Housing crash deniers ???
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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesThe market may correct, but I firmly believe there won't be a crash. The reason is simple, equity.
Before 2008 people with no income could get liars loans and buy much more real estate than they could afford. We heard stories of cleaning ladies buying multiple million dollar homes. When home prices starting falling, the whole thing collapses like a house of cards because nobody had any equity. They couldn't sell and get out. We had cascading foreclosures creating a downward spiral.
Recently, prices have been surging. Given the laws passed after the Great Recession, appraisals and lending is highly restricted. Appraisals have not been keeping up with prices and lenders won't lend above appraised value. We sold a house in 2021 and in one day had 20 offers. Several of them had acceleration clauses stating they would pay more than anyone else up to $X. Both of them waived any financing contingency because they KNEW the house wouldn't appraise for what they were offering. They had to make up the difference with cash. Those people have a ton of equity in their homes. If they had to sell, they might take a haircut, but they aren't going to get foreclosed.
There is no house of cards here to come tumbling down.
2904 Replies
- Member since 2019 · 7k+ posts · 4k+ votes3yYou and John are bringing up good points. Your heated argumentation is classic when two men see a baby elephant and a giant elephant from different distances. They both correct.
Quote from @James Hamling:
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @John Carbone:
Quote from @Joe Villeneuve:
Quote from @John Carbone:
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Quote from @Michael Wooldridge:
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
Your such a feckless Troll! Spending the day spewing lies, distortions, rants and baseless attacks.
yes, as the founder of a tech start-up, without doubt 0 innovation. Founder of more then a dozen companies, absolutely, imitator without doubt. Yes, one Absolutely achieves "Top Producer" via idiocy.
What have you achieved? Of course you must be "the" innovator supreme, please, bestow upon us your accolades of achievement kind sir. With out doubt they are so numerous that it would be a grand list of so many. Please, delight us all with accounts of your conquests.......
I can accept now when you say a 6% rate is normal because the mortgage/rent ratio is still within one sigma deviation from middle-class income AND your market appreciation is only $200-$300 more when translated to the mortgage payment.
CA/WA/AZ/NV mortgage/rent ratio is entirely different so our market can not survive with 6% "normal" rate.
The Fed rate hike only kills the west coast market, put it that way --not nationwide. - Investor · MI · Member since 2018 · 37 posts · 40 votes3y
Quote from @Joe Villeneuve:
What are you missing? Mega bucks. Here's why:Quote from @John Carbone:
Quote from @Joe Villeneuve:
This is very true, but CF returns will always be far less than equity returns (I'm assuming a property that is actually getting equity returns). You should never have one without the other. If you look at the math, the most important formula is how long it takes the REI to recover their cost...the DP,...in CASH, from the CF.Quote from @John Carbone:
Quote from @James Hamling:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
Talk to a home flipper, all we do is not only build equity, but build it at net positive rates of return. We have to build equity to cover our costs of building that equity AND additional equity to cover all transactional, operational and profits.
Or, how about any syndicator out there doing value-add deals? That is also creating equity.
Or, or, or.... Equity creating is a component of many strategies, many. It is not only possible but common. Not easy, and results will vary wildly, not all have equal talent for certain results.
@Joe Villeneuve is spot-on in sharing the relationship of CF and equitable returns, and that equity is what makes wealth.
Any asking how to start, how to best get from start too financial freedom, how to build a portfolio, the #1 importance to learn is this fundamental and how Pyramiding works.
Obviously adding value to a property can increase the “value”, but speaking from a turn key pov, once you max out the usefulness of the property you are letting interest rates dictate the value. I don’t calculate my property value based off of what an appraiser will give it, I base it off of what my asset returns to me. This is a wildly different number than what a bank will say it is worth. CASH FLOW allows me to not care about interest rates and the negative impact on the “home equity”.
Let's say it takes 8 years for this to happen, and the DP was $40k. That's a $200k PV at the start. If the property appreciated 4% over the that same 8 year period, the PV would then be $273k plus. That's an increase of $73k in Equity/PV, where as the cumulative CF over that same 8 years = only $50k.
Now, if you have both in that property, the once the cumulative CF = the DP, the property is now free to the REI, and when sold, the total equity is all profit (since the DP bought the initial equity, but the CF recovered it). This is also when the property is at its maximum value, and should be sold, or the REI will start losing money exponentially. The greater the appreciation, the more money is lost...if not sold.I agree that the time to recover the cost is the most important component to the formula. I don’t follow on selling though. Maybe the way I look at it is a little different than you. So I’m into a rehabbed property for 350k (200k cash down) and it returns me a net profit of 70k a year. Break even is sub 3 years, and 5 years free and clear, with an annual dividend thereafter of 70k once paid off. If I get an appraisal at 400k why would I sell when I’m getting 70k a year. This is a 20 percent return on a 350k investment. The “equity” component is meaningless to me since most of my formula comes from cash flow, not equity. Maybe the smart thing is to cash out refi up to 80 percent at that point, if there is a need/to create interest expense for tax deductions, but I don’t understand why I would sell. My whole philosophy is to buy and never sell. What am I missing?
