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Guest Post: Should You Buy a House Now?
Submitted by David Galland of Casey Research
Should You Buy a House Now?
Recently, we have had a number of queries about real estate. And no
wonder. For starters, real estate prices have come down. Plus, in an
environment with next to zero interest rates, the idea of possibly
picking up some income-producing property on the cheap holds a certain
appeal to some. Then there’s the fact that real estate is very much a
“tangible” – and so should hold up reasonably well, should the fiat
currency system come undone, as we expect it will before this crisis is
over.
The following, from reader and correspondent Ross, considers the issue of home buying from an interesting angle.
My wife and I have been considering buying/building a house for a
while now. After long months of searching, we have had to ask
ourselves about the "value" of a home. I say this because my parents in
1972 purchased a 2, 000 sq/ft home for $20,000. That was almost
exactly what my father made per year at his job at the time of
purchase. Is this ratio one to consider as a prudent homebuyer not
trying to live beyond his means? I make about $150,000 a year and can't
imagine purchasing a house here in Pittsburgh for that price and being
happy with that purchase.
My parents sold their home in 2001 for $180,000, which is obviously
9 times what they paid for it. We are looking at homes in the low 300s
to purchase, and I can't imagine the sales price in 30 years being 9
times that price, which would be $2.7 million! So do you see my line of
thinking?
Could hyperinflation cause the price to "appreciate" that same way
over time? Is inflation what caused my parents home to return 9 times
what they paid for it? The reason I wrote to you regarding this topic
is that I thought maybe there was a future missive buried in this line
of thinking. Maybe not, but if you have time I would love to hear your
thoughts on home purchasing at this time.
In response, I have to point out the obvious, that all real estate
markets are local. Simply, unless it’s a mobile home, you can’t pick
your home up and move. So, for example, you could offer me a house in
downtown Detroit for free, and I wouldn’t take it. But a house up the
road from me just traded hands at over a million dollars (for the
record, a 25% discount off the offering price). So where, and when, to
buy will largely depend on local market conditions… and the value
proposition of the real estate on offer.
That said, given the dismal outlook for the U.S. economy and housing in
particular, if you’re going to buy today – you should only do it on
your terms. Don’t let a real estate agent push you into a quick decision
or into raising your bid. Someone might beat your offer, but with the
large housing inventory, the odds are good another dream house is
available just down the block.
Now, as to the inflation question. If you do the inflation calculation,
then based strictly on the government’s debasement of the currency
over the last 30 years, the $20,000 that Ross’s parents spent in 1972 is
the equivalent of $107,000 today. That they sold the property in 2001
for $180,000 confirms that there was more than inflation going on.
As you can see in the chart just below, while they sold it early on in
the housing bubble, by 2001 housing prices – encouraged by the Fed’s
loose money policies and a collapse in lending standards – were already
on their way to the stratosphere.
While much of the appreciation in Ross’s parents’ home can be
attributed to currency debasement, it is reasonable to attribute the
additional appreciation to the general housing bubble and, finally,
positive local market conditions.
But that was then, and this is now. Is now a good time to buy? Again,
with the caveat that all markets are local, my general sense is that
it’s too early, but maybe not by much.
Weighing in on the “wait a bit longer” side of the argument is the
large inventory of homes. And while that inventory is high, it is likely
understated due to the shadow inventory of houses owned by fed-up
sellers who have pulled their homes off the market in order to rent
them and offset some of their carrying costs while waiting for better
days. In addition, there are millions of houses that are either in
foreclosure or will be before too long, adding to the inventory.
On the demand side, because of high unemployment, a sluggish economy,
and the end of government home purchase incentives, home sales are
falling again – indicating no significant decrease in house inventories
anytime soon.
On the flip side of the argument, today’s mortgage rates are
unnaturally low – and so, unlikely to last. When they begin to rise
again, they are likely to rise a lot, and in relatively short order.
First and foremost, there is no way the government’s benchmark rates
can continue to bump along next to zero, especially not with the amount
of debt and deficits we’re running. And even a return to a rate close
to the long-term norm will have a devastating effect… starting with
mortgage rates (and, as a knock-on consequence, house sales and
prices).
Secondly, something like 95% of all new mortgages are currently being
purchased, or otherwise guaranteed, by Fannie Mae and Freddie Mac. As
you don’t need me to tell you, those two organizations have essentially
been nationalized and are broke and doomed to fail. Simply, outside of a
full-on communistic system where all property is the property of the
state, the government can’t be the mortgage lender of first, second,
and last resort.
In time, as Fannie and Freddie are revealed for the scams they are –
followed by another trillion-dollar bailout – the government is going
to have to extricate itself from the mortgage business, which will
result in rates being set by the market and not by government dictate.
Thus, buying a piece of property today with a fixed-rate mortgage of
just over 4% would be about as cheap a mortgage as you’ll ever get… now
and for the balance of your lifetime.
What about inflation? Though one is tempted to add the likelihood of a
big inflation to the “buy now” side of the balance sheet – because
property is tangible – my sense is that it’s mostly a moot point. While
Ross can’t foresee a house that sells for $300,000 today being worth
$2.7 million in 30 years, not only can we foresee that happening – we’d
be surprised if that were all it sold for. Of course, my reference
point is today’s currency units; in 30 years, much fewer “new dollars”
will likely be necessary.
That’s because the past 30 years represent the salad days of the
current fiat monetary experiment. The fun part, if you will, with
everyone feeling wealthier because they had so many more dollars in
their bank and brokerage accounts, and because the things they owned
that were priced in dollars – Ross’s parents’ house, for example – had
appreciated in nominal terms. The next 30 years, however, will include
the dark years where the fiat monetary system comes unglued.
When that happens, some analysts expect that the dollar price of sound
money – gold – will rise to $5,000 an ounce. Other analysts think it
could go much, much higher than that. I don’t know, and to some extent,
as long as I have a sufficient position in gold, I don’t care. That’s
because the dollar is just a piece of paper with some numbers on it. As
long as my gold, and other tangible assets I own, continue to hold
their purchasing power, even as the number of zeros on the dollar
expands – I’m good to go.
As a tangible, the price of your real estate is likely to rise in
dollars’ terms, but only because the dollar is falling. However, the
premium that Ross’s parents received as a result of the housing bubble
will not rematerialize in our lifetimes. The overbuilding of the recent
bubble years, coupled with fairly straightforward demographics related
to the baby boom and bust – along with the inevitable return to sane,
versus insane, lending standards – will conspire to keep the value of
homes, regardless of their price in dollars, at or well below current
levels for years and even decades to come.
So, no easy answer to the question of whether now is the time to buy.
As with most things, it comes down to a personal calculation, based on
how much you can comfortably afford to pay. By extension, that requires
further contemplation as to how confident you are that your income and
net worth will continue to allow you to afford the payments well into
the future. Of course, in addition to your mortgage payments, that
calculation has to take into account property taxes, which are going
up, as well as maintenance, association dues, and more.
And because all real estate markets are local, you also need to do some
serious due diligence on the outlook for local markets. In Ross’s
general neighborhood, Harrisburg, Pennsylvania, just defaulted on a $3.3
million municipal bond payment, and Philadelphia’s finances are also
in poor shape – so, before buying, he should do enough research to be
confident that the neighborhood isn’t going to deteriorate.
Finally, one more reason why we may not have to wait overly long before
real estate becomes at least a rational investment. And that reason is
that there is a lot of money on the sidelines just now, both in the
U.S. and abroad. Much of that money is in cash, and much is in bonds – a
disaster in the making.
As interest rates start moving up,
and the fiat currencies start to come down, investors will become
fairly desperate to get out of bonds and into pretty much anything with
a discernable heartbeat. Once housing prices have fallen by another
20%, 30%, real estate will be again considered a safe asset to own, and
some percentage of money will certainly begin to flow back into it.
So, personally, I would hold off buying real estate for the time being.
At least in the post-bubble markets where the debt still really hasn’t
been addressed (much of it now sits on the books of the Fed, and Fannie
and Freddie), and where desperate governments will take advantage of
the fact that you can’t pick up and move your house to raise your
property taxes.
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Ive been looking for a house. And I am going to stick to this one rule of thumb:
Bid = (Comp - 20%).
You mean 20% off the asking price?
If so down here in Texas I was thinking asking price -16% (i forgot how I came up with that #)
The author is right. Desperate local governments will try to squeeze homeowners, plus I think house prices may still trend downward for a little while.
Throw in the possibility that MLS is skewing the comps by listing the final sale by 20-25% greater than the actual selling price. That's how I will handle the comparable prices for now.
