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Whoever wrote this doesn't really understand what they're talking about. Side note: this is written in 2019. Can we update the title? First, terminology. "Fli

by jmyeet 4y ago

Whoever wrote this doesn't really understand what they're talking about. Side note: this is written in 2019. Can we update the title? First, terminology. "Flipping" houses has a completely different meaning. The author mentions buying a house and "flipping" it 5 years later. That's not what flipping is. Flipping is short-term and typically means rehabing a property. Done quickly, you can make a profit on this if you're good and can control your costs and keep to short time frames. People do pay a premium for finished products and/or just don't want to deal with the headaches of massive renovations. Second, the author makes the same mistake every pro-stocks author makes and completely ignores leverage and borrowing rates. 1-2 years ago you could get a 30 year fixed mortgage as low as 2.5% with an 80-95% LTV. Try getting that on any portfolio. Houses don't have margin calls either. Third, this was written in 2019. A lot has happened since then. The 2006 to 2022 housing situation is radically different. Fourth, the national average of house price growth over that period isn't really meaningful. This isn't stock-picking as the author alleges. Just narrow it to greater metro areas with low unemployment, a growing population (even modestly so) and relatively low state public debt (ie not Illinois) and the picture is radically different. Fifth, real estate tends to be a very good hedge against inflation. We're seeing that now. Inflation has skyrocketed and so has housing in the last year. That's not an accident. There are some systemic problems here but that's a separate topic. As someone who is trying to protect the real value of your assets, you only really care that it is could happen or is happening not necessarily why. Lastly, property tends to be much better at generating an income than any other asset class. Gross yields of 8-10% aren't that uncommon. Getting a dividend yield like that is going to be much harder and will have much greater capital risk.

metacritic12 4y ago
Absolutely agree with your analysis above. The econ of the article's analysis is rubbish. She compares indexes that exclude dividends, cherry picks time periods, doesn't seem to command basic econ understanding. There are lots of good reasons to critique house flipping, like she could have: - Given statistics on average returns of house flippers. - Show how naïve investors and flippers get burned. - Even a piece of ancedata about one couple getting burned is at least real news. But she doesn't do any of that.
fweimer 4y ago
Regarding lack of margin calls, is there truly no way for the lender to renegotiate or get out of the contract if the market value of the collateral depreciates too much? And well before the borrower fails to meet interest payments?
- jmyeet 4y ago
  The first thing to know is that there really is no "lender" in the traditional sense. The first form of banks we had we had had depositors deposit money for safekeeping. Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. A lot of Crypto Andys see this as a problem. It's not, particularly because depositor funds are guaranteed by the government (up to a limit) in the US at least. But in recent decades we say the rise of mortgage-backed securities ("MBS"). Banks will take those mortgages and package them into what are effective bonds and then sell them to the market. This is now completely off the bank's balance sheet so they're not even really the lender anymore. They're basically just the agent who collects the repayments that get packaged up and go to the MBS holder. Non-payment of a mortgage will give the bank some options depending on your state but there are a lot of varying consumer protections here too (eg non-recourse states mean the bank can typically seize the property being the collateral for the loan or go after you for any outstanding debt but they can't do both). But if the loan is underwater (meaning the loan value exceeds the asset value) the bank can only really do something if you stop making payments. There is meant to be due diligence here done by the banks to make sure the entire package of property being an MBS isn't underwater. Obviously this failed spectacularly in the subprime era. But one house being underwater isn't generally a problem.
  - qeternity 4y ago
    > Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. This is entirely wrong. Fractional reserve banking is what allows lending. How do you envision a bank with $100k lends out $1m? What fractional reserves mean is the opposite: if you have $1m of deposits you can lend out $900k and only be required to keep $100k of reserves to meet withdrawal demands. This is the “fractional” bit of fractional reserves. Honestly HN please, go and learn the basics before penning comments that lack basic understanding.
ip26 4y ago
Successful flipping, as I’ve come to understand it, is basically a general contractor plus capital. In other words, it’s a variation on an existing line of work that allows the gc more control & speed, but it’s still a job, and most of the profits are the result of cost efficiency & sweat equity.

by jmyeet 4y ago

metacritic12 4y ago

Absolutely agree with your analysis above. The econ of the article's analysis is rubbish. She compares indexes that exclude dividends, cherry picks time periods, doesn't seem to command basic econ understanding. There are lots of good reasons to critique house flipping, like she could have: - Given statistics on average returns of house flippers. - Show how naïve investors and flippers get burned. - Even a piece of ancedata about one couple getting burned is at least real news. But she doesn't do any of that.

fweimer 4y ago

Regarding lack of margin calls, is there truly no way for the lender to renegotiate or get out of the contract if the market value of the collateral depreciates too much? And well before the borrower fails to meet interest payments?

jmyeet 4y ago
The first thing to know is that there really is no "lender" in the traditional sense. The first form of banks we had we had had depositors deposit money for safekeeping. Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. A lot of Crypto Andys see this as a problem. It's not, particularly because depositor funds are guaranteed by the government (up to a limit) in the US at least. But in recent decades we say the rise of mortgage-backed securities ("MBS"). Banks will take those mortgages and package them into what are effective bonds and then sell them to the market. This is now completely off the bank's balance sheet so they're not even really the lender anymore. They're basically just the agent who collects the repayments that get packaged up and go to the MBS holder. Non-payment of a mortgage will give the bank some options depending on your state but there are a lot of varying consumer protections here too (eg non-recourse states mean the bank can typically seize the property being the collateral for the loan or go after you for any outstanding debt but they can't do both). But if the loan is underwater (meaning the loan value exceeds the asset value) the bank can only really do something if you stop making payments. There is meant to be due diligence here done by the banks to make sure the entire package of property being an MBS isn't underwater. Obviously this failed spectacularly in the subprime era. But one house being underwater isn't generally a problem.
- qeternity 4y ago
  > Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. This is entirely wrong. Fractional reserve banking is what allows lending. How do you envision a bank with $100k lends out $1m? What fractional reserves mean is the opposite: if you have $1m of deposits you can lend out $900k and only be required to keep $100k of reserves to meet withdrawal demands. This is the “fractional” bit of fractional reserves. Honestly HN please, go and learn the basics before penning comments that lack basic understanding.

ip26 4y ago

Successful flipping, as I’ve come to understand it, is basically a general contractor plus capital. In other words, it’s a variation on an existing line of work that allows the gc more control & speed, but it’s still a job, and most of the profits are the result of cost efficiency & sweat equity.