1 - You don't own the equity...the property does, and you own the property. Not the same thing. The equity is actually what you are paying for this property. The fact that equity gained from appreciation is free to you just means you have a partner (the economy) as a form of a cash partner.
2 - The value of your equity isn't the face value of the equity...it's what that number is buying you in the form of property value...AND cash flow.
3 - The true asset you own is NOT the property...it's the cash in the property.
4 - Cash flow and equity are both forms of cash. One is liquid and real, and the other is frozen and virtual. Until you can "melt" the frozen asset (equity) is has no actual use/value to you. It's a trophy. The only/best way to "melt" it, is to sell the vehicle your equity is riding...the property.
...Now here comes the fun part,...the math...
5 - When you buy the property, that DP is actually the initial equity that you are paying for. If it's a 20% DP, that means you are getting a PV of 5 times what you're paying for the property. Also, as long as you have positive CF, that is ALL you are paying for the property.
6 - As your property appreciates, thank-you economy, the equity increases equally...dollar for dollar. This means, if your $100k property (that you paid $20k for) gains $20k in value, the PV now equals $120k...and the equity jumps up to $40k. Sounds great, and it is,...but you lost money. Here's why.
7 - When you buy the property (see #5 above), you are getting a PV of 5 times what you paid for it. When that property went up to $120k (see #6 above), that now $40k in equity is only buying a $120k property. Only you say? Yes, the equity is now only buying a property 3 times it's face value...cost.
8 - Now, if you sell the property, and move that equity forward, it once again has a buying power of 5 to 1, which translates to a new PV of $200k...not just $120k. Oooops?!
9 - Also, since that $40k in equity represents twice the $20k you paid for original property, could you not buy 2 of that same property, and thus double the CF as well?
10 - Buy and Hold, in my book, doesn't mean hold the property...it means hold the equity,...just keep it moving forward from one property to another (or more). Same equity, just living in a different location as it moves.
The power of the growth in equity (from appreciation) isn't in it's face value, its face value, its in the power it has to to buy...not sit and die.
Also FWIW @Joe Villeneuve this PV logic is not correct. If you buy a $200K house w/ 40K down, you are not buying 5x your PV as some magical move.PV (present value) is the sum of the cash flows into the future discounted by a discount rate. PV is different for something unlevered (a house with no mortgage) vs something levered (a house with a mortgage). That is because the stream of cash flow for a house with no mortgage is different (higher) than the stream of cash flow for a house with a mortgage.
So while I agree it's fair to say a $200K investment property has a PV of $200K (without leverage), that is not true once you add leverage to the investment property. "Mathematically" the present value of an 80% LTV $200K investment property would be exactly equal to $40K. So when you buy a property with 20% down, you are buying 1x the present value.
Same concept as enterprise value vs. market cap with companies. Enterprise value = market cap (equity) + net debt. Enterprise value = present value of all cash flows without leverage. Market cap = net present value of all cash flows with leverage. This is basic finance and I am more than happy to dive into it with anyone who wants to learn.
- 3yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votesThanks but no thanks...that's way too complicated. I'd rather just keep using my gut feelings and a pen and pencil..
Quote from @Nick H.:
- Investor · MI · Member since 2018 · 37 posts · 40 votes3y
Quote from @Bruce Woodruff:
Thanks but no thanks...that's way too complicated. I'd rather just keep using my gut feelings and a pen and pencil..Quote from @Nick H.:
Yeah I don't think everything I said is all that important to be a great real estate investor. Depending on strategy, I'd take someone that takes action / finds great deals / is great at value add / etc over someone who understands what I typed.
Just want to make sure that since it looks like people are taking Joe V's "math" as fact, that it gets fact checked as is in not correct math and I think it's not great to spread that esp. if people are listening. Not trying to offend anyone / Joe V, very much just want people to have a grasp of what's true here.
- Member since 2022 · 485 posts · 216 votes3y
Quote from @James Hamling:
Quote from @Michael Wooldridge:
Quote from @Carlos Ptriawan:
So I'm with you on the ultra billionaires and I know guys like that - there is a reason why they wake up at 4:30 am very commonly. I'm not so sure I see the long term perspective on RE for folks like us. Part of reason I'm investing in it now is to give up my job by mid 50's. I'll have a growing business on the side and my kids will still be in their teens. Which means more time. My day job allows flexibility BUT i still have to work a lot
But that's not the key. The key is your work in any level of capacity that you can do, and you have a good work-life balance WHILE the company can give you one or two houses in Midwest for free every year, so the capital is coming from the company while you do NOTHING more. Not from another real estate.
Agreed. hence my comment. Real estate takes time but if you are using property management, if you have a realtor even if you understand the valuations, your cash flow might not be as high but your time invested is minimal. Frankly, I have a folder that holds 90% of what I need for each purchase. My lender is so used to it now she saves as much as she can (can only hold so much and for so long) but she is used to me just lump sending a bunch of the paperwork for underwriting and they figure it out. It's a bit more work for them but given they have now had 3 mortgages from me in a year, and two more from friends alone. Well they are happy.
