I agree with your posts on when the bottom will come.

This week when packing for my move to my new apartment I came across all of the papers for the condo I almost purchased. My fiancee and I didn't purchase it because we found out the condo association was under insured by about half. In addition I did not like the terms of the condo association including ten percent interest after 30 days for assessments. This association had no money on reserve. Every expense would have been a special assessment.

Well what I found among those papers was the appraisal we ordered, or rather our eager mortgage broker ordered prior to the inspection period being over. The appraisal was very telling to me in hindsight. This was an appraisal for a condo that was for sale for $240,000 and was currently rented to a tenant. For some reason the appraisal said "The income approach was not appropriate for this property."

Well knowing what I know now, seems like the income approach was not appropriate because it would have shown us that the price we were paying was way too high!

This seems like it should be illegal to me. How come the appraiser decides it is inappropriate?

I agree with your assessment that the income approach is always appropriate. If you can rent the house for half what you are buying it for...don't buy it! They are asking too much!

This is just the beginning of the pop of the bubble. I have been reading patrick.net for a while as well as many others. Thanks for the blogging and keep it up. The more people know the more likely I will be able to buy a house at a reasonable price one day!

While I completely agree that house pricing is out of whack, I think you've stepped out on limb here?

In 30+ years of renting houses, I've never spent anywhere near $1,500 per month, and, I've never lived in a place that had a market value of only $126,000. Of course, that's just my situation.

Your argument is basically suggesting either that house prices should be much lower, or, rents should be much higher.

Also, regarding your comment that a sound business proposition is making a profit from day one - does the world work like that? You are probably make some money from your book, but I'm assuming you didn't make it the day you started writing it? Same for your blog, looks like you are making some well deserved money there, but I gather that did not happen from day one - to make those things happen you had to invest time, effort, resources ...

Keep up the great work!

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I'm outside of Vancouver which has to be one of the biggest bubble areas in North America - Shiller wrote that its one of the bubbliest cities in the world.

A house purchased in April 2002 for $195,000 total was sold in June 2007 for $459,000 (although the agents were suggesting that $479,000 was probably more like it).

So it went up at least 2.3 times (130%) in 5 years. And there were no improvements done! Check out www.realtylink.org for some excellent statistics on the Vancouver market.

Of course, its different here, blah blah, blah.

I'm wondering how much of the current boom in BC is Olympics related (construction of facilities, major highways upgrades, transit line upgrades, Olympic organizing employment, and the secondary effects, ie. housing for all these newly employed, etc....)

And what happens when it all winds down and none of these people have any work.

I feel we are at the very top here, listings increasing, sales decreasing, with prices still sticky, but poised to fall, but I seem to be alone in this assessment.

Also, the other question that no one seems to want to answer, how much of this economy is really driven by marijuana crops - because I see a lot of people who don't seem to have any typical work living very very well indeed.

Andrew L. Stachyra

I ran across your housing bubble blog while browsing at www.patrick.net, and I read a statement in there that I'd like to try to understand a little better. You wrote:

"Real estate investment pros have a rule of thumb for establishing fair value of rental property. Multiply the annual gross rental by between 6 and 10; that gives you a `business' estimate of the value of the rental."

I have two questions in response to that:

1.) Who are these real estate professionals? Have any of them written investment/finance advice books that can be cited? (I don't doubt that such a rule of thumb must exist, but I'd be really curious to see what numbers other independent experts are quoting for this, and whether or not their numbers closely match yours.)

2.) You state your rule of thumb in terms of a purchase price to gross rental ratio, but really the more classic way to compare returns on a property investment vs. expected returns on other types of investments would be to restate the ratio in terms of price to _earnings_, or, alternatively, it's reciprocal, yield. So, can you tell me what your rule of thumb comes out to when restated as a P/E ratio? (I have tried to search on phrases such as "historical investment property P/E ratio" on google and so far haven't come up with much good advice yet in terms of how to price property fairly in comparison to, say, for example, stocks, which have tended to exhibit long-term average P/E ratios of around 14-16.)

Thanks so much!

A couple of more points re:considering the overall ownership cost of real estate. Number one: the benefit of deductible interest should take into account that without it (and without itemizing), you'd already be getting a certain amount of standard deduction, so you can't really count 100% of the interest deduction as a net tax benefit.

