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Guest Post: Is Housing An Attractive Investment?

Tyler Durden's picture




 

Submitted by Chris Martenson contributor Charles Hugh Smith

Is Housing an Attractive Investment?

In a previous report, Headwinds for Housing, I examined structural reasons why the much-anticipated recovery in housing valuations and sales has failed to materialize. In Searching for the Bottom in Home Prices, I addressed the Washington and Federal Reserve policies that have attempted to boost the housing market.

In this third series, let’s explore this question: is housing now an attractive investment? 

At least some people think so, as investors are accounting for around 25% of recent home sales.

Superficially, housing looks potentially attractive as an investment. Mortgage rates are at historic lows, prices have declined about one-third from the bubble top (and even more in some markets), and alternative investments, such as Treasury bonds, are paying such low returns that when inflation is factored in, they're essentially negative.

On the “not so fast” side of the ledger, there is a bulge of distressed inventory still working its way through the “hose” of the marketplace, as owners are withholding foreclosed and underwater homes from the market in hopes of higher prices ahead. The uncertainties of the MERS/robosigning Foreclosuregate mortgage issues offer a very real impediment to the market discovering price and risk. And massive Federal intervention to prop up demand with cheap mortgages and low down payments has introduced another uncertainty: What happens to prices if this unprecedented intervention ever declines?

Last, the obvious correlation between housing and the economy remains an open question: Is the economy recovering robustly enough to boost demand for housing, or is it still wallowing in a low-growth environment that isn’t particularly positive for housing?

Factors Affecting Housing Demand

The demand from investors can be roughly bifurcated into two distinct camps: those buying distressed homes to “flip” them for a profit as market conditions improve, and those buying homes and multi-unit buildings for rental income and future appreciation.

The “flippers” are counting on continued demand by non-investor buyers, such as first-time buyers. The rental housing investors are counting on continued strong demand for rentals from those who lose their homes to foreclosure and must now rent, as well as from household formation resulting from population growth.

Both lines of reasoning are implicitly based on continuing Federal and Federal Reserve support of the housing market via first-time buyers’ incentives, such as low-down payment FHA and VA-backed mortgages, and the Fed’s continuing support of mortgages via low interest rates and the roughly $1 trillion in mortgages that the Fed purchased in 2009-10.

The assumption behind any forecast of improving demand and higher prices is that private demand for housing and mortgages will slowly replace government-stimulated demand. 

If either of these conditions deteriorates -- that is, if government support of the housing/mortgage markets declines due to the rising pressure to trim fiscal deficits, and private demand does not appear to replace it -- then the forecast of steadily improving markets weakens.

While direct government support of the housing market via ultra-low rates and guaranteed FHA/VA mortgages is well-known, the rental housing market is also implicitly supported by government transfers; i.e., cash distributed by the federal government in Section 8 rent subsidies, extended unemployment benefits, etc.

These transfers now make up an unprecedented share of household income, as this chart shows:

(Source)

Common sense suggests that the pressure to trim unprecedented (in peacetime) Federal deficits -- roughly 8%-10% of the nation’s gross domestic product (GDP) for four years running -- will eventually impact all government spending, including transfers and housing/mortgage subsidies.

Combine the prospect of declining government transfers with the deterioration in household disposable income since 2007, and the household income picture darkens considerably. 

Why these factors matter to investors is self-evident: If households receive less income, then they will be less able to afford either a mortgage or high rent.

The fact that inflation has outpaced disposable income should also give real estate investors pause. If rents have by and large kept pace with inflation (rental markets are local, so any national figures are generalizations that may not apply), then this divergence between income that has flat-lined and rents that have risen with inflation suggests a future convergence: Either incomes rise to align with higher rents, or rents decline to align with flat-lined income.

Though most believe the Fed has the power to counter deflationary forces, it is worth recalling that in the early 1930s, rents declined by roughly 40% as demand and incomes fell. Prudent investors should ponder the possibility that incomes won’t rise to align with higher rents but that rents will decline to align with flat-lined income.

(Source)

The general expectation in the real estate market is that whatever declines in home and rental prices could happen, have happened. This is reflected in this composite chart of the home price futures market:

(Source)

Clearly, the futures market is anticipating a bottom in home prices in mid-2012 and a gradual improvement in home valuations from then on.

On the “not so fast” side of the ledger is the possibility that both home valuations and rents have been artificially inflated or propped up by government intervention and stimulus, and that the positive effects of those gargantuan transfers of cash and risk have run their course.

Though the Fed has publicly stated its goal of keeping interest rates near-zero until 2014, investors should ask what might happen when that prop under the housing market is removed; i.e., what possible consequences might flow from higher mortgage rates?

Some believe that housing demand will surge as rates start to rise, driven by potential buyers who were waiting for the bottom in prices and rates to re-enter the housing market. Once the bottom is clearly in for mortgage rates, as this line of thinking goes, these buyers will flood back into the market.

Others worry that rising rates could crimp affordability, especially if housing prices resume their climb, as anticipated by the futures market.

Though the general assumption is that the Fed can engineer super-low rates essentially forever, investors should be wary of assuming that an omnipotent Fed can control the mortgage market. The Fed only sets the Fed Funds rate; it does not directly set mortgage rates. Its only other lever over mortgages is direct purchases of mortgages and mortgage-backed securities in order to prop up the market, and many observers believe there are now political limits on what the Fed can do. In other words, the Fed could theoretically buy another $1 trillion of mortgages on top of the $1 trillion it already owns, but the unprecedented expansion of the Fed’s balance sheet is already drawing criticism.

Thus the future trend of mortgage rates is an unknown. If housing values take another dive, then the availability of mortgages may decline even if rates stay low. Buyers of mortgages will have to factor in the risk of default and/or declining rental income, and that calculation is especially sensitive when the rate of return is already paltry.

The thesis for higher demand for housing and rentals is based on these assumptions:

  1. The economy is on a sustainable uptrend of growth
  2. Employment is also on a sustainable uptrend
  3. Inflation will remain low
  4. Household income will soon resume an uptrend
  5. The Federal government will continue issuing unprecedented amounts of cash transfers to households
  6. The Federal government will continue to fund housing subsidies and mortgage guarantees
  7. The Federal Reserve’s plan to keep interest rates low for the foreseeable future will also apply to mortgage rates
  8. The MERS/robosigning Foreclosuregate issues will all be settled without disrupting the housing market
  9. The bulge in inventory will be liquidated as new supply (i.e., newly built homes) stays well below demand (sales)
  10. New household formation will drive demand for rentals and homes

While it is widely assumed that new household formation parallels population growth (which is remarkably consistent), the following chart reveals that household formation is more correlated to recessions and periods of prosperity.

(Source)

We can see that peaks in household formation correspond rather well with peaks in economic growth, while the valleys correlate with recessions or periods of slow, uneven expansion.

While household formation has returned to the trendline, the long-term trend is clearly down. Other than the euphoric outlier of the housing bubble, the series displays the classic signs of a downtrend — lower highs and lower lows.

If the US economy turns out not to be decoupled from the sagging global economy, then this chart suggests another bout of recession could cause household formation to fall below its 2008 nadir. That would not be supportive of demand for housing, either home purchases or rentals.

Conclusion

The picture for housing is decidedly uncertain, and confirmation of the ten trends listed above will be needed to establish a clearer forecast.

In Part II: Key Insights for Those Buying Real Estate as an Income-Generating Investment, we inspect the specific factors that most frequently determine whether a real estate investment is successful or not.

Too often, when buying real estate for its income-generating potential, small investors make costly underestimatations or miscalculations that materially handicap the returns on their invested capital. In this type of sector, being forewarned is forearmed.

Click here to access Part II of this report (free executive summary; enrollment required for full access).

