have changed quite a bit since the summer. I have an eye on just a few
parts of the country. From my perspective there has been a markdown of
prices of late. The sign “Just Reduced” is now being replaced with, “Reduced Again”.
The story is the same. Too many distressed sellers (REO) and a total
shortage of buyers. Sure rates are low, but not many contracts are
getting signed. Liquidity has dried up. This is especially true for
high-end homes. There are many owners that have been looking for a bid
for two years now. Case had this to say:
“I don’t think anybody is predicting that it’s going to go up very much in the next couple of years unless we see a resurgence of economic growth,”
That’s just polite talk. Case knows full well that there is a “0”%
chance of a resurgence in economic growth. We will be lucky if growth
stays positive at all. So what Case really meant was: “There is no upside”. And that is why we have a buyers strike.
A question to ask is, “Where might the rock solid bottom of housing be?” If you could answer that question you could ask, “How far from the bottom are we?”
I will put a number out that I think will hold for house values. My
number is 10X’s annual rent. At that number you will find financial
buyers. My bottom side estimate assumes we do not fall off a cliff into a
deep recession. If that happens my bet is off. Some numbers that
express rents and values at the 10Xs ratio:
Looking at it the other way:
Question: Are single-family properties priced higher than 10Xs where you live? (Be fair on your rent estimates)
From what I see the lower numbers in the charts are in the ballpark. But
there appears to be a disconnect at the higher levels. For example;
north of NYC you can buy a home for $1mm or you can rent it for $5,000 a
month (implied value of $600K). The suggestion is that high end RE has
farther to fall. That would take us back to price levels of around 2000.
There are quite a few areas around the US where RE values have fallen by
40%. But I am quite sure that property values have not fallen to
anywhere near 10X’s rent. Many areas in the country (California) have
values close to 20X’s rent. My guess is the average is about 15x’s.
10Xs is a worst case number. It would probably be a good deal for a
buyer. But absent any other class of buyers stepping up, the market will
probably gravitate to where the demand is.
Now I feel twice as stupid for not doing that first -
But thanks RR those are interesting.
The US Government is propping up the real estate markets, both residential and commercial. This is destroying Government credibility as the Pravda Networks scream all is better. By providing funds to keep builders building, banks from foreclosing, and failed real estate loans from forcing banks and insurance companies into bankruptcy the Federal Government is perpetrating one of the most deceitful hoaxes on the youth of the US. This is causing young successful and well educated "kids" to go out and buy homes at these still inflated prices. This is setting our youth up for 30 years of slavery to the cartel "bankers". Government officials have not figured it out yet, but this misinformation is making their house of cards even more wobbly everyday and a breeze is beginning to blow.
Personally, I plan to start a Guillotine Factory so that there will be a plentiful supply available when the public starts demanding heads.
"My bottom side estimate assumes we do not fall off a cliff into a deep recession."
Bruce, I'm surprised you don't think the current conditions don't constitute a deep recession! By true unemployment alone, it would seem to be the case.
We're not in a recession. The NBER said so.....
Talking about the housing market....down under.
New home sales drop for fourth month"
Sales of new homes have fallen for the fourth month in a row, prompting a peak housing construction organisation to warn of the risk to the industry if interest rates are pushed up too soon.
The number of sales of new homes fell by 2.6 per cent to 6887 in August, the Housing Industry Association said in a statement today. The fall followed a 7.1 per cent drop in July and brought the decline since April to 19.7 per cent.
Sales in August were 20.5 per cent below the level recorded a year earlier in August 2009 and at their lowest point since December 2008."
http://www.theage.com.au/business/new-home-sales-drop-for-fourth-month-2...
I think it shows how far we have to fall that Bruce thinks 10x rent is a "rock bottom scenario." Think 12%+ cap rates. For that, you would need about 6x rent (17% gross rental income).
Makes sense - but also indicates that even here in devastated Las Vegas, we still have a long way to go.
The key is job security. There is none. If you are looking for employment flexibility a house is as good as a ball and chain.
Next, demographics, boomer homes are ready to flood the market. They would love to flip the McMansion for a dirt cheap condo in Florida.
Next, REO, the lender sale pipeline is currently constipated with procedural and record keeping snafus (JP & GMAC).
