Wednesday, February 01, 2012

Car Sales Start Year with Best January Since 2008

According to Fox News, "U.S. auto sales are off to a strong start this year, continuing their brisk pace from late 2011. Sales of cars and trucks rose 11 percent to 913,287 in January, kicking off what is expected to be the strongest year for the industry since before the recession in 2007.

New products, low interest rates and better loan availability helped overcome lingering worries about the economy and pushed car sales pace to the highest level since the Cash for Clunkers program in August 2009."

MP: Car sales increased to 14.18 million units in January on a seasonally adjusted annual basis, the best sales month since May 2008 except for a slightly higher sales total in August 2009 from the artificial "cash for clunkers" stimulus (see chart above, data here).  For the month of January, it was the highest sales activity in four years, since 15.43 million units were sold in January 2008. 

77 Comments:

At 2/01/2012 11:45 PM, Blogger Don Culo said...

We have too blame Obama for this !!!!

 
At 2/02/2012 12:59 AM, Blogger PeakTrader said...

New car sales are driven by pent-up demand instead of improving economic fundamentals:

2012 already looks like a winner for automakers
6 hours ago

"...buyers need to replace aging vehicles. The average age of a vehicle in the U.S. is a record 10.8 years, nearly two years older than a decade ago."

 
At 2/02/2012 1:13 AM, Blogger PeakTrader said...

New home sales, after peaking in 2005, likely hit bottom last year:

U.S. sales of new homes in 2011 hit record lows
January 26, 2012

The Commerce Department said Thursday that (new home) sales fell 2.2 percent in December, falling to annualized rate of 307,000 home sales, the lowest since 1963.

 
At 2/02/2012 6:18 AM, Blogger Larry G said...

Suze Orman says that housing is unlikely to recover any time soon and not back to prior levels.

1. - people no longer are convinced they can be employed on a continuous basis for the life of a 30 year mortgage.

2. - people no longer trust that if they take another job and move that they can sell their home and get their money back out of it to buy another home.

3. - people no longer believe that a house will appreciate in value significantly and is no longer viewed as a investment.

4. - a lot of folks no longer can save up 20% for a down payment.

5. - many people have thousands of dollars of credit card debt and thousands of dollars of education loans leaving much less money for a monthly house payment.

6. - No President GOP or Dem is going to fix this anytime soon.

 
At 2/02/2012 8:47 AM, Blogger Walt G. said...

People should view the house/apartment they live as shelter and not as an investment. Shelter is necessary to survive and in that respect is a consumable item no different than food. You would usually not consider food an investment. You can always buy investment property if you want to invest in real estate. The days of using homes as an ATM are over.

 
At 2/02/2012 8:54 AM, Blogger Larry G said...

" The days of using homes as an ATM are over. "

agree.

ergo - the days of home ownership being the primary driver of the economy is over.

 
At 2/02/2012 9:19 AM, Blogger juandos said...

".We have too blame Obama for this !!!"...

No culo blame Obama for this: Volt sales fall in January

Washington- General Motors extended-range electric Chevrolet Volt had its worst sales month since August, as negative publicity over fire risks hurt vehicles sales in January.

GM sold just 603 Volts - above its sales in January 2011, but far below GM's best-ever sales month in December, when GM sold 1,529 Volts...

 
At 2/02/2012 9:30 AM, Blogger PeakTrader said...

Walt, people also view homeownership as forced saving, to build equity, e.g. for a better house or retirement.

 
At 2/02/2012 10:05 AM, Blogger Hydra said...

is a record 10.8 years, nearly two years older than a decade ago."

==================================

But the cars are a lot better and last longer. One of those inflationary adjustments Vange complains about.

Pent;up demand or not, if you don;t have a job, you are not buying, so improving economics do play a role.

As Peak Trader points out, housing adjustments may play a role too: someone who dithched a house payment for rent may see imporved cash flow that allows a new vehicle.

Suze Orman is proably wrong about house prices. I don;t think she allowed enough for demographic changes.

The days when you could/should use your home as an ATM never really existed. Even so, it would be silly not to consider your (probably) largest investment for what it is. It is only that not all the returns are monetary, and fall in that area where it is not all that easy to put a price on things.

 
At 2/02/2012 10:08 AM, Blogger Hydra said...

How about if you blame the Volt for falling Volt sales: It is a crummy knock-off hybrid with a lot of sales hype. Some of it from the president.

 
At 2/02/2012 10:11 AM, Blogger Hydra said...

Off topic follow up: products do improve.

Had to replace a headlight bulb on my new Prius after it was struck by a cardboard box hard enough to cause the bulb to blow.