If I see things are looking better to buy and the prices are making more sense, then I will bid closer to the asking price, depending of course on the condition of the house, location, etc, etc.
bid = (comp - .20), with MLS inflation your bid is at the market.
"plus I think house prices may still trend downward for a little while".
So you like to be underwater?
bid = (comp - .20) - (downtrend projection / delta) - reality_quotient. In other words, are you crazy? The smart bid will never get close to the ask in the mid range to McMansion range.
There are asset classes that are going to have significant moves while your money is tied up in RE. Study Japan.
Oh no, I'm bottom fishing for sure. I shoud actually say thats is the max I would offer. Ive bid on at least 7 homes so far, but no takers, so I think my bid probably is in line with your thinking. I want my mortgage to be less than my rent, that's for sure.
The agents always try to tell me that the home is below the comps for the area. I see the motivation for MLS faking the sale prices. The Realtors are dying out there.
There is always some element of risk. However, it helps in considering that I intend to live in it, instead of flipping it.
Consider Property Taxes, in my town they went up 8% last year and 14% this year. The state made Educational Mandates and is now ducking out of paying for them.
Another couple years of double digit property tax increases will further decrease my property values.
Beware the Taxman.
Who runs the game? If we agree that it's bankers, then by fact that they're sitting on a TON of properties and are responsible for paying the taxes, I'd say that there's not a lot of up-side to taxes (increases) left. Local govts will HAVE to cut, so sayeth the banksers, AND, so sayeth the poor hammered masses. Unfortunately this will result in more unemployment in the govt sector, which seems the only employer left these days...
And before anyone thinks I'm nuts, that's what I was seen when I was calling for a housing collapse. And here in my county they actually DID lower taxes for quite a few properties: the exact reasons? no idea, but the fact that it happened is pretty much proof that the (downard) pressure is on.
You see it Seer. There is so much unlisted bank owned inventory. At some point it has to put downward pressure on pricing.
Our property taxes are projected to decrease significantly based on a downward adjustment in assessed value. The tax rate is not going up to match the downward revision in assessed value, at least for us. Proceeds will be down overall in my opinion. That is why services, such as frequency of trash and recycling pickup, are being cut.
Yes, watch the Property Taxes. I would stay out of the Citys and buy in the Counties. The Citys have higher expenses. They also have about 30% of the People paying for the other 70%. The Counties are more balanced.
MLS is not skewing the numbers. Those listings you are talking about are for Auctions and they list them for the Minimum bid that would be accepted. When they go to Auction they usually sell for more than the Minimum bid.
In addition some of them are Short sales that are advertized below were the Bank would actually accept a Contract of Sale. So, when a buyer bites and makes a bid the Bank regects the Bid and Counters. That can be a huge difference in the Ask price and the Selling Price.
There was a short sale in a Market that I watch and the people bought the property for $407,000. It was listed as a short sale for $225,000. I am not sure the Bank would accept that much less on their loan.
I guess you didn't see the article where the MLS was listing the auctioned property sold at full asking price where the auction register itself indicated the closing bid and final transaction happened far less (confirmed by live auction participant). Multiple examples were posted and the author claimed to have a hundred or so more in his area alone.
Granted, I haven't verified anything myself but this is what they are alluding to.
If you pull up a summary the listing will show the List price and say sold. If you pull up the full listing it will show the price it sold for.
I've heard that you should use 10-15 x annual rent to determine the value of a house. So, I'm looking for comparable rentals and then targeting 12 x annual rent as what I'm willing to pay. This formula makes sense to me because rent is what people actually can afford to pay without borrowing. Thus, it should provide a good idea of what the actual non-bubble value of the house is. If we find a house that we like and have an offer accepted at 12 times annual rent, great (especially if it is while interest rates are still low)! If not, we have nothing but time. Sellers have nothing but mounting competition and banks have nothing but mounting losses.
Value vs rent depends on where you buy a rental property. If you are a slum lord your return is a lot better vs an upper class Landlord.
If you buy a property that will give you a positive cash flow immediatly it will probably be in a depressed area. Your return on that property will be on the Rent and not the appreciation. But, the higher return on your investment intales chasing your rent each month and damage while they are living there and when they move out. Usually you have to evict them and that costs money in vacancy and time to repair the damage.
If you buy a very nice property in a good area you may even have a negative cash flow but you will get most of your return on the appreciation of the property over the long term. You will get a better class of tenant and will suffer less damage to the property when they move out. You will probably be mailed your rent and it will most likely be paid on time. They will usually give you proper notice so you can rent the property before they move out.
I prefeer the upper price property in a good neighborhood. I would rather have the appreciation which I do not pay taxes on until I sell. Whereas the slum landlord property you pay taxes on the Rental income. Plus, the slum Lord property take more of your time and energy.
You say,"Value vs rent depends on where you buy a rental property." I would imagine that the desirablility of the area would be reflected in the rental value -- i.e. rents are lower in undesirable areas and higher in more desirable areas. Thus, I don't see how the formula is really affected by the area. Desirability would already be accounted for in the rental price and the rental price is still what people can actually afford to pay.
We're not looking to buy a rental. We are looking for a home to live in. It would be a nice property in a good area. Right now, we are renting a large home in a very desirable area that was built in '95. I just checked the property records and the owner paid a little over 10 x our current annual rent for the house when it was new. An offer of 12x annual rent would be about 45% off what he would probably get if the house were on the market today (deriving a price from the most recent actual sold comps in our neighborhood).
Unfortunately, most properties in our area are still asking more than 2x (and in many cases 3x) pre-bubble prices (I know from searching county property records). Most of what is on the market has been there for well over a year and is not selling because the sellers are still holding on to their wishing prices (which are well over the actual sold comps).
As far as appreciation goes, I don't think you will have to worry about that for a long time. Prices have a long way to fall to reach bottom. Once they do, I believe they will stay there a long time. The unemployed will not be buying homes and there doesn't appear to be any engine for job creation in the private sector, so it will take a long time to reach full employment. Also, unless the rules are changed, none of the people who went into foreclosure will be buying for several years until their credit scores recover. Additionally, we will have a glut of single family homes on the market as Baby Boomers downsize and younger generations put off buying homes/having families because they don't have the salaries to do so because they were unable to get jobs out of college (and are saddled with loans). Finally, with lending standards tightening (see Sheila Bair's comments in article on cnbc today) and government bailouts for housing drying up, there is nowhere for the market to go but down.
As much as we'd love to buy a house to raise our children in, we will have to be patient and wait until the market comes down to reality.
1st point if you buy in an undesirable area you in many cases will be able to rent to Section 8 Tenants. The government pays above market rents. In Baltimore city you can buy a house for $50,000. and rent it for $850. per month.
Yet, if you buy a house in a good area in Baltimore County you will pay say $250,000. for a townhouse and will be able to rent it for aroung $1,350. to $1,500. per month.
2nd point. People will not sell for what you are willing to pay. The will sell for fair market value. You are making the assumption that every seller is so distressed that they have to sell to you for less than market value. The do not. If the seller is in distress the bank takes the house and you can then deal with the Bank that will not give you one penny.
3rd point. If housing prices go down and the interest rates go up you will not be better off. The monthly payment will not change. Yet, by waiting you lose the principal reduction for a year and the deductions you have as a homeowner.
Point 1: As I said, I'm not looking for a rental and I would be buying in a very desirable area. I don't believe that the government should be subsidizing rents at all; but unforuntately they do. There is absolutely NO justification, however, for the government to pay above market rents, especially in this economy where governments are going bankrupt. If they are paying above market rents, it is a goverment waste issue that should be addressed. And, in this environment, where people are fed up with government spending and waste, I wouldn't count on that to continue.
Point 2: Fair market value is set by a ready, willing, and able seller AND a ready, willing, and able buyer. So, I guess we're at a standstill. I sold my townhouse in '06 and have been renting for the last 4 years waiting for prices to come down (and they have despite all government efforts to keep them propped up). For the reasons stated in my previous post, I believe prices will fall a lot farther and I'm willing to wait. I believe that many of today's buyers are tomorrow's foreclosures. I can wait to buy. Many sellers -- even those who are not in financial distress or underwater -- cannot wait to sell (new job elsewhere, retiring and moving south, already bought another house and don't want to be landlords, etc.). Smart buyers will wait to buy until it makes sense vs what it costs to rent. If I can rent a house for half of what it would cost me to "own" (i.e. rent from the bank) that same house, why would I buy?