Finally, there is absolutely no credible scenario for economic growth, so why should expect prices to rise?
Does this look like a good time to buy?
+1 for truth encapsulated. The craters from former Marketing folks (the first to get nuked in hi-tech firms) are just down the aisle. I am happily renting and sending my 20-something daughter reports from the trenches to keep any house-lust innoculated. She should be able to afford that nice house in 2032 - payed with Real Money - circulated junk silver.
Sorry for the off-topic question: any idea how to change one's name? i used my standard scramble for new logins when I created the login name and now would like to change it.
We sold our townhouse in 2006 and have been renting a single family home in a very desirable area since. We have been waiting for prices to get down to 10-12x annual rent before we buy. Currently, the place we are renting would probably sell for at least 20x rent based on the price per square foot of the most recent sales on our street and in our neighborhood.
At least in our area, we have a looooong way to go.
I just checked the property records, and a price of 10x annual rents would take us back to about 1994 pricing.
How many people have $4K/mo to rent poorly built suburban McMansions? In Charlotte you see $1.7MM REO houses going for $800K in Eastover that are 2 blocks from J. Kennedy Thompson of Wachovia (er, formerly) & his $4.5MM residence.
BTW, go to Charleston, SC Craigslist house rentals. You can rent a 1700s SOB* 4BR/3BA for $2500/mo - fully furnished with antiques. That shows how the rental market has really tanked. Sneak in a week/weekend rental or two a month and make your nut.
*-SOB = South of Broad, y'all.
a big hitter real estate gal told me Dallas has a 7 year shadow inventory. This area, overall, is doing failry well on a National basis. Her feeling, and she has started and sold 3 real estate companies, is 5 years before we see progress and where we are between now and then is unknown. She is not an owner or buyer right now.
In my neck of the woods, Pacific Northwest, the only SFR's selling are short sales. I use to think 3x median income was a good measure, 10x annual rent seems about close to that around here - current short sale prices around this level. Regular listings still way too high, new construction is a fools buy at the prices I'm seeing. I now think we are going lower. Once we get down to say 7x annual rent, or 2.5x med income, I'm buying.
Crap. Stupid newbie and his first double post. Wont happen again.
You are the only one who has ever, ever done that.
Ha, ha.
That's an interesting question so I Googled it, got some interesting results.
http://www.google.com/search?q=how+to+value+agricultural+land&ie=utf-8&o...
Those are interesting - thanks RR
Any insights/rules of thumb on how to properly value agricultrural land? Some similar kind of multiplier applied to historic yield/output prices (and if so, what factors for water costs, increasing costs of transport and fertilizers and the like)? If you were something like a gold bug but believed agricultural commodities and water rights might be the best hedges for the pending apocalypse, what kind of charts and graphs would best describe your bases for determining that farmland is or is not in a bubble in any specific region? (US or Canadian market intel much appreciated)
Any insights/rules of thumb on how to properly value agricultrural land? Some similar kind of multiplier applied to historic yield/output prices (and if so, what factors for water costs, increasing costs of transport and fertilizers and the like)? If you were something like a gold bug but believed agricultural commodities and water rights might be the best hedges for the pending apocalypse, what kind of charts and graphs would best describe your bases for determining that farmland is or is not in a bubble in any specific region? (US or Canadian market intel much appreciated)
Most of the US suburban residential single family houses are NOT potential rentals. ie. Very very small fraction of houses in the US are rented.I agree that for condos and apartments in cities , a rent multiplier is not an unreasonable way to assess value - you cannot apply this to houses. There is no rental market for those.
Higher end houses ( >1Mil) are even less of a renters market - so forget about applying rent multipliers to those.
In much of the rest of the world houses sell for an even greater multiple of hypothetical rents and incomes. US houses are pretty cheap right now compared to Europe, Asia, Australia etc etc.
Of course it is possible that houses in the whole world are mispriced - and you know best. Keep waiting for that Million dollar house to come down to 400K to meet your 10X rental multiplier - it aint gonna happen.
True. I'm renting in suburban Australia. House is on the market at 31x my rent. Australia is still in a bubble.
Most of the US suburban residential single family houses are NOT potential rentals. ie. Very very small fraction of houses in the US are rented.I agree that for condos and apartments in cities , a rent multiplier is not an unreasonable way to assess value - you cannot apply this to houses. There is no rental market for those.