Number two: while it is true that the payment of loan principle is not actually a "cost", but rather a form of forced savings, it should not be forgotten that those forced savings are not earning any interest. And that is a cost (which is applicable in the same way to the down payment, which also earns no interest, or the situation of buying the house for cash, in which case you're surrendering interest on the entire bundle).

Also, I've often heard it said that renters don't get any benefit from the tax deductibility of mortgage interest. Not so. Since the deductibility is built into the landlord's cost structure, some of the benefit will inevitably be shared with tenants in a competitive rental market.

Thanks for all of your articles!

RE: Subprime Country: A Nation Within a Nation (April 24, 2008):

I appreciated the nation within a nation observation. But the final paragraph, riffing off of the input by Harun, really got me thinking; and so I lingered over todays blog....

"It is sobering to contemplate the possibility of a debt-ridden, anxious nation within a nation, a nation of residents who may, at some deep level, have lost confidence in themselves, in their supposed leaders, and perhaps in their nation itself."

It occurs to me that:

the "debt-ridden nation" bit is MORE than just a possibility;

the angst is an outgrowth, or logical endpoint, of our obsessive competitive temperament;

you describe us as "nation of residents" - this choice of words suggests that at some level you already understand that our performance, or our role (to continue the use of theatric coin), somehow falls below the level of "citizen", which would imply either greater enfranchisement or participation; and,

you invoke the poor quality of our leadership.

We have operated with relative ease and comfort during times of fair weather, and grown careless and thoughtless. Now the climate has changed and we are unprepared. Our lack of confidence, care and thought makes us poor at choosing leaders.

The paradox is that we are in sore need of wise leadership, but we do not seem to be in the business of making them.

I only hope that Americans have not totally abandoned the love of ideas that fostered our commitment to form a more perfect union. Only the love of ideas will prepare us to meet the challenge of retooling the nation for existence in a world of resource relations very different from those for which we have been "preparing" lately.

A dialog between the people and its prospective leaders, using a more informed resource based ideology must ensue if we are to discover the many roads available to our people going forward. How else will we be able to determine which of these is the "fair road" you mention. It is the greatest luxury, and to some extent a matter of fortune, to have the choice of the fair road to travel. We have been fortunate until very recently. We will need more than just fortune if our nation is to remain great.

RE: Subprime Country: A Nation Within a Nation (April 24, 2008):

Superb. You've outdone yourself once again.

Readers should ponder, carefully, why Obama is favored by young, college educated people and Hilary's backing by blue collar workers.

The credit card situation at Walmart I would wager heavily is playing out all over America. The fact that Walmart reported earnings growth was not a sign (to me) of economic strength. Walmart is now retailer of last resort and all too many are flocking there.

The paradox of "globalization" persists, i.e. lower or stagnant wages in a high price environment. This poses a problem for those wanting to support high home values. It also poses a problem for the 500 or so trillion in leveraged derivatives backed by collateral that is rapidly losing value. It poses a problem for retirees and a government obligated to provide "entitlements" (no longer can they bank on downscaling and using the profits from the sale to supplement SSI and whatever meager pension they may have) while the government must keep understating inflation to keep those payments down. And the Fed must keep interest rates low just so everyone can service their debt while punishing those who are responsibly trying to save thereby remaining independent of government aide.

Combine this with federal unfunded obligations of 55-88 trillion and billions of state pension liabilities and crumbling infrastructure and overcrowded, costly prisons in the face of declining tax revenues, not to mention two wars and food shortages and spiraling energy costs and we have something like a cat 5 hurricane, a massive earthquake, a raging forest fire, Yellow Stone erupting, and tsunami at the same time. And that is only the US.

(By the way, there is nothing in any of the candidates resumes that has prepared them for what they will face as president)

Nothing will "fix" this. We must harmonize with it and rebuild all the while maintaining our identity as a constitutional republic (for years we have lectured other countries on human rights issues but our conduct in this WOT in those terms has disappointed much of the international community). When we rebuild it needs to be with humility and an understanding of history. It must be done with the wisdom that growth requires setbacks.

For decades pandering but mostly well-meaning politicians have tried to give us the impossible. At every turn the universe was trying to politely instruct us that it doesn't work that way but to no avail; now we reap the whirlwind.

In these times I hope those of considerable means reach into low income communities in philanthropy.

How we fell is important but how we get back up is all important.