But yes the reason why I pointed it out is greg seems to look at it like work. And it can be. I'm looking at it for hte day I can stop working.A tip on the Realtor fee side of things.
For a person who is savy like yourself, and well organized, you can ask for Facilitator agency vs exclusive agency, and for applicable fee structure for such. Not uncommon for agency fee to drop too 1-2% in such scenario.
On buy side, doesn't really matter if getting seller to cover right BUT, for the more sizable deals and yes, commercial this works the same, that is an option in many if not most places of facilitator vs exclusive "full" agency.
thanks. I grew up around it and family business was one of the largest title insurance companies. It's something I may look at if I get into selling but frankly I don't see myself selling to many properties. Depending on long term strategy I may just turn over an effective business to the kids. I don't see as much value in selling the properties - UNLESS they dont' want to manage it but frankly by the time I'm ready to hand it over they just need to understand the basics I could teach them. And it will have enough to both GROW and pay a manager for if they want in the cash flow.
- Member since 2022 · 485 posts · 216 votes3y
Quote from @Carlos Ptriawan:
You and John are bringing up good points. Your heated argumentation is classic when two men see a baby elephant and a giant elephant from different distances. They both correct.Quote from @James Hamling:
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @John Carbone:
Quote from @Joe Villeneuve:
Quote from @John Carbone:
Quote from @Joe Villeneuve:
Quote from @Michael Wooldridge:
@John Carbone from the sounds of things you are a long term investor that is working to replacing his income with CF. My w2 also funds pretty quick purchases for properties.
Your such a feckless Troll! Spending the day spewing lies, distortions, rants and baseless attacks.
yes, as the founder of a tech start-up, without doubt 0 innovation. Founder of more then a dozen companies, absolutely, imitator without doubt. Yes, one Absolutely achieves "Top Producer" via idiocy.
What have you achieved? Of course you must be "the" innovator supreme, please, bestow upon us your accolades of achievement kind sir. With out doubt they are so numerous that it would be a grand list of so many. Please, delight us all with accounts of your conquests.......
I can accept now when you say a 6% rate is normal because the mortgage/rent ratio is still within one sigma deviation from middle-class income AND your market appreciation is only $200-$300 more when translated to the mortgage payment.
CA/WA/AZ/NV mortgage/rent ratio is entirely different so our market can not survive with 6% "normal" rate.
The Fed rate hike only kills the west coast market, put it that way --not nationwide.Funny I got busy with conference calls but I literally almost said the same thing. Those two seem to be on opposite end of the spectrum, and both making good points. I think you and I mostly fall somewhere in the middle. but I think outside of the fact that they both seem to dislike each other. There's been some good discussion ignoring the taunts on both sides.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Funny I got busy with conference calls but I literally almost said the same thing. Those two seem to be on opposite end of the spectrum, and both making good points. I think you and I mostly fall somewhere in the middle. but I think outside of the fact that they both seem to dislike each other. There's been some good discussion ignoring the taunts on both sides.
Both of their argument is accurate to their own market. So let's see the impact of six percent mortgage rate :
median household income San Jose: $120k
median household income Twin Cities: $50k
average Zillow home price Twin cities: $300k
average Zillow home price San Jose: $1,400k
Average mortgage payment with 20% down and 6% interest rate.
San Jose: $6700/mo
Twin Cities: $1,430/mo
San Jose's mortgage to gross monthly income : 0.67 ratio
Twin Cities mortgage to gross monthly income : 0.34 ratio
So cost of living in high cap rate like SJC is twice than Twin Cities.So how do people in San Jose survive and afford mortgages?
Simple, by having both husband and wife working, each making $120k, so the household income of $250k is the new middle class.
(btw $120k is like intern salary in tech co. these days).
....And this is where I seriously Think FED is incorrect in their inflation calculation. They should make individual adjustments to their CPI calculation specifically to OER targetting specific city. Simply aggregating UShome ownership is not accurate. As not too many people buy the home anyway and cities like those inside CA has different affordability ratio. I think they have an archaic system and inaccurate methodology. The OER component is actually the one that drives CPI as it's the highest weighting factor. - Member since 2022 · 485 posts · 216 votes3y
Quote from @Carlos Ptriawan:
Funny I got busy with conference calls but I literally almost said the same thing. Those two seem to be on opposite end of the spectrum, and both making good points. I think you and I mostly fall somewhere in the middle. but I think outside of the fact that they both seem to dislike each other. There's been some good discussion ignoring the taunts on both sides.
Both of their argument is accurate to their own market. So let's see the impact of six percent mortgage rate :
median household income San Jose: $120k
median household income Twin Cities: $50k
average Zillow home price Twin cities: $300k
average Zillow home price San Jose: $1,400k
Average mortgage payment with 20% down and 6% interest rate.
San Jose: $6700/mo
Twin Cities: $1,430/mo
San Jose's mortgage to gross monthly income : 0.67 ratio
Twin Cities mortgage to gross monthly income : 0.34 ratio
So cost of living in high cap rate like SJC is twice than Twin Cities.So how do people in San Jose survive and afford mortgages?
