Comments on: 24 years old, and making $94,000 – a typical Bay Area tech salary

By: Er

Er — Sun, 15 Jun 2008 05:29:21 +0000

Real Estater said:

Why is real bay area not going down despite the current economic situation?

Fair question.

I believe it’s because technology company income derives partially from overseas markets. The weakening dollar has resulted in increased revenue (in dollar terms) for many companies that maintained their international prices (in Euros, dinars, etc) at earlier levels. Those that reduced prices (since their cost in foreign currency dropped with the weak dollar) had an increase in sales.

This activity is cyclical. As Bernanke and the Federal Reserve Board worry more about inflation, they will start raising interest rates and the dollar will strengthen, drying up the overseas revenue excesses. This will likely take another year to play out. At that time, you will see technology companies begin to cut back. When this occurs, you will see foreclosures in the mainstream and home prices will then fall.

It won’t help that in a year or two the Alt-A resets will be cresting.

By: RealEstater

RealEstater — Fri, 13 Jun 2008 22:47:47 +0000

Bob says,
>>If you have a fear of the USD…. then invest in foreign companies. Diversify.
>>investments in stocks have historically beaten housing hands down for a century.

Unfortunately, it’s not that simple. Stocks go through bear market cycles during which there may not be any gain over a period of 10 years.

I’ve never been a big believer in diversifying either. It tends to give you very modest returns because the different sectors act against each other.

By: RealEstater

RealEstater — Fri, 13 Jun 2008 22:37:03 +0000

>>buying a home doesn’t shelter wealth because the value of housing is inextricably tied to the fate of the economy.

When the dot com bubble bursted, how come real estate started taking off?

Why is real bay area not going down despite the current economic situation?

When you say it’s tied to the economy, it doesn’t tell me anything, because there are so many forces within the economy that even economists don’t get it right most of the time.

By: RealEstater

RealEstater — Fri, 13 Jun 2008 22:30:58 +0000

mtv-renter Says:
>>If you really believe in using leverage to multiply your gains, you can certainly do so with stock investments as well.

You can, but you’ll get margin calls to put up more money if the stock goes the wrong way. That doesn’t happen with real estate.

If you make the wrong calls with stock, you can be wiped out with nothing to show. With real estate, you can always live in it or rent it out.

By: R

Fri, 13 Jun 2008 22:26:14 +0000

57 – I generally agree on all fronts. However, bear in mind that on your primary residence, your exposure is limited to your investment (ie. bank can’t obtain personal judgment against you). Thus, if you put in 10k, your losses are capped at 10k but your upside is unlimited.

By: R

Fri, 13 Jun 2008 22:22:58 +0000

Bob, the returns you cite are generally true, however, they ignore the concept of leverage, which, along with tax benefits, ordinarily makes real estate a good investment. The more cash you pay up front to purchase property, the less compelling real estate becomes, because as you state, it historically only appreciates at about 1-2% above inflation per year. That is why leverage is so important, and why buying now, when 10 + percent is required, isn’t that attractive from a financial perspective.

By: mtv-renter

mtv-renter — Fri, 13 Jun 2008 21:57:03 +0000

@55

R, leverage works both ways. If you can make 10x as much because of it, you can lose 10x as much as well. When the value of a property declines, your loan doesn’t get any smaller, does it?

If you really believe in using leverage to multiply your gains, you can certainly do so with stock investments as well.

In your example, you paid 10k of you own money and borrowed $490k from the bank to buy your $500k asset. If your asset drops by a mere 2%, you’ve lost 100% of your money. Now, let’s be generous and assume that housing appreciates at the same rate as stock. In your case, your net gain with housing is a lower percentage, because you have to deduct the cost of the loan interest from your profit.

There are certainly times where it makes sense to “invest” in housing. Now’s not the time in the Bay Area.

By: bob

bob — Fri, 13 Jun 2008 21:12:08 +0000

WillowGlenner,
Then your answer alone gives me your idea of how you imagine economics work. Enough said.

By the way- buying a home doesn’t shelter wealth because the value of housing is inextricably tied to the fate of the economy. The proof is already here, with the US economy slumping as a direct result of the housing bubble with housing depreciation as the result.

If you have a fear of the USD…. then invest in foreign companies. Diversify. In other words, buy small cap, mid cap, large cap, blue chips, red chips, BRIC funds, Dragon funds, and so on. Regardless of what housing does, stocks appreciate 7 out of 10 years, with an annual median appreciation of 10% per year. It’s been this way for 100 years. Housing has not, and never will be.

We all make financial choices. Do what you feel comfortable with. But the truth is that investments in stocks have historically beaten housing hands down for a century.

By: R

Fri, 13 Jun 2008 20:57:18 +0000

On a percentage basis, stocks invariably outperform real estate because of productivity gains in the underlying asset. However, at reasonably price levels (which IMO we are nowhere close to), real estate is the better investment because of 1) leverage, and 2) tax benefits. Real estate wealth isn’t generated by paying 500k cash for a 500k house and watching it appreceiate 3-4% a year like a stock is, it is generated by leverage – ie. paying 10k cash for a 500k asset and watching your 10k investment grow exponentially. Simple math really.

By: WillowGlenner

WillowGlenner — Fri, 13 Jun 2008 20:01:18 +0000

The best investment for me, now is housing. I can assure you I have a significant comprehension of economics. The reason I am supportive of real estate as an investment is because of the plight of the USD, something you don’t seem to get, because you keep bringing up the fact that RE has appreciated so much in 8 years without mentioning that the dollar has been cut in half. Stocks have underperformed and will continue to underperform in inflationary environments, just like stocks were a horrible place to be in the 70s, they are a horrible place to be now. This climate is diametrically opposed to what we had in the 90s with an appreciating USD, which made investments in stocks (and earnings) MORE valuable with time, as opposed to LESS valuable with time which is what we have now with the dollar crash. Sure you can find individual stocks like Apple that go up, there is always that needle in a haystack you can find in a flat or declining stock market, but generally speaking stocks are not paying off like RE in this decade. Now if we get a better president which is a given, and the government starts paying down the debt like they did in the 90s, that will turn things around completely.
Angry renters in the bay area come from all kinds of backgrounds and many can afford to buy here but choose to not do so. It doesn’t matter how much money you have – the problem is you present buying in the bay area as some kind of stupid option that is completely unwise without a lot of actualy facts to back up that position.