 

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Tue, 02/28/2012 - 19:47 | 2206166 yogibear
yogibear's picture

Real estate taxes keep going up even though housing prices are falling. Property owners are paying for all those bloated and underfunded public pensions. The local governments see the peoperty owner as an unlimited ATM for funds.

Tue, 02/28/2012 - 19:56 | 2206193 Conrad Murray
Conrad Murray's picture

Municipal Finance in the Face of Falling Property Values - http://www.clevelandfed.org/research/commentary/2011/2011-25.cfm

Tue, 02/28/2012 - 20:38 | 2206292 flacon
flacon's picture

As long as my coworkers keep on "buying" (in quotes) homes, and spending about $10K per year on upgrades to "their" homes, I can not see myself selling my silver to trade for a "home".

 

I don't live in a cardboard box because I choose to rent because I can walk away from this "home" with no strings attached at any time of my choosing. 

 

My property taxes on silver are.... get this.... OMG.... drumroll..... my property taxes on my silver is precisely.... ZERO!

Wed, 02/29/2012 - 08:04 | 2207319 thewhitelion
thewhitelion's picture

That's nice, but unless your landlord is an idiot you're paying his property taxes.  It seems to me that the real strategy here is to live in much less house than you can afford, whether you own it or rent it.  Oh, and buy silver!

Tue, 02/28/2012 - 22:45 | 2206611 JW n FL
JW n FL's picture

 

 

Conrad Murray

Municipal Finance in the Face of Falling Property Values - http://www.clevelandfed.org/research/commentary/2011/2011-25.cfm
Thank You Kind Sir!
Tue, 02/28/2012 - 20:09 | 2206224 markar
markar's picture

Not the case in CA--at least not yet.

Tue, 02/28/2012 - 20:37 | 2206296 r00t61
r00t61's picture

It is true that in CA, Proposition 13 "officially" limits the ability to extract revenue via ever-increasing property tax.  But the legislators aren't stupid.  They just invent new "fees" to charge to cover the shortfall.  The classic end-run around Prop 13 is Mello-Roos.

No matter the "rules" or the "law," it is undeniable that governments exist to collect taxes.  All else is justification for the gullible.

Wed, 02/29/2012 - 00:10 | 2206860 prains
prains's picture

invest in house vaporizing, cull the herd

Tue, 02/28/2012 - 20:30 | 2206269 SwingForce
SwingForce's picture

Yogi, YES! Its happening in Broward county Florida. They act like the pension payments are somebody else's problem, not their's!  Sheriff's office too, not their problem that employees work 70+ hours their last year to game the system into paying BIG Pensions, the taxpayers be damned. My NYC Bus Driver neighbor did the same thing before moving to Florida.

Tue, 02/28/2012 - 20:30 | 2206275 midtowng
midtowng's picture

The big thing going foward is the collapse in decent paying jobs for young people.

They can't form new households and have to move back with their parents. This is happening right when the Baby Boomers want to sell their homes to fund their retirements.

Tue, 02/28/2012 - 21:47 | 2206457 Yes_Questions
Yes_Questions's picture

 

 

The big thing going foward is the collapse in decent paying jobs for young people...They can't form new households..

From your post to GOD's ears, or not.

Easy Money made its way too soon (2003-2006) into the hands of home buyers, I suspect.  Retirees able to cash in on some equity, downsize and finally enable their entrepreneurial talents (some of them at least) is exactly what is missing now in the US Economy.  There are lots of boomers ready to start a new small business incorporating their experiences and passions, but NOOO, they instead get to look begrudgingly across the dinner table at junior thinking of this: http://www.youtube.com/watch?v=-io-kZKl_BI.

NOT the same as it ever was...

Tue, 02/28/2012 - 22:22 | 2206541 centerline
centerline's picture

Because retirees enabling thier passions is what is missing?  You have got to be fucking kidding me.

Tue, 02/28/2012 - 22:29 | 2206567 Yes_Questions
Yes_Questions's picture

 

 

None of them have passions and talent, huh.

Or do you automatically think retiree means feeble and TOOOOOO old to do anything?

 

Wed, 02/29/2012 - 07:38 | 2207281 Medea
Medea's picture

Thanks for the early morning comedy.

Tue, 02/28/2012 - 22:37 | 2206590 CrazyCooter
CrazyCooter's picture

I almost never bump posts (just not my thing) but I bumped yours. I think most people do not relate to the incredibly horrible fundamentals young workers are stuck with. I commented about this to my dad last night ... I specifically said ...

"Dad, even with my engineering degree, if I was graduating now I would have much less opportunity, I would work more hours for less, and I would have a lot less job security. I wasn't savy in my 20s like I am now, so I would be at risk of picking a bad employer in a sector that is doomed to scale down, making punishing financial mistakes, and so on."

I also think the boomers are going to retire and try to cash out in a huge wave. I mean, its basic medical physics; at a certain age you can't live by yourself or independently.

I think housing fundamentals, as a generalization, are piss poor.

Lastly, I think there is one exception to all of this; quality homes close to major work centers. So many people live in the suburbs. The price of oil is going up and staying up. In fact the State of Alaska forecast 100+/bbl average oil price for the next X years (start here and see the 2011 Fall Forecast PDF - page 10).

I think this translates into a shift in home valuations where property in the inner city areas is going to go up, reflecting the savings in transportation costs, which will be a transfer of value from homes in suburbs where commutes are longer. If a family is commuting 30 miles to work and fuel costs double, it doesn't take a genius to figure out they will want to move closer to work.

But what the hell do I know, I am just a redneck ...

Regards,

Cooter

Wed, 02/29/2012 - 08:59 | 2207397 Silver Dreamer
Silver Dreamer's picture

In the city I live North of, there are all kinds of new communities being built.  We are apparently on an economic island.  What most people do not realize is that island will sink once federal funding in the area dries up.  The developers don't give a damn though.  They will build and build anyway, for a crash a couple years from now does not matter.  They just have to sell their drastically discounted new homes to the locals, who mostly have no idea what's coming.  From the radio to TV, they think we are in a "recovery." 

The site I work at though has three buildings.  One of them is losing 50% of the people, with most of that being contractors.  Our building was built for 1100, is currently around 700, and it is expected to drop to 600.  The third building is similar I'm sure, but I have not heard the details on it (I rarely go over there).  Government contract money is drying up quickly, and it is only going to get worse in the future.  Plus, a ton of officers are being "released" (fired) from their contracts.  Even though my job is at risk too, I welcome the cut backs!

Tue, 02/28/2012 - 21:38 | 2206440 Thisson
Thisson's picture

Not only that, but the continued tax deductibility of mortgage interest is questionable.

Tue, 02/28/2012 - 22:39 | 2206596 SpeakerFTD
SpeakerFTD's picture

It's worse than that.   I haven't seen a single commentator discuss the connection between AMT and real estate prices, but having done the math on my own recent purchase over and over, it seems like a material consideration.

I live in Long Island, so taxes are punitive.  Make a decent salary here and AMT kicks in, and all of a sudden you are not able to deduct your property/state/local  taxes and potentially even some of your mortgage interest.   Throw that consideration into the buy/rent calculator, and renting looks a lot more attractive.

Wed, 02/29/2012 - 02:18 | 2207030 RafterManFMJ
RafterManFMJ's picture

 

 

I live in one unit of a tri-plex; the other two units provide enough cash flow to pay my mortgage, taxes, and utilities.  Simple logic indicates your property had better generate a cash-flow benefit - either providing you with wood for heat, head for hydro-power generation, rental income, food that you eat and can, gas rights or some such benifit to offset your property taxes - either you work for your property or it works for you.