Higher end houses ( >1Mil) are even less of a renters market - so forget about applying rent multipliers to those.
In much of the rest of the world houses sell for an even greater multiple of hypothetical rents and incomes. US houses are pretty cheap right now compared to Europe, Asia, Australia etc etc.
Of course it is possible that houses in the whole world are mispriced - and you know best. Keep waiting for that Million dollar house to come down to 400K to meet your 10X rental multiplier - it aint gonna happen.
I buy residential houses with cap rates of 10-18% where I live. I use FNM/FRE to finance at 5.125%, and I bank the cashflow in silver. It's time to issue bonds instead of buying them.
It's time to issue money instead of bonds.
"It's time to issue bonds instead of buying them."
1000+ Finally, somebody gets it. Get the f***ing banks and property tax assessors off the backs of honest homeowners. Back in the 70s, I sold real estate. Rule of thumb back then was 25% of gross income should cover ALL housing expense - i.e. PITI.
I live in a home in foreclosure that I do not own. There is no incentive for me to pay either the existing FRAUDULENT mortgage (Cuntrywide was originator, theives) or property taxes - actually the property taxes aren't bad, the school district tax is 4X the county tax.
So, if this house is worth $80K and my property tax is (be seated, please, this is NY state) $4000, I've got nearly a $400 nut just on the taxes. If I put $20 down, a $60,000 mortgage at 5.25% for 30 years is 331. Add in another $40 a month for insurance and you're up to about $700, which isn't too unreasonable, even though the tax bill is higher than the mortgage payment (something's not right about that). So, according to my old school calculation, I'd have to gross roughly $2800 a month or $33,600.
Try getting a mortgage if you're making less than $35,000 a year. The banks don't want to talk to you, and if your FICO is under 680, absolutely forget it. The 31% they're using today is BS and part of the reason everybody's belly up or upside down. Housing is vastly overpriced almost everywhere except deep rural areas.
Honestly, the house I am squatting in should go for no more than $60,000, if that, and the taxes should be reduced to 2% of the value, or $1200. Am I getting through to anybody? The housing mess wasn't just about subprime or defaults or banks holding off on foreclosures, it was about over-leveraging homeowners.
Housing needs to take another 20-30% haircut before it's even close to being worthwhile. Using the 10x annual rent calc, the rent would be $500, not $800 like most people would like to charge.
Housing is a basic necessity, like food and water. The problem is that since nothing is being made in America any more, the greedy pols and bankers have been making all their dough on housing, screwing over homeowners and renters, and that's also why there's no savings in this country. Nobody has anything left over.
I have been making offers on homes in the Hudson Valley for 6 months now. I have made 5 offers on 5 different homes and all were rejected or countered for way too much. (In the last case their realtor's manager called them and pleaded with them to take the offer.) In every case I have been the only offer and they were all listed for 6+ months. My offers are generated based on historical prices, sold prices, and recent comps. My offers have been between 8-16% below the asking price.
In my opinion, this is a bitch of a market for buying. The problem is simple. Everyone took equity out of their house at the peak and now they want buyers to bail them out. That just isn't going to happen. It will be interesting to see how this plays out. Most of the estimates I have seen puts the bottom at 10-25% below the current market. Personally, I don't think prices will stabilize until unemployment drops to 8-8.5%. For now, I think I'm going to rent a condo. I'll try again in 6 months.
Mrs. Rainman owned a clear inherited income property for several years. In July '07 I coaxed her into putting it up for sale , not because I saw a downturn, but because I was tired of fucking around with it ( the desperation of a handyman ).
Long story short, a guy with all green came along in Sept. and wanted everything inside for his daughter going to university.....furnishings, washer, dryer, etc. ......at $333k. The wife pissed and moaned. Same unit naked just sold at $ 350k the month before. I told her to give him all of it and buy him a porch swing as a kicker. For once in a quarter century, she did what I told her to do. Today it zillows at $196k.
I still get out of the doghouse early to this day for that move. Even the blind and lazy squirrel .........
Being lazy has its advantages. I keep trying to convince my wife of that daily.
She ain't buying it.