Simple, by having both husband and wife working, each making $120k, so the household income of $250k is the new middle class.
(btw $120k is like intern salary in tech co. these days).
....And this is where I seriously Think FED is incorrect in their inflation calculation. They should make individual adjustments to their CPI calculation specifically to OER targetting specific city. Simply aggregating UShome ownership is not accurate. As not too many people buy the home anyway and cities like those inside CA has different affordability ratio. I think they have an archaic system and inaccurate methodology. The OER component is actually the one that drives CPI as it's the highest weighting factor.And the big thing is the income. People talk about housing affordability against median income. But if the median income in Cali is $300k (which is probably close for two incomes if not low) even if they spend a lot on the mortgage their disposable is large, even when compared to the midwest markets.
- Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes3y
Quote from @Carlos Ptriawan:
Funny I got busy with conference calls but I literally almost said the same thing. Those two seem to be on opposite end of the spectrum, and both making good points. I think you and I mostly fall somewhere in the middle. but I think outside of the fact that they both seem to dislike each other. There's been some good discussion ignoring the taunts on both sides.
Both of their argument is accurate to their own market. So let's see the impact of six percent mortgage rate :
median household income San Jose: $120k
median household income Twin Cities: $50k
average Zillow home price Twin cities: $300k
average Zillow home price San Jose: $1,400k
Average mortgage payment with 20% down and 6% interest rate.
San Jose: $6700/mo
Twin Cities: $1,430/mo
San Jose's mortgage to gross monthly income : 0.67 ratio
Twin Cities mortgage to gross monthly income : 0.34 ratio
So cost of living in high cap rate like SJC is twice than Twin Cities.So how do people in San Jose survive and afford mortgages?
Simple, by having both husband and wife working, each making $120k, so the household income of $250k is the new middle class.
(btw $120k is like intern salary in tech co. these days).
....And this is where I seriously Think FED is incorrect in their inflation calculation. They should make individual adjustments to their CPI calculation specifically to OER targetting specific city. Simply aggregating UShome ownership is not accurate. As not too many people buy the home anyway and cities like those inside CA has different affordability ratio. I think they have an archaic system and inaccurate methodology. The OER component is actually the one that drives CPI as it's the highest weighting factor.My whole argument has been nationwide drops of 20 percent minimum. I even said in the beginning individual markets will out perform (due to the reasons you mention). Jim has been defending the nationwide market by giving minessota data. I won’t argue with the math in some markets.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesAhhh, no
Quote from @Nick H.:
Quote from @Joe Villeneuve:
What are you missing? Mega bucks. Here's why:Quote from @John Carbone:
Quote from @Joe Villeneuve:
This is very true, but CF returns will always be far less than equity returns (I'm assuming a property that is actually getting equity returns). You should never have one without the other. If you look at the math, the most important formula is how long it takes the REI to recover their cost...the DP,...in CASH, from the CF.Quote from @John Carbone:
Quote from @James Hamling:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
The problem with equity is you can’t force overall markets to go higher. You can somewhat control cash flow. For example, someone with a 350k investment that nets them 75k a year. After 10 years even if real estate is flat at 350k, they still have earned 750k over the 10 year period. Equity is just gravy, but should not be factored in when purchasing properties, especially at these prices.
Well technically the renter is paying down your principal which means you shouldn't' be flat - ever really.
And realistically most houses/properties always appreciate over a 10-15 year margin. But I do think it's tough to chase equity (i.e. hard to truly predict the big growth otherwise would have had a lot more boomers who held on to shore houses in the northeast) but it's probably fair to say it should be factored in.
Talk to a home flipper, all we do is not only build equity, but build it at net positive rates of return. We have to build equity to cover our costs of building that equity AND additional equity to cover all transactional, operational and profits.
Or, how about any syndicator out there doing value-add deals? That is also creating equity.
Or, or, or.... Equity creating is a component of many strategies, many. It is not only possible but common. Not easy, and results will vary wildly, not all have equal talent for certain results.
@Joe Villeneuve is spot-on in sharing the relationship of CF and equitable returns, and that equity is what makes wealth.
Any asking how to start, how to best get from start too financial freedom, how to build a portfolio, the #1 importance to learn is this fundamental and how Pyramiding works.
Obviously adding value to a property can increase the “value”, but speaking from a turn key pov, once you max out the usefulness of the property you are letting interest rates dictate the value. I don’t calculate my property value based off of what an appraiser will give it, I base it off of what my asset returns to me. This is a wildly different number than what a bank will say it is worth. CASH FLOW allows me to not care about interest rates and the negative impact on the “home equity”.
Let's say it takes 8 years for this to happen, and the DP was $40k. That's a $200k PV at the start. If the property appreciated 4% over the that same 8 year period, the PV would then be $273k plus. That's an increase of $73k in Equity/PV, where as the cumulative CF over that same 8 years = only $50k.