I have a real genuine laugh at the dullards who live on 1/8 of an acre, who can spit out their bathroom window and hit 3 other houses, who pay 12K per year in property taxes IN ADDITION to an HOA fee...makes me feel no matter how fucked up my life might be, I'm not a complete tool like those clowns.

Only Americans are stupid enough to pay for their own propaganda (TV/Cable) and Fin dumb enough to pay for their own proto-commie/fascist living arrangements (HOA).

 

Wed, 02/29/2012 - 09:03 | 2207410 Silver Dreamer
Silver Dreamer's picture

Their hamster cage is so much nicer though! I lived under an HoA once in my life, and I'll never do it again.

Wed, 02/29/2012 - 02:45 | 2207048 Michael
Michael's picture

By state constitutional amendment, Florida homestead taxes can only go up by a maximum of 3%/year based on the property value.

Thank God for the second tsunami wave of foreclosures. I'll pay less that $1000/year on my almost new 2,750sf home that's paid off for a long time to come.

Wed, 02/29/2012 - 03:18 | 2207065 New World Chaos
New World Chaos's picture

What does "based on the property value" mean?  Would be nice if tax increases were capped at 3% increases per year in nominal dollars.  Bwahahahah

Tue, 02/28/2012 - 19:48 | 2206171 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Owning arable land is attractive.  Owning rental property if you have the time to manage it is attractive.  Owning a home you could turn into a duplex is attractive.  Owning a single family home, despite what Buffet says, is not attractive.

Tue, 02/28/2012 - 19:54 | 2206190 NotApplicable
NotApplicable's picture

Given all of the new houses that have been turned into rentals, I don't see anything attractive about having to compete against them.

Tue, 02/28/2012 - 20:18 | 2206246 General Decline
General Decline's picture

I have a couple rentals that are doing quite well, actually.

Tue, 02/28/2012 - 21:21 | 2206388 Boondocker
Boondocker's picture

Me too, the competition for decent housing in some areas is fierce.

Tue, 02/28/2012 - 21:47 | 2206461 monoloco
monoloco's picture

The pool of renters is much higher now due to all the homeowners who have defaulted on mortgages and will not be eligible for another anytime soon.

Wed, 02/29/2012 - 02:24 | 2207033 RafterManFMJ
RafterManFMJ's picture

Had a rental open in Feb - had no real hopes of renting it soon; not a big moveing time in the winter.  I had over 80 calls on this property where the normal peak of early summer would have been maybe 20; interestingly, I had quite a few people say they were moving since they got their tax refund.  Raised rent from 480 to 545 for a two bedroom.

The women I rented had stellar refs; BTW, to potential renters - don't have your ringback tone some screaming rap song...any sane landlord just hangs up and crosses your number off the list.

Tue, 02/28/2012 - 20:11 | 2206227 General Decline
General Decline's picture

Well said mr lh. The wild card in this is the property taxes. You can count on the parasites to continue that trend in the positive direction. I have explained to my 3 preteen boys that we are by definition not free because we are required to pay property taxes. That, in my opinion, is the basic indicator of true freedom. They are young but they completely understand this. Most adults I know do not.

Tue, 02/28/2012 - 21:31 | 2206423 TonyCoitus
TonyCoitus's picture

I own commercial real estate (class A office space) and recently had my property tax reduced 19%.  I had to file an appeal and appear in front of the "committee" to state my case.  It was an easy sell.  The Auditor's office was very helpful and friendly.  Why?  Because the Auditor wants to get re-elected and isn't so much concerned about balancing the budget; not their job. 

TC

 

Tue, 02/28/2012 - 22:24 | 2206550 centerline
centerline's picture

Dont forget about property insurance if you have a mortgage.  In some cases mortage insurance as well.  In some areas if you can't keep the property the HOA's have the right to lien you and take your property too.  There are all sorts of ways to get screwed here.

Tue, 02/28/2012 - 19:49 | 2206173 CrashisOptimistic
CrashisOptimistic's picture

"and alternative investments, such as Treasury bonds, are paying such low returns that when inflation is factored in, they're essentially negative."

 

Long US Treasury funds have returned 37% over the past 12 months and averaged 10%/yr over the past 3 yrs.  See it on Morningstar.

I didn't bother to read further.


Tue, 02/28/2012 - 20:22 | 2206256 tswenson
tswenson's picture

I lol'd

Tue, 02/28/2012 - 21:22 | 2206393 lotsoffun
lotsoffun's picture

dude - you got it right.  so then buy some more right now.  boatloads, wave it in.  who could have imagined the extent of the printing?  you did - great - good for you.  load up.   i'm bitter because they are sucking down my savings.  you got it right.  buy more.  it's going to go big time negative rates in US

 

Tue, 02/28/2012 - 21:39 | 2206441 TonyCoitus
TonyCoitus's picture

I bought 20YR TIPS at auction a few years back, held for 18 months and sold for 12% gain.  Thought I was real smart, but the same treasury is now selling at $137.  However, not planning to buy more UST anytime soon.

 

TC 

Tue, 02/28/2012 - 22:25 | 2206552 CrashisOptimistic
CrashisOptimistic's picture

Rates may go negative.

Fear will do that.

If that happens, there will be another 10%/yr for the next 3 yrs.

Tue, 02/28/2012 - 19:56 | 2206174 New World Chaos
New World Chaos's picture

Rural Western homesteads only.  Anything else will be a big fat target for starving bureaucrats, cops/local warlords, DHS thugs, gangs, and zombies.  And it's probably best to keep everything mobile during the chaos.  You would hate to have your land end up on the wrong side of the DMZ.   Renters also may have no scruples about strip-mining your copper and suing you when they trip on the way out.  Destruction of morality is part of the plan.

Tue, 02/28/2012 - 19:58 | 2206202 Conrad Murray
Conrad Murray's picture

"Destruction of morality is part of the plan."

You might like this - http://agendadocumentary.com/

Tue, 02/28/2012 - 20:43 | 2206242 New World Chaos
New World Chaos's picture

Looks like a modernized take on the Red Menace.  Most of it is probably true but it is still deceptive.  The agenda is not run by the Communists, it is run by Luciferian cultists who are trying to summon the Beast of world government.  And the right has plenty of dupes, thugs, profiteers and evil manipulators to match those on the left. 

I didn't junk you.

Tue, 02/28/2012 - 21:31 | 2206416 Pinktip
Pinktip's picture

Search Youtube for G.Edward Griffin from 1985 interview a former KGB agent.

Paraphrase quote for KGB " over the last 40 yrs communism has slowly demoralized the USA"

Tue, 02/28/2012 - 23:11 | 2206625 New World Chaos
New World Chaos's picture

Important advantages to renting:

 

  • Mobility.  Mobility.  Mobility.
  • You can do it on the down low, while getting your mail delivered to friends/family, thus putting a layer between you and the Feds.  Arrange tipoff codes that won't sound suspicious if the Feds force your contact to call you for a meeting.
  • You can be gone in 60 seconds, lose nothing and not look back.
  • You won't have to worry about roving gangs taking over your place for a whole weekend and raping your family until they extract your stash locations from you.  Ferfal talks about this happening to isolated Argentinian farm families.  Neighborhood Watch is good.

Important advantages to owning:

  • You might be able to get a house with a 30-year fixed mortgage and very little money down, you might be able to pay back the mortgage after the dollar becomes worthless but before they switch all the contracts to a new (supposedly gold-backed) currency, the pig-men might decide to let you keep your house, rule of law might eventually be re-established, and the title might be clear when you sell.
Tue, 02/28/2012 - 23:28 | 2206749 kekekekekekeke
kekekekekekeke's picture

do you have a blog / newsletter please

Wed, 02/29/2012 - 02:13 | 2206869 New World Chaos
New World Chaos's picture

Not now, but since you are the second person to request this I will get off my ass with a half-assed newsletter that will consist of police state alerts, conspiracy theories and occaisonal topic-sorted links to my assorted ZH rants and bizarre ramblings.  Send an email to valis [delete this] rising at gmail.