I made a few cash offers that sellers in one complex thought were too lowball but would have closed a year ago. One year later, several are still listing and have dropped their ask to below my offers of last year. One actually had the nerve to complain to his association that due to a lack of funded reserves, bidders who would have hit his original ask couldn't get financing, but the bottom line is that he was that the bird in the hand really is worth more than the two in the bush.
but the bottom line is that he was that the bird in the hand really is worth more than the two in the bush.
Or $.85 in FRN in thy hand is much better than $1.00 in someone else's FICO score.
Renting is saving me over $5k a month right now. Average price drop in my current neighborhood was 5% in August with 30-40% drop from January to June. This area is a bit behind the curve since the state has been doing well economically (top 5 in nation past several years)....so we are starting to catch up.
It's a fair rule of thumb. I would have guessed 15x, but the properties I let out are in a higher-demand locale.
As to someone else's comment about Florida condos and cash out, I thought the new FHA standard was no more than 70% to 75% LTV for Florida condos. Have they been lowering standards yet again?
Single family residential real estate is not an asset, it's a liability. It gives local government a license to tax you to death. All government is scum sucking leach.
Agreed -- especially during the bubble where people were taxed on the ever increasing "values" of their homes (based on fraudulent borrowing and lending) even though they incurred no real benefit. For example housing prices tripled in our area. People's assessments went up and they were taxed on the higher assessed value of their homes even though they didn't have any real additional wealth (only a paper gain). Because people were told their houses were worth more, they felt wealthier; but, unless they sold at the inflated price they weren't really wealthier. You don't have to pay capital gains taxes until you realize the benefit on your investment, why should you have to pay higher real estate taxes when you haven't realized any gains? Also, people felt wealthier because they "extracted equity" from their homes to enhance their lifestyles as if they were using money they earned and saved, but, in reality, they were borrowing money against their homes. So, not only did they pay higher taxes on that phantom equity, but they are paying interest to the banks for borrowing against them.
It's been written that the Roman Emperor Trajan "helped Italian landowners, both large and small, to improve their situation by supplying them with cheap credit." And that is how it starts. Of course he was trying to prop up the local economy since there was an ever increasing lack of opportunity in the "homeland" while he squandered precious resources in his attempts to take Mesopotamia while at the same time leaving other frontiers open to probing attacks by barbarians looking for better vistas within the empire and its provinces.
History might not always repeat, but it often rhymes.
BTW, one of Trajan's cures was to attempt to ban expatriation from Italy. Do you suppose we'll see a modern parallel to this.
by The Alarmist
"Of course he was trying to prop up the local economy since there was an ever increasing lack of opportunity in the 'homeland' while he squandered precious resources in his attempts to take Mesopotamia while at the same time leaving other frontiers open to probing attacks by barbarians looking for better vistas within the empire and its provinces."
Rome needed to conquer Parthia in order to survive, to end the bleeding of gold/silver for luxury goods from the east. Julius Caesar knew that and was preparing to attempt it before his assassination. Trajan actually did it, briefly, and a more aggressive successor than Hadrian (Mr. Pull Back, and Hide Behind Walls) might have been able to complete Trajan's work.
The modern parallel exists in the American income tax system for expats... other citizens get a much better deal. Plus, if you renounce citizenship, you get to pay income tax for 10 years.
I don't think you pay for 10 years. That doesn't sound right, at least based on my memory of Tyler's first-hand experience in renouncing citizenship.
I agree, there is a pretty large movement here in Tx, to do away with P/T. Honestly I don't see it happening. Seems we will be slave's in one form or another, no matter what.
Per the just released today 2009 American Community Survey by the Census Bureau:
42.5% of renters pay more than 35% of their household income in rent.
28.7% of homeowners pay more than 35% of their household income in mortgage.
Compare this to the bubble peak of 2005:
37.4% of renters paid more than 35% of their household income in rent.
25.7% of homeowners pay more than 35% of their household income in mortgage.
This implies that homes and rents are currently 11% and 13% overvalued relative to the 2005 bubble.
Or that a percentage of people left lower-cost areas for higher-cost ones, such as rural to urban flight.
Or that more people got on food stamps so they could move to nicer rentals.
Or the real estate taxes went up, causing rents to rise.
Or rents increased by the average rate of inflation and wages stayed the same.
Or HOA fees were raised, causing rents to rise.
Or there were more renters per household in 2005.