Replacement cost on the new Prius was less than a quarter of the cost of a recent bulb replacement on my older Prius.

 
At 2/02/2012 10:13 AM, Blogger Walt G. said...

Peaktrader,

Then they made a poor investment decision. Homes, as opposed to houses, are too illiquid and they still have to have a place to live if and when they do sell. Shelter costs are consumables that simply cannot be avoided. Homes are not wealth, and they should not be counted as such.

Great news about the cars sales!

 
At 2/02/2012 10:35 AM, Blogger PeakTrader said...

Walt, many people also view homeownership as forced saving, not just shelter, and when there's negative equity, there's no saving.

And, historically, homes generally appreciate.

 
At 2/02/2012 10:49 AM, Blogger Larry G said...

" And, historically, homes generally appreciate"

I think that idea is no longer accepted.....since many houses have left half their value and the bleeding as not yet stopped.

 
At 2/02/2012 11:00 AM, Blogger PeakTrader said...

Larry, the first chart shows even after the bursting of the housing bubble, the long-run trend shows appreciation:

http://www.jparsons.net/housingbubble/

 
At 2/02/2012 11:05 AM, Blogger Walt G. said...

Peaktrader,

I know the reasoning of homes as an investment that many people have. I just don't agree with it. I've argued this point for many, many years. Just like the GM bankruptcy I was talking about back in 1998, I am not happy I was right about home values not being wealth builders.

 
At 2/02/2012 11:10 AM, Blogger Larry G said...

I think even if homes are appreciating in value, it's perceived as much more of a crap shoot than ever before.

People who are sitting in homes that have lost half their value and they owe more than the house is worth and cannot even sell it to take a better job without taking a hue loss - are not going to be convinced that homes are still good investments - and rightly so IMHO.

the world has changed for most folks who spent years putting 1/3 of their income into their home and now it's gone.

 
At 2/02/2012 11:19 AM, Blogger morganovich said...

"People should view the house/apartment they live as shelter and not as an investment"

that is absolutely true. almost everyone who buys a home with a mortgage loses money on it.

traditionally, you face 5-6% interest, another 1% in taxes, and another 1-2% in upkeep annually.

that's about 8% in the hole every year, even before inflation which adds another 3% easily.

thus, if your house doesn't double in value every 6.5 years (and almost none do) then you lose money.

oh, and don't forget the 6% fee when you sell...

 
At 2/02/2012 11:21 AM, Blogger Walt G. said...

PeakerTrader: "Larry, the first chart shows even after the bursting of the housing bubble, the long-run trend shows appreciation:"

But how do you improve your wealth/standard of living by home ownership even with increased home values? I am talking about an asset a prudent investor would put on his or her personal balance sheet.

The house you bought for $50,000 goes up in value to $100,000 and you sell. You have two choices for your money: 1) buy a $200,000 house than was $100,000 when you bought your last house, or 2) lower your standard of living by buying a $50,000 house that was $25,000 when you bought your last house. I will assume sleeping on a park bench is not a viable option. Going in hock for a bigger house is a loss to me and lowering my standard of living is a loss to me and this is with an increase in home values.

 
At 2/02/2012 11:44 AM, Blogger PeakTrader said...

Walt, my parents bought a house in 1978 for $100,000. In 2005, it was worth over $900,000, and today it's worth about $700,000.

They refinanced twice at lower rates, for lower payments, and took out $150,000 in equity.

They're living in that house for less than $1,000 a month, and the equity is around $575,000 (after paying-down the new mortgage).

 
At 2/02/2012 11:58 AM, Blogger morganovich said...

peak-

if they paid 100k and took out a mortgage, then they paid over $300k for the whole thing. likely more than that given that rates in the late 70's were double digit.

add in taxes 1% of assessed value for 32 years and you are likely looking at another $130k.

add in maintenance and insurance and you likely pile on another $150-200k.

now you're over $600k in costs, which exceeds their equity even before inflation.

inflation adjusted, they lost big.

prices went up over 300% in that period. (using CPI)

people just don't do the math the right way, so they don't see it.

in inflation adjusted terms they spent about $600k to get $200k in equity, a whopping loss.

granted, they likely saved money on rent etc and that does matter, but as a stand alone investment, housing stinks if you take out a mortgage and is pretty tough even without one.

 
At 2/02/2012 12:04 PM, Blogger PeakTrader said...

Morganovich, so, you're saying they would've been better off renting since 1978?

