All Forum Posts by: Brent Seehusen

@Matt R.

The best part of that William Yu story in the LA Times is the chart of 'real' home prices.

Notice that somebody buying in 1997 effectively paid the same price as somebody buying in 1980.  Similarly, somebody buying in 2012 paid the same price as somebody buying in 1989, a full 23 years later!  And for anybody that bought during the 2005-2007 time frame, they will still be selling for break even until sometime in the early 2030's, accounting for inflation.  That's a long hold time to break even!

I think this illustrates perfectly that appreciation in LA/OC is not a slam dunk. You can own a property for 20+ years and still not see any REAL appreciation at the end of it.  

Buy wisely folks.

What exactly is Rich Dad's prophecy?

 Californian's love to brag about how great life is on the West coast.  I don't know if it's to feel better about our elevated housing costs or what.  A lot of average people in the Bay Area are super stressed out about the cost of living.  The anxiety is palpable.  There are tons of homeless people in the Bay Area and a lot of young people scraping by because they can hardly afford to rent an apartment.  That's the part they don't tell you when discussing 'quality of life'.

Hi Andrew - Can you expand on this a little more?  How do you do a rate/term refi on a property that you paid all cash for?

 What specifically was the point he made that turned the light bulb on?  I read his real estate article on buying vs. renting and it was full of really bad assumptions, which made me question how many other poor assumptions might be buried in his stock articles.

I perused the first article linked by Mindy and he states unequivocally that stocks always go up in the long run.  Yet we have an example from our lifetimes where an economic powerhouse, Japan, is still half of where it peaked 25 years ago.  How does Jim Collins explain that away?

Well, I doubt much of what I have to say will change your mind, but in the 1930's the value of dollars was pegged to gold.  So the "increase" in the price of gold was FDR's artificial devaluation of the dollar against gold.  You're right times have changed, as the dollar is no longer pegged to gold, which happened starting in.... drum roll please... the early 1970's. That's why I advised looking at charts starting then.  

Nonetheless, any long term chart you look at disproves the inverse relationship between housing and gold, so at least admit to yourself that buying gold is not grounded in any historical performance data.  It's a gut feeling on your part, nothing more.

If deflation takes hold, it won't matter which market a debt holder is located in, they will get crushed.  The advantage a cash flow investor will have is that the value of the rent dollars will appreciate at the same rate as the debt payments.  Investors speculating on appreciation in a deflationary environment will be in for a rude awakening as the value of their investments plummet and they don't have cash flow to cover expenses.  Cash flow investors should still be able to cover expenses, which will lessen their chances of getting wiped out.

There isn't an inverse relationship between precious metals and real estate.  You need to look at a chart that goes back in time to the early 70's, not just the past 5 years.  The last bear market in gold took 18 years to unwind and real estate had almost 2 full cycles over that time (1981-1999).  

From the year 2000 to 2007, both gold and real estate absolutely killed it.  No inverse relationship there.

From 2008 to 2011, gold went into parabolic bubble territory while real estate crashed hard.

From 2012 to present, real estate has recovered from the crash, while gold has crashed hard from its bubble.

If you study all of these time frames, RE and gold are not positively or negatively correlated. In truth, real estate is driven by completely separate fundamentals than precious metals.  Real estate is a play on housing supply & demand, as well as population & job growth, whereas precious metals are a play on rising inflation and lack of confidence, as well as global commodity demand. 

Right now inflation is going nowhere and global demand is tanking with a capital 'T'.  If the US raises interest rates it's going to start another leg down for gold.  A lot of the excesses of the prior gold bubble have not been worked out yet.  The price of gold outpaced the rate of inflation for many years, basically on the expectations of inflation that never materialized.

If I were you, I would avoid precious metals for many years until this mess has completely worked itself out.  In the meantime, look for a rental in a market with good cash flow prospects.  Perhaps Stockton or another inland market in California.

This is a good point but what was the reason those products existed in the first place?  It's because people couldn't legitimately afford to buy properties otherwise.  So I think it's a fair question to ask what has changed since 2007 to allow everybody to buy at the same prices or even higher?  Has something replaced toxic mortgage products?  The answer is yes, low interest rates have replaced the need for toxic affordability products.  

Back during the bubble, getting a 3.5% mortgage was considered a "teaser" rate. Nowadays, everybody is getting that teaser rate and in a strange reversal from all of prior history, jumbo rates are actually cheaper than conforming rates right now.  So not only does San Francisco have the highest home prices, but they also have the lowest mortgage rates of anywhere in the country (assuming a higher preponderance of jumbo loans).

The problem as I see it is that someday, nobody knows when, mortgage rates will rise back to 6.5% like they were in 2007.  Where will the future buyers come from without the lowest mortgage rates in history and without toxic affordability products?  Last time I checked the price-to-income ratio in San Francisco was already at 13, higher even than during the housing bubble in 2007.  So incomes would need to rise dramatically from their already lofty levels just to maintain prices.

What then is the exit strategy for an investor buying on the peninsula today?

OK, I can see how my statement could be taken that way.  My wife and I still generate funds to invest through savings at our W2 jobs.  It's old fashioned I know.

@Account Closed

I don't think we're going to find much agreement on the other points, so I'll just address number 4.  I'm not advocating selling your Cali properties to invest in the Midwest, in most cases.  I'm only saying time your entry points to the California market for when the cycle is optimal, and not when prices are showing a bubble.  For California, the times to buy would have been 1983-1987, 1993-2000, and 2009-2012. 

Buying during a bubble seriously kills your chances at returns from appreciation for the first 5-10 years.  Examples of those times would be 1988-1992 and 2003-2007.  I also think we're entering another one of those time periods right now based on fundamental ratios of price/rent and price/income.

In the meantime, if you can buy smartly in cash flowing markets for 15% or higher CoC returns it's going to return more than appreciation markets until those markets have had a chance to correct themselves. For your existing properties in California, it's usually not going to make sense to sell due to capital gains taxes and transaction costs. So I'm not advocating for that.