Industrial Man--Individuals living in the United States, western Europe, Japan and a few other places who lived better then at any other time in human history. This was brought about by the abundance of cheap energy primarily crude oil, natural gas and coal. This period lasted for about 100 years. An additional event was the population of earth increased from 1.5 billion to 7 billion in this 100 year period.

What followed thereafter was a 100 year period of war, pestilence and plague. It was known to the people at the time as the " Great Starving. " Excerpt from the last history book ever written, published in 2115.

It is pretty common knowledge that cannibalism was pretty common on the eastern front during WW II.

Great article today, ( Subprime Country: A Nation Within a Nation), which way will the 80 per cent run when they finally figure out that they have lived through the best that it will ever be for them.

Lenin " In order to be a great leader you must be able to guess which way the crowd will run, sprint to the front, wave your arm and yell follow me." or some such quote.

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Excellent real estate analysis the last few days. I promised I would stop what follows but I can't.

" Real Estate only goes up. "
" God isn't making any more land. "
" I am in this for the long haul. "
" I have been in Real Estate for 15. 20, 10 years and we are at the bottom. "

This list is endless, but I think you get the drift. History for these people is only 2-20 years long. These people think that because it happened to them that it is interesting and meaningful.

Books are display items if they have any.

RE: It's Not Just Peak Oil: It's Peak Coal, Too (April 25, 2008):

As always, a thought provoking series of essays. I particularly liked the one about taxes; as far as Federal income tax is concerned, the group that really pays are those in the top 10%. There's a certain absurdity in claiming that "the rich" need to pay more, when in California a "rich" couple is two elementary school teachers.

Your essay today really struck a nerve, however. I'm old enough to remember the "No Nukes" concerts and "MUSE" (Musicians United for Safe Energy -- the Bono-esque feel good cause for celebrities in the late 1970's) AND lived 100 miles from Three Mile Island when the accident occurred.

Which ultimately leads to this: in the short term, all roads lead to nuclear power. It's the only sensible and reasonable answer to worldwide energy problems.

To have readily useable energy, we need to burn something: wood, whale oil, petroleum, natural gas, coal, or atoms. No other way around it (well, maybe there is, but I'm not aware of it). Even if, by magic, we were able to convert ALL ground transportation to Hydrogen tomorrow, and with the attendent infrastructure to store, transport, and deliver it, we still need to get it from somewhere. Water can be split into Hydrogen and Oxygen -- but we need electricity to do it. So we're right back where we started.

Unfortunately (for the US), we are no longer a leader in nuclear technology. There are very few nuclear engineers left, and most of the promising R&D is done in Asia. Nuclear power can be dangerous -- failure at poorly desdigned, constructed, and maintained facilities can be catestrophic. But in the US, Three Mile Island, while a terrible mess, was contained as designed. Finally, the waste issue is a solvable -- I don't know what the perfect solution is but burying waste in a 1000 foot deep salt mine in the middle of nowhere is a reasonable short term solution.

Finally, there is a South African company, SASOL, that has advanced coal to liquid fuel technology. For a radical idea, how about using nuclear power to convert coal to liquid fuel? Now that's a radical idea.

RE: It's Not Just Peak Oil: It's Peak Coal, Too:

You didn't mention that some of these price increases are related to the drop in the dollar, just as they are with oil.

You did mention that it's the green lobby that has worked against nuclear power. It's also the risk of catastrophic accident, which isn't there for coal, and the subsequent insurance/liability problems. Three Mile Island (and Chernobyl, later) made that cost very clear. The cost of nuclear power never did include decommissioning costs either, from what I've read. On the other hand, there are newer plant technologies that could eliminate some of that.

Nuclear plants have so little waste output that they are basically all storing their waste at the plant sites. None of it has been emitted into the atmosphere like with coal/oil, and none of it has been shipped to disposal facilities, since the political process has bogged down on the Nevada site. From what I've read, all the spent fuel rods are sitting in swimming pools on the sites where they were used. Since France and Japan both extensively use nuclear power, I'm curious as to what they've done with their waste.

I also read somewhere that the waste is still putting out heat, and could be used for small-scale power generation. Waste-based reactors are used to power satellites (or deep-space probes?), for instance. Of course, it's also good "dirty bomb" material.