 
At 2/02/2012 12:19 PM, Blogger morganovich said...

peak-

no, that's not what i'm saying.

i'm saying that as an inflation adjusted investment, their house, like almost everyone's, has been a big loser.

i don't have the info to do a renting calculation.

if they had put $100k into a bond in 1978, it would be worth $650k today (assuming 6% avg rates, which is likely too low given the period). put in the stock market, they'd have more like $1.1 million.

but they would have paid out rent too all along. we'd need to know what that was to do the calculation.

but, i'm not really sure you can look at rent/own in purely financial terms.

personally, i enjoy owning as it's my house. i can change things, paint things, and put in amenities that would never be found in a rental (like a wolf movie theater).

it also gives me continuity and predictability. rental rates can change, landlords can want to move in or fail to take care of a property.

you have a lot more control when you own. to my mind, that's worth something.

i'm not attempting to disparage home-ownership, i do it myself. i am just pointing out that as an investment, buying a house with a mortgage is a bad one and few even make their money back pre inflation when they sell.

they think they do, because they fail to account for all the costs, much less the opportunity costs, but it's a popular delusion, not a fact.

 
At 2/02/2012 12:24 PM, Blogger PeakTrader said...

Morganovich says: "if they had put $100k into a bond in 1978, it would be worth $650k today."

They can't live in a bond, and what's the capital gains tax when it's sold?

 
At 2/02/2012 12:52 PM, Blogger juandos said...

"How about if you blame the Volt for falling Volt sales: It is a crummy knock-off hybrid with a lot of sales hype. Some of it from the president"...

How about not blaming the Volt for being the Volt but Obama & the politos that thought the stimulus was needed to bail out their compadres in the autombile business, eh hydra?

Would the Volt have come into existence if GM hadn't been bailed out?

 
At 2/02/2012 12:57 PM, Blogger Ron H. said...

"How about if you blame the Volt for falling Volt sales: It is a crummy knock-off hybrid with a lot of sales hype. Some of it from the president."

*like*

 
At 2/02/2012 1:14 PM, Blogger Walt G. said...

PeakTrader,

If your folks sell their house, what will they do with the money? Buy a bigger house, buy a smaller house, or rent? I don't see not having shelter as an alternative.

I am not against home ownership. I like my house and property. I just don't want to depend on counting it in my wealth, so I don't.

 
At 2/02/2012 1:16 PM, Blogger Ron H. said...

"thus, if your house doesn't double in value every 6.5 years (and almost none do) then you lose money.

oh, and don't forget the 6% fee when you sell...
"

Yeah, but when you sell it, you get all your rent money back.

 
At 2/02/2012 1:28 PM, Blogger Ron H. said...

juandos: "Would the Volt have come into existence if GM hadn't been bailed out?"

Probably, but it might have been known as the Ford Ohm, or the Chrysler Amp. :)

 
At 2/02/2012 1:33 PM, Blogger morganovich said...

peak-

did you even read my comment?

i already laid out how to do a rent/buy equation. you comment makes me think you read only the first few lines.

no, you can't live in a bond.

but you can (in 1978) pay what, 2k a year in rent and live there and keep the rest in a bond. in fact, the bond in 1978 probably appreciated 9%. that's 9k, several multiples more than you paid in rent. so you are ahead of the game at year end.

you forgo this to buy a house and then pay 6-10% in costs, but you may get some appreciation. however, if in 1978 your mortgage was likely 10%+ and you paid another 3% in taxes, maintenance, insurance, etc, then you'd be down 13% on that vs up 9% on a bond and would need mid-high 20's appreciation in one year to keep up.

this is pretty basic stuff, do you really not understand how to do simple NPV comparisons?

 
At 2/02/2012 1:42 PM, Blogger morganovich said...

ron-

"Yeah, but when you sell it, you get all your rent money back."

no you don't. as an NPV you get back less than you put in.

you also face the opportunity costs of what that money could have done instead of generating a pre inflation loss in your house.

read the one year example i just laid out for peak.

in such a situation, buying a bond and renting clearly dominates buying a house in financial terms. iterate it 30 times and the divergence just widens.

this may not be so at present as rates are so low, but it certainly was in the 70's.

and actually, i just realized my earlier calculations on bond performance were much too conservative.

i was using a blended rate for 30 years, but that's not how it would have gone.

you buy a 30 year bond in 1978 at 9% (likely higher, but let's use 9) and 30 years later 100k is 1.33 million.

you make no additional payments.

on that house you have $575k in equity for which you paid around $600k.

thus, so long as you paid less than 1.35 million in rent ($3750/month) you came out ahead.

given that rents are not that high in most markets even now, much less 30 years ago, the evidence points to renting being a better financial decision than buying in that case.

do this with 3% long bond yields and 3.5% mortgages, and it may look different, but in this example, the data is pretty clear.

