LifeGame

Real Long Term Home Values Visualized

Whenever I talk to anyone who makes their living in the housing industry... it's always a good time to buy or sell or refinance or whatever. If interest rates are low, they might go up... if they are high, they might go higher. If prices are high, they might go higher, if they are low, they might be near a bottom. It's so confusing.

This leads me to the question of how good of an investment houses are... in the long term... I mean the REALLY long term... like a hundred years or so. We just kind of assume that houses are these great long term investments and are integral to "the american dream." Maybe so, but when I look at the inflation adjusted Case/Shiller index, it looks a bit different.

 

A few things I noticed right away:

• Until the mid 1990s, a house was about a 10% or so ROI over a 100 year period, with a couple of spikes at around 30% with corresponding drops. That's not that bad really, but not amazing either.
• The great depression didn't kill home values... they were dead BEFORE the great depression.... interesting. I didn't know that at all.
• Timing badly can take a long time to recover from. 
• If you bought a house in 1895, you didn't recover until around 2001. WOW! 
• If you bought in 1912, you recovered in about 1942. 
• If you bought in 2006... I shudder to think... might be 2142 I guess? Then again we could just wait for the next real estate bubble and sell then...
• Of course if you bought in 1920s and 1930s and sold in 2006; you made about 110%... good for you I suppose.

I figure I'd be much more interested in buying a house when that blue line goes closer to 0. This is 2010 data, btw. I'll look for the 2012 data to visualize, but what I can say is that things have "stablized" well above the 1994 levels. I believe this is a result of lots of foreclosures and abandoned properties (Which the case/shiller index does not track) and as that story plays itself out we'll see more decline. It's also impacted by really low interest rates, since people generally think about how much they can pay a month, rather than how much a house "should cost" (something people don't really have an easy way to know).

 

Incidentally... this further solidifies my belief that houses are not assets, they are consumable goods. When we think a consumable good is an asset, dangerous things happen. With an asset, the more money you put in, the more valuable you think it becomes, causing you to put more money into it. With a consumable good, it's just kind of losing value over time so you don't really behave this way. Thus, when we think of consumables as assets we get really terrible bubbles: think, Tulips, beanie babies, etc. here... are Tulips REALLY assets? They are if we think they are, I guess.

Hermann

Slicing the Pizza

There's a lot of excitement around the mainstream-ification of the various "free" business models. In many cases, there's a conversion back and forth from social to real capital and various toll keepers take a cut when those currencies are exchanged. It's tempting to believe that this is somehow new, but it's not. If we just consider that "interest" or "engagement" is another abstract representation of our time and effort, it's not that distinguishable from other forms of currency. When civilizations converted from raw material trade to official "coinage" and then eventually representative coinage (I.e. coins made from non-precious materials but stil guaranteed by official entities), similar social transformations took place.

These transformations also allow for an increase in leverage. If you need to trade raw materials, you have essentially 0 leverage. If you have coins that represent raw materials, you have convenience but are still limited to the material you are carrying around. As soon as you have coins or paper money that represent a guarantee; you can now engage in leveraged borrowing which allows for economies to do things like speculate, sell future interests, charge interest for risk and most of the normal things that all of us are now used to when we buy stuff we can't or don't want to afford.

In any case, for the sake of this post, the pizza just represents the total volume of a "free" serviced market. In most cases the pizza is expanding as more people become interested in whatever the market represents: games, search, apps, etc. Slicing the pizza occurs when a new service provider enters the market and competes against the existing providers.

We've all seen how this goes... A company has a "great new idea" which will hopefully disrupt an incumbent via a new feature, a superior offering or some other perceived increase in value. Most of these ventures fail for lots of different reasons but it generally is a result of overconfidence in one form or another. Of course, these failures usually take SOME amount of the pizza on their way. As a market heats up, more of these providers enter the market, backed by various sources of leveraged risk.

The pizza is, of course, sliced in an incredibly uneven manner. Generally the top 2-5 providers take a huge share (50-90+%). For example, android and iPhone or google and Microsoft or zynga and... Well... Zynga. The remainder of the pizza is left for all the other providers to fight over. Early or dominant players may survive in the 5-10 rank, but as hundreds more flood in, even those providers find it more and more expensive to maintain their share of the pie. Their relative success feeds the investment to the ever crowding field. Eventually, most of the providers are unable to get enough pizza and they starve. As they do so, they also thin out the pieces of the other providers who then also starve. Thus, aside from the dominant providers, everyone else is starving even though they have some small piece of the pie.

