target homes have increased from $180k 4 years ago to $220k now.  So, I stand to gain more by staying where I am, and waiting it out.

This is all assuming that the cycle will follow its pattern, and that it won't take 15 years for the market to drop.

Does this mean I'll hold back on buying that $220k home for now?  Maybe for a little while.  But there is no way to know for sure if it's going to increase to $300k, and the market correction only brings it down to $280k.  So, perhaps I should just live life :)

We bought in 2004, and a coworker said "it's going to drop, don't do it!"  But the thing is, what you don't know - how far will it go up before it drops, and how far will it drop?  What if it's still higher than now?  So we bought when we were ready.

...hindsight being 20/20
Peak of the market, house worth about $81k more than we paid (neighbor on the right)
Trough of the market, house worth about $288k LESS than we paid (neighbor on the left)
Current market, $0-$20k more than we paid.  Let's just call it even.

Maybe should have waited.  Still feels like the market is a little too high.  I expect another drop.  Maybe not all the way down to 2010-2011 (our trough). 

[Vindicated]

I just ran some simple numbers to think this through in a specific scenario.  I'm leaving realtor fees out for simplicity.

If you owe $110k, it's worth $130k.  Assuming you pay $10k off in 3 years either way.

Sell now for $130k, have $20k difference.  Buy ideal $220k home = $200k Mortgage.  $190k left in 3 years

Hold for 3 years
20% fall = Owe $100k, sell for $105k = +$5k difference       //  Buy for $220k*0.8 = $176k - $5k = $171 Mortgage  ($19k lower)
20% grow = Owe $100k, sell for $155k = +$55k difference  //  Buy for $220k*1.2 = $264k - $55k = $205 Mortgage  ($15k higher)

So, even with a market value swing of 20% either direction, there is little difference when you'd be selling and buying at the same spot in the RE cycle.  However, if you anticipate a 20% fall, you should wait to sell until then.  If you anticipate 20% growth, you should buy now.  Pretty logical.

[StephenP]

Nice!  Small world.

I am leaning more toward just saving and waiting for inventory to rise and prices to drop.  My home was purchased for $118k 4 years ago, and is only up to $130k now.  So, even if prices drop, I won't lose much.  However, my future target homes have increased from $180k 4 years ago to $220k now.  So, I stand to gain more by staying where I am, and waiting it out.

This is all assuming that the cycle will follow its pattern, and that it won't take 15 years for the market to drop.

Does this mean I'll hold back on buying that $220k home for now?  Maybe for a little while.  But there is no way to know for sure if it's going to increase to $300k, and the market correction only brings it down to $280k.  So, perhaps I should just live life :)

Ha, living life is a good strategy. You can always save a second pile of cash and buy an investment property if you see a deal at some point. Hopefully the two things align.

Also might want to consider cap rates. If the cost of homeownership is relatively low compared to the cost of buying, there's still a good chance prices can move up until they no longer make sense. In Toronto we're seeing cap rates less than 2%.

What's the cost of renting a house in the neighborhood you're looking at vs buying?

[Vindicated]

Nice!  Small world.

I am leaning more toward just saving and waiting for inventory to rise and prices to drop.  My home was purchased for $118k 4 years ago, and is only up to $130k now.  So, even if prices drop, I won't lose much.  However, my future target homes have increased from $180k 4 years ago to $220k now.  So, I stand to gain more by staying where I am, and waiting it out.

This is all assuming that the cycle will follow its pattern, and that it won't take 15 years for the market to drop.

Does this mean I'll hold back on buying that $220k home for now?  Maybe for a little while.  But there is no way to know for sure if it's going to increase to $300k, and the market correction only brings it down to $280k.  So, perhaps I should just live life :)

Ha, living life is a good strategy. You can always save a second pile of cash and buy an investment property if you see a deal at some point. Hopefully the two things align.

Also might want to consider cap rates. If the cost of homeownership is relatively low compared to the cost of buying, there's still a good chance prices can move up until they no longer make sense. In Toronto we're seeing cap rates less than 2%.

What's the cost of renting a house in the neighborhood you're looking at vs buying?

I looked through some Zillow listings, and see about 8%-11% cap rate not counting maintenance costs.  So, if it costs $5k to maintain per year, it's down to 6%-9%.

My current home is around 8% based on neighbor's renting, assuming $5k/yr maintenance.  That wouldn't just about cover the mortgage.

I'm not really interested in real estate investing.  I just want our next home to be perfect, and to get it at the perfect price :)

[StephenP]

Nice!  Small world.

I am leaning more toward just saving and waiting for inventory to rise and prices to drop.  My home was purchased for $118k 4 years ago, and is only up to $130k now.  So, even if prices drop, I won't lose much.  However, my future target homes have increased from $180k 4 years ago to $220k now.  So, I stand to gain more by staying where I am, and waiting it out.

This is all assuming that the cycle will follow its pattern, and that it won't take 15 years for the market to drop.

Does this mean I'll hold back on buying that $220k home for now?  Maybe for a little while.  But there is no way to know for sure if it's going to increase to $300k, and the market correction only brings it down to $280k.  So, perhaps I should just live life :)

Ha, living life is a good strategy. You can always save a second pile of cash and buy an investment property if you see a deal at some point. Hopefully the two things align.

