Posted by Hank on January 06, 2003 at 17:45:24:
OTHER peoples mortgages and money is what I should have posted.
The Long-Term Projections For Real Estate ? - Posted by Elise
Posted by Elise on January 05, 2003 at 09:04:14:
?Are Outstanding!
On average, rent levels and housing prices have doubled
in the past 20 years, between 1980 and 2000. The same
thing happened during the prior 20 years, between 1960
and 1980. And the same thing happened between 1940
and 1960. Some markets have done much, much better.
We have every reason to believe the same thing will
happen over the next two decades. Look at the facts…
By 2010, according to recent estimates by the U.S. Census
Bureau, the U.S. population (currently 280 million) could
increase 11%, to 311 million. By 2020, the population
could be up 26%, to about 354 million. At the same time,
according to Gary W. Eldred PhD (Stanford University), the
United States’ gross domestic product (all of the things we
produce as a country) is poised to grow at an average rate
of 3-5% per year.
Because of the increase in GDP and population size, rent
levels and housing prices will more than double - just as they
have since the early 1980s. Just as they did between 1960 and
the early 1980s. And just as they did between 1940 and 1960.
I meet people all the time who say: “I should have bought
property years ago. I’ve missed out.” Well, regret never made
anyone rich. As was the case in 1940, 1960, and 1980, now is
a great time to invest in good real estate!
Here’s another real estate case study … - Posted by Robert Campbell
Posted by Robert Campbell on January 05, 2003 at 13:11:10:
Elise -
While the potential for big real estate profits does exist, it is far from guaranteed. Another factor to consider is how long-term real estate investments compare to other long-term investments, such as stocks and bonds.
To give you some perspective, I will share with you a recent study from Professor William Goetzmann from Yale University. Here were the findings:
From the years 1980 to 1999, and looking at real estate performance in 12 major cities compared to stocks and bonds, stocks returned an average of 18% per year, bonds 11%, and houses 4% to 5%.
Profesor Goetzmann goes on to say, "In many cities, homes underperformed T-Bills, which averaged 6% per year over that period of time.
Now granted, real estate is normally purchased with a large percentage of borrowed money which gives an investor the “potential” benefit of financial leverage.
But as we all know, leverage is a double-bladed sword that can destroy wealth as well as create it, depending on the market cycles.
In other words, I always advise investors that just because real estate is a good long-term investment doesn’t mean it’s prudent to buy at any price in the market cycle.
Robert Campbell
Oh, Really???..(looooong) - Posted by Bill
Posted by Bill on January 05, 2003 at 10:35:38:
Elise,
What a cheery thought. Sounds like public relations gobblydegook.
There are just a few questions that I and possibly some others might have that are unresolved.
Since you were so kind to post this, perhaps you could answer some of these lingering questions so that I/we might be comforted.
Not doubting your information above, just curious how you might think these things would be factored into the figures you give.
It’s interesting to note that rent levels and housing prices have doubled , on average, each 20 years for the last 3 cycles. Perchance, do you know if wages and take home pay have also doubled each 20 years also?
Now I realize that minimum wage is not intended to be enough for the average person to live on in anything but a bare subsistance mode, but at the current rate of about $6.00 per hour (more or less), that means that 60 years ago, the wage would have been, what about 50-75 cents per hour. I can remember working for 75 cents per hour in the mid 60’s as a kid doing menial labor, clearing weeds, mowing lawns, picking up trash, etc. I have reliable info that a average one story ranch house built in 1960 (approx) cost about 16,000. An average, plain, entry level house.
Today, average, plain, entry level houses in some parts of the country can be built for about 50 dollars per sq. foot (not in some areas, but yes in others). Add to that the cost of land and improvements and you are still over 65-70K for a minimum 1000 sq ft house on a cheap (
“Lies, D@mned Lies, and Statistics” - Posted by RobH_WA
Posted by RobH_WA on January 06, 2003 at 16:48:07:
Robert,
Technically the Professor is correct, stocks did have a total return of 18% from 70 to 99. On the other hand, stocks “only” returned 10%p.a. from Jul 74 to Jul 94, so it just depends what length of time you take and the starting point.
For the record, since Jan 70 to Nov 02 the figs are (dividends reinvested, S+P 500):
Best period 61%/1 yr, 30%/5 yrs, 20%/10 yrs, 18%/20 yrs
Worst period -44%/1 yr, -4%/5 yrs, 4%/10 yrs, 10%/20 yrs.
Overall in the 30 year peiod the average was 11.35% (all figures are p.a. compounded.) Clearly investing for the long-haul pays off in lack of volatility…
In terms of the figures that Elise quotes these are hardly exciting. A doubling of rents and prices in 20 years?? That’s simply keeping pace with the long term rate of inflation (3-4% p.a., depending on who is counting.) And that ignores the fact that house sizes have increased significantly over the period.
