This is kinda a PSA post, along the lines of the rent vs buy calculation. Lots of people have been clamoring about house prices getting back to normal, and although that's happening, they are far from there yet. Many people are confused as to where they should be, and there are lots of useful guidelines (3x annual household income, etc.), and here's another one:
A useful metric for calculating when prices are equivalent to rent amounts.
If the total ownership amount (mortgage + taxes + insurance + HOA + upkeep) minus the amount going into principle is equal to the rent, the price is about "right". The rationale is that if you were renting, you could be saving the principle amount in a bank account, and be accumulating just as much "equity" as the person paying a higher cost to own. For a 30-year mortgage, about 1/4 of the payment is principle during the first 10 years or so, and it's about $6.32/month per 1K borrowed (for a 6.5% mortgage).
So say you have a condo which would rent for $2000/month, and has $400/month HOA. If we assume $100/month for insurance, $100/month for upkeep, and 2% taxes, we could compute the "right" price 'p' relative to rent 'r':
***** Edit: charles pointed out my math is wrong; interestingly the "right" prices are even lower with the correct numbers. Numbers corrected below. *****
p * 0.00632 + p * 0.00167 + 100 + 400 + 100 - (0.25 * p * 0.00632) = r
p * 0.006416 + 600 = r
p * 0.006416 = r - 600
p = (r - 600) * 156
So with r = 2000, the "right" price should be ~$218,000.
For a house, the calculations are similar; figure $200 for insurance and upkeep instead (no HOA though), and you get:
p = (r - 400) * 156
With r = 2000, the "right" price would be a higher ~$250,000.
Note: Down payments are not included because then you'd also have to include lost opportunity cost on the down payment amount, which works out to be roughly equivalent to assuming 100% financing as far as the ratio goes.
Feel free to use this metric the next time someone tells you a property is affordable, and/or reasonably priced. This is above the amount that intelligent investors will buy property, but it's close enough to be a good measure for when prices are "right".
Thursday, August 28, 2008
Saturday, August 2, 2008
Why I think Obama will win the election
Everybody has an opinion on politics, and I am no different. When it comes to the presidential election, I think Obama will take it, and not just cause he's ahead in the polls. There's historical precedent on his side, and moreover, the election is likely to reflect an underlying statistic, which is easier to make predictions about. I'll tell you what I think each are...
First, the historical precedent. America is entering a recession not unlike the one which preceded the Great Depression. I say preceded because the recession was just the economic correction of over inflated asset markets (sound familiar?), and would likely have been painful but short if not for the actions of the government in response to it. Instead of letting the markets correct and the participants take their losses, the people elected socialist leaning representatives to make the government solve their problems by nationalization. This, in turn, plunged the country into the depression, since they were intent on punishing "evil" industry while spending huge amounts of money the government didn't have on social programs the government couldn't afford. When that didn't work, they promised more spending and more socialism as the cure. It wasn't until WW2 that the government was forced to restart industry, and the country could actually recover.
Now, I'm not saying that Americans don't learn from history; I'm sure there are a few intelligent people out there who realize that socialism and more government spending do not help our economy at all. Unfortunately, those people are not in the majority at the moment, so it looks likely we'll get more socialism and more obscene amounts of government spending and anti-industry legislation.
Which brings me to the second point, the underlying statistic which is easier to predict. You see, it stems from a seemingly simple, yet understated principle: intelligent people think. In thinking, you can learn from history, you can analyze economic forces (at a high level, if not at an in-depth level), and you can recognize and filter through empty rhetoric and underlying socialism. You can extrapolate out potential effects of destroying what's left of our wealth generating industrial capability, converting to a nationalized industry of consumption and debt spending without production, and the likely outcomes of massive government interference and manipulation in every aspect of our economy. In short, an intelligent person can likely see past the pretty facades and flowery speeches, and see which candidate is more likely to cause less destruction to our country; which, in the case of this election, is not even very hard.
Given that, predicting the outcome of the election boils down to predicting if the majority of the independent "swing" voters (the 40% or so who are not hardcore supporters of either party) are intelligent, thinking people, or rather are more like automatons, swayed by flowery rhetoric and creative advertising. For that, one has to look no further than the campaign rhetoric, the proliferation of advertising in the country (and its relative success), and the voting patterns of the voters. Consider that in California, for example, we re-elected a Congress person after she has defaulted on a loan, defrauded the bank, stole the money to pay for her campaign, lied about it, bribed the bank to get it back, and payed off the investor who legally purchased it at foreclosure to cover it up. We have elected a Congress with a 9% approval rating, the lowest in recorded history. Americans are in debt up to their eyeballs, and are once again in virtual unison clamoring for the government to bail them out, like deja-vu.
I don't think it's too much of a stretch to say that given the above, Obama will win the election. As always, though, it's just my opinion, I could (and am holding out hope that I will) be wrong.
First, the historical precedent. America is entering a recession not unlike the one which preceded the Great Depression. I say preceded because the recession was just the economic correction of over inflated asset markets (sound familiar?), and would likely have been painful but short if not for the actions of the government in response to it. Instead of letting the markets correct and the participants take their losses, the people elected socialist leaning representatives to make the government solve their problems by nationalization. This, in turn, plunged the country into the depression, since they were intent on punishing "evil" industry while spending huge amounts of money the government didn't have on social programs the government couldn't afford. When that didn't work, they promised more spending and more socialism as the cure. It wasn't until WW2 that the government was forced to restart industry, and the country could actually recover.