I'm not assuming that all sellers are in distress; however, the sellers that are not in distress will be competing with those that are and with all of the foreclosures that the banks are finally starting to put on the market. Which houses do you think will actually be selling and, thus, setting the comps ... the foreclosures and the distressed properties where sellers are willing to cut a deal or the ones where the sellers are clinging to bubble prices? Sellers who are not in distress should have room to negotiate on price. The smart ones have an opportunity to make a profit while they can or get out before taking a loss. The dumb ones will sit on the market holding onto their wishing prices, chasing the market down as prices continue to fall. Inventory is going up, but, with tightening lending standards and higher unemployment, the number of willing and able buyers is decreasing. It is a simple case of supply and demand.
I don't understand your statement about the bank not giving me one penny on a foreclosure. If your saying the bank won't lend to me (stellar credit and 20+% downpayment), then they won't be lending to anyone and prices will come down even more, at which time, I'll buy in cash. If your saying that the bank won't negotiate on the foreclosures, you're mistaken. Unlike to an emotional seller, to the bank it is a business deal and they will sell for what they can get.
Point 3: It is always better to lock in a lower price than an lower interest rate. The price doesn't change, but you should have learned from the current situation that interest rates go up and down. If I get a high interest rate, I can always refinance into a lower rate if rates go down. I can't, however, get a lower price. If over the year, the price falls more than the principal reduction, then I would have lost money. If interest rates go up, prices will go down because the amount of money people have to spend per month stays the same. Also, as far as the mortgage deduction goes, wouldn't a higher interest rate mean a bigger deduction?
The fact that people are constrained by how much of a monthly payment they can afford is exactly why prices will come down in line with rents. People only have so much money to spend per month, whether it goes to pay rent or the mortgage / PITI.
Point 1, The Government has to pay above market rent because the Tenants tend to cause a lot of damage and repairs. The higher rent offsets the damage and repairs. There is also no Security Deposit paid. Even without Section 8 the Tenants usually do not have good credit and eventually are evicted so they will pay more just to get you to rent to them.
I also think that the article is comparing Real Estate as an investment vs the Stock Market. Not as a principal residence.
Point 2, You are right that the eventual Market value is where you can get a willing Buyer and a willing Seller. Yet, most Buyers like yourself think that the Sellers should sell at what you want to pay. That is a falacy.
You think prices will fall futher. Yet, in my Market in Maryland the prices have not only stabalized they have gone up in good neighborhoods. The Real Estate Market is not like the Stock Market. Desirable areas stay desirable.
When I said that the Bank will not be willing to negioate on the price I was not refering to the rate or the loan. I was refering to the Price on the property. They may take a lower offer but it is very unlikely. What the Banks do is they take your offer and wait for someone to come along and make a better offer. They also shop your offer. Meaning that they will tell potential Buyers of your offer and what it is for. Dealing with a Bank is quite different than an individual. Plus, you should be very careful to read the Banks addendum. In fact you should have an Attorney review their Addendum. Burried in that Addendum is usually a clause that they will give you a "Special Warranty Deed". This is not the same as what is usually a Standard General Warranty Deed. This does not give you as good of a title. They also have in the Addendum that if the prior Owner has a claim to regain title you will relinquish the title.
Your statement: "If I can rent a house for half of what it would cost me to "own" (i.e. rent from the bank) that same house, why would I Buy." You are Buying. You are Buying, you are Buying your Landlords Property.
Point 3: It is a falacy that if Interest Rates go up prices will come down. You are not taking into account for the fact that if Rates start to go up People will rush in to Buy before they are priced out of the Market because of rising monthly payment due to interest rate hikes. Many times Buyers go into a Buying frenzy to lock in the lower rates. It happened in the 80's and it will happen again. The Psychology of Real Estate is very different from the Stock Market.
If rates go up you could end up being priced out of the Market. I watched this happen in past. When rates went up from about 6% to over 10%.
As far as the rate going up and your getting a bigger deduction, you are correct but you still have to pay 2/3rds of it.
So, if you wait you could lose out on the lower housing prices and interest rates combined.
Keep living in your fantasy world where real estate is always an appreciating asset if its in a desirable area (it's different here) and sellers alone set the price. Sorry, but they need a buyer. If there are no willing and ABLE buyers at the price they want, they will not sell. Unlike the bubble years, right now there is an overwhelming amount of inventory and very few QUALIFIED buyers.
I never said that sellers are CURRENTLY willing to accept what I'm willing to pay. I said that eventually the market will come down so that prices are in line with rents and I'm willing to wait. It is a simple matter of math. Prices cannot be more than people are able to pay based on their salary constraints. People only have a limited amount of money to spend on housing per month, whether that money is going toward rent or PITI. When people spend more than they can afford, we end up with the problems that we have now.
Smart sellers will price their properties where they can currently find a willing buyer (i.e. a naive buyer who believes his Realtor and the pump monkeys on CNBS saying that we've reached bottom, we're in an economic recovery, and it's a great time to buy because prices and interest rates are "low" (compared to what -- bubble prices or traditional non-bubble price to rent/ price to income standards?)). Sellers who are not in distress, depending on how long ago they bought, can still get out with a profit or may avoid a loss. Just because the seller may be able to find a buyer today, doesn't mean that the buyer made a wise decision. Prices are still way too high vs traditional price to rent and price to income standards; thus, I believe that many of today's buyers are tomorrow's foreclosures. Dumb/emotional sellers -- i.e. those who who hold out for their wishing prices (listing way above most recent sales) -- will just continue to chase the market down. Unfortunately for sellers, the pool of greater fools has been greatly diminished by unemployment, foreclosures, and more stringent lending standards. Prudent buyers, who understand that a house provides shelter and is a depreciating asset, not a money machine, are waiting for reasonable prices to buy.
You say that, if interest rates rise, people will rush into buy. Are you kidding me? No one is buying now when interest rates are at historic lows. Why would they rush into buy when rates go up? Other than a handful of fools like the ones who fell for the tax credit, who is going to rush into buy? Too many people bought already who couldn't afford the houses -- hence the bubble and bust. Lending standards are tightening -- proof of income and substantial downpayments are again going to be required (again see Sheila Bair's remarks from yesterday). Unemployment is going up. People are in debt up to their eyeballs. Again, who are all of these people that are going to rush in to buy? Sorry, but the bubble will not be reinflated any time soon.
You say,"If rates go up you could end up being priced out of the Market. " ROTFLOL "Buy now or be priced out for ever!" -- *** Newsflash *** It's no longer 2004! *** Being priced out FOREVER is the fallacy. In fact, most of the people who fell for that line over the past several years are now priced in because they can't sell without taking a loss. If you're a Realtor, you better find a new shtick. Better yet, start convincing your sellers to come down to reality. It is better to make smaller commissions on a lot of sales, than no commissions on overpriced listings that sit forever.
As I explained above, people are constrained by their salaries as to how much money they have per month to spend on housing. Therefore, if interest rates go up, prices will come down. We bought our townhouse in 1998 for about the same monthy payment as our much smaller apartment was costing us. We sold in 2006 for more than 2.5x what we paid. Prices will come down again in line with rents. That alone will be when it will make sense to buy. It is simple math, but you keep living in that fantasy world.
I have given you good advice. You are a novice, I am not. One day you will realize I was correct. Until then, keep you dreams.
P. S. you held a property for 8 years and made 250% on the propety value.
How much was your downpayment so we can really calculate the percentage of your gain. And you think I am wrong? How much would you have made in the Market on your down payment over the last 8 years?
I know what happened to you. You sold in 2006 and now you cannot even buy your old home back as prices are higher than you sold. That is why you are so intent on prices comming down. You lost out and sold too soon and now cannot replace the house you sold.
NO - Bitchez!
Word up wegro...
/b/rofist
Your avatar is a blood-thirsty murderer. NICE !!!!!
Despite ZIRP, housing is still depreciating. If rates go up, housing going lower still. Except in the most extreme cases, residential real-estate in USA is still a sucker's toxic asset and will be for quite some time. Stay liquid, rent a minimal home on a short lease, and invest what doesn't have to be liquid in the most tangible, portable, inflation-proof substance(s) you can think of.
You're right, even if you do have the cash to buy it, it's still a liquidity trap. As the market tanks more, it's harder sell. At least 25pc of previous buyers pre 2008 cannot get a loan due to credit and jobs. Many able buyers are stuck in their homes now can't sell for reasons like underwater, no interest, or expecting to get more than they paid.
"Stay liquid, rent a minimal home on a short lease, and invest what doesn't have to be liquid in the most tangible, portable, inflation-proof substance(s) you can think of."
Eighteen year old Eastern European hookers. They earn oodles and oodles, are cheap to maintain and can be used...sorry worked...goddamnit...they can provide service for decades.
Be awe-strucked if you could get over 1 decade. Beauty fades fast in that line of work.
why eastern europe?
amerika is FULL of whores....
yes, pussies are a commodity that should be considered for stockpiling.