Thanks!

Tue, 02/28/2012 - 19:50 | 2206175 devo
devo's picture

*Ding ding* on the first two comments.

Tue, 02/28/2012 - 19:50 | 2206178 kito
kito's picture

housing has at least another 30 percent to fall and may fall to cash value.........government will soon give them away like they used to do with land in the wild west. 

Tue, 02/28/2012 - 20:12 | 2206231 lolmao500
lolmao500's picture

But but but Shangai has houses 70 times the average salary! We can get there! USA NUMBER ONE!!! USA USA USA!!!

Tue, 02/28/2012 - 20:43 | 2206308 Troll Magnet
Troll Magnet's picture

unrelated to the topic at hand but...

shanghai fucking sucks.  been there several times on business and it is literally a city of filth filled with dirty air - not helped by their very liberal smoking non-laws (you can smoke just about everywhere - and shysters looking to rip you off at every turn.  beijing is infinitely worse but shanghai is still horrible.

Tue, 02/28/2012 - 22:29 | 2206566 xela2200
xela2200's picture

ah! the smell of freedom and capitalism.

Wed, 02/29/2012 - 05:10 | 2207121 prains
prains's picture

shanghai fucking sucks. 

 

http://www.wimp.com/throughoutalberta/

 

 

nothing left to say

Tue, 02/28/2012 - 22:27 | 2206564 CrashisOptimistic
CrashisOptimistic's picture

What happens if population declines?  Number of house units do not.

 

Tue, 02/28/2012 - 22:31 | 2206574 xela2200
xela2200's picture

but population is NOT declining. It might move.

Wed, 02/29/2012 - 00:21 | 2206889 Bunga Bunga
Bunga Bunga's picture

US fertility rate is currently at 2.06, but has to compensate for early deaths and emigration to keep population growing.

Wed, 02/29/2012 - 09:33 | 2207483 Silver Dreamer
Silver Dreamer's picture

A house, free or otherwise, does you no good if you're starving to death.  What happened in the Great Depression?  I tend to believe what's coming will be FAR worse.  We will have plenty of vacant houses in the near future.

Tue, 02/28/2012 - 19:52 | 2206187 surf0766
surf0766's picture

Answer: No, not when the government becomes the largest landlord

Tue, 02/28/2012 - 19:59 | 2206204 Shizzmoney
Shizzmoney's picture

Is it really an investment when you don't have the hard cash to buy it in the first place?

You don't own it, the banks do.  And even if you buy it 100%, them or the government still might fucking own it. 

Tue, 02/28/2012 - 22:37 | 2206588 xela2200
xela2200's picture

Do you really EVER own it? HOA can put a lien on it, county can put a lien on it, even an assistant to the assistant of a contractor you hired to fix the roof can put a lien on it and eventually force a sell. I understand that all these can be justified. However, if somebody for whatever reason can take your property from you, do you REALLY own it?

Wed, 02/29/2012 - 02:34 | 2207040 shuckster
shuckster's picture

Imminent domain bitches

Tue, 02/28/2012 - 20:02 | 2206211 Dre4dwolf
Dre4dwolf's picture

Investors will not buy into homes even if they plan on renting them if they feel like the value/price of the home will go down.

 

If I told you, buy this house and fix it up/rent it out, and then I told you that next year the house would be worth 10% less than today.... would you still buy it? or wait for the price to drop?

 

No one is in a rush to invest, its not like the situation is "if i don't invest right now im gona die".... the media pushes people to invest in the "asset" classes they want as quickly as possible.

If the media says housing is a good investment, GET THE FUCK OUT OF HOUSING.

If the media says bonds are bad, GET THE HELL INTO BONDS.

If the media says Gold is bad, GET THE HELL INTO GOLD, lets take this week for example, all month they have been portraying gold/silver as HORRIBLE investments.... the price of silver is up almost 7$ from a month ago, and gold is doing extremely well.

 

Why? because all this counterfeit money/credit/derivative GARBAGE is just floating around inflating the value of assets (the stock market/dow is GARBAGE) theres no money left in equities, Consumer purchases are going to fall as gasoline prices SKY ROCKET, so ???? how are these corporations going to be profitable? IT DOESNT MAKE ANY SENSE why the market is going up right now , which leads me to believe that what we see there is INSTITUTIONAL INVESTMENTS / banks PUMPING the market up for the BIG DUMP (pump and dump).

 

They will entice un-informed investors to throw away their savings into equities and then pull the rug out and let the market tank all the while betting against it on the other side.

 

What goes up, must come down all other laws are laws of men which hold no ground.

 

 

Tue, 02/28/2012 - 21:18 | 2206380 lotsoffun
lotsoffun's picture

dre4wolf - but why would some insane attention idiot on cnbc lie to me?  i thought they were so pretty and loving?  (sarcasm).  i think you wrote now every response i ever hope to articulate.

 

i thought years ago - the more somebody has to advertise on t.v. - the less you need the product.  did anybody forget to 'eat' because they missed the advert on t.v. for two whoppers for $3?

 

Tue, 02/28/2012 - 20:07 | 2206218 Joaquin Menendez
Joaquin Menendez's picture

Ha, anyone who buys a house these days is a sucker.  The entire industry is subsidized by a bankrupt government.  No one knows how much a given house is worth because the people left with houses won't sell them at a loss.  There are still a lot of people living in houses that should have been foreclosed on long ago.  Investors own huge swaths of houses in my neighborhood.  One guy owns 48 houses.  With that many houses concentrated in a few hands, investors can control the prices of houses in your part of the city while the city happily looks the other way.  Nearly every sale of a house here is from one LLC to another.  Are the LLC's owned by different people or the same person driving up prices?  Another huge problem is that when gas eventually costs $10 a gallon the idea of what seems like a good location will change dramatically.  Why would anyone in their right mind plunk down money on something they cannot determine the value of?  Owning real estate as a bet on increasing equity is so last decade.

Tue, 02/28/2012 - 20:06 | 2206219 markar
markar's picture

Low mortgage rates won't help investors who are largely cash buyers. If interest rates go up, their property values will decline.

Tue, 02/28/2012 - 20:10 | 2206225 lolmao500
lolmao500's picture

In Canada, it certainly is not...

When my bank call me to tell me they want to meet to talk about me buying a house... you know they are desperate to keep the BS going... especially when I am $9k in debt with no job. LOL

Wed, 02/29/2012 - 00:28 | 2206904 Bunga Bunga
Bunga Bunga's picture

Because the new debtors finance the old debtors.  If there are no new debtors money supply collapses, currency deflates and old debtors get in trouble or government has to borrow like crazy to compensate for that ... actually the macro-economic reason behind the huge deficit spending in the US.

Tue, 02/28/2012 - 20:17 | 2206239 I should be working
I should be working's picture

Housing can be a good investment depending on where.

I live in Boston, say I put 100k down on a 400k rental property with a 30 year mortgage.  The mortgage, taxes and insurance will be ~1800/month and the rent is ~2300.

So you clear 500 in cash flow, another 400 is principle on the mortgage and you deduct everything, which will save you 300/month on taxes.

500+400+300=1200 or 14400/year.  More than 10% ROE, I challenge you to get that return in the stock market.

Of couse being able to take the deductions requires you have a job, which could be easier or more difficult depending on your situation.

Tue, 02/28/2012 - 20:38 | 2206298 TuesdayBen
TuesdayBen's picture

Maintenance? Vacancy factor? Credit losses?

Tue, 02/28/2012 - 20:41 | 2206303 mendolover
mendolover's picture

Douchebag renters.