Now, I'm not saying that Americans don't learn from history; I'm sure there are a few intelligent people out there who realize that socialism and more government spending do not help our economy at all. Unfortunately, those people are not in the majority at the moment, so it looks likely we'll get more socialism and more obscene amounts of government spending and anti-industry legislation.
Which brings me to the second point, the underlying statistic which is easier to predict. You see, it stems from a seemingly simple, yet understated principle: intelligent people think. In thinking, you can learn from history, you can analyze economic forces (at a high level, if not at an in-depth level), and you can recognize and filter through empty rhetoric and underlying socialism. You can extrapolate out potential effects of destroying what's left of our wealth generating industrial capability, converting to a nationalized industry of consumption and debt spending without production, and the likely outcomes of massive government interference and manipulation in every aspect of our economy. In short, an intelligent person can likely see past the pretty facades and flowery speeches, and see which candidate is more likely to cause less destruction to our country; which, in the case of this election, is not even very hard.
Given that, predicting the outcome of the election boils down to predicting if the majority of the independent "swing" voters (the 40% or so who are not hardcore supporters of either party) are intelligent, thinking people, or rather are more like automatons, swayed by flowery rhetoric and creative advertising. For that, one has to look no further than the campaign rhetoric, the proliferation of advertising in the country (and its relative success), and the voting patterns of the voters. Consider that in California, for example, we re-elected a Congress person after she has defaulted on a loan, defrauded the bank, stole the money to pay for her campaign, lied about it, bribed the bank to get it back, and payed off the investor who legally purchased it at foreclosure to cover it up. We have elected a Congress with a 9% approval rating, the lowest in recorded history. Americans are in debt up to their eyeballs, and are once again in virtual unison clamoring for the government to bail them out, like deja-vu.
I don't think it's too much of a stretch to say that given the above, Obama will win the election. As always, though, it's just my opinion, I could (and am holding out hope that I will) be wrong.
More thoughts on national RE database
The more I think about it, the more I think this would be a hugely beneficial thing to have (for consumers, at least... not so helpful for scam artists). A national database with all real estate information, even just sales information, would go a long way toward stabilizing the housing market and reassuring people. Some things it should have:
- Uniform monetary accounting
The total sales price, and all special considerations and circumstances, should be recorded in a standard, uniform way. For example, there should be a net sales price which is the gross price minus any seller considerations, kickbacks, or down payment assistance. All parties providing all assistance should be in the public record, all non-monetary considerations should be included with valuation approximations, and all special terms documented. It should be against the law to provide incorrect information or not include material information, and the all parties (buyer, seller, agents, etc.) should be jointly and severally liable.
- All party names recorded
As much information about all parties involved (as much as is public record for each state) should be recorded. Not only will this help identify questionable transactions by related or conspiring parties, but will provide valuable information for cities and municipalities if code violations are discovered. Most information is already in the public record, but a centralized search-able database would definitely help with transparency in the market.
- All transactions recorded
It should be required that any transaction involving the real estate property be recorded in the database. This would include public auctions, private sales, and any other transfers of ownership. It should be easy to include transactions to ensure there is not substantial cost in doing so.
- Data available to anyone
Any company or individual should be able to access any/all the data at any time. For individuals, this could be achieved via a simple web interface with very limited functionality. Businesses would need to work with the government agency to have regular database change exports on a feed-based system, so they could set up and maintain their own applications without putting significant load on the central database.
That would be my first-pass design specification. Now I just have to find someone in our government with enough brain cells to understand why this would be good, and not corrupt enough to actually do something which would benefit the people. Hm... that would probably be the most difficult part of the whole project. =/
- Uniform monetary accounting
The total sales price, and all special considerations and circumstances, should be recorded in a standard, uniform way. For example, there should be a net sales price which is the gross price minus any seller considerations, kickbacks, or down payment assistance. All parties providing all assistance should be in the public record, all non-monetary considerations should be included with valuation approximations, and all special terms documented. It should be against the law to provide incorrect information or not include material information, and the all parties (buyer, seller, agents, etc.) should be jointly and severally liable.
- All party names recorded
As much information about all parties involved (as much as is public record for each state) should be recorded. Not only will this help identify questionable transactions by related or conspiring parties, but will provide valuable information for cities and municipalities if code violations are discovered. Most information is already in the public record, but a centralized search-able database would definitely help with transparency in the market.
- All transactions recorded
It should be required that any transaction involving the real estate property be recorded in the database. This would include public auctions, private sales, and any other transfers of ownership. It should be easy to include transactions to ensure there is not substantial cost in doing so.
- Data available to anyone
Any company or individual should be able to access any/all the data at any time. For individuals, this could be achieved via a simple web interface with very limited functionality. Businesses would need to work with the government agency to have regular database change exports on a feed-based system, so they could set up and maintain their own applications without putting significant load on the central database.
That would be my first-pass design specification. Now I just have to find someone in our government with enough brain cells to understand why this would be good, and not corrupt enough to actually do something which would benefit the people. Hm... that would probably be the most difficult part of the whole project. =/
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