The Draconian is now Cognitive Concord.
Don’t worry, everything is exactly the same. It just has a different color and a new name. I’m still your host.
Today I’ve got some pretty crazy real estate charts to show you. These are the cart that real investors look at and they are some charts that, if you know what you’re doing, could help you make some money over the next decade. I’ll get to all that in just a minute. First, I want to say a few words about these exciting new changes.
Why the change?
I’ve been wanting to re-brand our newsletter for a while. We use WordPress to power this site and a lot of the technology has changed since 2009. Back in the day, WordPress was just blogging software. But now everybody uses it to manage all the content on their sites. People who don’t even blog use WordPress. Companies use it to build their corporate websites. This software is much more powerful than it once was. So the computer geek in me is really excited to be rocking the latest and greatest web publishing technology.
It was also time for a new aesthetic. I wanted to take advantage of Google’s awesome, open source Web Fonts. I wanted better and easier social network integration. I’ve learned a lot over the years about web publishing and one of the most important things is to convert pageviews into some kind of action. That’s why we’ve got the new subscription box and Twitter follow button on the sidebar for every page.
The ideal action is to get our readers to share an issue they find interesting with their friends. That’s why I have the ShareThis buttons.
I’ve done a poor job over the years converting casual visitors into more regular readers. 40% of our traffic comes from returning viewers, which is a good thing — it tells me that people who read once are willing to come back in the future and read again. It tells me that the content is at least somewhat sound. But in order to really grow, you have to get new traffic and convert that into regular traffic. Hopefully I’ll have some time in the coming year to develop some projects like that.
The point is that now we’ve got a better aesthetic and technological foundation for that. The pieces are now in place to get to the next level.
OK, what’s with the name?
I did a Google search a while back for “cognitive concord.” The term basically didn’t exist on the internet. So I’m laying claim, if not as its inventor, then its official and first champion.
The term is derived from the term cognitive dissonance. Cognitive dissonance is a no-good very bad thing. In plain English, it’s what happens when your brain freaks out after it’s given information that directly contradicts its previously held beliefs. It’s that uneasy feeling you get when you see new data or feedback that makes you say, “uh oh, I may be wrong.”
Cognitive dissonance is one of the big reasons why most people are such terrible investors. Most investors do some research, make a few decisions, and then make some actual investments. Usually they like the investments that they make and get kind of attached to them. The investments get comfortable and familiar. But the problem is that investing is a dynamic business and things change. Facts change. The investment that they thought was really good might turn out to be a stinker. There might even be a ton of evidence to prove that it is, indeed, a stinker.
Rather than incorporate all this new, contradictory data, most investors dismiss it outright. They make up crazy, irrational reasons why the data should be rejected. They invent conspiracy theories. They hang on to that stinker-of-an-investment and ride it all the way to down the point where they cry out, “I can’t take the pain anymore! I hate this stupid investing thing!!!”
As you can imagine, cognitive dissonance is a phenomenon that is on display rather prominently in two other fields: religion and politics. But I’ll save that for another day. When I feel like angering a bunch of people and stirring up some controversy, I’ll do a newsletter on that.
Cognitive concord is the opposite of all this. It means cognitive harmony. It’s what happens when your thoughts and the data sing in concert with reality.
In essence, it means mental peace.
Personally, I think it’s a beautiful term.
I hope it’s the beginning of something great and I’m glad you all are with me for it.
Let’s be friends
I’ve had a lot of feedback over the years about our Facebook page. People seem to enjoy it. I only post one update per week so it doesn’t clog up your newsfeed the way that some of your other friends or pages might. Facebook is unsurprisingly inflexible about migrating fans, so you have to like us again. It’s really frustrating not being able to migrate that old list. We had over 300 fans and I’d even passed up my cross-town rival, Louis Navellier (before he started cheating). Facebook won’t even let me get a real button until we get at least 30 people to like the new page.
Anyway, go on now: clicky clicky then hit the “thumbs up” like button.
There are also comments on our Facebook page, so it can be a good place to engage me and others in conversation.
Don’t forget about Twitter, too!
Here, all you need to do is click the pretty button:
Not on Twitter? Why not? Do you still think Twitter is about listening to what kind of sandwich your favorite celebrity had for lunch? WRONG!
Twitter is all about news. It’s about what’s happening right now, which, as you can imagine, is very important when it comes to investing. Twitter is serious business. It’s way past the novelty phase.
Embrace lists and third party apps. I use the TweetDeck app inside Chrome. I have lists for market news, sports news, and world news. I have a list for just my friends. And I have a list for people who have interesting things to say on a regular basis. Some really intelligent people in this business think that Apple is going to buy Twitter and I agree. Apple has made Twitter part of the OSX and iOS core. When you think about how much they want to get involved with social, I’m surprised it hasn’t happened already.
So follow me on Twitter. If you do, I’ll follow you back and put you in a special list. I promise. We’re friends. We should at least be following each other on Twitter.
I’ll admit that Twitter never really clicked for me until I figured out how to separate the signal from the noise. Lists, apps, and tight integration with all my Apple devices were what finally helped me see the light.