Tue, 02/28/2012 - 20:40 | 2206304 mendolover
mendolover's picture

Douchebag renters.

Tue, 02/28/2012 - 21:53 | 2206474 WolfePaq
WolfePaq's picture

yup- i should be working is a troll- one mis step and those figures are a loss... one pissed guy who losses his job and trashes the place and hocks the appliances and it is a BIG loss.

Wed, 02/29/2012 - 00:31 | 2206910 Bunga Bunga
Bunga Bunga's picture

Another proof that housing is a bad investment, at least for the people who know how to do business.

Tue, 02/28/2012 - 20:52 | 2206328 jo6pac
jo6pac's picture

The only way it pays is if you cash out the property then you need to be able lower rents as this economy drops into the cellar.

Tue, 02/28/2012 - 21:03 | 2206352 donsluck
donsluck's picture

Careful, that $300 a month savings in taxes reflects a much larger deductible SPENDING (presumably on interest). You need to account for the SPENDING also to get a clear picture. Plus, you are counting your $400/mo principle, which is an illusion if the price is falling.

Tue, 02/28/2012 - 21:07 | 2206360 lotsoffun
lotsoffun's picture

buy aapl.  or ibm.  it's NEVER going down.  just more and more up.

 

Fri, 03/02/2012 - 18:01 | 2206612 xela2200
xela2200's picture

I have had rentals too. You cannot analyze a rental as an investment. It is NOT. It is a business and you should factor in your work. 10% is shit when you factor in the work YOU will have to put into it. I have changed so many toilets in my life already that I don't even like to sit on them for fear of breaking them. I was ALWAYS the ahole landlord because I wanted the rent on time or I had to take money from deposit to fix the holes in the wall the angry teenage punch in or so many of the other reasons. And don't get me started on dealing with the bank and their bullshit games not to mention getting the property tax bill required some liquor.

You are better off buying a reit if You want to get into that or the ETF VNQ.

Tue, 02/28/2012 - 20:28 | 2206245 cowdiddly
cowdiddly's picture

lets see my mortgage interest is 4.8%

my taxes are 2.2% (up .03yoy

my insurance cost another 1% (up 30%yoy)

my maintenance cost including the central air unit that went out last summer cost another 5%

____________________________________________________________________________________

Total costs 13% of the homes  supposed value

+ Last years 10% price depreciation in my area = -23%

Yep homeownership still sucks. Im listening to that Three Little Pigs story next time ANd Im building my next home out of GolD BriCKs. 

Tue, 02/28/2012 - 20:19 | 2206247 Bunga Bunga
Bunga Bunga's picture

What about the millions of foreclosed people? They won't come back into the housing market too quickly, will they?

Tue, 02/28/2012 - 21:31 | 2206420 El Hosel
El Hosel's picture

The ones still living in the McMansion and not paying are digging it...for now.

Wed, 02/29/2012 - 00:56 | 2206954 Bunga Bunga
Bunga Bunga's picture

And there credit score allows them to come back when?

Tue, 02/28/2012 - 20:20 | 2206250 Snakeeyes
Snakeeyes's picture

Yup, the lt trend of housing is still down and homeownership is a nightmare for anyone but the elites.

http://confoundedinterest.wordpress.com/2012/02/28/case-shiller-20-city-...

Tue, 02/28/2012 - 20:20 | 2206251 luna_man
luna_man's picture

 

 

"Is Housing An Attractive Investment?"...You Betcha!

Not Many Better!...Got Pleanty of Money & Savvy??

I'd like to have both right now.

Tue, 02/28/2012 - 20:24 | 2206259 Hugo Chavez
Hugo Chavez's picture

I just bought five acres and a trailer in ruby arkansas for 26,000 total. It is a shirty place to live, but full of mexican farmworkers. I will never rent to section 8 again. I get a little bit less for renting to latinos but they always pay. One of the family always has a job, and I trade rent for work on the house.

I actually think i do better than with section 8. My experience was that i was always repainting and recarpwting when they moved out.

If you are gonna buy cheap property advertise for latinos in the local latino circular or put up an index card in a latino grocery store.

First generation immigrants, legal or otherwise, are a joy as renters, and they wont destroy your stove cooking meth like section 8 will.

Tue, 02/28/2012 - 20:54 | 2206331 jo6pac
jo6pac's picture

yes

Tue, 02/28/2012 - 21:42 | 2206451 Papasmurf
Papasmurf's picture

A buddy of mine leased his two bedroom condo out for a while.  Each rental ended with a period of non-payment followed by playing the eviction game.  Back-rent was hard to collect.  Ex-tenents would quit working for an employer if he got the courts to order payroll withholding for the debt.  Each rental caused him the need to repaint and recarpet after 18 months to three years occupation.  We nick-named carpeting "an apartment diaper".   Actually, use diapers look and smell better than used apartment carpet at the two-year mark.  

These were people one notch above section 8.  When he went to rent the last time, the county came in to insist his property was avaiable to section 8.  He took the rental off-market and left it vacant until the 2005 market cycle got him out of the property.

I vowed never to repeat his mistake. 

Tue, 02/28/2012 - 22:35 | 2206587 CrashisOptimistic
CrashisOptimistic's picture

Recarpeting and repainting every 2-3 yrs is normal.  Divide the cost by 2.5 and that's in your annual maintenance budget.

There are also now insurance policies for appliance damage, paid by the tenant.  

It's not too bad, provided you don't walk into it with minimum down and a big mortgage.  You can't get homeowner mortgage rates for rentals.  Better you just pay cash, and pay upscale, not section 8.  And from day one start making noises to the tenant about them buying it some day.

 

Wed, 02/29/2012 - 14:28 | 2206977 Flakmeister
Flakmeister's picture

Rent month-to-month, 2 weeks advance...

You can boot em out immed. as the lease has expired....

Don't even try to get the back rent...

At least according to a slumlord I know in Cohoes NY...

Tue, 02/28/2012 - 22:56 | 2206650 xela2200
xela2200's picture

they wont destroy your stove cooking meth like section 8 will.

=========================

Section 8. The only time you remodel with crapier stuff. You got to love that linoleum floor and there is nothing like carrying a gun to fix something in the property.

Tue, 02/28/2012 - 20:25 | 2206262 LookingWithAmazement
LookingWithAmazement's picture

Marc Faber considers US housing cheap.

Wed, 02/29/2012 - 00:34 | 2206914 Bunga Bunga
Bunga Bunga's picture

Because he lives in Thailand and not in the US.

Tue, 02/28/2012 - 20:27 | 2206264 Piranhanoia
Piranhanoia's picture

The piece didn't mention anything like;  "If property laws are followed there will only be a recovery when the people get their homes back and the economy can recover after the perpetrators are indicted and a recovery of some 500 billion is returned to the homeowners and investors.

 The thesis is reliant on ongoing and retroactive crime as a business model. 

Tue, 02/28/2012 - 20:27 | 2206267 TheSilverJournal
TheSilverJournal's picture

Housing is set to fall 70%-80% considering hyperinflation will remove the easy credit because the printing press will be rendered worthless. Also, hyperinflation is completely economically devastitatin which will cause Americans to become much poorer, further driving down housing. In order to save on housing maintenance and utility costs, more people will live together in each household. In addition, many will altogether leave the country, which will further expose the overbuilding of housing that cheap money and government backing of mortgages has created.

Now is the time to take the equity out of your home if you would like to keep that equity. The best way to save is with silver. Gold is a great option too. If you’re looking to save in USD, nickels now have a melt value of more than $.05.


TheSilverJournal.com

Tue, 02/28/2012 - 21:04 | 2206355 riphowardkatz
riphowardkatz's picture

What history do you have to support this? 