It would be interesting to know the methodology for the returns on real estate the Professor used. Taking 12 cities is already a smaller (= more volatile) sample than the S+P, and as others have pointed out the comparison is difficult at best, if for no other reason than most Sale and Purchase of real estate is not for “investment” but to put a roof over someone’s head. Stocks and Bonds are discretionary investments, Housing is only discretionary in terms of quality of your current home and/or whether to purchase 2nd and subsequent properties.
Others have mentioned taxation, leverage, etc. One additional and critical issue is reinvestment. The Total return of the stock market is heavily dependent (almost 50% historically) on reinvestment of dividends. Taking a pure RE investment (eg NOO apartments, or whatever) how do you account for the cash flow after debt service? At what rate is that reinvested? Because of the relative size and illiquidity of RE investments it cannot be treated the same way as the stock reinvestments (unless maybe you assume all such cash flow is used to pay down principal on the loan.) There are also large transactional costs (excise tax, agent fees, etc) so what hold period do you assume? Most properties turn in less than 10 years, so potentially these costs are a large drag on total return.
Etc, etc, etc.
Robin
Re: Here’s another real estate case study … - Posted by Ronald * Starr (in No CA)
Posted by Ronald * Starr (in No CA) on January 06, 2003 at 13:22:17:
Robert Campbell–(CA)-------------
The return on stocks over the long run seems to be about 5 or 6% if you believe the book “Value Investing in Real Estate.” I’m not sure I believe the figure stongly as the author did not do a study to find out. However, he did debunk all those statistics that people throw around of stock returning 10 or 11 oar 12% a year. It is apparent the the actual rate of return is far lower than that.
Now, we we talk about the appreciation of the real estate in the same breath as the return on stocks and bonds, we would have to add to that the cash flow and the tax benefits, to get the total return. And, it would be sensible to use leveraged purchasing of real estate.
I’m sure that real estate would far outway stocks or bonds on the total return. The negative is that real estate rentals, while the IRS calls them “passive” are not as passive as stocks and bonds. They require some skill to get the good returns.
Good Investing********Ron Starr*************
Re: Here’s another real estate case study … - Posted by Mark (SDCA)
Posted by Mark (SDCA) on January 06, 2003 at 13:03:15:
One other point… if you are a buy and hold investor… RE is tax positive. Stocks are at best tax neutral (cap gains) and bonds are tax negative.
The 2 biggest advantages RE have are
- huge and accepted leverage (on the order of 10:1 or 20:1)
- tax advantages.
Mark
Re: Here’s another real estate case study … - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on January 06, 2003 at 12:57:32:
Robert Campbell–(CA)------------
The obvious problem with the comparison is that the people for the comparison was the time of the greatest bull market in the stock market in the history of the USA. One should probably use much longer time periods.
Good Investing*****Ron Starr
Re: Here’s another real estate case study … - Posted by Hank
Posted by Hank on January 05, 2003 at 20:13:06:
>>From the years 1980 to 1999, and looking at real estate performance in 12 major cities compared to stocks and bonds, stocks returned an average of 18% per year, bonds 11%, and houses 4% to 5%.<<
There is so much wrong with Goetzmann’s comparison that I don’t know where to begin.
I know of several guys whom I admire that “own” large portfolios of real estate, but haven’t been in a bank to ask for a loan about any of them.
And these guys aren’t writing big checks either.
Some of these guys (& ladies) can be found here.
How can one compare apples and oranges like this?
How can amortization and tax benefits be left out?
How could the NY Giants blow a lead like they did?
Have to disagree on one point… - Posted by Corey ND
Posted by Corey ND on January 05, 2003 at 22:54:38:
I live in North Dakota. The area I live in is about as rural as you can get. The average price of homes here is around 60K (were talking 2 bed ranches in pretty good shape). We are the ONLY state in the nation that is loosing population. People are leaving left and right to larger metro areas around the country. This trend is not expected to change any time soon. We have waited out here for many years for the rest of the country to “fill up” and then people would start moving here. Well it has not happened nor do I think it will. If you study population trends people are moving to metro areas in droves. Now some will say this is an phenomena only in N.D. but it is happening all over in rural areas (mainly in the Midwest).
Good points. - Posted by randyOH
Posted by randyOH on January 05, 2003 at 13:29:34:
Bill,
You make some very good points about our economy. I have also been wondering how we are going to sustain our prosperity after we export most of our manufacturing jobs to other countries. It doesn’t make sense to me, but we seem to be getting more and more prosperous as the manufacturing goes away. I have to wonder too how long this can continue.