Now, if you have both in that property, the once the cumulative CF = the DP, the property is now free to the REI, and when sold, the total equity is all profit (since the DP bought the initial equity, but the CF recovered it). This is also when the property is at its maximum value, and should be sold, or the REI will start losing money exponentially. The greater the appreciation, the more money is lost...if not sold.I agree that the time to recover the cost is the most important component to the formula. I don’t follow on selling though. Maybe the way I look at it is a little different than you. So I’m into a rehabbed property for 350k (200k cash down) and it returns me a net profit of 70k a year. Break even is sub 3 years, and 5 years free and clear, with an annual dividend thereafter of 70k once paid off. If I get an appraisal at 400k why would I sell when I’m getting 70k a year. This is a 20 percent return on a 350k investment. The “equity” component is meaningless to me since most of my formula comes from cash flow, not equity. Maybe the smart thing is to cash out refi up to 80 percent at that point, if there is a need/to create interest expense for tax deductions, but I don’t understand why I would sell. My whole philosophy is to buy and never sell. What am I missing?
1 - You don't own the equity...the property does, and you own the property. Not the same thing. The equity is actually what you are paying for this property. The fact that equity gained from appreciation is free to you just means you have a partner (the economy) as a form of a cash partner.
2 - The value of your equity isn't the face value of the equity...it's what that number is buying you in the form of property value...AND cash flow.
3 - The true asset you own is NOT the property...it's the cash in the property.
4 - Cash flow and equity are both forms of cash. One is liquid and real, and the other is frozen and virtual. Until you can "melt" the frozen asset (equity) is has no actual use/value to you. It's a trophy. The only/best way to "melt" it, is to sell the vehicle your equity is riding...the property.
...Now here comes the fun part,...the math...
5 - When you buy the property, that DP is actually the initial equity that you are paying for. If it's a 20% DP, that means you are getting a PV of 5 times what you're paying for the property. Also, as long as you have positive CF, that is ALL you are paying for the property.
6 - As your property appreciates, thank-you economy, the equity increases equally...dollar for dollar. This means, if your $100k property (that you paid $20k for) gains $20k in value, the PV now equals $120k...and the equity jumps up to $40k. Sounds great, and it is,...but you lost money. Here's why.
7 - When you buy the property (see #5 above), you are getting a PV of 5 times what you paid for it. When that property went up to $120k (see #6 above), that now $40k in equity is only buying a $120k property. Only you say? Yes, the equity is now only buying a property 3 times it's face value...cost.
8 - Now, if you sell the property, and move that equity forward, it once again has a buying power of 5 to 1, which translates to a new PV of $200k...not just $120k. Oooops?!
9 - Also, since that $40k in equity represents twice the $20k you paid for original property, could you not buy 2 of that same property, and thus double the CF as well?
10 - Buy and Hold, in my book, doesn't mean hold the property...it means hold the equity,...just keep it moving forward from one property to another (or more). Same equity, just living in a different location as it moves.
The power of the growth in equity (from appreciation) isn't in it's face value, its face value, its in the power it has to to buy...not sit and die.
Also FWIW @Joe Villeneuve this PV logic is not correct. If you buy a $200K house w/ 40K down, you are not buying 5x your PV as some magical move.PV (present value) is the sum of the cash flows into the future discounted by a discount rate. PV is different for something unlevered (a house with no mortgage) vs something levered (a house with a mortgage). That is because the stream of cash flow for a house with no mortgage is different (higher) than the stream of cash flow for a house with a mortgage.
So while I agree it's fair to say a $200K investment property has a PV of $200K (without leverage), that is not true once you add leverage to the investment property. "Mathematically" the present value of an 80% LTV $200K investment property would be exactly equal to $40K. So when you buy a property with 20% down, you are buying 1x the present value.
Same concept as enterprise value vs. market cap with companies. Enterprise value = market cap (equity) + net debt. Enterprise value = present value of all cash flows without leverage. Market cap = net present value of all cash flows with leverage. This is basic finance and I am more than happy to dive into it with anyone who wants to learn.
- Member since 2019 · 7k+ posts · 4k+ votes3yYes, I did many of these calculations before. The CA mortgage is very affordable when the monthly mortgage is $3.5-$4.8k ; that's only possible with 3% rate. With 6% the new mortgage is $6500-ish for a property that has 6% IRR LOL, that's ultra-expensive.
Quote from @Michael Wooldridge:
Quote from @Carlos Ptriawan:
And the big thing is the income. People talk about housing affordability against median income. But if the median income in Cali is $300k (which is probably close for two incomes if not low) even if they spend a lot on the mortgage their disposable is large, even when compared to the midwest markets.
Renting is much better than home ownership on the west coast.
Also comparing a market that has 700 homes for sale VS 4000 homes for sale is super inaccurate as supply-demand ratio is entirely different.
What Fed must do is actually deleting this OER and suddenly they will see we have NO inflation, as the other components are actually driven more by the oil supply. If oil goes back to go below $80 we really have no 'unmanageable' inflation.
So what the Fed doing right now is like --for a problem that's west coast guy did, the Fed punishes the entire world -- hahaha LOL
Sometimes to avoid WW3 one just need to fix the error in the excel table formula.... - Member since 2019 · 7k+ posts · 4k+ votes3ySo what the Fed wants is.....they ask us to reduce our home price back to Jan 2021-May 2021 level.