No house yes undeveloped property (depending on location and zoning of course).
papaswamp
Bingo.
d
Undeveloped property is not a good choice in my opinion. You cannot get a return on the investment or live in it. The Banks are stricter on the loan terms. More in downpayment like 30 to 40%, shorter loan terms usually with a 7 year Ballon.
Stay away from undeveloped property unless you are a Builder.
Maybe be excellent advise... I can tell you one area that is overlooked and that is property with excess land. Not much value being given for upside via lot split, change in use (SFR on MFD-zoned land). That's a land bank with almost no upfront investment beyond the price of the "base" home or structure.
Absolutely agree. A house on a very large lot is great. It could even have the potential of being subdivided into two lots. One where your house is and one to sell and pay off your house. Great idea.
Most people have no business "investing" in real estate. As far as housing goes, it's a lifestyle choice for necessary shelter.
As far as investment return goes on a house, you're lucky to get out what you put in. Every house will need upkeep (paying to have snow removed, grass cut) repairs (roofs aren't cheap neither are bursting pipes and water damage etc.) insurance, property taxes, utilities. All of this assuming a newer, problem free home.
Neglected foreclosure homes are usually a money pit and nightmare. Most people have no business buying s fixer upper and are out of their minds if they think they can remodel and repair it themselves. Some People really have no idea that construction is an actual skill.
I should clarify first that I was never an investor but a homeowner. I have done quite well in this arena as the designer and first mate to the person I hire to do the construction. Maybe I've been a bit lucky but I have done this for 18 years and always come out on top. However, the caveat is that I have always been aware of market cycles and sold in AZ at the top in 2005, had a great deal of fun with an 1890 Vic in upstate NY and got out of it in a little over a year and have been waiting now for 3 1/2 years to get back into my own home. It's time. Let the market go down.
I don't care if it goes down for I know it will. And I will pay cash since that is how I function. I don't give a shit about losing 30% on $200,000 since that is about 7 years rent (including property taxes and insurance) and this will be my last home. Sure, I could invest the money in other ways and make more on it, but we are talking about a home without a mortgage that I can do anything I want with.
And I won't be renting with someone else's rules about pets or smoking or some other bullshit. I won't have to put up with the lifestyle of a renter and buying in the state I am moving to that has a 3% cap on property tax increases is just fine for me. If hyperinflation hits, my house is mine. For those with mortgages in that framework, if anyone can explain how it would work to get a 30 year fixed now and a new currency evolves--what happens? How are the old dollars of the original mortgage converted to new dollars. Are you suddenly unable to pay your mortgage? I have no clue.
It's the northeast/midwest areas I am familiar with and wherever else that the public schools are tied into the property tax system that really take a bite out of you. Thus why I got out of the 1890 Vic I bought in 2005. Bought the house for $91,500 cash (property taxes were over $3000 a year on a 91K house which I thought was madness), put in $7000 and lots of labor and sold in just over a year for $135,000 to a cash buyer in early 2007. He is doing fine on it since this is the Marcellus Shale boom area. But had I held onto it, the roof on that gingerbread Vic would have taken all the profit out and it would have been one thing after another. Old houses are like 2 year olds. Everyday when you wake up, they tell you they need something and are very loud about it. Gimme a new furnace motor. Mine! Gimme a new driveway. PAINT ME! Help! Fascia is falling and the gutter with the french drain that was working great yesterday has a dead animal in it!
The Vic reno was a work of art and already a great place when I bought it that just needed some redesign to become family friendly (the back bedrooms went through the master to get to the bathroom on the top floor).
The skill in construction is knowing code (which I do), electrical, plumbing, weight bearing walls, and having a keen eye for fixing a seemingly impossible design with a creative eye. No genius needed. Just vision. It's an art and a skill. There are plenty of foreclosures that are priced well enough to cover the costs to make it right. But you have to have vision and know what you are buying.
Before I die, all I wan't is a refrigerator with an ice machine. My needs are minimal.
Bucket List = ice bucket
Most people have no business "investing" in real estate. As far as housing goes, it's a lifestyle choice for necessary shelter.
Thank You for that comment! This "investment" mentality is going to die hard, but die it will; soon people will have to actually WORK for their living rather than making a living off of "investments."
There's property, and then there's land. A big difference. Although the sector is hammered, it's almost a certainty that they'll be making more houses. But as the old cliche goes, "land, they ain't making any more of it!" Food can actually come out of the ground, a bit harder to do with "investment" properties (not sure that I'd want to face the future trying to extract rent payments from the unemployed).
Food, Shelter and Water...
d
If real estate is not an investment, but a place to live, seems like now could be as good as any time. Not like the dollars will fare better anyplace else other than maybe physical gold. I am trading up after eight years in a modest (1200 sq ft) ranch, to a nice brick colonial. Brick better than straw, when the wolf comes.
d
Tell that to Donald Trump or Richard Frack.
Most of the Wealth that has been made in this Country has been thru Real Estate NOT THE STOCK MARKET.
And, yes there is a limited amount of it. They cannot make any more land.
Actually the "wealth" you speak off has been made through leverage of the real estate market. Recent events have now show that the unwinding of the leverage has created the biggest bust.. in that same supposed "wealth". Personal real estate and vacant commercial RE are always liabilities in that they generate monthly expenses, not revenues. Buy real estate with an eye to what part of your current income you can afford to spend (lose) on housing.
Same stupid argument I heard in 2006. The wealth of this country was made though invention, innovation, and the building of business. Real estate values went up a result of the success these things as well as sucessful real estate development, not by virtue of being the surface of the earth. Just how valuable is real estate in Zimbabwe?
Id fight Gandhi
"As far as investment return goes on a house, you're lucky to get out what you put in. Every house will need upkeep (paying to have snow removed, grass cut) repairs (roofs aren't cheap neither are bursting pipes and water damage etc.) insurance, property taxes, utilities. All of this assuming a newer, problem free home."
Well Billy, that's all fine and dandy except in the areas where you do minimal upkeep. Renting to college students, they pay an arm and a leg per semester each and every semester, and immigrant families who are usually too scared to ask for upkeep.
Those are your money makers.
But the real investment should be land. They ain't making no more of it and you can either rent it out or farm it yourself.
I was saying buying a home as a primary residence and investment in my context.
Are you assuming renting it out? That's a nightmare to play landlord, keep up the property and do upgrades and repairs after the last tenant without equity appreciation its all a loss. Land is cool, at the right price and time frame, but you need to buy right and be on top of taxes, local zoning nonsense. It's also highly illiquid.
duplicate
That's a nightmare to play landlord, keep up the property and do upgrades and repairs after the last tenant
Amen to that! I hate being a landlord. Have been forced into it because of an aging parent.....Yuck!
I've been renting a 1000 sqf house for 10 months now and can honestly say I have zero plans to buy for at least the next two years. My landlord has been pitching to me the idea of doing some kind of ridiculous rent-to-own arragement even though he's at least 20% underwater. Needless to say, there's no way he can come up with the difference at the table. My plan is to lock him into a new lease through the end of 2012 by convincing him the market will "recover" by that time. I know he'll take it because he has no other option.
"No, no,and more NO! Patience grasshopper. Wait til you see the terror and hoplessness in the eyes of prospective sellers - begging for you to buy their house. That's when you step in for the coup de grace - not before!"
Sun Tzu - (Recently Released transcript of his best-selling seminar titled "How to Buy Residential Real Estate at Rock Bottom Proces while the World Collapses - with NO MONEY DOWN!" Also available in paperback.
Thats what I'm saving and waiting for...what was it?
The young bull says to the old bull "lets run down to the Field and go get one of those females"
The old bull wise as he was replies "lets walk down and get them all"
well bear in this case..
"Get" them? That's not the way I heard it. When i heard it it was "Fuck."
A typical college graduate won't find a job until they're well into their 30s (ie: the past decade of university/college graduates are mostly unemployed!), so the multiplier between income and house prices should be far lower than it was in earlier generations.
Contrary to perhaps what the author was implying, I'd rather have the Detroit home than the $1 million suburban home. Houses can be purchased in Detroit for $15k. Fort Myers, FL for $60k. Obviously, substantial discounts to replacement cost, and little downside left.
The compression in prices will come from the top. $200k homes might go to $150k, but the $1 million homes will go to $600k or less. The dream of owning a home for 20-30 yrs is dying. How many people know where they will work in 20 years? And people will downsize, want more flexibility, etc. In my NW city, homes in certain pockets are 2x, 3x what they go for a couple of miles away. Schools don't explain it. It's prestige. That goes away in the coming shit storm. Already the for sale signs are out, and nothing is moving. Even 30% off the top is better than what they will go for a year from now. Dow 10k, while not 14k, is still better than 7k. Sellers know this.