 
At 2/02/2012 1:47 PM, Blogger morganovich said...

"Would the Volt have come into existence if GM hadn't been bailed out?"

perhaps a better question is would the volt have come into existence if GM had been bought/bailed out by any entity other than a government?

 
At 2/02/2012 5:06 PM, Blogger PeakTrader said...

Given monthly payments for mortgages are so low, it may be cheaper to buy than rent:

Cost Spread Between Owning a Home and Renting is Narrowing: Credit Suisse
July 13, 2010

With mortgage rates at record lows and housing markets stuffed to the gills with cheap distressed properties that's led to declining home prices, the cost to own a home is sometimes cheaper than renting an apartment in many markets, according to analysts at Credit Suisse.

 
At 2/02/2012 5:51 PM, Blogger PeakTrader said...

Stronger Lure for Prospective Home Buyers
NOVEMBER 26, 2011

Home prices and mortgage rates have fallen so far that the monthly cost of owning a home is more affordable than at any point in the past 15 years and is less expensive than renting in a growing number of cities.

The Wall Street Journal's third-quarter survey of housing-market conditions in 28 of the nation's largest metropolitan areas:

Monthly mortgage payments on the median priced home—including taxes and insurance—are lower than the average rent levels in 12 metro areas.

Those cities where it is cheaper to own than rent include Atlanta, Chicago, Detroit, Las Vegas, Miami, Orlando and Phoenix.

In Atlanta, which had the most favorable values for owning versus renting, the monthly payment on the average home was $539 assuming a 20% down payment during the third quarter. By contrast, the average asking rent stood at $840.

The trend is getting even more interesting. In San Diego, where the monthly cost of home ownership compared to renting averaged about 83% more in the past 20 years, has slid to just 22%.

 
At 2/02/2012 6:06 PM, Blogger Walt G. said...

PeakTrader,

There is a huge difference between renting and buying or using your principle residence as a secure source of future income-producing wealth. For a good visual representation, chart your home cash flows and compare how many arrows are pointed down instead of up.

 
At 2/02/2012 6:27 PM, Blogger PeakTrader said...

Walt, of course, owning a home has expenses. So, does owning a car, and even having a job (e.g. a $5 cup of Starbucks coffee, lunch, buying & cleaning clothes, etc.).

 
At 2/02/2012 8:20 PM, Blogger Walt G. said...

PeakTrader:

Of the items you mentioned, only my job produces consistent positive cash flows I can count on.

 
At 2/02/2012 9:40 PM, Blogger VangelV said...

But the cars are a lot better and last longer. One of those inflationary adjustments Vange complains about.

No. As usual, you are looking at the wrong thing. The average age has increased as much as it has because people could not afford to purchase new vehicles or could not find financing. Higher gas prices and an economic contraction means that they drive fewer miles and repair rather than replace older vehicles.

 
At 2/03/2012 3:42 AM, Blogger PeakTrader said...

Autos are more durable:

Americans Are Keeping Their Cars Longer, and It's Not Just the Recession
March 9, 2011

According to George Augustaitis, an analyst at IHS Automotive, today's cars are just better made, so people are keeping them longer.

It's not uncommon, for instance, to see Toyotas and Hondas from the early 1990s still on the road with 200,000 or 300,000 miles on them.

People are holding onto cars longer because they're simply built better, and that's reflected in the initial quality data from J.D. Power and others.

 
At 2/03/2012 4:32 AM, Blogger PeakTrader said...

Ron says: "Yeah, but when you sell it, you get all your rent money back."

I guess, Morganovich believes borrowing $100,000 at 10% to buy a $100,000 bond at 9% and renting is better than buying a house.

 
At 2/03/2012 7:03 AM, Blogger Walt G. said...

PeakTrader,

I will grant you buying can be emotionally and financially superior to renting. I think your home is a poor source of future income-producing wealth so you should not count on it for your financial security. You better have a plan B if it is.

 
At 2/04/2012 5:18 PM, Blogger Ron H. said...

morganovich,

While I agree that as a standalone investment, a bond is most likely to outperform a house, it may not be so much of a blowout as you claim.

You may not be comparing apples to apples. If you compare a 100K bond bought for cash, don't you need to compare it to a 100k house bought for cash, with no mortgage? You may want to compare the performance of a $20k investment (20% down) to that 100 k bond, or a 100k down payment on a 500k house to that 100k bond over 30- years.

You can use a 6.75% mortgage interest rate for 1978. Trust me.