Quote from @John Carbone:
Quote from @Carlos Ptriawan:
My whole argument has been nationwide drops of 20 percent minimum. I even said in the beginning individual markets will out perform (due to the reasons you mention). Jim has been defending the nationwide market by giving minessota data. I won’t argue with the math in some markets.
I did a calculation last night, in west coast market they want a 20% price reduction, we have -13% now, Fed will be happy when we reduce a bit more LOL
You will see when oil drops below 80 bucks and home dropped near 20% suddenly inflation is 4 percent LOL - 3yGreg R.Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votesOPNot sure if anyone has broke the news to you yet, but when your kids are teens they are not going to want to hang out with mom and dad anymore lol. The window is very small, they are only children one time. Once they grow up the dynamic completely changes. Not saying it's bad, but they have their own life, their own priorities, and often that means wanting to hang out with friends, not their middle aged parents.
Quote from @Michael Wooldridge:
Quote from @Greg R.:
Quote from @Carlos Ptriawan:
No dude, you got me wrong haha LOL we can still have Musk/Bezos printed money for us while having 90% life and 10% work (from Hawaii).
Almost everyone is doing that now.
That zero work life balance is BS--that's only true for working class, Mark ZUkerbegh is actually surfing in Kauai beach righ now hahaha LOLIf you think these guys hang out all day while others make money for them, you're deceived. These guys work night and day, they only come up for air every once and a while. Zuck probably had to book time on his calendar a month in advance to take a few hours for surfing. These guys (and many others) will wake up one day and wonder where life went. It passed them by.
I get your post though :)
So I'm with you on the ultra billionaires and I know guys like that - there is a reason why they wake up at 4:30 am very commonly. I'm not so sure I see the long term perspective on RE for folks like us. Part of reason I'm investing in it now is to give up my job by mid 50's. I'll have a growing business on the side and my kids will still be in their teens. Which means more time. My day job allows flexibility BUT i still have to work a lot at times. So I have a nice world but the whoel point of the investing is to have that freedom one day. Besides which the RE side will let me have more and leave a lot more to my kids who will have so much more flexibility than I had (and I had more than my dad to an extent or it looks like I will).
No need to be a billionaire. $1-3 million in cash flow a year creates a lot of independence and time for family or passions.
- Member since 2022 · 485 posts · 216 votes3y
Quote from @Greg R.:
Not sure if anyone has broke the news to you yet, but when your kids are teens they are not going to want to hang out with mom and dad anymore lol. The window is very small, they are only children one time. Once they grow up the dynamic completely changes. Not saying it's bad, but they have their own life, their own priorities, and often that means wanting to hang out with friends, not their middle aged parents.Quote from @Michael Wooldridge:
Quote from @Greg R.:
Quote from @Carlos Ptriawan:
No dude, you got me wrong haha LOL we can still have Musk/Bezos printed money for us while having 90% life and 10% work (from Hawaii).
Almost everyone is doing that now.
That zero work life balance is BS--that's only true for working class, Mark ZUkerbegh is actually surfing in Kauai beach righ now hahaha LOLIf you think these guys hang out all day while others make money for them, you're deceived. These guys work night and day, they only come up for air every once and a while. Zuck probably had to book time on his calendar a month in advance to take a few hours for surfing. These guys (and many others) will wake up one day and wonder where life went. It passed them by.
I get your post though :)
So I'm with you on the ultra billionaires and I know guys like that - there is a reason why they wake up at 4:30 am very commonly. I'm not so sure I see the long term perspective on RE for folks like us. Part of reason I'm investing in it now is to give up my job by mid 50's. I'll have a growing business on the side and my kids will still be in their teens. Which means more time. My day job allows flexibility BUT i still have to work a lot at times. So I have a nice world but the whoel point of the investing is to have that freedom one day. Besides which the RE side will let me have more and leave a lot more to my kids who will have so much more flexibility than I had (and I had more than my dad to an extent or it looks like I will).
No need to be a billionaire. $1-3 million in cash flow a year creates a lot of independence and time for family or passions.
I'm well aware of it. My oldest would be 15 at 55. I've got a fair shot at retiring at 51. Me trying to retire at 43 is unrealistic. But I work from home, have pretty damn good flexibility in my schedule for example I can skip work and go skiing with kids during the week etc...
The point isn't to be there full time as an adult but to be able to do all kinds of things throughout their lives. And have their own schedules or not I'm pretty sure the kids will be up for playing hooky on school for a 5 days ski trip to Aspen etc.. Thats the flexibility I'm talking about in their teens.
Besides who wants to work to 65? - Member since 2022 · 485 posts · 216 votes3y
Quote from @Carlos Ptriawan:
Yes, I did many of these calculations before. The CA mortgage is very affordable when the monthly mortgage is $3.5-$4.8k ; that's only possible with 3% rate. With 6% the new mortgage is $6500-ish for a property that has 6% IRR LOL, that's ultra-expensive.Quote from @Michael Wooldridge:
Quote from @Carlos Ptriawan:
And the big thing is the income. People talk about housing affordability against median income. But if the median income in Cali is $300k (which is probably close for two incomes if not low) even if they spend a lot on the mortgage their disposable is large, even when compared to the midwest markets.