I guess the idea is that we benefit from being able to buy products more cheaply when they are manufactured in places like China. Then, those manufacturing jobs are supposedly replaced by higher paying information age jobs.
But here is another problem that I don’t hear anyone talking about. Now the information technology jobs are being exported to India. And the technology companies are bringing in highly skilled people from India to do the technology jobs that are left here. $50 an hour IT American workers are being replaced by $25 an hour Indian immigrants.
I aree with you, the trends do not look good to me. Maybe someone on this board can explain how the U.S. prosperity can continue as these trends persist and probably accelerate.
Do you know of any economists that have addressed this problem?
Thanks,
Randy
Oh yeah! - Posted by Robert Campbell
Posted by Robert Campbell on January 06, 2003 at 17:21:20:
You’re preaching to the choir, Robin. (grin)
Like you, I know that carefully selected statistics can be easily used to make almost any point you want to make, in spite of the long-term trend.
By the way, the media thrives on this type of attention-getting manipulation for it’s headline news.
Point well made.
Robert Campbell
Good comments, Ronald and Mark! - Posted by Robert Campbell
Posted by Robert Campbell on January 06, 2003 at 15:46:51:
Ronald and Mark -
I don’t know about both of you, but I really enjoy examining all investment markets.
Is one specultive market inherently more profitable or less risky than another?
Who knows? To me, thats like asking if blonds really have more fun.
While my preference is real estate, I always enjoy reading stories about savvy individuals who have also secured their fortunes in stocks, bonds, commodities, stamps, coins, baseball cards, etc, etc. etc.
Bottom line is this: Whatever the investment arena, fortunes have been made and lost largely by how well risk has been managed when the inevitable storms do arrive.
It’s kind of like flying a jet fighter. It’s really not that hard to do, that is until you get an engine fire, the weather turns very bad, or you encounter some other unexpected emergency. When these unpredictable events occur, you better have skill or as they say in world of avaition, you may be “buying the farm.”
Robert Campbell
Re: Here’s another real estate case study … - Posted by Robert Campbell
Posted by Robert Campbell on January 05, 2003 at 22:50:36:
Hi Hank -
For my benefit - and perhaps for the benefit of other discussion board readers as well - please take a moment to present the innaccuracies in Professor Goetzmann’s analysis that you refer to.
Thank you.
Robert Campbell
Your point is interesting - Posted by Bill
Posted by Bill on January 06, 2003 at 22:15:55:
Corey,
Yes, I see what you’re saying.
I think I would agree with you in that younger people who want higher incomes and the “glamorous big city lifestyle” are definitely moving from the rural areas to the big cities.
But I was referring to the upcoming baby boomer soon to be retirees. Many of them spent all they had, suffered investment losses or did not save enough. Many millions will reach retirement with little more than social security of 800-1500 a month.
How will they afford the rising pricesin the larger metro areas, especially the burbs where houses are commonly over 200k and rising?
My prediction is that they can’t and won’t. They will be forced by economics to seek these rural areas where the housing is less expensive.
To take advantage of this, I’d recommend investion in options on the properties that the young folks are leaving and then advertizing in the big cities for the retirees.
I can see the ads now:
Retirement heaven. Beautiful 2BED/1 bath house with large country lot. Big trees. Quiet , peaceful town. Cheap. Only $500 a month with low down . Call today. Free moving for your furniture.
See what I mean.
Bill
P.S. I heard that there was a town in North Dakota that would GIVE you a piece of land in town to build on if you would only move there. Now that gives an investor ideas. Like taking it and putting one of those Conseco repo’s on it and running an ad in the big city. Let’s see now: land =$0, repo=$5000, Hookups, sewer, permits, etc=$5000. Sell for $40,000 with low down and $500 a month. How many can I do?
Re: Good points. - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on January 06, 2003 at 12:15:50:
Randy–(OH)--------------------
My view is that when manufactured goods get cheaper, that allows two things to happen: people can live on a lower salary and people have left-over money which they can spend on other goods and services.
I’m not an economist, and I don’t have statistics, but I’ll bet that you will find that people have a “richer” life than they did 20 or 40 or 60 years ago. Houses had less square feet on average, one bathroom, and no central airconditioning and often no central heating. How many people have cable TV service now? Seventy-five percent of the people who have TV in their homes. Whoa, there’s a number for you. How many people eat out at restaurants now compared to 40 years ago? Seems to me that many more eat out much more often. There were no big chains of restraurants in 1960, except MacDonalds, and that was much smaller than it is now. VCRs, CD players, DVD players? virtually everybody has the first, many have the second, and the number with the third is expanding exponentially now. I’ve even got all these now, and I’m a self-confessed cheap-skate. People buy movies and have them at home to enjoy when they wish, not true 40 years ago. Seems like most families have a car for every family member of driving age. Certainly not true when I was a boy in the 1950s.