Tue, 02/28/2012 - 21:35 | 2206429 Boondocker
Boondocker's picture

and if Amerikans get that poor, where and how are they going to move?????

Tue, 02/28/2012 - 22:59 | 2206658 xela2200
xela2200's picture

Prices for some houses are already been supported by rental multiples. I think is not right to lump real estate into one class or region and make conclusions.

Tue, 02/28/2012 - 20:43 | 2206278 Waterfallsparkles
Waterfallsparkles's picture

Everyone on Wall Street tries to look at Real Estate Investment thru the eyes of a Wall Street trader.

Investment in Real Estate is a Life Long project.  It is not a slam bam thank you mam investment.

It is a true buy and hold investment.  You buy and hold for at least 30 years.  In time you pay off your Mortgage and Raise your rents but that takes many years to accomplish.

You have to be very committed to your quest.  As you will spend many hours cleaning after people, replacing damage (tenants break anything that cannot be replaced), painting, answering phone calls and meeting prospective tenants and shelling out tons of dough until you accomplish the above.  If you do not do most of the work yourself you will not be profitable.  As electricians, plumbers, painter are more exepensive than you think.

The current problem is that the City's and County's have Landlords in their sights.  With liscensing fees, regulations and fines for a missing trash can lids to raise revenue.  Consumer protection at its highest.  They want to "protect" the Tenant from a dirty refrigerator even if the Tenant caused the problem in the first place.

Although after time it can be a great investment, yielding a lot more than the interest in the Bank or the Stock market.  But, you have to think like a turtle to like Real Estate.  Slow and steady until you reach your goal.

 

Tue, 02/28/2012 - 21:03 | 2206353 lotsoffun
lotsoffun's picture

 buy something and then put boogie-down wonderland i'm on food stamps with X kids from Y daddys in there  and wait and see what happens to you.  it IS GOING TO BE a lot worse than the 80's soon.  a lot.  the culture has changed and the concept of entitlement (mr. 'i got me's a noble prize for nuttin') only greatly increased the concept of being owed and rewarded back for all they were owed.  have fun.

 

Wed, 02/29/2012 - 08:18 | 2207326 Waterfallsparkles
Waterfallsparkles's picture

I always believed that it would be better to buy upscale houses in very good neighborhoods.  Yes, the cost of entry is a lot more but you get much better tenants.  The Property prices are higher and it takes longer to break even on the rent vs the Mortgage, Taxes etc., but you make your Money thru Appreciation.  I had a good income so I preferred to have the Appreciation instead of the cash flow as I did not have to pay taxes on the Appreciation until I sold.

I never wanted to be a so called slum lord.  Those propertys you can get an immediate cash flow but it does take a lot more time managing the propety and money for repairs.  With the 2 Apartment Houses, I only like 1 bedroom units as then I do not have to rent to people with Children.  Which also limits your exposure to Lead Paint Law Suits.

Athough, I do have a 2 apartment property that is in an undesirable area and it is a real headache.  A lot of people skip out.  Lots of Section 8 in the Neighborhood and everything that goes with that.  I have avoided renting to Section 8 because of the damage the people cause.  Although, some of the Landlords on the street that I know do rent to Section 8.  They get about $200. more per month than I do, so maybe in the end they get paid for the damage and they always get their rent on time.  Plus, they generally do not have the vacancy as the Section 8 Tenants stay for long periods of time. If my current Tenants leave I may consider Section 8.  With only 1 bedroom apartments I will not be renting to anyone with Children.  The County requires that if they have a child they have to have a 2 bedroom apartment.

Tue, 02/28/2012 - 20:36 | 2206283 riphowardkatz
riphowardkatz's picture

"many observers believe there are now political limits on what the Fed can do. "

Which ones?

You also fail to mention Land Banks. They are demoltioning property in a cash for clunkers type move. Have you read about the price of used car inventory? It isnt falling.

Hey and what a coincidence. Detroit seeing some housing price appreciation and look at this quote...

"Other cities — most notably Detroit — have used federal money designed for foreclosure relief to knock down thousands of houses."

 

 

 

Tue, 02/28/2012 - 20:35 | 2206290 OldTrooper
OldTrooper's picture

Common sense suggests that the pressure to trim unprecedented (in peacetime) Federal deficits...

There is also a deficit of common sense, though...

Tue, 02/28/2012 - 21:58 | 2206488 Xrated
Xrated's picture

FO 74-78 for the 325.

1/320th FA

 

Tue, 02/28/2012 - 20:37 | 2206291 non_anon
non_anon's picture

well, some have a "knack" at real estate and/or business, but I ain't one of 'em.

Tue, 02/28/2012 - 21:21 | 2206312 deflator
deflator's picture

The D.C. area is somewhat insulated from home price declines. It is a pretty safe bet that the government will continue it's growth trajectory. It's all about location if you are talking about "investing" in real estate. There are money pits everywhere, real estate generally requires maintenance and building materials seem to be steadily going up along with oil. On a longer timeline housing turns out not to be an investment but only a place to live. I think you need to be saavy in a number of areas to be a successful housing investor at this point in time--or real lucky.

 I tried to explain to my dad the thing about, "on the longer timeline" housing is not an investment. He said, "I don't know I did pretty well with the houses I bought" I tried to explain that he lived in a point in time of "growth" unlike any time in the past and unlikely in the present or future. I went on about population growth attributable to energy and how energy growth similar to his lifetime experience is unlikely to be extrapolated into the future similar to his lifetime experience, you know, "the fundamentals"? Needless to say his eyes kinda glazed over as he reluctantly agreed with me to shut me up.

Tue, 02/28/2012 - 20:48 | 2206319 lolmao500
lolmao500's picture

And let it begin!

Greece cuts minimum wage, pensions as austerity drive begins (Reuters)

Tue, 02/28/2012 - 20:53 | 2206327 Moneyswirth
Moneyswirth's picture

Opa!

Tue, 02/28/2012 - 21:28 | 2206411 El Hosel
El Hosel's picture

Greece is a not so attractive lubricant.

Tue, 02/28/2012 - 20:52 | 2206325 Moneyswirth
Moneyswirth's picture

Is Housing an Attractive Investment?

Um, no.

Tue, 02/28/2012 - 21:01 | 2206345 LiquidityandLunacy
LiquidityandLunacy's picture

Im curious what Tylers thinks about all this, hey tylers, do you own or rent buddy?

 

 

Tue, 02/28/2012 - 21:25 | 2206400 lolmao500
lolmao500's picture

Tyler lives at the Playboy Mansion.

Tue, 02/28/2012 - 21:48 | 2206462 Atomizer
Atomizer's picture

I own three houses & land. Two properties are rental. A forth house will be purchased soon. When dealing with the banksters, you have to have cash. During the bidding process, set your limit and hold. If the house purchase is lost, move on.  About 8 months ago a modest house was for sale, it included a current renter occupying the home. I notched up the bid, the banks decided to take this home to audition and raised the price x2 fold. The house is still on the market today. Wells Fargo is still sitting on this property.

 

I received an email a few months ago inquiring if I was still interested in purchasing the home.. I replied, FUCK OFF!

Tue, 02/28/2012 - 21:11 | 2206367 JohnKozac
JohnKozac's picture

My brother fell for the "buy RE as investment" pitch. The first renter taught him a tough lesson; even though the tenenat was a professional with a good credit rating, when he got mad he vacated in the middle of the night and damaged the place....$14k of repairs!

After reparing the place selling also became a nightmare in this market.

Being a landlord has definite risks...some bigger then others. There are safer investments imo.

