Too good to be true...

May 31, 2006 7:31 PM

How to Buy a $450K Home for $750K - Yes, its true. Low and behold, all the conditions have been met, and it is indeed possible to buy houses for 50% above their market value.
posted by H. Roark (56 comments total)

/me makes a loud "moo" sound, then beholds.
posted by uosuaq at 7:42 PM on May 31, 2006

Enlist an army of Wall Street and media cheerleaders to promote the notion that "this time it's different" and "housing never drops in value,"

Meh. The post isn't too bad, but Wall Street would much rather you bought securities than real estate. Suzanne, on the other hand...
posted by Kwantsar at 7:44 PM on May 31, 2006

Does it say who paid for the ad?
posted by soiled cowboy at 7:49 PM on May 31, 2006

Suzanne, on the other hand...

Ugh, how I loathe Suzanne. Btw, the text accompanying the video is lifted from The Nastiest Wife on Television.
posted by Armitage Shanks at 7:50 PM on May 31, 2006

Er... is there a point to that article? It's just a generic bitchfest, with nothing new to add to our knowledge. It wasn't amusing, it wasn't insightful, and it wasn't informative.

H. Roark, I'm curious: why did you post this? Maybe if I can get on the same wavelength as you, I'd appreciate the article...
posted by five fresh fish at 7:51 PM on May 31, 2006

Yes its true

Someone with that much cash to throw around ought to be able to afford an apostrophe.

Where's that link to the Shockwave house-flipping game?
posted by emelenjr at 7:59 PM on May 31, 2006

five fresh fish, if you go to the guy's blog index, he seems completely dedicated to the housing bubble. I've never seen so many graphs in a blog before.
posted by mathowie at 8:00 PM on May 31, 2006

fff, just because YOU know something, doesn't mean that every reader of mefi knows it.
posted by parallax7d at 8:03 PM on May 31, 2006

There's been so many American jobs offshored that frankly I cannot see how the bubble can't burst, short of some new miraculous industry sector appearing. All the semaphores are pointing into the hole.
posted by rolypolyman at 8:05 PM on May 31, 2006

"Lo"
posted by hackly_fracture at 8:23 PM on May 31, 2006

House prices are pretty important. Since there are still people buying mcmansions, there are people for whom valuation discussion is informative. More substantive housing bubble discussion here or here . It matters a lot whether prices stagnate and volume drops, as has happened in regional booms in the US and is happening in Britain now, or whether there's a sharp drop in nominal prices. FWIW, I thought the ad was funny.
posted by lw at 8:33 PM on May 31, 2006

Foreclosures on the rise nationwide.
posted by brownpau at 8:39 PM on May 31, 2006

The guy's blog is indeed interesting, especially the entry from May 25, 2006. There are some good points there about the opportunity costs of home ownership.

Although, based reading some of his other entries, I think he fundamentally misunderstands the mortgage-backed securities market. He's wrong about the assessment of risk in that market--I actually wrote a little rant about it here, but I realized I was arguing with no one so axed it.
posted by mullacc at 8:45 PM on May 31, 2006

Look at the picture of the ad carefully. Looks like a little lowtech cut-n-paste going on there to me.
posted by konolia at 8:46 PM on May 31, 2006

Shhh, I live in a bubble house, do NOT pop my bubble!
posted by fenriq at 8:50 PM on May 31, 2006

Since my condo is on the market, what I'd really like to know is how to sell a home for 30 to 50 percent above market value. I didn't go to the guy's blog, but is that in there someplace?
posted by diddlegnome at 8:57 PM on May 31, 2006

Another excellent blog link! Thanks, HR.
posted by mischief at 9:03 PM on May 31, 2006

Speaking of housing blogs -- and hoping this is an acceptable digression -- what happened to America's Overvalued Real Estate [previously]? I looked at it today for the first time in about a week, and it's now a weirdly written (and yet boring) essay about commerical real estate.
posted by The corpse in the library at 9:04 PM on May 31, 2006

My housing needs are pretty simple. All I want is one of these (previously mentioned here), but even for something as modest as that I can't find a speck of land on which to put it. I, and hoards of middle-class renters like me, await the day when the investment real-estate market collapses so we actually have a chance of owning any property at all. Unfortunately, the fact that I want it to happen doesn't bring it any closer to reality.
posted by 1adam12 at 9:46 PM on May 31, 2006

uosuaq: best comment I have seen in ages!
posted by nightchrome at 10:03 PM on May 31, 2006

The cutting-edge secret to buying real estate at 30% to 50% below market value? It's this simple: wait a few years for the market to re-set valuations. Pretty simple, huh?