None of this is new or revolutionary of course.

The thing that is interesting to me, is that it's challenging to see what comes after free? Once most of the major services stop charging, compete with each other for eyeballs at an ever increasing acquisition cost, and drive each other to near starvation, what will happen next? What is the value proposition for the customer in a world of competing free services?

Airlines have faced this to some degree in the past decades. As consumers became more price conscious, travel became more mainstream, energy costs more volatile, and so on; airlines became far less stable. So much so that aside from a few stars (like southwest) airlines are not really considered a "smart" investment... Yet they are services nearly all of us use.

From what I can tell the airline industry has yet to solve this problem and so they just kind of lumber along and have occasional disruptions (like JetBlue).

Im wondering if it would be feasible to have a "free" airline. Imagine, for example, that your ticket is free, but you have to stand. For $50 you can sit, for another 30$ you can check a bag, for $15 you can board before other people (thus having a better standing position). I have not done any investigation on the regulations or cost logistics, but a free to fly airline would obviously be very compelling... And I wonder if people would pay close to normal ticket prices by customizing their level of convenience...

My Results (guesses) vs. S&P 500 in 2010

Below is a graph of how I did vs. the S&P 500 in 2010. Not too badly. I got a little bit lucky... or perhaps totally lucky. I won't go into details, but I didn't do any selling after the first month and just increased my position by % allocation every so often - just when I thought things seemed "low" resisting the urge to sell when things were "high" whatever low and high mean to you. It was tough holding on in April/May.

My main guess was that Citibank would bounce back. That proved to be less true than I expected. The speculation that banking was ending as we know it and that C would get crushed because it was "owned by the government" I thought was pretty over rated. Fundamentally I think that banks will come back just fine because they kind of run the whole economic system and I have confidence that people who run the system and make the rules are likely to survive. I suspect the major banks will soon figure out where the next big bubb... investment opportunity... is and will continue to do well. The mistake, IMO, is when the investors working for the banks start to believe what they say too much. When you're betting with other people's money it seems kind of foolish to throw your own in there as well... If anyone wants to give me money to bet with and cut me a % when I win and not require that I pay anything back when I lose, I'm in!

 

 

Time Management: Great Lecture from Randy Pausch ("The Last Lecture" guy).

Just fantastic.

http://www.youtube.com/watch?v=oTugjssqOT0

Perfect Storm for a Big Financial Crunch

I just read this article on MSNBC entitled "Baby Boomers facing retirements in jeopardy" and that's about all you need to know. Basically, the two great American dreams (1) the eternal rise of housing prices and (2) the eternal and reliable increase in the stock market both dropped off the end at precisely the same time that baby boomers are going to retire... 10,000 per day for 19 years. That's a lot of people. If you consider the S&P is up about 4% for the decade and we don't even need to discuss what your house might be worth... AND you combine that with a drop in the savings rate of about 10% in the 70s and 80s to -1% in the last decade... well... it's not good news for anyone.

As a 35 year old male hitting what is supposed to be the prime of my income potential... and someone with a higher than average savings rate, it's very concerning. My generation has less children and may have to support a lot of people who are completely unprepared for retirement. People with little or no assets... people with children with little or no assets... people who vote. If I were a betting person I would predict that large tax hikes are on the way... and they are NOT going to go to infrastructure improvements or for the benefit of education... or defense or paying down the debt for that matter.

The fact is we spent the last 30 years living WAY above our means and now we're going to spend the next 30 living below our means just to stay even with the huge debt we are carrying around. I don't see budget surplusses and decreases in the national debt anytime soon.

I'm not really interested in the blame game. Should people have saved more? Yes. Should we have exercised fiscal discipline? Yes. Does knowing this now change the past? No.

So what to do? I think we just have to prepare to pay the price. We're going to have less money... maybe a lot less. People are ultimately going to vote in self-serving ways... even to their own pain. If you're 63 years old, can't get a job in the 10%+ unemployment economy, can't retrain your skills in time for it to matter, have massive debt and medical costs and your only way to survive is social security... guess what you're political platform is? If you're a politician who needs votes to get elected, guess what your most important issue has just become?