Renting is much better than home ownership on the west coast.
Also comparing a market that has 700 homes for sale VS 4000 homes for sale is super inaccurate as supply-demand ratio is entirely different.
What Fed must do is actually deleting this OER and suddenly they will see we have NO inflation, as the other components are actually driven more by the oil supply. If oil goes back to go below $80 we really have no 'unmanageable' inflation.
So what the Fed doing right now is like --for a problem that's west coast guy did, the Fed punishes the entire world -- hahaha LOL
Sometimes to avoid WW3 one just need to fix the error in the excel table formula....
Ehh most Bay area folks I know who rent are paying 3.5-4.5k a month and that was 2 years ago. No idea what it's going for now but is it really better?
Housing just plain sucks in Bay Area or NYC. Even making a great living I wouldn't want to live there because of it. - 3yGreg R.Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votesOPI'm with Joe on this. His system & logic make the most sense.
Quote from @Joe Villeneuve:
Ahhh, noQuote from @Nick H.:
Quote from @Joe Villeneuve:
Quote from @John Carbone:
Quote from @Joe Villeneuve:
Quote from @John Carbone:
Quote from @James Hamling:
Quote from @Michael Wooldridge:
Quote from @John Carbone:
Also FWIW @Joe Villeneuve this PV logic is not correct. If you buy a $200K house w/ 40K down, you are not buying 5x your PV as some magical move.
PV (present value) is the sum of the cash flows into the future discounted by a discount rate. PV is different for something unlevered (a house with no mortgage) vs something levered (a house with a mortgage). That is because the stream of cash flow for a house with no mortgage is different (higher) than the stream of cash flow for a house with a mortgage.
So while I agree it's fair to say a $200K investment property has a PV of $200K (without leverage), that is not true once you add leverage to the investment property. "Mathematically" the present value of an 80% LTV $200K investment property would be exactly equal to $40K. So when you buy a property with 20% down, you are buying 1x the present value.
Same concept as enterprise value vs. market cap with companies. Enterprise value = market cap (equity) + net debt. Enterprise value = present value of all cash flows without leverage. Market cap = net present value of all cash flows with leverage. This is basic finance and I am more than happy to dive into it with anyone who wants to learn.
- Member since 2019 · 7k+ posts · 4k+ votes3y
John here's what Fed/you want is the west coast to reduce the price to 20% ; then there is no inflation.
The peak of $1,4k truly doesn't make sense as 6 months earlier it was only $1,2k. This is the result of FOMO buyers
are overbidding property hence triggering inflation.
- Realtor · Gatlinburg · Member since 2020 · 1k+ posts · 957 votes3yYeah and also in vacation markets like tennessee and Florida for example. I agree it’s getting there quickly, 3 more months of this and I think fed objectives could be met. I also think there is upper pressure in inflation from the bottom rung of society. The floor for homes has likely doubled from 100k to 200k as a result of anyone with a pulse being able to make up to $20 an hour. These are likely very “sticky” unless there is a depression with massive layoffs - not what the fed is going for. It’s a bit more complicated though, because food is up a lot (not likely to come down) and have you seen car payments lately? The bubble in the car market makes housing seem sane to a certain degree. I think food and transportation costs are going to drag housing a bit further from baseline levels when all is said and done.
Quote from @Carlos Ptriawan:
John here's what Fed/you want is the west coast to reduce the price to 20% ; then there is no inflation.
The peak of $1,4k truly doesn't make sense as 6 months earlier it was only $1,2k. This is the result of FOMO buyers
are overbidding property hence triggering inflation. - Member since 2022 · 485 posts · 216 votes3y
Quote from @John Carbone:
Yeah and also in vacation markets like tennessee and Florida for example. I agree it’s getting there quickly, 3 more months of this and I think fed objectives could be met. I also think there is upper pressure in inflation from the bottom rung of society. The floor for homes has likely doubled from 100k to 200k as a result of anyone with a pulse being able to make up to $20 an hour. These are likely very “sticky” unless there is a depression with massive layoffs - not what the fed is going for. It’s a bit more complicated though, because food is up a lot (not likely to come down) and have you seen car payments lately? The bubble in the car market makes housing seem sane to a certain degree. I think food and transportation costs are going to drag housing a bit further from baseline levels when all is said and done.Quote from @Carlos Ptriawan:
John here's what Fed/you want is the west coast to reduce the price to 20% ; then there is no inflation.
The peak of $1,4k truly doesn't make sense as 6 months earlier it was only $1,2k. This is the result of FOMO buyers
are overbidding property hence triggering inflation.Florida and Tennessee have gotten a huge amount of transplants though. I know Nashville and some of that has had some big growth even pre-covid so it’s adjusting (have to go look to how much it is but you aren’t far so maybe you know?) but FL is holding strong. it’s a lot of Northeast money moving down there and at $410k for median home price, in July. Despite the fact they are up al ot I’m not so sure FL is going to correct anything close to CA. Plus the overall impact of interest is just flat out less there.