Umm..the market value is whatever the house will sell for.
So if the market "resets" then the new price _is_ the market value, not 50% below market value.
posted by madajb at 10:19 PM on May 31, 2006

What I'd like to know is, what does a bubble-burst look like when it's real estate instead of securities? Shares of meatbid.com may not have any intrinsic value, but you can always live in a house, right? At the worst, the govm't can buy it to put up Katrina victims, or something. What am I missing here? I've been reading these links, and none of them are actually making the case in terms I can understand. Economist... please hope me.
posted by anotherpanacea at 11:05 PM on May 31, 2006

I'm not an economist, but a real estate bubble burst would feature a number of bank foreclosures for people who are in with little equity and rising adjustable rate mortgages that they can't afford. That would put a lot of additional property on the markets which would drive down the price that sellers can get for their homes.

That's fine if you got in low or if you don't want/need to sell. However, if you got in when prices were high, you'll be forced to wait to sell until the prices can get back up. If you have to sell, you'll be forced to take a major loss -- you may even be upside down on the loan.

You'll also may see a pretty nasty recession as people who have been driving the economy with home equity loans can't get the loans any more or just don't want them at the much higher interest rates. The economy has been propped up on credit and cheap money, but both of those would likely reverse themselves.
posted by willnot at 11:46 PM on May 31, 2006

Hmmm... less bad than 2001, then? Or potentially worse? I guess I'm wondering whether this is a problem for anyone other than real estate speculators and people who work in construction.
posted by anotherpanacea at 12:00 AM on June 1, 2006

people who work in construction are a fairly big chunk of the economy. Throw half of them out of work at once & you can expect a recession in your future.

A real estate crash is usually seen as more serious than a stock market crash for the economy as a whole, because people's investment is real estate is usually leveraged, so they lose all their capital in a crash.
posted by pharm at 12:57 AM on June 1, 2006

There's been so many American jobs offshored that frankly I cannot see how the bubble can't burst, short of some new miraculous industry sector appearing.

Here's how:

1. Lots of people in India and Pakistan get jobs outsourced from the U.S.

2. Bush throws open the gates on immigration, because it makes big business happy.

3. Lots of those Indians and Pakistanis (and Chinese, and Russians, and etc.) move to the U.S. and need housing.

4. Bubble!


Of course, this all really sucks for those who already live here, and probably many of those immigrants can't find good jobs here, but that's progress in our Global Economy. Can't make an omelet without breaking eggs, and all.
posted by Kirth Gerson at 4:05 AM on June 1, 2006

1adam12: I, and hoards of middle-class renters like me, await the day when the investment real-estate market collapses so we actually have a chance of owning any property at all. Unfortunately, the fact that I want it to happen doesn't bring it any closer to reality.

Adam, get yourself a Realtor. Even if you're not actively looking, have that person look for foreclosures, sheriff's sales, and estate auctions. If you've got your paperwork in order, a comfort letter from a banking institution, and the like, you could pounce on a ridiculous deal.

My wife, who is a Realtor, happened on a house in Stamford, CT just recently where the bank foreclosed on its prior occupants and the bank turned around and sold the house for 176k. This is in a neighborhood where the average house price for the features of this house would sell for 500-600k.

Of course, you need a Realtor for something like this because that's what these people do all day, and deals like these are cherry-picked within hours of going up on the market. Think of your Realtor as a ticket-searching-agent when you really wanted those Pearl Jam tickets in 1994.
posted by thanotopsis at 5:10 AM on June 1, 2006

Jesus H. Let me rant here for a second. thanotopsis, apologies to your wife in advance.

Why must we capitalize "Realtor"?! Is their job really important enough to get a capital letter? I don't capitalize heart surgeon, do I? It's a sales job, people! Get down from your high horse, and quit capitalizing your goddamn job title. It's just a job, and it's not Rocket Science. Thank you.
posted by heydanno at 5:45 AM on June 1, 2006

Realtor is capitalized because, as the OED puts it, it's "A proprietary term in the U.S. for a real-estate agent or broker who belongs to the National Association of Realtors (formerly the National Association of Real Estate Boards)." Here's the first use:
1916 C. N. CHADBOURN in Nat. Real Estate Jrnl. 15 Mar. 111/2, I propose that the National Association adopt a professional title to be conferred upon its members which they shall use to distinguish them from outsiders. That this title be copyrighted and defended by the National Association against misuse... I therefore, propose that the National Association adopt and confer upon its members, dealers in realty, the title of realtor (accented on the first syllable).