Well, people have to provide those TV cable programs, and the DVD movies and airconditioning machines and the cars. And, if you have paid to have a car repaired or an airconditioner, or, well, about anything that you buy, you know that there are service people to pay. And for some of them you probably, as I have, paid a pretty penny. I doubt that very many refrigerator repairpersons declare bankruptcy.
My grandparents lived on a farm and a ranch. They worked many long hard days when the weather premitted. They did not have much liesure time nor money for frivolities. So, as people have more money and more time for activities other than working, they create jobs for the people who cannot work in the manufacturing jobs which have left the country. I don’t remember anybody having jobs in Blockbuster when I was a child. There was no Blockbuster. Nor any other video rental stores because there was no video tape until I was about 14 years old. And even then for a long time it was only used in the television industry, not by consumers.
I really don’t worry that the buggy whip manufacturers have mostly all gone out of business. Do you? So why would we be worrying that the computer programs are being produced in India rather than Indiana?
When you look at the overall perspective, rather than concentrating on what is gone, I think you see things in a clearer light.
So, that is my view of things. The cheaper manufactured goods means that the consumers of those goods have added money to spend on services and products where were not possible before.
There are some effects of this globalization of the economy that some people like and some effects that some people do not like. But, overall, I judge that it benefits us more than it harms us.
One thing that has happened, I think, is that Americans and the Western European countries no longer consume as large a portion of the world production as they did 60 years ago. We are not as “imperialistic” now as then, I think. Except maybe where it comes to the current federal administration and the matter of oil production.
Hmmmm. I wonder if we will be soon hearing of manufactured houses being shipped to America from Africa or Indonesia or South America somewhere? At prices that will make some of the vacant lots in the older cities of America good investments again for placement of the homes?
Good InvestingRon Starr***
Re: Good points. - Posted by Eddy (CT)
Posted by Eddy (CT) on January 05, 2003 at 17:31:52:
And now smaller companies are taking the lead of the Fortune 500 and outsourcing their IT programming to India and Malaysia, where they get the skill set for $5-$15/hr, to bolster their bottom lines. Its a win-win for the off-shore and the US companies. Where things are going from here I’m not sure.
Re: Good points. - Posted by Bill
Posted by Bill on January 05, 2003 at 14:50:35:
Randy,
Good to see someone else thinking about these problems.
Sorry, but I don’t know any economists looking at this, but I’m sure there are some. I just don’t know who.
I think you’re right about the technology jobs also.
I do however, see plenty of opportunity in real estate, just not in the ever expanding theory.
I’ll bet Robert Campbell , who tracks trends in Calif area could give some better info on this.
Bill
Re: Here’s another real estate case study … - Posted by Hank
Posted by Hank on January 06, 2003 at 10:09:13:
Real estate doesn’t compare well with stocks, bonds and copper.
Real estate has aspects of investment, business and/or self employment.
Other investments can have those aspects as well, but not usually. If one does want to make it a business, one should realize trading is similar to Vegas.
Quoting appreciation rates of real estae vs. other asset classes doesn’t make much sense to me when done in a vacuum.
Bill… - Posted by Corbay
Posted by Corbay on January 06, 2003 at 23:01:28:
Bill, I can fully understand your concept and ideas 100%. The only option that I see being viable is the “broke babyboomers” needing more affordable housing. BUT it still does not change the fact that people are leaving rural areas. You are correct about towns giving lots and even houses away. All they want is the property back on the tax rolls.
Let me tell you a brief story about where I live (A rural N.D. city of 16K). An east coast investor (originally from N.D.) hears about this great property where I live, it is a stately old commercial building with lots of great charm and character. He was amazed that he could buy it for only 10,000.00. HOW could he go wrong? Well he purchased it in approximately the mid 1990’s and proceeded to buy up other properties near by at “bargain basement” prices. Stuck hundreds of thousands of dollars into “basic” repairs (windows, roof, etc…) TO this day those properties have NEVER rented and still sit empty. LOOSING large amounts of cash for upkeep and taxes every year. This “outside” investor thought that he could take “big city” investing and apply it on a much smaller and cheaper scale in rural America. Well it didn’t work.
You see what works in one place does not always work everywhere.
I am trying to explain how things are in my area. Now don’t get me wrong there are still good investments to be had and deals to be made as long as you know what your doing. Not everyone has left so there is still a need for housing and some commercial property (if it is done correctly).
Happy investing!
Corbay