I'm somewhat skeptical of those figures on radioactive releases with coal. First, you have to keep track of your isotopes. U238 is much less radioactive. That's what depleted-uranium shells are made from, and I don't think there's much danger from it. It has a long half-life (hundred thousand years?), which indicates low radioactivity. The stuff they use for medical purposes (injected into your body) has much shorter half-lives than that. The U235 is the dangerous stuff, and I'm pretty sure that any reactor fuel has to include a significant percentage of that.

I'm also surprised that uranium or thorium would be present in layers of coal to that extent. Isn't coal supposed to be from compressed, fossilized critters? Where would that much metal come from? The metals should be from the original material that formed the earth. I'm not sure how they would get mixed into coal layers in the first place.

Building more railroads is a cost, but we build more infrastructure, from roads to bridges, all the time. I can't believe that's a show-stopper.

Lastly, are those coal fields the only ones in the U.S., or just the prime fields? Where does the 400 year estimate come from if we are already peaking on coal production?

I thought it was interesting, and the point that housing prices will reach an equilibrium when houses can be rented at a profit seems like a good one. The 6X to 10X "rule of thumb" for evaulating a rental property could be spot-on (I'm certainly not an expert), but, I found the example math you presented a little misleading. To find the point where Costs = Revenue when renting an apartment, you use the formula:

Mortgage payments + Other Costs = Rental Income

A mortgage payment is not strictly a cost. The interest paid on the loan is a cost, but the principal you pay is money you are exchanging for an equally valued asset (the house). That money isn't being spent, it's just changing forms, and shouldn't be treated as a cost.

A more accurate equation would seem to be:

Mortgage Interest + Other Costs = Rental Income

There are (of course) many of factors that still aren't accounted for - increases in value of the home, the opportunity cost of not investing your money elsewhere, etc - but that seems like a more reasonable evaluation than the one you presented. Maybe the omission is what you meant by "making a profit fromn day-one", but I think rental property investors would certaing include the equity in the home they are paying for when evaluating an investment.

greatly enjoyed your article "want to know when housing has bottomed". i have had a hunch that this is the case for several years (rentals make sense when you're in the black on day one) as i've watched the fundamentals of housing prices get soo far out of whack.

another point i've heard (that i don't recall reading in your article) is that historically, people won't pay much more to own a house than they will to rent it. right now where i live the cost to own is upwards of 3x the cost to rent (not to mention the 'affordability' number 8x; median home price / gross median income).

my question to you is: where did you get your 6% 30-fixed mortgage numbers? i can't find a calculator on zillow.com; the one i use is:

https://www.mortgage-calc.com/mortgage/simple.php

for 30 year fixed at 6% is $300/mo for every $50k/yr. so the $300k loan is 6 x $50k; 6 * $300 = $1800/mo (the article lists $2100/mo for $300k). are you adding in mortgage insurance (no down payment)?

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Thx for the reply -- hadn't noticed that box on zillow. further investigation of the source of that page shows that they are folding in some value for property tax and some for 'hazard insurance':

you can see the calculation they are doing by wading through this code:

zillow.com page

stripping the mortgage number down to only mortgage changes your calculations slightly, but the overall premise still holds: the house we're considering that is on the market for $319k, that they are also advertising to rent for $1500/mo is a far cry from it's "value" of $1500 * 12mo = $18000 * 10x = $180k. it's got a ways to fall.

BBC News

"A strike by Argentine farmers over rising taxes on major export goods has entered its third week, with little sign of resolution."

"The latest crisis was sparked by the government's decision to introduce a new sliding scale of export taxes, raising levies in some cases up to 45%.

President Cristina Fernandez has refused to back down, saying the taxes are a means to raise badly-needed revenue, curb inflation and guarantee domestic supplies."

"This country is fed up with taxes. Where does the tax money go," retired flight attendant Karin Sagemuner told the Associated Press in the Argentine capital.

"What they are doing to the farmers is shameful by confiscating their money." (the odd contradiction comes from 2 paragraphs below that just shows a huge disconnect)

"The government is not against the farm sector. Farmers' profits have never been as high as they are today," her chief of cabinet, Alberto Fernandez, said on Wednesday.

"Our profit margins are getting smaller and smaller. What we pay to the state is not returned to us in the form, for example, of subsidies to buy fertilizers or to promote the social and educational development of our communities," Marcelo Rasseto, a small farmer from Santa Fe province, told the BBC.