The question is why we cave in and use this artificial proprietary term instead of calling them "real estate agents," which is what they are.

Also, not only can the guy who wrote the linked blog not spell lo, he doesn't understand the meaning of market price. Hint: it's the price something sells for.
posted by languagehat at 6:18 AM on June 1, 2006

There are some good points there about the opportunity costs of home ownership.

Well, I dunno. I mean, he makes assumptions abotu rents versus home prices, which are just that - assumptions. While I understand the idea of opportunity costs, if these costs were so huge, why would anyone own the unit you're renting in the first place? Don't they have the same opportunity costs?

If the author is trying to say that he (and now we) knows something that landlord's don't, he's essentially saying that the rental market is highly inefficient. While I don't believe in perfectly efficient markets, I think that the rental market is a bit more efficient than that.

I bet if you looked a little harder you can find other factors that make renting look about the same, cost-wise, as owning. I mean, landlords aren't in the business of losing money (in general).
posted by GuyZero at 6:29 AM on June 1, 2006

And Charles Hugh Smith discovers the wonders of credit.
posted by monju_bosatsu at 6:50 AM on June 1, 2006

Your user name is perfect for this post.
posted by Mean Mr. Bucket at 6:53 AM on June 1, 2006

The ad does look fake. I think that he wrote the supposed ad copy and then mocked up the graphic as a sort of "headline" for his blog entry.

The ideas in the supposed ad are interesting and fine, but it is a sort of weird rhetorical technique to pretend to have stumbled across an ad that makes the points you wish to make.
posted by Mid at 6:58 AM on June 1, 2006

I therefore, propose that the National Association adopt and confer upon its members, dealers in realty, the title of realtor (accented on the first syllable).

And, I can't help but notice, lower case.
posted by Kirth Gerson at 7:02 AM on June 1, 2006

GuyZero writes: Well, I dunno. I mean, he makes assumptions abotu rents versus home prices, which are just that - assumptions. While I understand the idea of opportunity costs, if these costs were so huge, why would anyone own the unit you're renting in the first place? Don't they have the same opportunity costs?

I didn't mean to say he was absolutely correct--just that it's an interesting (and I think necessary) exercise to go through. I think many home buyers assume a downside scenario that is much rosier than what this blog puts forth.

GuyZero writes: If the author is trying to say that he (and now we) knows something that landlord's don't, he's essentially saying that the rental market is highly inefficient. While I don't believe in perfectly efficient markets, I think that the rental market is a bit more efficient than that.

He obviously set out to put home ownership in the worst possible light and found an analysis that supported him. BUT...I think the rental market is probably efficient in that rents reflects the demand for housing in a given market, but the housing prices have become artificially inflated due to a number of factors (easy mortgages, overly-optimistic assumptions about price appreciation, lack of awareness of additional costs, etc.). Also, you have to remember that a landlord's investment may come years before this housing price run-up, so market rents may be perfectly acceptable to her while unacceptable to new investors who bought a house at a higher valuation. To anticipate the obvious riposte to that--well, why doesn't the old landlord sell?--that landlord may view her investment as a very long-term prospect and won't give in to market timing.
posted by mullacc at 7:25 AM on June 1, 2006

or she may be averse to shares, taxes (or 1031s), commissions, et cetera.

Market efficiency (if we allow shades of grey) doesn't really happen when assets are not alike, transaction costs are high, and liquidity is low.

And, GuyZero, you can't make a rent vs own comparison without a ton of assumptions: changes in rent, return on money that would otherwise go to PITI, maintenance, present and future tax rates, present and future fees, present and future commissions, etc.
posted by Kwantsar at 7:37 AM on June 1, 2006

he doesn't understand the meaning of market price. Hint: it's the price something sells for.

So subsidies, tariffs, market manipulation and fraud don't exist? Good to know!
posted by jlub at 9:14 AM on June 1, 2006

Er, jlub... it's the price something sells for.

