Assorted Real Estate Thoughts

An assortment of real estate things

  • An in-the-flesh example of growth vs value in real estate

    While traveling this summer we bought a house. It was a quick (that’s how I spell “impulsive”) decision. We weren’t even shopping for RE but it was one of the rare moments where Yinh and I took a look at something and arrived at the same conclusion telepathically. The home has some interesting optionality to us but the first checkbox was thinking about our downside. So we asked our local friend, who found the listing, to handicap the worst-case rent we could get for it. Feeling satisfied, we shot our shot and lifted the house.

    Turns out we underestimated the rent we could get for it by more than 40%. Within 3 days of listing it, we had 4 offers through our asking price, all guaranteed by an insurance company, a re-locating employer, or an upfront check for the whole lease term. Feeding frenzy.

    Now, the interesting part. The house is half the price of the house we rent in CA and fetches more rent than we pay here!

    What’s going on?

    This is a growth vs value thing. The house we bought is in an area where there are lots of new build permits. Supply is currently constrained because of immediate inflows of residents overwhelming capacity. But this place is nothing like the NIMBY Bay Area where home prices rightly have capital appreciation baked in. Meanwhile, where we bought has cap rates priced for carry.

    In other words, nothing to see here…markets make sense.

  • Why US Housing Prices Aren’t As Crazy As You Think (A Wealth Of Common Sense)

    This brief post by Ben Carlson provides an international perspective. It suggests that the recent surge in real estate prices is hardly a bubble and [gulp] it might even be early innings.

    This may surprise you, but compared with other developed nations, US home prices are merely playing catch-up. This is even more true when we adjust for inflation and disposable income.

    It wasn’t discussed in the post but another point suggesting RE has lagged, is US stocks have massively outperformed international markets since the GFC. This can be reassuring for those of you looking to rebalance out of stock [or crypto] gains into RE.

  • A reminder that RE is a very direct bet on interest rates

    This is from an account I like and follow (as opposed to a ‘hate-follow’) @sidprabhu:

    The median home price in 2007 was ~$250k with 30y mtg at 6.5%. Assume 0 down that’s $1,580/mo. With 30y mtg at 3%, $1,580 gets you a $375k house, which is the current median price. (thread)

    I want to add another insight from @ByrneHobart paywalled letter highlighting the bond-like quality of real estate:

    The higher the price/rent ratio for a home, the higher its duration is as a financial asset, so the rates-sensitivity of big city real estate offsets a lower expected rent.

    The quote refers to the fact that while covid decimated rents in big cities, the home prices fared comparatively well. Because city cap rates are already low they are priced like high P/E growth stocks. They have high duration (ie driven by values much further out in the future) so the immediate earnings (the “rent” in the RE context) have less impact on the price than if they were value stocks which are more sensitive to the cash flow.

  • If RE prices are high but the payment is the same should we care?

    Let’s turn to @sidprabhu again. The emphasis is for the geek readers who thirst option references any way they can get ‘em:

    Some will say what’s the problem? The payment is the same. Who cares what the price is? That ignores the fact that high home prices transfer wealth intergenerationally and can decrease mobility for buyers…

    Mortgages can be prepaid. Savings can be redirected to paying down high mortgage rates early creating a risk fee rate of return. It’s much better to buy a low priced house with a high rate because you can prepay. High prices benefit sellers…Perhaps more importantly, if home prices do go down it effectively traps buyers in their home. If rates go up they lose on their home value but locking in the mark to market gain on their mortgage is very difficult…

    Want to move cities for a better job in a recession? You owe the bank the negative equity or risk damaging your credit by walking away. (thread)

    Sid’s tweets made me reconsider one of my prior takes that I called “Minimum Tick Size Frustration”:

    Real estate prices that are high are mostly annoying because they force you to put a lot of eggs in one basket. This can be true even if the prices are high but cheap (a house on Carbon Beach for $3mm is cheap even if the price is “high”). If you are worth $1.5mm and own a house worth $1mm it’s hard to diversify. Your home is 2/3 of your assets. Many homeowners are even more concentrated than that. The high price might not be a problem from an affordability point of view but it’s a problem from a risk or portfolio point of view. So when you live in a high cost of living area, the minimum acceptable house forces you to concentrate wealth more than you’d like to.

    Here’s another way to look at it. Imagine if the lowest-priced stock in the world was $50,000 a share and there’s no way to buy fractional shares. We don’t need to make a statement about whether the stock is cheap or expensive (that depends on its earnings and how many shares outstanding there are) to be frustrated that the price is high even if it’s not “expensive”. We would just be frustrated that creating a diversified portfolio would be difficult if the minimum purchase prices were so high.

    Sid’s tweets make me change my opinion that high real estate prices are “mostly annoying”. They have much worse multi-order effects, unfortunately.

  • Since the GFC, builders were slow to get their mojo back…see the replies.

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