Tue, 02/28/2012 - 22:22 | 2206542 Atomizer
Atomizer's picture

 

 

Advice: Don't buy homes that attract renters attempting to upscale themselves from a two bedroom apartment. Secondly, have your tenant sign a one year contract outlining rental damages and terms of agreement for rental property. Lastly, check their references. You'll eventually find the right person after droves of lying socialist viewing the property fib about the income they actually bring in. :)  Please understand. At 2,500 to 3,200/month rental rate, these thieves will tell you they are related to Warren Buffet. LOL

Wed, 02/29/2012 - 08:25 | 2207337 Waterfallsparkles
Waterfallsparkles's picture

One thing I learned is to STAY AWAY FROM PEOPLE WITH BAD CREDIT.  First they have nothing to get if they do not pay you.  Plus, your ding on their Credit Report does not matter as you will be in a long line of other Creditors they already defaluted on.

Every time I gave someone a CHANCE, I got burned.

I would rather have it vacant than rent to someone with really bad credit.

Wed, 02/29/2012 - 10:29 | 2207636 Silver Dreamer
Silver Dreamer's picture

Pull the credit and look at it though.  If the applicant has a foreclosure but is okay in every other account, they should not be a problem.  When the credit report shows a long and ongoing history of negatives, that's when you just laugh and walk away.

Tue, 02/28/2012 - 21:11 | 2206370 RiverRoad
RiverRoad's picture

Considering the demographics of the aging baby boomers and the fact that most folks in their 90's do not maintain their own homes, we are going to have to deal with the fact that the post WW2 great homeownership era is in all likelihood over.  It was fun while it lasted.

Tue, 02/28/2012 - 21:27 | 2206405 rosiescenario
rosiescenario's picture

If home prices decline, then more mortgages will be underwater leading more homeowners to take a hike, leading to more homes being sold at distress prices. Rinse and repeat.

 

More owners of $1million plus homes are now hiking, not because they cannot afford to pay, but because it is a sound financial decision.

Wed, 02/29/2012 - 00:41 | 2206925 Bunga Bunga
Bunga Bunga's picture

Unwinding of a bubble is no pleasure.

Tue, 02/28/2012 - 21:31 | 2206417 wcvarones
wcvarones's picture

No.

Tue, 02/28/2012 - 21:31 | 2206419 masterinchancery
masterinchancery's picture

The article doesn't even mention the most important factor, which is generational.  The baby boomers, largest generation in history and far wealthier than the generations following them, are downsizing, moving into rentals and assisted living, and dieing off. This will put downward pressure on housing prices for a decade or two.

Tue, 02/28/2012 - 21:31 | 2206422 Westcoastliberal
Westcoastliberal's picture

Beware properties subject to Mello-Roos or other taxes homeowner's were saddled with by the developer.  My understanding is these taxes are fixed and not based on % of valuation.  You could easily double your property tax expense without realizing it.

Tue, 02/28/2012 - 22:41 | 2206600 mophead
mophead's picture

I regularly come accross properties where taxes+mello-roos are well in the upper 2% range. I often see 2.8%, and occationally 3.2%. Not only that, but most of these have an HOA. It's like paying two mortgages.

Tue, 02/28/2012 - 23:10 | 2206694 xela2200
xela2200's picture

If you are buying land also consider Impact Fees. I was looking at a 10 acre land that I wanted to do a simple campsite. The impact fees are 3 times the cost of the land.

Many municipalities are still holding the bureaucracies, unions, etc from when times were good and refuse to reset to reality. Properties are for sale and money is sitting on the sidelines. It is just a mess right now.

Tue, 02/28/2012 - 21:43 | 2206446 dwdollar
dwdollar's picture

When I hear someone say...

"I am investing in housing."

That sentance is automatically converted in my brain to...

"I am a fucking idiot who believes McJobs will someday be able to pay for McMasions."

Is that normal?

Tue, 02/28/2012 - 21:53 | 2206477 El Hosel
El Hosel's picture

Abby Normal, tune in to Kudlow for some sprouts ala fairy dust.

Tue, 02/28/2012 - 22:21 | 2206536 besnook
besnook's picture

i bought a small summer cabin in a lakeside community in new york in sept 2008. it has appreciated by 33%. i just bought a home in hawaii for no money down and no money shown to the bank with an instant 100-200000 dollars of equity in it. i have flipped a coupla foreclosures in that time for modest money. the amateurs are gone but the money is tight. the glory days are over and will be for a long time unless the community you invest in has a growing population due to a growing economy or you are very choosy about what to invest in.

Tue, 02/28/2012 - 22:21 | 2206539 Papasmurf
Papasmurf's picture

I'm investing in tulip bulbs.  Those will appreciate again, probably sooner than housing. 

Tue, 02/28/2012 - 21:51 | 2206468 Xrated
Xrated's picture

i am an Underwriter at BOA. The only way you'll get a mortgage on an investment property is have $10 million liquid at Merrill Lynch.

Cash is driving home prices down. Jump on it.

Tue, 02/28/2012 - 22:35 | 2206586 Seasmoke
Seasmoke's picture

then modify my mortgage and stop playing games !!.....or can you not do that as the debt collector servicer

Tue, 02/28/2012 - 22:52 | 2206591 tickhound
tickhound's picture

Ah yes Underwriting... the once noble art of determining "customer eligibility"

What was it like back in the good 'ole days when a paycheck came by simply repeating these 3 words, "Congratulations, you qualify."

I don't have $10 million but I inherited about $56k in my Merrill Socialized Losses account... Are we good?

Wed, 02/29/2012 - 08:32 | 2207349 Waterfallsparkles
Waterfallsparkles's picture

Xrated,

You are right.  The Banks will only let you count 75% of the Rental Income against the Mortgage.  If you own a few rentals the Banks only let you count 75% of your rental income.  So, the other 25% is considered a debt.

Tue, 02/28/2012 - 21:51 | 2206473 El Hosel
El Hosel's picture

      Housing has limited Price Discovery,  propped up zombie market.... having a bounce.

Tue, 02/28/2012 - 22:11 | 2206515 QQQBall
QQQBall's picture

I am looking at a specific area here in Coastal Socal.  You really don't get much for $350,000, but you get a heck of a home for $550,000+ - I mean nice casa! A $400k mortgage is less than $2k a month in PI payment - I can rent my F&C casa for that much and be living in a nice custom with an ocean view. At $150/SF (say 3,500 SF), it has me thinking.  I am talking a supply constrained market w/in 1 mile of the beach with horizon ocean views. Not too start any trouble but economics is the great discriminator and the coastal zones with great skool districts will bounce the hardest. This area - not the greatest skools, which is not ideal, but my kids are grown anyway. I'm thinking you gotta pay up - the effective demand on the "lower" end is still there; the upper-end has better "value".

 

I have seen only one CRE asset class here get to the point where prices are so low below replacement cost that people say " I may not hit the exact bottom, but I will pay this price for this propery b/c even if it goes lower I don't care."  I don't really see that in housing, but for $1,800 P&I a month; I'm guessing that's 1/2 the monthly rental rate not long ago, but thats a WAG.

 

Tue, 02/28/2012 - 22:11 | 2206516 QQQBall
QQQBall's picture

I am looking at a specific area here in Coastal Socal.  You really don't get much for $350,000, but you get a heck of a home for $550,000+ - I mean nice casa! A $400k mortgage is less than $2k a month in PI payment - I can rent my F&C casa for that much and be living in a nice custom with an ocean view. At $150/SF (say 3,500 SF), it has me thinking.  I am talking a supply constrained market w/in 1 mile of the beach with horizon ocean views. Not too start any trouble but economics is the great discriminator and the coastal zones with great skool districts will bounce the hardest. This area - not the greatest skools, which is not ideal, but my kids are grown anyway. I'm thinking you gotta pay up - the effective demand on the "lower" end is still there; the upper-end has better "value".