I'm also puzzled by the I recently came across this ad in a major American newspaper... framing. Is this a parody of adverts you do get in major American newspapers?
posted by jack_mo at 9:29 AM on June 1, 2006

I can't speak for quality of Charles Hugh Smith's take on real estate, but he's perfectly sound on the animes of Miyazaki. Read his brief and insightful comments on the magnificent "Spirited Away" (his comments on "Howl's Moving Castle" are less interesting). A cool guy, in some respects.
posted by Faze at 10:21 AM on June 1, 2006

Why must we capitalize "Realtor"?! Is their job really important enough to get a capital letter? I don't capitalize heart surgeon, do I? It's a sales job, people! Get down from your high horse, and quit capitalizing your goddamn job title. It's just a job, and it's not Rocket Science. Thank you.

I actually have the auto-correct feature set on Google spell-check, and it went through and changed those for me.

The only thing I hate about the word "Realtor" is how people, even within the industry, can tend to pronounce it with a Bush-ism (i.e. "Real-i-tor").
posted by thanotopsis at 10:50 AM on June 1, 2006

Er, jlub... it's the price something sells for.

Sigh. I thought this was obvious, but...

If it costs me $3 to grow a pound of rice, but the state government kicks me back $2.50 in water subsidies, then I sell you the pound of rice for $1, is $1 the market price for a pound of rice?

If I lie to you and tell you an acre of worthless swamp land in Florida is actually beachfront property, and you buy it from me for $1 million, is $1 million the market price for an acre of worthless swampland?

If I can buy a ton of steel in country A for $100, but I live in country B which imposes a $30 import tax, is the market price $130 for a ton of steel?

Things get bought and sold for prices which are not the market price all the time, for all kinds of reasons. In fact, I would go so far as to say that the vast majority of individual transactions are not made at market price, because the vast majority of transactions are not made in a perfect open market.

Like houses, for example.
posted by jlub at 10:53 AM on June 1, 2006

I thought the "low and behold" was a pun, not a misspelling.
posted by dances_with_sneetches at 11:10 AM on June 1, 2006

you can't make a rent vs own comparison without a ton of assumptions: [...]

It seems like a comparison that is almost never going to be effectively, to me. The financial analysis is fairly difficult (or at least fraught with inaccuracies), but there is another big difficulty I can't help thinking of whenever people talk about this comparison.

In most cases the biggest factor is living standard. If you are paying the full cost monthly, you will be willing to live a less luxurious lifestyle than if you bury the costs in the property value. I think this applies to every aspect of luxurious living, square footage, location, renovation, appliances..
posted by Chuckles at 11:25 AM on June 1, 2006

If it costs me $3 to grow a pound of rice, but the state government kicks me back $2.50 in water subsidies, then I sell you the pound of rice for $1, is $1 the market price for a pound of rice?

Yes.

If I lie to you and tell you an acre of worthless swamp land in Florida is actually beachfront property, and you buy it from me for $1 million, is $1 million the market price for an acre of worthless swampland?

No.

If I can buy a ton of steel in country A for $100, but I live in country B which imposes a $30 import tax, is the market price $130 for a ton of steel?

Yes.

The market value implies a market. If there is only one of the thing you're selling, then whatever you sell it for is market value. If there are more than one thing and some level of liquidity, a single sale does not a market price make. A house has an intrinsic market value (or, more accurately, a range of market values) based on the prices of comparable houses sold--if you sell your house below that intrinsic value range, for whatever reason, you've sold it at a price below its market value.
posted by mullacc at 11:32 AM on June 1, 2006

Chuckles writes "In most cases the biggest factor is living standard. If you are paying the full cost monthly, you will be willing to live a less luxurious lifestyle than if you bury the costs in the property value. I think this applies to every aspect of luxurious living, square footage, location, renovation, appliances.."

What costs are you talking about here?

Anyway, I don't see why the analysis is too difficult. It's fairly easy to figure out what all the various assumptions are and crunch the numbers--the trick is to come up with a reasonable range for each of the assumptions. If you don't bother with the analysis, you're still making the assumptions implicitly but you just didn't bother to quantify it.
posted by mullacc at 11:40 AM on June 1, 2006

Also, not only can the guy who wrote the linked blog not spell lo, he doesn't understand the meaning of market price. Hint: it's the price something sells for.

Methinks thou doest protest to much. Firstly, he never uses the term market price, instead, market value, which I think connotes the idea of what a given good would sell for on average with similar goods or over time.