I would want to assume that rent for a single family house will, over the long run, be roughly the same or higher than the costs of ownership, because if that were not generally true, there would be no houses available to rent. A landlord hopes for either price appreciation or positive cashflow at some point.

If you count the realtor's commission at the sale of the house, you must include cap gains in the sale of the bond.

Does any of this change your calculation?

I have neither the handy tools nor the time to do this myself right now.

 
At 2/04/2012 7:23 PM, Blogger Walt G. said...

Ron H.,

I have both a house and investments bought in 1987 (25 years ago this June). The house is worth almost exactly what I paid for it, and I have put the same amount in repair and upgrades, so it is worth 1/2 what I paid for it (I just appealed and won my property tax case in the Michigan State Tax Tribunal). My investments I made at the same time I bought the house are worth between 8 times and 9 times what I paid for them (I just checked this out).

Even before the housing slump, my house was assessed for what I had in it. This does not include the interest and taxes I paid on the house or inflation. I like being a homeowner, and it might also be financially better than renting, but my house has underperformed any investment I have ever had over the last twenty-five years.

 
At 2/04/2012 7:26 PM, Blogger Walt G. said...

That is any investment I have ever had the last except my GM stock :)

 
At 2/05/2012 2:07 AM, Blogger Ron H. said...

Walt: "I like being a homeowner, and it might also be financially better than renting, but my house has underperformed any investment I have ever had over the last twenty-five years."

That a house is a poor investment isn't in question. The issue, is that you will pay rent in one form or another, and if you compare a bond to an owner occupied house, you need to include the amount of the imputed rent as a gain for the house.

In addition,you need to compare it on the same terms. If you have a mortgage, your investment is only the amount of the down payment, not the full price of the house, unless you compare it to a bond for which you borrowed 80% of the price.

Inflation is the same for both bond and house, so calculating both in nominal dollars is fine.

 
At 2/05/2012 12:30 PM, Blogger Walt G. said...

Ron H.,

If you expense your shelter expenses on your personal cash flow statement whether it is rent, or P & I, property taxes, and insurance, and you don't include your house on your personal balance sheet as an asset, you will have a much clearer picture of your immediate/usable wealth.

To rent or own shelter can be a separate decision where the financial advantages are secondary over the emotional decisions.

 
At 2/05/2012 1:48 PM, Blogger Hydra said...

Homes are not wealth? People with more than one will disagree.

 
At 2/05/2012 1:58 PM, Blogger Hydra said...

The average age has increased as much as it has because people could not afford to purchase new vehicles
++++++++++++++++++++

That is part of it. But one reason one cannot " afford" a new car is that they'd still have a reliable old one. I typically drive my cars until the whhels fall off, rebuild them and do it again. They last a lot longer nowadays.

 
At 2/05/2012 2:05 PM, Blogger Ron H. said...

Walt: "If you expense your shelter expenses on your personal cash flow statement...

Walt, I understand your argument, which you have made several times before.

"...and you don't include your house on your personal balance sheet as an asset..."

But your house may be an asset. If you have positive equity you can borrow against that equity, or you could sell it and rent instead.

In any case my comment was about comparing a bond to a house as an investment, and I was asking for an apples to apples comparison.

 
At 2/05/2012 2:07 PM, Blogger Ron H. said...

"I typically drive my cars until the whhels fall off..."

Or until a headlight goes out.

 
At 2/05/2012 2:14 PM, Blogger Larry G said...

" Or until a headlight goes out"

ouch. ouch. ouch.

;-)

 
At 2/05/2012 3:30 PM, Blogger Walt G. said...

"In any case my comment was about comparing a bond to a house as an investment, and I was asking for an apples to apples comparison."

Typical 25-year Example:

House: pay 6% interest, 3% repair cost, 1% taxes and insurance = -10%a year

Bond: earn 6% year = +6% a year

Spread between house and bond 16% a year.

You have to hope for a hell of a lot of house appreciation to come out ahead.

 
At 2/05/2012 6:12 PM, Blogger Hydra said...

I replace headlights, engines, clutches, transmissions, even replaced an entire body once.

I have seen good designs and bad designs as far as durability goes, and good and bad for maintainability. I admit it is a pet peeve, but deliberately making and selling something that cannot be repaired cost effectively is a fraud. Unless the thing is so cheap that any repair is not cost effective.

 
At 2/05/2012 6:12 PM, Blogger Hydra said...

Walt: do you own a home?

 
At 2/05/2012 6:19 PM, Blogger Hydra said...

If your bond defaults, you get nothing. You may not get your money back out of a house, but you still have something.