And if interest rates rise, housing prices will get whacked. The author alluded to this, but didn't make explicit enough.
Are houses a good hedge against a currency collapse? Huh. Depends upon the house. A $150k house? Perhaps. A $1 million house - nope. Will go for $300k on the courthouse steps. It wouldn't be my first choice of a hedge (which would actually be farmland).
Exactly. When interest rates rise, prices will collapse. So If you have a ton of equity in your house and would like to buy a house now to lock in these unreal low rates but realize that prices still have a way to go...
Take a loan out on your house. At 4.25% or whatever manipulated rate (isn't the interest rate a reflection of risk, how odd, they are pricing no inflation, no risk... I will take that deal) you can get. Then, with that cash pot start bottom fishing, with time on your side.
There is more downside in the low price houses in areas like Fort Myers than you imagine. Like in detroit, the end game is to have the excess inventory demolished ( price -zero) because they generate ongoing losses (maintenance and taxes). When there is no hope of inventory being reduced by future sales, these places will remain unsold at any price.
i bought a foreclosed house last year in cash and fixed it up myself. As soon as i put it for rent in less than a week a received 2 offers from individuals with stellar credit. The rent is bringing in 12% return on my investment which is more than I would get anywhere else. Real estate is a great investment right now especially in distressed area such as Florida. About the person in the article, I dont see how you can make a comparison about how much houses were worth 100 years ago compared to now. Raw materials are getting more scarce and have risen exponentially in price so a more accurate method of house valuation would be to calculate how much a house costs to build now compared to 100 years ago.
waffle,
+10
Well the 1890 Vic I bought and restored originally cost $6000. In 2005 I bought it for $91,500 cash. 105 years--that's not much inflation there, is it? It was a helluva structure, beautiful landscaping, carriage house, completely private with large evergreens, front roll around covered porches, back screened in porch, 3000 sq ft, 3 owners since build, with a life of major TLC and a structural engineer actually owning it for 45 years made sure it was one sound, solid house.
I insured it for $350K because that was my estimate to rebuild in 2005.
Another renter by choice here. I'm selling my condo with the closing in just over a week. I'll rent a bit less space for less per month and let the buyer take the depreciation from here. Maybe in late 2012 or early 2013 might be a good time to buy again. But I feel very lucky to be getting out with equity. I should have sold 4 years ago. I knew it then but I was too lazy. I'd have made about 30-35% more. But I'm just not a money fixated person and didn't want to be one to any significant degree. I think that's true for a lot of people. They just don't want the stress of having to frequently consider all sorts of macroeconomic issues. Yes, there's some head in the sand aspect in that. It's also a degree of trust that the most basic pillars of the economy and society have a fricking clue what they're doing and that you don't have to be considering every angle even of the 30,000 foot high view of the economy. Unfortunately you do.
d
What's with these annoying 'd' posts?
sorry. I got tired of listening to myself last night and deleted everything. poor posting etiquette.
First, a house is not an investment, it is a place to live.
I am currently building a house in the Midwest Rust belt. It is where we live now and we want the house we want. Plus, we are near sixty and I am in poor health. If we don't build now, we (as a couple) won't get to. Also, since my health prevents travel, inability to pursue our hobbies, etc., it is the only luxury we enjoy now.
Look at a house not as an investment but as a part of your life. The neighborhood you live in determines (usually) where your kids go to school, the people you are friends with (to some degree), how you entertain, how safe your family is (somewhat), how much time you spend commuting. In short, it is an important factor in how you live your life. Not everything in life is about money.
That being said: Drive a hard bargain. Pick out several houses you could be happy with. Rank them based on your preferences. Make offers that reflect your preferences but don't be afraid to lose the deal if it doesn't make sense.
PS. Don't believe the realtor's comps. Look up sale prices in the tax records. Market Ticker (and ZH) both posted articles suspicious of MLS reporting of sale prices (used for comps). Remember, your realtor is not your friend. In many states, unless he is a buyer's agent compensated by the buyer, his legal responsibility is to the seller. Don't tip your hand to the realtor. Keep your counsel and make your offers based on what you know, not what a realtor tells you.
PPS: Let the sellers know you have multiple houses you are pursuing. Don't take counters. Don't make second offers until you have gone through all your first offers on acceptable houses. Make offers expire quickly--2 days at most--and move on. If no one accepts your first offer, repeat with offer bumped up 1% or so. Be realistic but not generous. Buyers have the whip hand, use it, be professional, and business like.
We made an offer on a foreclosure before deciding to build. The bank wouldn't negotiate. After two offers, we moved on because they weren't get realistic and we didn't want to waste time (home still for sale five months later). Don't let what the seller wants affect your price. Figure out what you are willing to pay. If you are way off, you'll find out soon enough. Re-study the situation and re-evalute what you think is a reasonable price. Expect to (short-term) see house prices drop. Long term, we're all dead (I read that somewhere) but you gotta try to live between now and then. Good luck.
Just a brief aside, but you raised a good point in mentioning commutes.
I've got a book somewhere called Edge City by Joel Garreau. It's largely about why one suburb instead of another explodes in growth. Mostly, it's completely obvious. Highway access.
The most valuable thing I got from the book was Garreau's contention that research shows that all throughout history, at 45 minutes travel time to work, whether it was walking through a walled city, jumping on a horse, cranking up your Model T or jumping into your SUV, people start to find the travel time to be just too much.
I think it's true. I had a long commute once, my first job out of college and I hated it.
A lot of times people think they'll just grin and bear that 80-90 minute commute to live in a better house farther out in the suburbs. But most people can't. They hate it and it seriously detracts from their quality of life. Do you want to spend 5-10 extra hours a week sitting in traffic, away from your girlfriend, wife or kids?
Or even better, work in your own county 90 miles from any major city making a smaller pay doing something useful and living within your means? The commute is a distant memory and one less source of stress.
Our commute downtown with two cars at 2.00 gas worked out to be about 600 per month in gasoline. At 3.00 900 per month in gasoline and so on.
No commute, fill car once every two weeks or so and work close to home weaving baskets or something save the bills and stress.
The real problem with long commutes is that it wears your car out very fast. Cars are expensive. You also have the maintaince on your car (expensive) and gasoline.
You have to calculate into your mortgage paymnet burning up a Car every three years. Plus, gas and maintaince.
Wow! Every three years?
What exactly are you doing with the car that would make it useless after 3 years?
I worked out of a Auction place for a few years in Little Rock and I have seen, for example plenty of Buick Centuries run down into the ground with only 40K miles and a year old or two years old. They have mechanical problems to the extreme. Sure they can be reparied and resold on the used market.
I have had many commuter type cars with 150, 200 thousand miles on the clock and only a few years old and not running well at all. Some have caught fire from time to time before or after the sale.
I am absolutely convinced that there is a class of worker who buys a car commutes the hell out of it going downtown and when it starts to break down, trade it in and buy another one.
Actually disposible cars.
I buy a vehicle and I intend to keep it at least ten years to 20 years or longer pending parts availibility. They go to the shop, get taken care of once in a while and if something i s wearing out, it is replaced with OEM factory parts before it becomes a problem. Yes we put money into our vehicles but they are essentially the same as they were at 130,000 miles at 5 years old then they were when we got em at 1 year old at 30,000 miles.
Since we have quit the high speed rat race fighting traffic at 90 mph with the herd for 60 miles to downtown each way hoping to be early enough(7, then 6:30 then 6 then 5:30 etc) trying to beat known gridlock points where braking and stops are very harsh and aggressive driving is a problem.
We work in a place with maybe a two lane state road commute through farmland at 45-55 mph for about a half hour or so, gently rolling along and we are there. Returning home, bypassing all the traffic crap and rolling along the little two lane roads with hardly any traffic to speak of.
Some times with part time work, those cars dont get driven for a week or more if at all, they are used to get mail and that is it.
Cars tend to last a very long time under soft use conditions.
I was raised near DC and Baltimore and if you did not have a Sports car with at least 300 Horsepower and a 100 foot stopping distance with tires to match along with a sharp sense of aggression to get to your workplace while shoving and fighting other sports cars all gunning for that small advantage to get ahead of everyone else in the far left lane while the schmucks rot in the right three lanes going no where.
I had a early 70's muscle car and did this kind of commute with glass pack exhaust. Anytime these little crappy BMW's or Audi's hear me stomp the throttle and open up that high rise dual pumper holley, they get the fuck out of my way. And then they learn I can stop as well almost as fast as they could. At twice thier weight too.