Or rental costs include utilities and utilities went up.
Or...
Or that household income is actually falling faster than rent/mortgage payments...
Probably both, but in either case it means prices must fall.
I have been looking at Florida properties and running #s for the past several years. IMO, 10X is way too high a multiple of gross rent for a financial investor. Consider property taxes 2%, cost of management, mortgage if you have one, normal depreciation of the structure, extra damage that typical renters do to the dwelling, accounting costs, unknowable % of time the home is unoccupied, contingency for deadbeat renters, insurance, legal costs for that contingency and who-knows-what, costs of keeping up with local issues such as zoning changes, risks that the neighborhood declines, etc.
And of course if this is a condo or home in a gated community, the landlord typically pays those fees. (That's a "bonus" cost.)
To have a decent ROIC and provide for the illiquidity inherent in this investment, unless you are buying to have a hard asset that provides an inflation hedge, to only get a gross 10% return on your money (for the period that the home is occupied) means that you have capped your upside to very low levels yet run the full risk of capital loss with an illiquid asset.
If rental rates are free market, what I see nowadays is that home prices remain too high based on free market rental rates.
Free houses for everyone....
is there a way to short land titles?
http://covert2.wordpress.com
I bought my first 4plex in San Diego in 1998 - as an owner occupant I didn't care too much about GRM (gross rent multiplier - ie, annual rents times X) - bought the second 4plex in 1999 - paid 11.5 GRM for a property almost next to the beach (someone with a strong arm could throw a rock and land it in the water) - I was afraid I was over-paying at 11.5 GRM but it was what I considered a trophy property so I went ahead with the deal - bought several more 4plexes between 1999 and 2002 - GRM continued to rise but rents were rising as well and San Diego IS a nice place - by 2002, any 2-to-4 unit property was 14 GRM minimum and 15 and 16 wasn't uncommon for a decent property in a reasonable location - there was no way I could make sense of buying property at those GRM levels and I realized about then that San Diego RE had become a bubble - after reading all of Prechter's books I became a big-time bear and started selling my properties in 2002 - GRMs continued to rise - I sold one of my properties at 18 GRM
I didn't realize it in 2002 but condo-conversions would have justified the higher GRMs
I am waiting for 10x GRMs before re-entering the market - I am hoping that prices will overshoot to the downside and I can pick up some for 8x GRM - we'll see!
Bronzie,
In the past 25 years, I have seen GIMs in prime beach areas near 10x PGI twice. Assuming you are not overly aggressive in your rent projections, at 10x to 12x and are near the water, you are golden. I know people is east buttfuc, nowhere will scream, but I bought my first place w/in a block of the beach in an upscale neighborhood for under 10x gross. Of course, the ARM had a 11.374% start rate and 5% cap on increases (16.375% max). I sold that place at almost 30x gross - prices continued higher - I was early. Prices in that area are now 20x PGi - I can wait, nothing pays like patience. i look at it this way - you buy quality locale and BE for three years and then you're in good shape. I'd rather forego some CF for the higher quality tenants and appreciation. The great thing is that you can get owner-occ financing on these higher priced 4-plex and under beach properties.
BTW, I remember back when those little North Park/Normal Heights 7- or 8- and 12-plex bldgs suitable for condo conversion were not getting any premiums for that upside.
I suspect that the cash buyer will be king at the eventual bottom in San Diego - especially for condos since banks seem to be less and less interested in financing condos
it may make more sense to buy individual condos for rentals although there are a lot of uncontrollable factors with condos
should be fun whichever way the ball bounces ...
agree that patience is the key for good investing - it amuses me that people have been trying to call bottom for the last two years after the biggest RE bubble that planet Earth has ever seen went POP!
Martin Armstrong charts a 26 year cycle in RE with a peak in 2006 and the next trough in 2032 - hopefully we won't have to wait that long but anything is possible at this point
I live north of NYC and can confirm your figures --if able to find renters for larger homes. Problem being many in financial industry have not recovered or even if they did now see wisdom of living within means and therefore are downsizing to smaller homes. Result is glut of large homes on market with renting only at large discounts . There has also been a psycological shift in recognizing home prices will not appreciate as in past but more akin to the period in the 50' and 60'. No doubt RE will not recover soon short of an economic boom only envisioned by the mentally impaired