Of course people borrow to buy cars, too, with almost no expectation of return.

 
At 2/05/2012 6:30 PM, Blogger Hydra said...

Many houses a have lost half their PEAK value, and are still worth more than their initial cost.

You could say the same about many stocks: off their high, but still in the black, and still churning out dividends.

Hard to find a rental that does that.

In order to make the rental argument work, you would have to put up the same amount of money every month, some for rent and some for other investments. The return on the rent portion is zero.

 
At 2/05/2012 6:57 PM, Blogger Walt G. said...

Hydra,

Yes, I own a home, but no rental houses. My dad had 5-10 rental houses all the time when I was growing up, and I learned my lesson then. I work for landlords on repairs on the side now. I have positive cash flows on that work; they usually do not. Of course, we are in a depressed area, too (Flint, MI.).

My argument is not rent vs. buy. It's buy vs. other investments. Except for my GM stock, I have never lost 100% of an investment. Even with that GM loss, my gains on my stock portfolio over the last 10 years are a bit over 9% annually (that includes the 2008 crash). I believe in diversification of income streams for financial security. My real estate income stream is in REITs.

The formula to see if you have a housing profit: rent value to you + appreciation + tax advantages - opportunity costs (interest) - PMI - maintenance costs - taxes - insurance - transaction costs to buy and - transaction costs to sell.

 
At 2/05/2012 7:59 PM, Blogger Hydra said...

How do you reconcile your ownership with your argument?

I've been lucky with real estate, apparently. Up well over 300% in 20 years and throwing significant free cash flow every month.

I have done slightly above average in the market, too, but I am nowhere near as negative on real estate as described here.

 
At 2/05/2012 8:58 PM, Blogger Walt G. said...

Hydra:

Are you talking about rental property or your personal house?

If rental, are you up 300% after subtracting opportunity cost interest, carrying costs (repairs), taxes, insurance, and the opportunity cost of your time you could you have to have been doing something else if you were not dealing with tenants or the houses? You also have to count transaction costs to acquire and sell the houses along with the time that you have to wait to collect your money. If your house, you have to sell or refinance with the associated costs to pocket any profit and possibly buy or rent another place to live.

As I stated earlier, the market value of my house is currently worth almost exactly what I paid for it 25 years ago. I like my house, but I do not consider it an asset.

 
At 2/06/2012 3:37 AM, Blogger Ron H. said...

Walt: "Typical 25-year Example:

House: pay 6% interest, 3% repair cost, 1% taxes and insurance = -10%a year.

Bond: earn 6% year = +6% a year

Spread between house and bond 16% a year.

You have to hope for a hell of a lot of house appreciation to come out ahead.
"

OK, let's continue.

Rent while holding bond instead of buying house: -10% per year - approximately equal to interest, insurance, tax, and maintenance.

Actual spread assuming no appreciation of house is 6%.

Investment in house 20% down.

20% x 6% = 1.2%. annual appreciation of house necessary in the first year to equal 6% bond.

Not so hard to imagine, is it?

 
At 2/06/2012 3:44 AM, Blogger Ron H. said...

Walt: The formula to see if you have a housing profit: rent value to you + appreciation + tax advantages - opportunity costs (interest) - PMI - maintenance costs - taxes - insurance - transaction costs to buy and - transaction costs to sell."

You mean add the stuff that comes in and subtract the stuff that goes out? Sounds like a good formula. :)

 
At 2/06/2012 7:12 AM, Blogger Walt G. said...

Ron H.,

Here's what I imagine about just an investment not considering a rent or buy choice:

Investment choices yearly cost/benefits:

1) $20,000 down on a $100,000 house.
6% interest on $80,000 = $4800
Property tax = $2000
Insurance = $1000 (1%)
Maintenance = $2000 (2%)
Total = cash flow out of $9800
You might shave the 2% maintenance cost, but you will lose that in depreciation when you sell.

Minus the tax write-off if you don’t take the standard deduction

2) Bond $20,000 at 6% = cash flow in of $1200 just sitting at home.

My experience is many people overestimate cash flowing in and underestimate cash flowing out. I used to do income taxes for a tax service. Most people I talk to cannot tell me how much they spent on gas, groceries, and etc last year and only know their gross pay or AGI if it is tax time.

 
At 2/06/2012 7:51 AM, Blogger Walt G. said...

Hydra,

A $100,000 dollar house that appreciates to $300,000 in 20 years is returning a 5.65% compound annual growth rate. That assumes you don't put a penny more into the house over the 20 years, which you will.

 
At 2/06/2012 8:18 AM, Blogger VangelV said...

