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Physicist, Startup Founder, Blogger, Dad

Monday, March 07, 2011

Almost over?

What's a factor of 2 between friends? :-) Note no long term appreciation of houses relative to CPI.




Here's Japan for comparison. Our bubble has popped much more quickly.




Yes, Virginia, we knew it was a bubble back in 2005, but no one believed us. Next time, watch the price to rent ratio:




Yes, equities beat housing over the long run, and even at the peak of the biggest housing bubble of the 20th century.

13 comments:

Jorge_Videla said...

Obviously stock prices beat everything. The question is whether levered real estate, and all real estate investors are levered, beats stocks. Answer: it always will for the shrewd, because the real estate market has far more properties and is far less liquid than the stock market.

J. said...

May be Gral Videla is willing to elaborate?

DB said...

FWIW, I "knew" real estate was in a bubble in 2003 when I bought my condo, but I still think it was a good decision, versus paying rent for 8+ years.

LondonYoung said...

As Barton Biggs points out in "War, Wealth, and Wisdom", the housing vs. equities experience in the U.S. during the last century has been atypical of a broader average of societies over time. Think about Japan, Germany, China, or India ... Or the U.S. in the 1700's or 1800's ... Or any African country during any long period of time ...
Land has its place in the long term. As Mr. O'Hara told Scarlett, "land is the only thing that matters, it is the only thing that lasts". Of course, later on Scarlett got to hear how the Yankees had done run up the property taxes on Tara sky high ... (pls excuse the Ronald Reagan-esque introduction of fiction into factual discussion)

AG said...

Total agree. Feudal lords were about land. Land=capital. With land, you get wealth.

David Stern said...

So do you think Australia is in a housing bubble? Some (e.g. Steve Keen) have called for prices to fall for several years now, but they haven't. It's possible to come up with stories to explain the high prices here though they really are crazily high (not as bad as Vancouver though for example).

steve hsu said...

I don't know enough about Australia but usually when houses appreciate faster than rent or other fundamentals, it's a bubble.

Pincher said...

I'm sorry, but why would anyone ever compare the returns in residential real estate (provided to homeowners) to those in stocks? You should compare the returns in commercial real estate, or REITS, with the returns in stocks. For several reasons, that's the proper comparison.

A home almost never provides an income stream to the homeowner. Maintaining it is costly. Nor is it diversified.

By comparison, almost all stocks have a dividend. Ideally, they are dirt-cheap to own with a negligible expense ratio. And it is easy to diversify your stock holdings across a wide range to capture the broader market's return.

REITs also, potentially, have all three characteristics (dividend, low expense ratio, and diversity) Commercial real estate doesn't have the last two characteristics, but for the investor who specializes in real estate and is not risk-adverse, the assumption of leverage with a potential income stream in the form of rents will often juice up the returns far beyond what the homeowner could possibly get from his house.

At best, a home should probably be thought of as a inflation-hedged bond.

Jorge_Videla said...

The market is easier to beat the less efficient it is. That's almost a tautology. The real estate market is much less efficient than the stock market, because transaction costs are enormous, diversification is impossible for all but the richest, and there are a million times more properties than there are stocks (more possible bargains going unnoticed), the real estate market is much less forward looking than the stock market (prices reflect current supply and demand much more than speculation---people buy real estate to use it), etc., etc., etc.

Jorge_Videla said...

When is Steve going to call the top of the gold and silver bubble?

Abcd said...

Off-topic but fun thread:

http://www.reddit.com/r/AskReddit/comments/fzek1/what_is_your_favourite_intellectual_joke/

LondonYoung said...

Pinch - one might want to compare alternatives (a) buying and maintaining a house and implicitly collecting the owner equivalent rent and (b) renting a place to live and investing the capital in equities. But this discussion hinges importantly on rental rates. Actual Americans seems to willing to buy much bigger homes than they would rent. So there would be some value in testing the wisdom of that behavior in a way that would depend a lot less on rent.

Adam said...

As Jorge_Videla notes before discussing inefficiency, a big difference here is that lots of people can get a loan to buy $1M worth of real estate, while no one can get a loan to buy $1M of equities. At 20% down, 5 to 1 leverage makes say 10% stock returns equivalent to 2% real estate returns. Of course, this is before costs of real estate ownership: spending $20k/yr on costs incremental to renting (taxes, insurance, repairs, remodels, etc) on a $1M home zeroes out a 2% return. Where I live, taxes alone are over 1.5%.

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