The other thing that helped me make peace with Twitter was understanding that I didn’t need to read every single tweet from every person. If I catch a tweet, I catch it. If not, no biggee. It’s real-time information, after all.
And now we return to our regularly scheduled programming.
Market Update – Real Estate Edition!
I promised a while back that I’d show you some pretty amazing real estate charts. Here they are.
The first is a chart of the median existing home price. But it’s adjusted for inflation.
I know you don’t need me to tell you that home prices are the lowest they’ve been in a looong time. But this chart is helpful for context.
Over the long, long run, real estate should appreciate at Inflation + a little bit extra, which I call “wealth appreciation.” Real incomes in the U.S. have stagnated for about a decade now, but the history of the U.S. and long-range trajectory is still one of slowly rising real wealth. This is a natural side effect of being a rich, powerful, productive nation. Despite what fringe alarmists may say about the U.S., none of that will change in the next 50-100 years.
But absolute prices aren’t what people focus on when they buy a house. Most people don’t have an extra $150k lying around, and so they have to get a mortgage. What determines how nice a house they get is the monthly payment. That’s governed by two things: price and interest rates.
The next chart calculates the monthly payment on one of those median priced homes using the 30yr mortgage rates at the time of purchase. It assumes a 20% down payment and that you are “credit worthy.”
My guess is that you’ve probably never seen anything like this before.
Remember, that chart is in “today’s dollars.” People weren’t spending $2,000/month on their mortgage payment back in 1981. But that’s what it would be equivalent to in today’s dollars. That’s assuming they were financing 80% of the price, too, which seems a bit of a stretch with mortgage rates over 16%. I’m guessing they weren’t. If any of you old timers have some good real estate stories from that era, send me a message!
(Also, we have a snazzy new contact form that sends a message straight to my desk.)
I know it sounds hard to believe, but a mere decade ago, we were all financing homes at 7-9%. Since the mid 80′s when the runaway inflation was finally tamed, the 30yr mortgage rate has averaged around 8%.
In any case, inflation-adjusted home prices are at a generational low. When you take mortgage rates into consideration, this is literally a once-in-a-lifetime event. There has never been a better time in our lives for long term buyers to get a mortgage and purchase a home.
Doing so obviously requires conquering quite a bit of fear, uncertainty, and negative opinion about the sector. But at the very least, that chart should serve as a reminder of how dramatically things can change in a decade.
What about renting?
Renting is the hottest thing right now. The pendulum has shifted dramatically in recent years towards renting.
A lot of people don’t qualify for a loan anymore. A lot of people don’t have 20% down anymore. A lot of people want to avoid the headache. A lot of people are afraid. A lot of people just like the freedom.
This next chart relates the median rent payment to the median mortgage payment. It’s in nominal terms, too. So over the long run, both of these data sets should exhibit very mild exponential sloping up and to the right. I graphed an exponential regression of the rent line to show you what I mean.
I think this is a fairly astonishing chart. It’s not an apples-to-apples comparison. The median mortgage payment should generally be higher than median rents because a mortgage includes a “payment” toward reducing the principal balance of the note.
Technically, what I need to do here is isolate the interest component and make some kind of adjustment for taxes, let’s say an extra 1%. Then relate that to rents.
Oh, wait. I just did it:
This is the chart that real real estate investors look at. They want to know what they clear after expenses. This relates the two streams of expenses that you’re “throwing out the window” to either the bank or the landlord.
Remember that this is nationwide, median data. The real estate market is anything but homogeneous. So who knows if it’s a good idea in your local market to operate some rentals. Maybe. Maybe not.
But I like to show this chart because it tells a particularly ironic story. Back in 2006, everybody thought they were a real estate “investor.” There were a plethora of wannabe mini-moguls in every nook and cranny of the market. According to this chart, that was pretty much the worst time imaginable to play Donald Trump. Conversely, this chart suggests that now is the best time imaginable to be a real investor in this space.
This is why the Dow Jones Real Estate Investment Trust Index is up about 90% since 2009. It’s why it’s up about 20% since last September when rates really fell off a cliff.
The imbalance between mortgage interest and rental payments is extreme. Perhaps as extreme as it’s ever been. In fact, it’s unsustainable. This condition cannot last forever. It’s, as we say in the business, an “unstable equilbrium.” At some point rents will completely collapse, real estate prices will skyrocket, or interest rates will normalize and the portion of the mortgage payment that the bank gets will return to historically normal levels.
Which do you think it’ll be?
Because one of those things has to happen eventually.
The big picture
Look, I’m not telling you to run out and buy a bunch of rentals. The real reason why I’m telling this story and presenting this data to you is to point out that investors, regardless of the investments they consider, should always be mindful of perspective and context.
Does the real estate market suck right now? Yes. Yes it does. But there’s a lot more to it than that. Participants need to weigh all sorts of different relationships, dimensions of time, and idiosyncratic market mechanics.
Investors who get swept up in the emotion of the moment almost always wind up making bad decisions.
Ultimately, people have to live somewhere. We forget that in this business. Demand for a housing unit is demand for a housing unit. Maybe your housing unit is owned by you. But if it’s not, it’s owned by someone. Usually someone who’s trying to make a profit.
Did I mention you can follow me on Twitter?