House: pay 6% interest, 3% repair cost, 1% taxes and insurance = -10%a year.

Bond: earn 6% year = +6% a year

Spread between house and bond 16% a year.


First, where exactly do you find a bond that yields 6%?

Second, if you purchase a 30 year bond today your return will likely be significantly poorer than if you purchased a house with a 30 year mortgage today.

Note that I do not like real estate much and expect it to track inflation over time. But it seems clear that bods have a negative return these days and are one of the worst buys around.

 
At 2/06/2012 9:35 AM, Blogger Walt G. said...

Vange VI,

The bond example was a 1980s era example because we were discussing 20 and 25 year ago investments.

Pick any numbers you like. My REITS have returned 9% already this year. I will make my real estate play sitting at home instead of fishing out tampaxes from sewer lines and picking up dog shit out of basements at rental houses for my dad when I was a kid.

 
At 2/06/2012 9:52 AM, Blogger VangelV said...

Vange VI,

The bond example was a 1980s era example because we were discussing 20 and 25 year ago investments.

Pick any numbers you like. My REITS have returned 9% already this year. I will make my real estate play sitting at home instead of fishing out tampaxes from sewer lines and picking up dog shit out of basements at rental houses for my dad when I was a kid.


OK. Let us start with a 6% yield when inflation was higher than that for most of that period. I think that both the real estate and bonds would have provided poor returns.

First, the purchasing power of the USD fell by more than half so the bond gains would not have been as high as it appears, particularly if you had to pay tax on the interest paid out. And given the fact that one would have used savings to purchase the bonds even if one could have purchased a high yielding 'safe' bond the total gains would have been low.

Second, while the gains from the leverage used when purchasing a house would have helped it is important to note that Ron is correct when he is talking about the cash flow situation. Real estate requires maintenance, utility, and financing costs. On top of that you pay property taxes every year.

By the time you account for everything you find very poor real returns for both approaches. I still think that Don Coxe was onto something when he suggested that individuals look to beaten down sectors that have gone through a triple waterfall and put their money there. In 1980 that would have been bonds and stocks. But as I pointed out, the liquidity injections by the central banks did not help bonds as much as they would have in a hard money system and the gains there were not material in real terms. The right play would have been stocks.

If we apply the same logic to today we would have to look to housing, real estate, and some of the commodities. The problem is that today the currencies are in big trouble and ready to lose what is left of their purchasing power. And unless local governments can get some revenues from taxing drug transactions or gambling the property tax hit would be too high to justify getting into real estate at this particular period of time.

 
At 2/06/2012 10:03 AM, Blogger Walt G. said...

Vange IV,

I am a buy-and-hold investor since my Peter Lynch and Fidelity Magellan days. I tweak the mix a bit, but I keep putting money in if the market is up or down.

Here's my 2012 portfolio performance to date of 37 days (and, NO, I don't expect this to always happen):

9.11% REIT Funds
12.39% Growth Stock Funds
9.92% Value Stock Funds
1.52% Bond Funds
29.16% GM Stock
16.25% Gold Funds

I don't care what my house was worth on 12/31/2011 and today or next year or the year after that.

 
At 2/06/2012 10:41 AM, Blogger VangelV said...

Here's my 2012 portfolio performance to date of 37 days (and, NO, I don't expect this to always happen):

9.11% REIT Funds
12.39% Growth Stock Funds
9.92% Value Stock Funds
1.52% Bond Funds
29.16% GM Stock
16.25% Gold Funds

I don't care what my house was worth on 12/31/2011 and today or next year or the year after that.


What your returns are showing is the extent to which the Fed and other central banks have flooded the system with liquidity. But what do you think happens if the bond market dries up? After all, if default insurance is to be worthless if bonds fall by 60% why would anyone buy sovereigns any more? And if that leaves the central banks monetizing government debt what exactly happens to the currency and your after-tax gains?

 
At 2/06/2012 11:02 AM, Blogger Walt G. said...

Vange IV,

What you say might happen, but I grew up practicing running to fallout shelters for a nuclear explosion that never happened. In truth, we would have all been vaporized anyway.

 
At 2/06/2012 2:16 PM, Blogger Ron H. said...

Walt: "Here's what I imagine about just an investment not considering a rent or buy choice:

Investment choices yearly cost/benefits:
"

You are missing the point. You have estimated a negative cashflow for a house you have bought and then left unused. No one does that. You are ignoring the value of the rent.

If you rent it to tenants, like any sane investor would do, you can add rental income of about the amount as the expenses you mentioned, thus your cashflow is approximately 0.