Very intimidating unless I am up against a Merchedes or some really exotic sports car driven by a millionaire who considers me a rust bucket and a ego to match and has the money to buy my POS car ten times over.
In those days maintaince was done with parts at the front of the yard. Until said maintaince became too costly and too frequent. Those brake pads and piston rings only last so long under such severe service.
And that was with a car that was 30 years old at the time. Not three.
Those were the days. Long before traffic cameras were completed to monitor and catch people for truly aggressive driving. I was one very aggressive person at the time.
And all for what? To get to work on time only to be pounded in the butt by a overbearing sweaty manager telling me that my work is shitty and no good and must be done over again by skipping lunch and maybe being fired by the end of the day.
I. Dont. Think. So. TOO much stress.
Playtime on the DC beltway if caught by the even more aggressive and focused Police will net you at least one ticket that will totally destroy your paycheck for that week and disrupt your work schedule for court appearances for months to come. Ugh.
So I quit that and went trucking. Learned to stop at 6 AM, eat breakfast and sleep for a few hours near a city while the commute works it out and then ease through midday.
I'm with you since I am disabled. Your house is your home and the place you will spend the most time in. I am moving to the NW and have spent 2 years watching prices fall. At this point, as a cash and shrewd buyer, I will not fall into any "the house will go tomorrow" crap. But my realtor is a dear friend and she knows the game and doesn't pretend that things are better than they are. I would love to build but that is just too much of an expense for me. My home is right around the bend--due to a lawsuit from an MVA I am stuck in the east until Nov 15. I expect that to be a great time to buy in Oregon--and I will take my lumps as prices go down further. No problem. I will be HOME.
Oregon? Why not go north across the river? No State tax in WA and no sales tax in Oregon. Oregon is a basket case. Maybe you are thinking of the southern portion of the state.
Yes, commutes are a big consideration in metropolitan markets and will have a huge impact on your quality of life. Good point.
How about in Canada? I escaped USA and now live in Ontario. I am renting now (sold my PA home and bought silver/gold).
I personally saw miles upon miles of rolling fields and woodlands north of toronto vanish into houses built ten feet apart over a few years time back in the 90's
Then the interstate all along that part of the Canada choked up and siezed up in gridlock.
Hah.
What happens when all the farms are paved and nothing but houses remain. How are we to eat or feed a nation? hmm?
Gotta love the Don Valley Parkway, eh? What a mess. All the way to Finch.
Man, that DVP, I had to commute from King and Bathurst to hwy 7 every day for work. That got old very quick.
The QEW into Toronto is always fun, although the left most lane is usually speeders delight.
Rule of Thumb: Real estate sucks as an investment
wb<
1. I enjoy your art and when I can, your site. Thanks!
2. Buying a house: Coming back to SE Michigan in 1986 we bought a house in Bloomfield Township that was slightly "special". A roof, basement work, kitchen and landscaping redoo we sold it 18 years later for a price that (excluding realty fees and closing costs) was 7% per annum more than we had paid. But, of course, the sale was in 2004 to get that kind of markup. We have taken a hit on the value of our condo but as others have noted, we bought it to live in and don't expect to be trying to sell for at least another decade. (I am assuming I don't die first.
The secret is in using good judgement about what you buy. You have to live there so get something you are satisfied with. If youreally like it, and decorate it properly, its others will probably like it also.
And right now, many houses in the Birmingham/Bloomfield area are selling below construction cost (early 80's prices).
Tnx HB,
I said investment. If you buy a place to live and live in the right place 20 years, fine. But in today's environment, staying in one place long enough to beat the timing is very difficult indeed.
For myself, I can only say this. I have owned property in NYC, London!, Vermont and HK. For timing reasons I have just barely ran even on my purchases. The headaches of owning versus renting are well known.
I know less than a few who have done much better.
The long term real estate wealth creation model is something that worked mainly for our parents.
Cheers,
WB7
d
d = drunk ?
Yeah, sort of. RE is kind of a passsion for me, but nine posts? No one needs to hear from the VI nine times on one thread - I deleted.
There is no "magic formula" to utilize for an offer strategy. You can't just assume that comps - 20% is a sweet deal or 16% under ask price etc. etc. In a perfect world, I'd bargain hunt until you find the perfect deal, something terribly distressed so there's a ton of equity right at purchase. The immediate equity will only help to offer a "cushion" should prices continue to contract as I suspect they will. And no, your personal residence is never a good investment, it's only a standard of living on a relative scale. Break even proposition at best; Morgan Stanley did an awesome, 20 year study on this and posted it some years ago on their 321 Gold site.
Back to my point, find the right property and perhaps if interested in some day renting the property, think about what makes for an attractive rental i.e. location, size, curb appeal, maintenance, age, durability of materials i.e. brick, vinal etc.
As for timing the interest rate environment, I'd say rates go lower if I were a gambling man. Fed going to keep rates artificially low for extended period and I think they want longer rates quite a bit lower before all is said and done. If 10 year goes to 2% or less, where does that put the 15 year note? 2.9% Gimme some!
I've been in the rental business for about 10 years and it's a love hate relationship. Right now however, no one can afford to purchase a home so all of my tenants are stuck renting from me for the forseable future. One of my prior tenants that just moved out rented for 7 years from me...7 years (and that's a 15 year note)! So he paid for 1/2 the entire note... For those that say you can't make money in Real Estate, it's an ignorant statement to say the least. If you're diligent, patient and use some caution, you can prosper HUGE in the days ahead!
I didn't buy anything in the prior 6 years as I was worried about inflating prices but just recently turned my old home into a rental, that's a great strategy as you get ower occupied rate which tends to run 50bps under tenant occupied.
Rule of 15, baby: http://realestate.msn.com/article.aspx?cp-documentid=13108387
But the answer to this question is different for everybody, their plans and their location.
Another landlord here.
What today's real estate market allows you to do is live _free_.
Best strategy right now, since you need to live _some_ place: Duplex or double bungalow or big house with convertible basement. (The former is legal, the latter is usually "non-conforming you take your chances").
You only have one tenant... most people don't realize that you can choose your tenant when you are a small landlord... no families have to be accepted, for instance, if the rental is owner occupied (according to the last time I checked the Fed law).
"I don't want to live close to a tenant". Well unless you have acreage in the country, you live close to neighbors anywhere. At least you can choose not to renew a tenants' lease.
Again, it should be possible to live free. In 2001 I bought a double bungalow and the rent of the other side was $50 more than my payments... and my second mortgage then was at 10.9%!
Currently in a double bungalow (side by side) with next door rented plus an income unit in the basement! (And another on the way in the other basement!)
Still it is not for everyone. However based on all the laws, there are lots of politicians that are small time landlords...!
We don't live rent free, but a couple hundred mortgage payment is nice when you have the right tenant.
Hey! How about this, for a change? I'm living in the house in which I grew up, helping to support my younger siblings and my widowed mother. It's hardly easy...this area in NJ is rife with people who can afford to wipe their asses with what I make in a year, but the house is basically clear (mom still has a small equity line on it), I run my business out of it (no storage of expensive equipment in a place where I cannot guarantee its security), and my ex lives not far away, so I get to have my daughter with me on a frequent basis. The place is sort of a wreck...I can only fix things as there's extra money and time to do so, but I still wouldn't trade it for anything. The land is arable, and a small stream runs through. Now that the weather is cooler, I sleep with the window open and wake up with the sunrise to the sounds of birds and other critters going about their own routines.
First, my whole argument will rest on two simple facts that I believe that most ZH readers can understand, if not necessarily embrace...one, the fiat currency that we now have is totally fraudulent and manipulated and controlled by people who will never give a flying fuck about you, me, or anyone else that isn't in their skins. Two, there may actually be some truth to the idea that we took something that used to be a simple necessity (or, in more idealistic terms, a fundamental of the "American Dream") and began viewing it as more of a mechanism of upward mobility, or just a cash-cow to obtain more useless shit that we never would have wanted in the first place, save for the ceaseless sensory assaults of the advertising industry.
In light of those two issues, I'm happy to dig my heels in right here. Before, I used to run from one place to another, trying to find the "right" place to "make it happen" for myself...and all of that was happening BEFORE the shit started to hit the fan on a large scale two years ago. The end result, so far as I'm concerned? This little patch means more to me than whatever some asshole will pay me for it in pieces of craptacular paper. I take care of the people who took care of me when I was younger. I get to enjoy some of the less tangible pleasures of just drawing breath from one day to the next. If this idea of viewing your home as just a house, just another commodity that can be leveraged, is what's supposedly sane these days, then zip me up and get me ready for the fucking rubber room. I'm tired of this bullshit.
d
Good comment! You seem to be the only person who has posted thus far to put in words your primary concern of the dollar being a factor in not entering a real estate transaction. You are ahead of the crowd here.