I felt the use of "market value" in this post suggested that in an environment of deceptive CPI, undisciplined monetary policy, gross artifical liquidity, etc, the current market price for housing is massively and artificially inflated, and that this is an unsustainable situation; additionaly, if the history of housing markets is any indication, the bubble is about to correct itself and housing will become much cheaper. Therefore, any real market value, averaged over time to compensate for this bubble, would be, as the author contends, 30 to 50 percent lower than current prices.

Judging by the rest of this blog post, I would think that this is probably what he was trying to say, using the shorthand of market value. Could he have said "long term market value" and been a little clearer? Probably, but this would have been needlessly wordy, like I just was.
posted by [expletive deleted] at 12:18 PM on June 1, 2006

What costs are you talking about here?

My speculation is that in a rental you settle for less size, less luxury, less quality, and poorer location. My reasoning is that the luxury rental cost vs. the average rental cost is drawn in stark contrast, and most people will make the frugal choice.

The calculus changes when you buy. You start thinking about how much property value you will gain with that bathroom renovation and the new windows. You become hyper sensitive about your neighborhood, because it has such a huge effect on your investment. You get twice (or perhaps 4x) the square footage you need because 'we might start a family in 5, 6, n+1 years (where n-->inf).

Taken in total, instead of looking for the least you can live with (rental), you start looking for the most you can afford (buy).
posted by Chuckles at 12:19 PM on June 1, 2006

Err, to complete the idea..

The rational is, you should buy 'the most you can afford' because of the investment side. But, that keeps your costs (upkeep, taxes, the hidden cost of living in all that space you don't really need) in 'the most you can afford' category too. Often more than you can afford, obviously.
posted by Chuckles at 12:24 PM on June 1, 2006

Chuckles: I see what you mean. Though I think the rental market nowadays offers about the same amount of luxury/high standard of living. But, I still think you're onto something, I just think it's more intangible than not. I could see myself buying rather than renting even if my analysis told me renting was the more financially prudent option for reasons that you mention (and more than anything, the emotionally-comforting feeling of owning a home rather than renting a house) . No financial model will ever tell you what to do, it's just a good tool to have.
posted by mullacc at 12:33 PM on June 1, 2006

Sigh. I thought this was obvious, but...

Sigh yourself, pal. (Sorry, but there's something particularly annoying about being sighed at by someone who then demonstrates that they don't even understand what they're sighing about.)

Or, what mullacc said.
posted by jack_mo at 12:39 PM on June 1, 2006

From what I read, mullacc agreed with me:

if you sell your house below that intrinsic value range, for whatever reason, you've sold it at a price below its market value.

In other words, just because something changed hands at a price, doesn't make that the market price.
posted by jlub at 12:57 PM on June 1, 2006

That’s nothing. I can turn $500,000 in real estate into $350 in cash.
posted by Smedleyman at 1:05 PM on June 1, 2006

jlub writes "In other words, just because something changed hands at a price, doesn't make that the market price."

I wasn't sure what exactly you were getting at with your previous examples, but I agree with this sentence.
posted by mullacc at 1:31 PM on June 1, 2006

From what I read, mullacc agreed with me

Yeah, sorry - I skimmed the meat of his comment and only registered the 'yes, no, yes', which is what I was referring to.
posted by jack_mo at 2:00 PM on June 1, 2006

Where there are comparable properties, rent vs. own calculations are conceptually quite simple. The problem is that with the 90% leverage most people use, the expected appreciation or depreciation in home value swamps all the other factors, to the extent that, certain extremes aside (e.g., single family houses in the Bay Area) all that matters is whether you expect the property to appreciate more than 3% or 4% a year in the period you're evaluating. If "yes" than you should buy, if "no" than you should rent.

A second problem is that there often aren't comparable properties. In most places in this country, the only dwellings non-poor families will consider remotely suitable are single family homes, and single family homes are overwhelmingly owner-occupied. A big enough wave of defaults and we might see a more robust single-family home rental market develop, but it's not there yet in most places.
posted by MattD at 2:13 PM on June 1, 2006

Ahhhh! I see: it's much more amusing once one backtracks into his blog and starts playing with the bubble links.

I like this graph.

Then again, I'm noticing he uses the same graphs to make the same points over and over. It's a re-blog.
posted by five fresh fish at 8:10 PM on June 1, 2006