If you live in the house yourself, you can add the same amount as you would if you rented to others, as you won't be paying rent somewhere else.

If that 100k house appreciates 1.2% in a year, you have matched the return on a 6% bond.

I understand that housing has done poorly in your area, but that isn't true everywhere.

In many areas inflation has driven housing prices and rents higher over the years. A typical rental housing investor might expect negative cashflow for the first few years of ownership, with rental prices rising over time to make it neutral or positive.

Most prices, including housing, have risen over the years due to inflation. That house is, if nothing more, a hedge against inflation, if not a positive return on your leveraged investment.

Obviously, your mileage may vary, but the same numbers apply whether you live in the house or rent it out.

If it was impossible to make money in houses as investments, there would be no rental houses available, as no one would buy them for that purpose.

 
At 2/06/2012 2:18 PM, Blogger Ron H. said...

Walt: "Most people I talk to cannot tell me how much they spent on gas, groceries, and etc last year and only know their gross pay or AGI if it is tax time."

:) In their defense, there are few other times when knowing one's AGI is necessary.

 
At 2/06/2012 2:23 PM, Blogger Ron H. said...

Walt: "A $100,000 dollar house that appreciates to $300,000 in 20 years is returning a 5.65% compound annual growth rate. That assumes you don't put a penny more into the house over the 20 years, which you will."

That also assumes you paid $100k cash and have no mortgage. Try that with a 20% down payment and add the value of the rent for 30 years.

 
At 2/06/2012 2:50 PM, Blogger Ron H. said...

Walt: "I will make my real estate play sitting at home instead of fishing out tampaxes from sewer lines and picking up dog shit out of basements at rental houses for my dad when I was a kid."

I can see why you are soured on rentals. :)

Nowadays, we use things called managers to handle all that tenant stuff, and they hire maintenance people or kids like you to do the dirty work, so most real estate plays are now made while sitting at home.

Of course, a proper security deposit allows the owners of tampaxes and dog shit to pay for their removal.

I realize that probably doesn't make it any better when you're the kid removing them.

 
At 2/06/2012 3:27 PM, Blogger VangelV said...

What you say might happen, but I grew up practicing running to fallout shelters for a nuclear explosion that never happened. In truth, we would have all been vaporized anyway.

What exactly do you think that I am predicting? I am merely saying that fiat currencies have a way of evaporating and losing their purchasing power. This is not theoretical. I have experienced this first hand in Europe, Africa, and in Asia. Now you could argue that the USD is different but I will point out that it has lost more than 80% of its purchasing power since Nixon closed the gold window.

I point back to your own history. The Continental experiment did not turn out very well. Neither did the Greenbacks. FDR took the nation's gold and devalued the USD $20.67 to $35 per ounce. There were property tax riots during the Great Depression as municipalities jacked up rates to pay for police, fire, etc. They only ended when Prohibition ended and they could raise taxes from the sale of liquor. This time around it will be drugs and gambling revenue that saves the day. But given the debt levels it won't save the currency.

 
At 2/06/2012 3:37 PM, Blogger VangelV said...


Which shale producers are cash flow negative? I just looked very quickly and Whiting's cash flows look okay.


I don't know the company well but didn't it announce around $100 million in borrowing because operating cash flows were insufficient to finance its drilling?

My problem with the industry is the inability to generate enough cash flow to pay for its drilling costs. You would think that after nearly a decade of operations the industry could show a few companies that could be self financing. Now it may be that such companies are out there (I expect those in core areas of good formations to make a pile of money) but I just don't see them.

And let me remind you that some shale producers will be fine if they get most of their cash from conventional operations. In that case the value of the shale comes from the ability to hide the depletion rates and use the stock price to acquire smaller players with conventional reserves, not from the shale operations.

 
At 2/06/2012 6:04 PM, Blogger Walt G. said...

Ron H."In their defense, there are few other times when knowing one's AGI is necessary."

I meant they don't acknowledge their net pay. If asked, they will tell you their gross pay, which is more than they have to spend and understate their bills ("my cable bill is $100.00" when it is actually $146.00).

I work for landlords on the side. After they get done paying for upkeep their profit is low or non-existent. In this area, landlords who make money do their own work. The security deposit is spent on non-payment during the eviction process. I realize this area is not an example of the entire U.S., but it is where I am at.

 
At 2/07/2012 2:58 AM, Blogger Ron H. said...

Walt: "I meant they don't acknowledge their net pay. If asked, they will tell you their gross pay, which is more than they have to spend and understate their bills ("my cable bill is $100.00" when it is actually $146.00)."

And that's why they come to you to have their EZ forms completed. You should thank them.

 

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