Here is a good question for all those who want to take on mortgage debt: what happens to your mortgage if the dollar goes out of existance? Do you by chance think the bank is gonna roll over and say--ok, you can have the house.... !?
Yeah right. I do not know what would happen, but my guess is that anyone having any kind of real estate debt to any financial institution is going to get the shaft. These are banksters we are talking about. If you are getting a new mortgage-have them put some kind of clause in that addresses this scenario-better safe than sorry.
I would stay away completely until the currency is stabilized-or another currency comes in.
My posts above questions the same thing about a new currency. As far as I am concerned, as a cash buyer, I am buying a HOME. My home. For my family and friends to visit or live in and with enough land for a great garden.
I'm right there with you. Once you tie the intangible assets down to a fucking dollar value, you're basically screwed. That old saying about "playing the game so you can change it?" What a bald-faced lie. Only by refuting the lies with conviction will anyting of real value be saved, even if other people call you a lunatic or just turn you right off and walk away. So far as I'm concerned, their loss...not mine.
I suppose that it's just a matter of relative value...I value my house as a home, in assets that don't translate so well into dollars (which seem doomed to implode in "value"), hence the home/house argument. I think we lost something along the way when we crossed that line.
What a novel idea! A home is something to live in. A home is a place spend time with people you care for. A home is a place in which one builds memories and enjoys the slow passage of the years.
Would that 310 million other Americans adopt the same philosophy and reacquaint themselves with the real Dream.
You've nailed life's priorities. May the years unfold slowly and with many joys!
Hahaha, it's too bad that my priorities seem to run counter to contemporary philosophy, as of late, but as I said...my heels are firmly planted, for reasons that cannot be easily equated in dollars or pesos or renminbi or whatever. I really wish that people saw their houses as homes instead of "financial instruments." If that were the prevailing philosophy, I doubt that much of the current disaster would have unfolded the way that it has. If anything, that sense of value beyond ones and zeroes would have instigated some sort of resistance to such blatant class disparity by stark manipulation. But...here we are anyway.
Thanks for your well wishes, and I return them in kind. I don't know how the whole mess plays out, but I hope that there will be a return to some basic values after the pomp and circumstance finally collapses.
+10
Hang over the estate sales. Some states are better than others. You will see a few pop up here and there. The surviving kin or executor is motivated to sell the property pronto as they usually are paying the costs of that home in addition to thier own. If you find a estate home for.... 50K instead of one like it for 200K grab it. But try to get it within the first month of death. because Probate takes months and years and sometimes the property involved will quit seeing bills paid and see nature damage in summer and winter and eventually vandalism and rot.
We aint selling our place. NO. WAY.
What we are doing is upgrading, replacing obselete shit and reducing the load on the grid in addition to possibly adding on a few new rooms and making further work and improvements so that 20 years from now when we are in wheelchairs, everything is already set up for that purpose.
We find that contractors for a variety of small jobs that we would like to have done come out of the wood work, hungry and motivated to work and do a good job for income NOW!
7 years ago you could not find any contractor as the houses were being built in whole subdivisions trying to keep up with the Schools sprouting up all over the state. No one cared to take on your tiny puny runt repair jobs.
Now the shoe and money is on the other foot. One call gets a dozen bids in a day or two.
Great article. I would add only two things:
1) Price is permanent, (at least until Obama created his new entitlement of renegotiating home values and mortgage principal). Interest rates can be refinanced.
2) If interest rates rise significantly, then fewer buyers will be able to afford the prices and they will have to come down to compensate. It's supply and demand. As the cost rises to finance real estate, demand will decrease and eventually, so will prices. There is an inverse relationship between interest rates and home prices, but its not a perfect one.
Maybe US property has another 20-30% downside, but what about the rest of the world? The US has higher per capita income and lower mortgage rates than most countries in the world, but has some of the least expensive RE of any developed or semi-developed country. It is more than just inventory and demand. That Hong Kong, for example, or Singapore can maintain the current values they have seems rather unlikely, but who knows. Same for the UK, and even Italy, at least in the major cities or in the Piedmont and "Chianti-shire", aka Tuscany. And for a real outlier---I have noted this before---in Yangon, albeit in a residential part of the municipality, an 89' x 89' piece of land sold in May for $6.5 million (per capita income of the country: less than $250 per year). Go figure.
US is a steal in comparison to most anywhere.
d
I believe the housing market collapse has barely started. Don't forget that the second wave of bad loans is still coming up in 2011. The first wave was subprime....the next wave is Alt-A and flat-out liars loans, if I recall correctly. Not only are they riskier and have a higher likelihood of default, that market was $1.5T vs. $1T for the subprime wave. I think it's going to be a long time before housing finds a bottom.
Another factor to consider is mobility. With economic uncertainty in our future, why commit to buying a house now?
Of course, if mobility is not an issue, and cash flow is not an issue, and property taxes are not an issue, and selling your house in the future for what you paid for it is not an issue, then it doesn't matter if you buy now. But that's a lot of issues for most people. :)
"Of course, if mobility is not an issue, and cash flow is not an issue, and property taxes are not an issue, and selling your house in the future for what you paid for it is not an issue, then it doesn't matter if you buy now. But that's a lot of issues for most people. :)"
Or, if you are loaded to the gills with $$$. Also not a situation many people find themselves in.
Remember Katrina where a certain percentage were too poor to escape? The best they could do was limp, hobble or walker/wheelchair to the big stadium.
We are poor. But we try to have a little something to help others, it's not always money. This year it happens to be a bit of firewood to keep a family warm until they can save up enough to install thier own heat.
We hope to be able to leave at any time if we must, but would hate to have to start over in a new place all over again somewhere far away where we are viewed as foriegners.
d
HungrySeagull,
The kindness you show to others in need is priceless.
Residential Real Estate is not a great investment. Somewhere along the line, I saw a chart of real estate values compared to the rate of inflation from the 1890's thru 1980 and RE just kept pace with inflation. Generally, the chart showed inflation to be relatively less volatile and RE values see-sawed with booms and busts. So unless you can time the RE market to buy low (2001) and sell high (2006), you run the risk of getting stuck with something that won't sell when you want it to (2009).
3 long term points that might affect your purchase ideas:
1. Baby boomers will want to live in no/low tax areas/states after they retire (Oregon, AZ, FL, TX) (most boomers aren't going to have much to retire on) - boomers will greatly affect RE prices as they rush to sell somewhere and rush to buy (OR RENT) somewhere else. Demographics is a major part of the RE puzzle.
2. They won't want 2 story homes - bad knees and such
3. The mortgage deduction may go the way of the buggy whip as government looks to increase tax income.
If you get lucky and buy in a recession and sell in boom times and double your money in 5 years, lucky you. Otherwise just enjoy your castle while you can.
d
d
A frend of mine owns a house in Vegas. In response to my question about the housing market, he sent to me the following information about his declining real estate tax assessment:
Tax Bill Mail Date - December 2007 = $305K - $310K (need to locate hard copy)
Tax Bill Mail Date - December 2008 = $178,843
Tax Bill Mail Date - December 2009 = $126,394
Assessed Valuation for tax year 2010-2011 - Mail Date July 2010 = $44,238
Shocking, eh?
Not really. He's in one of the hardest hit areas. Phoenix, Vegas, LA, FLA. They are assessing his/her home based on the neighborhood comps at about $90K. At least someone is being real in Nevada. Watch out for Sharron Angle though...(no further comment as my head just did a 360 thinking about her)
I live on Maui where real estate prices doubled in two years from 2003 to 2005. I know because I bought in 2003 for 398,000 and sold it for 812,000. I rented for the next five years paying about 2300 per month in rent. I just bought a house in a old neighborhood that is what I have been looking for for two years. The price was right and what I got was worth it. Will the price go down? Perhaps but I don't care. Maui did not overbuild but is having its share of foreclosures and short sales. No new development is happening at this time. I think prices here will stabalize sooner than in places where there is excess supply. I am glad I bought and if I was to do it over again I would.
From the chart in the article - "since 1997, the index has risen by about 83%" and always "returns to levels consistent with the 1950's."
Look at that Viagra induced boner on the right of the chart. Wait till the market calls the emergency room to deflate that thing to its proper size. Anything that overinflated will hurt you.