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Michael Wooldridge:
Ehh most Bay area folks I know who rent are paying 3.5-4.5k a month and that was 2 years ago. No idea what it's going for now but is it really better?Quote from @Carlos Ptriawan:
Quote from @Michael Wooldridge:
Quote from @Carlos Ptriawan:
Housing just plain sucks in Bay Area or NYC. Even making a great living I wouldn't want to live there because of it.That number is quite right, although the ranges are from $2.8 to $5k realistically for 2/3BR. SF rent is actually cheaper and depending on location could have a bargain as it's owned by a pop and mom investor (prior owner). Class A MF is the most expensive with $4.5k for 2BR.
Yes about housing it is sucks but really depends on where one is coming from. A guy coming from London, India or Seoul still thinks it's affordable, obviously from a Midwest perspective it's very expensive, but the cost of living in the Midwest is actually cheaper than some third-world country cities, to begin with. - 3yGreg R.Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votesOP
@John Carbone @Carlos Ptriawan @Joe Villeneuve @James Hamling @Michael Wooldridge @Bruce Woodruff
Here's some fresh data as of October...
With current rates, buyers have 29% LESS purchasing power.
- - The monthly mortgage payment on the median-asking-price home climbed to a record $2,528 at the current 6.66% mortgage rate, up 49% from $1,701 a year earlier, when mortgage rates were 2.99% and up from a recent low of $2,209 during the four-week period ending August 14.
- - Pending home sales were down 25% year over year, the largest decline since May 2020.
- - Months of supply—a measure of the balance between supply and demand, calculated by dividing the number of active listings by closed sales—increased to 3.0 months, the highest level since July 2020.
- - Homes that sold were on the market for a median of 32 days, up a full week from 25 days a year earlier and the record low of 17 days set in May and early June.
You can't tell me that rates aren't having a catastrophic impact on the market and housing prices.
- - The monthly mortgage payment on the median-asking-price home climbed to a record $2,528 at the current 6.66% mortgage rate, up 49% from $1,701 a year earlier, when mortgage rates were 2.99% and up from a recent low of $2,209 during the four-week period ending August 14.
- Member since 2022 · 485 posts · 216 votes3y
Quote from @Greg R.:
@John Carbone @Carlos Ptriawan @Joe Villeneuve @James Hamling @Michael Wooldridge @Bruce Woodruff
Here's some fresh data as of October...
With current rates, buyers have 29% LESS purchasing power.
- - The monthly mortgage payment on the median-asking-price home climbed to a record $2,528 at the current 6.66% mortgage rate, up 49% from $1,701 a year earlier, when mortgage rates were 2.99% and up from a recent low of $2,209 during the four-week period ending August 14.
- - Pending home sales were down 25% year over year, the largest decline since May 2020.
- - Months of supply—a measure of the balance between supply and demand, calculated by dividing the number of active listings by closed sales—increased to 3.0 months, the highest level since July 2020.
- - Homes that sold were on the market for a median of 32 days, up a full week from 25 days a year earlier and the record low of 17 days set in May and early June.
You can't tell me that rates aren't having a catastrophic impact on the market and housing prices.
People have paused. The fed has made public statements for a very long time that they expect to reduce rates by 2024 (we could even see it in 2023). I believe the rate changes is going to force stagnation. Catastrophic? Cali/west yes. The rest of US not so much.
Also first time home buyers were up. I imagine we will see them continue to purchase because at the dollar value they buy in at - it’s a lot better than renting. Well if not in cali.
Anyway. I expect full stagnation. catastrophic? Nope. I’ve been saying for a bit overall sales will stagnate. I just don’t think prices will drop catastrophically. Also we need a chart showing how much median decline we need to see to equal about same buying power, to say January-March 2022, with current rates. I assume cali it’s about 20%. Rest of the country less.
- - The monthly mortgage payment on the median-asking-price home climbed to a record $2,528 at the current 6.66% mortgage rate, up 49% from $1,701 a year earlier, when mortgage rates were 2.99% and up from a recent low of $2,209 during the four-week period ending August 14.
- 3yGreg R.Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votesOP
- 3yGreg R.Investor · Dallas, TX · Member since 2016 · 887 posts · 1k+ votesOPHere is link to WSJ article, need a membership... https://www.wsj.com/articles/h...
Quote from @Greg R.:
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @John Carbone: depression with massive layoffs - not what the fed is going for. It’s a bit more complicated though, because food is up a lot (not likely to come down) and have you seen car payments lately? The bubble in the car market makes housing seem sane to a certain degree. I think food and transportation costs are going to drag housing a bit further from baseline levels when all is said and done.
All these food and transportation inflations are actually happening because of one factor only: During covid, the shipping freight charge is raising 400% because (sometimes) the port closes or no workers.
Now about your STR in TN, it raises because of cheap lending from Fed, same as in CA, the price goes up $300k without reason.
It's all a logistical issue.
