Friday, November 24, 2006

Post-Thanksgiving Stories Anyone?

So does anyone have any post-Thanksgiving real estate stories to tell?

For me, unlike Thanksgivings past when people were tolerant if not a little amused by discussions that entertained the possibility of a Marin real estate downturn, this year there was outright hostility. People were angry at me for saying that Marin housing would go down more.

In one odd instance a dinner guest was angry with me when I said you could not simply subtract the purchase price of a house from its sale price so as to calculate how much profit you made by your housing investment; you have to at least adjust the purchase price by inflation -- translate that purchase price to today's dollar value and then subtract the adjusted purchase price from the sale price. I think the reason why people were mad when I made that point is that some of them, if they did that adjustment for inflation, know perfectly well that they didn't do so well. Of course, their ire could also be due to my mention of the increased frequency of defaults in Marin and some pointed examples of people dropping their asking prices 20-35% So who is the turkey now?

It seems so obvious to me -- that is, adjusting the purchase price for inflation. It got me thinking of why people don't want to do that adjustment for inflation when bragging about their RE acumen. Is it because the math is too hard? Is it because doing so would let some wind out of their sails? Is it because people are so needy of good news that they are willing to pretend that bad news is good news?

7 Comments:

Blogger marin_explorer said...

"People were angry at me for saying that Marin housing would go down more."

There you go--you and your blog screwed up the psychology of our "unbustable" market! Whatever happened to Marin being that special place where wealth was simply created by living here? We'll sure miss discussing how much paper wealth we accrued each month over family dinners. Now I'm left to console myself in how much our house won't depreciate this year. Whatever happens in 2007, I just hope it means we'll feel a little better than people elsewhere. Long live the Marin dream!

Nov 24, 2006, 11:57:00 AM  
Blogger Marinite said...

Yup. We Marinites will be able to salvage our sense of superiority by repeatedly pointing out that our losses aren't as great as those of other places.

Nov 24, 2006, 12:02:00 PM  
Blogger Rob Dawg said...

Marinite,
Happy Thanksgiving to you and yours.

[S]imply subtract the purchase price of a house from its sale price so as to calculate how much profit you made by your housing investment; you have to at least adjust the purchase price by inflation -- translate that purchase price to today's dollar value (assuming you sold the property at today's dollar value); then subtract the adjusted purchase price from the sale price.

If it were all this simple we could all be rich. There's about 2 dozen "howevers" in the calculation. There's the lost oportunity cost of tying up any downpayment. The tax advantages of ownership at the time of the tax bill. The value of equivalent rent. Taxes upon sale. All the inflation you mention but effecting the things I mention. Then there's a nasty bit; needing to live somewhere. If you have to pay too much to live someplace after selling off then even the profit we are talking about gets eroded month after month far into the future. My brother-in-law hinted that Marin near the bridge is in transition. I don't know how to translate that as he and his wife have long (15+ years) practice the art of live-n-fix and move on. Usually for the would-be flipper financiers.

Nov 24, 2006, 12:12:00 PM  
Blogger cajun100 said...

To many people, and apparently MOST of the BA population, "opportunity cost" means the cost of pursuing an opportunity! Or something like that.

I have given up on discussing this with people. It's like getting into the "war-no war" or similar veins. Difficult and rarely rewarding.

I have had friends get angry when I raised the deduction of (take your pick) equity via principal repaid, inflation, selling commissions, repairs/improvements, etc. from a selling price. Amazing.

Nov 24, 2006, 12:15:00 PM  
Blogger Marinite said...

robert -

I understand you and agree. Unfortunately, when discussing this sort of thing face-to-face with people, one has to keep it simple or else their attention wanders or they rudely interrupt you in frustration. Hence, simplifying it down to just inflation which is (or should be) an easily grasped concept.

Nov 24, 2006, 12:18:00 PM  
Anonymous ross valley local said...

This reminds me of people who return from a weekend in Vegas with stories of their "winnings". Of course, many fail to mention how much they put into the casinos, plus hotels, food, and transportation costs. What again did Dr. Robert Shiller say about long-term housing returns?

Adding to the other costs of ownership here, a significant factor is maintenance--especially if you live on the bay or other exposed areas. I probably do twice the maintenance of family living south in drier climes. Of course, it's plainly obvious that a lot of people simply let their homes go in Marin. How many homes here are dry rot free?. Nobody should expect top market dollar if they don't maintain their home.

Nov 24, 2006, 12:48:00 PM  
Anonymous Anonymous said...

In addition to the inflationary factor, the depreciation of US dollar should also be factored in as well. The dollar has lost so much value in recent years and today it just grabbed another headline for its drop.

The following is a quote from Financial Sense Website:

"The dollar Index, now trading near 83.5, has broken though some key support levels and the next test will likely be its all time record lows of just under 80. If that test fails, as it most likely will, look out below. Once the dollar moves into uncharted territory, the selling could intensify, with the dollar index trading below 70 in short order. My ultimate target for that index is 40, which would literally cut the dollar’s value in half. I think the entire move could occur in just two years. Again, putting that decline into perspective, it is the equivalent of over a 6,600 point decline in the Dow. Of course this assumes the Fed finally gets religion and Congress and the President heed its sermon. If not, and hyperinflation ensues, the dollar index could fall far lower, perhaps even breaking into the single digits before bottoming out.

Don’t make the mistake of thinking that this is somehow a problem for foreigners. It is Americans who will feel the losses the greatest, as it will result in substantial increases in both consumer prices and interest rates, and in declining assets prices, particularly for residential real estate. In the other words, what we own will be worth a lot less and what we need to buy will cost a lot more."

Nov 24, 2006, 9:41:00 PM  

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