Also might want to consider cap rates. If the cost of homeownership is relatively low compared to the cost of buying, there's still a good chance prices can move up until they no longer make sense. In Toronto we're seeing cap rates less than 2%.

What's the cost of renting a house in the neighborhood you're looking at vs buying?

Great stuff Stephen.

Any thoughts on bay area markets?  Wife and i are retiring this year and i get the nagging urge to bail out from an investment property in downtown Napa and home in Oakland. Cap gains are a factor, as is inertia and lifestyle (dont need the cash), but we seem to be peaking much like Toronto and congestion is getting pretty critical mass.  Tempting to take our capital and apply elsewhere.

Whoops I missed this. Not an expert on Bay Area real estate, but we've been running numbers on a few US regions, and the Bay Area is one them. So I'll just outline a few things I've noticed, tell me what you think.

The Bay Area has higher wages than Toronto, so it's better leveraged to support the higher prices IMO. Cap rates are relatively low compared to the rest of the US, but they're up ticking. Generally speaking rents rising faster than the price of real estate makes it easier for investors to swallow the higher prices. While prices seem bubbly in the Bay cities, everything is kind of bubbly including wages. Unless there's a major change to employment, not sure how much of a drag on real estate prices there will be.

One thing to keep an eye on is the number of vacant units in San Francisco. According to the US Census, there was a buttload of vacant properties, which likely means there's a good amount of speculators. The Bay Area is somewhere around 7% vacant, which is almost twice the rate of a place like Toronto. Surrounding areas like Healdsburg are above 9%. Having that many empty homes likely provides extra pressure on prices. This would only be addressed if there was something like a vacant home tax however. Tried to speak to Mayor Ed about vacant homes, but he didn't seem interested. I'm assuming unless there's a change in municipal government, that won't be addressed.

Numbers are just numbers though, it's much easier to make a conclusion on paper. Are you and your wife seeing this kind of stuff?

[Neustache]

We sort of timed the market, and it might work out for us.  We bought our 2nd house (the one we live in) in 2013.  At that time, we weren't sure we'd be able to sell our first house for very much at all.  We owed about 72K and our realtor thought we MIGHT get enough to break even after fees and closing costs.

So we rented it out. 

Fast forward 4 years.....our house that we bought in 2013 has gone up about 30K in value (we are in LCOL Midwest, that's pretty good for us) and the house that might have sold for 80K in 2013 has a contract and will hopefully close with a sales price of 124K (appraisal pending). 

If this all works out, we swung about a 70K (saving money on current house, gaining money on rental) difference by timing things sorta right. 

We'll see though.  There's still two weeks for it all to blow up. 

[Last Night]

Keep in mind that these cycles tend to be longer than most people think. 18 years is the average for the US, so if you're going to sell at what you perceive as peak, you should consider if renting an apartment fits your family lifestyle for an extended period of time. Might not be a big deal if you're a single person, but it might be if you have a family. So that's another factor to consider. Sometimes we need to factor in emotional aspects of life when buying.

You also might want to do some math on how saturated your market is too. i.e. in Toronto, the fact that they've started building 4 units per person projected to move to the area every year for the past five years is just one thing to consider. This didn't seem like a problem to market participants that sent the market up another 56%, which some people are probably kicking themselves over. The fact that high-ratio mortgages started to look saturated at the end of last year however, may be an indicator that this will change in the near term. So just because you're seeing overbuilding, doesn't necessarily mean there's going to be a top soon. You should search for something that will trigger the change in mindset for the local market.

Also worth considering, if you liquidate your primary residence and are waiting for cheap property to start appearing, what's your inflation hedge to ensure that the money you just made doesn't decay in value? 

P.S. I wrote the article you're referencing, so there's a definite bias towards cycle perspective. Not necessarily advice, but things to look for when considering your market. Long time lurker, first time poster.

Great blog and analysis of the Toronto market, you have a new follower :)

[StephenP]

We sort of timed the market, and it might work out for us.  We bought our 2nd house (the one we live in) in 2013.  At that time, we weren't sure we'd be able to sell our first house for very much at all.  We owed about 72K and our realtor thought we MIGHT get enough to break even after fees and closing costs.

So we rented it out. 

Fast forward 4 years.....our house that we bought in 2013 has gone up about 30K in value (we are in LCOL Midwest, that's pretty good for us) and the house that might have sold for 80K in 2013 has a contract and will hopefully close with a sales price of 124K (appraisal pending). 

If this all works out, we swung about a 70K (saving money on current house, gaining money on rental) difference by timing things sorta right. 

We'll see though.  There's still two weeks for it all to blow up.

Ideally you also made money from your rental payments too (even if it just paid your mortgage). Hope it works out! Can't imagine an appraisal will blow up the whole deal, but I can see it complicating things for you. I'll cross my fingers for a quick close!

Your thoughts are consistent with mine.  In a prior position i had access to real estate market and wage data and performed similar analysis of several regions, and reached similar conclusions.  For now my better half wants to stay here for personal reasons, so we just needed to earn and save a few extra million.  Cost of my lifestyle choices I guess.

Lifestyle costs are an important factor. I'd chose losing a little (or ideally making less), over being unhappy any day of the week.

Great blog and analysis of the Toronto market, you have a new follower :)

Thanks! Are you from the GTA? If not, what market are you in out of curiosity?