I agree with the author. Buy the home on your terms. Know that all realtors are motivated to sell you the highest price home they can as quickly as they can. Start with Zillow, get an idea of the comps, sit with the realtor and have them show you all the comps in MLS. Make sure they don't go over 6 months and make sure some of the comps are from after the tax credit expiration (you have to nose around a bit to see what things went into contract for recently). I think a good rule of thumb, at least in my area, is homes should be worth roughly what they were worth in 2003.
Personally, I am going to buy in the next few months. One of my offers is on the verge of being accepted. If I had the time I might try to wait another 12-18 months. However, I do get the feeling that auto-refi is going to happen eventually. That might buoy the market for a while.
Good luck, you'll need it. Household deleveraging will continue for years. If there's a fiscal crisis, as I'm sure there will be within a few years, government-guaranteed mortgages will be going away, and mortgage rates will be going sharply north.
The author is right that real estate is a hard asset resistant to inflation, but that doesn't mean all those crappily built houses on all those crappy little lots in all those crappy distant suburban housing developments are going to hold their value. I wouldn't touch real estate now with a ten foot pole, and when the time comes, you'll need to stay in elite neighborhoods and quality build if you want to hold value. Leaving the issue of inflation or not aside, societies in economic depression do not run up the real values of property, especially not the flimsy stuff built to not last.
My parents bought a new house in a new straight-up middle class suburb for about $30k in about 1970. The value went up and up and up - and then, after they moved out and kept it as a rental, down and down and down, as the house and most those around it dilapidated and the neighborhood went to hell. Sold it a few years back for about $100k, a loss after the kind of inflation the government tells you about, and a big loss after the kind of inflation you actually experience.
Great advice from the author. If I was in the market for a home, I would wait it out a bit longer even though mortgage rates are quite compelling. Having tried it both ways, I would only pay cash for a home and skip the mortgage altogether.
One thing I would add for consideration by potential home buyers is that you need to carefully consider how long you plan to live in the home. If it is less than 5 years, rent.
Somebody said that you make your money when you buy the real estate it is that is true. With a bit of effort and saavy, you should always be able to find and/or negotiate below-market deals.
I say, the way to make money in real estate is to never sell. (Yes, this is meant to be a koan.)
Zen. Bitchez.
Also, that chart is great. I think most homeowners would picture home values as a long, steady upward curving line.
Times have changed. But in the past run-up over the past few decades, I have observed that Florida home values sustained relatively longer periods of stability with short periods of significant appreciation. Tension builds like a rubber band and all of a sudden there is a release and values change rapidly.
These days, uncertainty rules, and real estate depreciation is a proven fact which most people would not have acknowledged 5 years ago. Tension and volatility. Values could easily snap downward before things stabilize again.
What if I told you that I would give you a house at the end of 30 years? All you have to do is to take care of that House. To be given the house you have to Rent it, Maintain it, Paint it inbetween tenants. Would you do it?
If you would welcome to the World of a Landlord.
I will give an example using a $100,000. House because it is easy. You will need a 20% downpayment. $20,000. Now, lets talk about leverage. If your $100,000. goes up just 2.5% you have made $5,000. That is 25% on your downpayment of $20,000. At 2.5% increase for 4 years you will have made 100% on your Money, Investment. This is just to start.
You will be able to depreciate the house. $100,000. divided by 30 equals $3,333.33 per year that will be taken directly off your Taxable Income. If you add that to the $5,000. You will have gained $8,333.33 in your first year on your $20,000. Plus, you get to deduct your Mortgage payment interest, Taxes, Insurance, Repairs, etc.
A property should rent for about 10% of its value. So rent should be $10,000. per year or $833.33 per month. This year. You should be able to raise your rent every year about 2.5% or more depending on the economy. So next year you should get $854.16. Continue to compount this out over 30 years and you will see how the propety will soon have a snowball effect on the Rent vs Mortgage Payment. If the additional rent is paid toward the principal it will eventually pay off that 30 year mortgage will be paid off a lot sooner than expected.
In about 15 to 20 years you will have a property paid off that is generating non earned income for the rest of your life and your Childrens life time. And the greatest part of it is that you did not pay for the property, the Tenants did. The advantage to the non earned income is that it does not go against your Social Security income.
Right now Rates and prices are great. So, what is stopping you?
"Right now Rates and prices are great."
What's stopping is 50% of your assumption - the part about prices being great. Prices are great only when comparing them to 2006. When you price any asset you need to consider the risks.
1) Liquidity, if you need to relocate, plan on it taking much longer to sell and hope you get a reasonable price
2) Market demand, totally dominated by the government. What's the real market? As close as I can tell, if you remove the tax credit, elimitate Fanny/Freddy, housing completely blows appart to the downside on real fundamental demand. That includes the job picture and real tangible cash people have for a down payment or even to maintain their lives.
3) Market supply, simply massive and hugely understated. Banks sitting on massive inventory hoping to portion it out little by little as the backlog of foreclosures constantly add. This will take YEARS to work off and the bias toward low value properties is very worrisome as the $500-$1.5m houses (2006 pricing) will eventually come to market and find there is much less demand for the McMansion/Suburb 3-5K+ square foot homes despite having granite countertops.
4) Market uncertainty, given very low equity positions and cash levels in the demand pool if rates do go up, housing affordability goes down which means prices go down. People already maxed themselves out, they can't reach deeper still. Potential tax changes - which wil come and further increase carrying costs of homes/depressing prices further will come and my sincerest hope is that this results in a revolution of thinking in this country and major political reform where "the people" begin taking back their country from career politicians as the fiduciary responsibility for running state/local/and federal governments has all but disappeared and turned into a power/reelection/lobbying game. People need to feel pain to change, at some point it's coming and I'd rather it be sooner than later. We need more real people with real world experience working hard on our behalf to make a better place for all.
The thing I do not think that anyone is thinking about is what happens when rates go up. If Mortgage rates go to say 7% your purchasing power goes down. So, you may be turning you nose up at houses say at $250,000. but if the rates go up you may only qualify for $200,000.
With rates where they are now your purchasing power is maximized. As, I said in the above post your return is determined by the house price. So, if you buy a $250,000. house now your return at say 2.5% would be $6,250.per year. If you wait and can only buy $200,000. your return at say 2.5% would be 5,000. per year, plus it is cumulative.
Keep in mind that your monthly payments will not be any different for a $250,000. at say 4.25% house at todays rates vs a $200,000. house at 7%. This is an example not acutal numbers as I was too lazy to calculate the actual difference for a message board post.
UPDATED CHARTS:
http://stockmarket618.wordpress.com
Just bought a place on a short sale, under 100k with a nice older house, a well, and lots of land, a half hour out of town in the mountains in Southern California. Gated community. First place ever owned by me, not the bank--a cash deal. Seemed like a better deal than keeping the cash in my investment account. I've also got a place to go if things get hairy. Would cost at least 150k for the structure alone for a new building, so I think I am ok. (Neighbors think their houses are worth 250 or more. I think not.) Should do ok if the dollar tanks, which I expect. The big house, which the bank owns, not so much.
Smart move. You will not be sorry. Everyone seems to be looking at Real Estate as a one year investment. It is not it is a long term investment. In my opinion even the homes that are underwater will be fine in a few years. This is just a one or two year downturn that is all.
But for people that trade stocks in milliseconds would not have the patience for Real Estate. It is a great investment over time.
A home on the range where there is no bank note in sight and a family to raise and things to do and dreams to make.
Awesome. You will grow old there.
Now the little greedy shits who buy a 259,000 house expecting to sell it for 340,000 two years from now are only destroying themselves. And they deserve it.
I used to rent. I made it 9 months before moving back out. The constant stress of raising rent money firsts then utility money second and then food and gas third before even considering any kind of fun activity made me a very poor person.
Never mind all those random strangers knocking on your door at all hours of the day and night. There was absolutely no peace.
Here in a home that is undergoing repairs paid for with cash that should be good for the next 20 to 30 years we have a fighting chance to stay in a home that we consider OUR place of rest, peace and a bit of fun when each month's bills are paid in full for the home by the end of the first week.
I am there. Yes my home does not have much retail value and frankly I dont give a damn because I still aint selling. I/We did not buy for investment. We bought it to get away from gang infested complexes and constant battles over parking, damage, random situations and other stressful issues.
Such as theft of your own laundry in a roll of quarters and another roll of quarters to dry it all downstairs with 20 strangers all with you making sure thier laundry isnt stolen either.
UGH. I do laundry now in a HE machine and dont even hear em work at all. The laundry is done several times a week with hardly no effort on our part.
And best of all, the total cost to RUN the home with the gas bill, electric bill and whatever is LESS than half the current rents for apartments in our area and 1/3 or less of the current rents of single family homes in our area.
Hooray!
Nice article thanks.
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