 

I have seen only one CRE asset class here get to the point where prices are so low below replacement cost that people say " I may not hit the exact bottom, but I will pay this price for this propery b/c even if it goes lower I don't care."  I don't really see that in housing, but for $1,800 P&I a month; I'm guessing that's 1/2 the monthly rental rate not long ago, but thats a WAG.

 

Tue, 02/28/2012 - 22:15 | 2206523 q99x2
q99x2's picture

Well I guess it would be ok to buy rental property if it were an apartment complex and you had a management company running it. And, you went in with no money. And, it was profitable from the start.

But if you had to come up with money out of the pocket you could not buy because in times of social collapse, like the banker sponsored one in Argentina and the one that has started in the US now, then it is better to buy dirt bikes and trade them for homes once the collapse takes place.

Tue, 02/28/2012 - 23:13 | 2206700 xela2200
xela2200's picture

So buy a reit.

Wed, 02/29/2012 - 08:53 | 2207381 Waterfallsparkles
Waterfallsparkles's picture

If they change the Tax on Dividend income the reits could lose 50% of their value.

Wed, 02/29/2012 - 11:40 | 2207936 xela2200
xela2200's picture

Then you can sell it on the spot. When the property taxes on my rentals (bought pre boom value based on rental income) were going through the roof and rents down (2006), the properties started to go cash flow negative. It took me two years to get rid of them.

There is a LOT of uncertainty in the market that is for sure. Capital gets no love right now. Money is sitting on the sides and stock holding periods are in the range of weeks and not years.

Yeap, that is what happens when you try to be a capitalist in a command economy.

Tue, 02/28/2012 - 22:29 | 2206560 q99x2
q99x2's picture

Some people make money bribing housing department officials to overlook turning coastal properties into vacation rentals. They then rent them out at two and half times the market rate. Once rented they pawn the properties off at an inflated price on wealthy chinese whose money is looking for a place outside of China.

Tue, 02/28/2012 - 22:28 | 2206565 Seasmoke
Seasmoke's picture

why would anyone feel comfortable about buying a house in 2012.....the CON list is too long to even list here

Tue, 02/28/2012 - 22:53 | 2206639 deflator
deflator's picture

 You buy a house because you need a place to live...

Wed, 02/29/2012 - 00:13 | 2206867 prole
prole's picture

Yeah regardless of everything else, you have got to live somewhere

Tue, 02/28/2012 - 22:56 | 2206651 michael_engineer
michael_engineer's picture

I suspect that the root causal factors to Chris M. rationale are another one of his favorite considerations and that would be the Hubbert curve. If we are close to the downslope that could explain weakness in government spending and in wages too.

It's kind of like in Electrical Engineering how you can trace everything back to Maxwell's equations.

See http://www.zerohedge.com/news/observations-engineer

From there :

Looking forward to the coming years, what are the reasonable expectations for housing and many other aspects of the world economy if oil production does at some point start to decrease as projected by the Hubbert Curve? Is the banking business model of providing 30 year home loans at risk? One might think so.  There are projections that at some time we may expect oil production to decrease by anywhere from 2 to 5 percent year after year after year (http://www.drmillslmu.com/peakoil-3.htm and see the World GDP Growth chart and comments). Do 30 year home loans (or any long term loans of any type) make good business sense under a 2 percent decrease (year after year after year) in oil production which is the worlds most critical natural resource? Would they make good business sense under a 5 percent decrease (year after year after year)?  The banks may finally be starting to "get it", and long term credit may be tightening as a result.

Assets that require longer term loans to purchase where there is a forward looking expectation that the debts incurred in today's transactions will be able to be repaid from wages earned in future years will suffer deflation and falling prices and asset valuations. The reasoning for this is as follows :  The Hubbert Curve strongly implies that future real economic activity will be decreasing since there will be less energy available in each successive year, so less will get done in each successive year, which implies that there will be less jobs in each successive year. With less jobs available, and more unemployed people competing for any job openings that do become available, the wages for jobs will be dropping too, as there will be more competition between the unemployed to get any given job. Employers will be able to do price discovery for wages where supply and demand work somewhat in reverse (but not counterintuitively). With a high demand for jobs, and a small supply of jobs, the price (or wage) of jobs goes down! So, with less jobs in the system, and a tendency for there to be less wages paid for existing jobs, we can expect the funds that will be available in future years to repay long term credit to be decreasing. This is a fundamental change for the long term credit business model used in prior years and decades. Prior to peak oil/debt/GDP/water/soil/phosphorous etc, the trends and expectations were that there would be more wages earned and more funds available to repay loans in future years, and 7 yr. loans for CRE, and 15 and 30 yr. loans for housing made good business sense. Now that we are post peak the long term credit business model is structurally challenged with higher risks of defaults due to an expectation of less wages being available to repay loans.

Tue, 02/28/2012 - 23:02 | 2206675 besnook
besnook's picture

nat gas for energy and other substitutes for plastic, fertilizer, and petroleum products. peak oil is real but the consequences are based upon static technology.

Wed, 02/29/2012 - 01:24 | 2206987 Flakmeister
Flakmeister's picture

Does the US currently import or export NG on a net basis??

Tue, 02/28/2012 - 23:01 | 2206666 nah
nah's picture

to be honest it is the time to buy if you have a job and can get a solid rate

.

inflation will make your paymets crap... the .gov will not allow overwhelming deflation, but they could 'destroy the economy' that they surrounded themselves with... at which point you could be in a house, with natural gas surrounded by property owners

.

or the .gov stays in business for another 100 years and what the fuck do you care

.

hell every city aint tokyo bitchez

Tue, 02/28/2012 - 23:20 | 2206716 besnook
besnook's picture

even though it may get even better 5% money nets a 3-5% gain based upon upon shadow stat inflation figures. it is a good deal provided your income is rising

Tue, 02/28/2012 - 23:14 | 2206701 twotraps
twotraps's picture

anyone buying farmland?

Tue, 02/28/2012 - 23:21 | 2206724 Downtoolong
Downtoolong's picture

It is a bit amusing how Buffett is suddenly pushing residential housing as a great buy and investment, now that he's taken a stake in B of A which coincidentally has a huge portfolio of foreclosed inventory for sale which is growing by the day. Talking your book much there Warren?

Tue, 02/28/2012 - 23:29 | 2206744 dolph9
dolph9's picture

It depends on what type of house you're talking about.

A shoddily built McMansion in an exurb in a desert or snowy place, or somewhere riddled with crime and decay, is all but worthless.  Cooling/heating and transportation costs, as well as the quality of the neighbors, make that so.

A well built modest home, located close to work and services in a decent neighborhood, with a big cash downpayment of course, is priceless.

Use your brain people instead of relying on stupid metrics and trends pimped by Wall Street idiots.

Tue, 02/28/2012 - 23:27 | 2206746 chunkylover42
chunkylover42's picture

No.  The flaw is evident in the title - a house in not an investment, it is a durable good.  Sure some people may make money, but over time you should expect a well-maintained home to appreciate at the rate of inflation, nothing more.

Wed, 02/29/2012 - 01:55 | 2207008 DarthVaderMentor
DarthVaderMentor's picture

IMNHO, bail out if there's celebrations and buy in when there's despair, no hope for growth and blood in the streets. The time to invest in RRE or CRE is coming, but not just yet. First get your money out of the equities market and into gold for a little while.

Wed, 02/29/2012 - 01:59 | 2207011 LucasATX
LucasATX's picture

This is a very interesting article. I think one of the primary drivers that might have been overlooked/underweighted is the current demographic profile of the US.

We are an aging nation. The proportion of adults over the age of 65 will continue to grow thru 2025. The housing markets (regardless of financing inputs, sanity etc.) was built up in response to a demographic that was hitting their prime earning years in the 1990s and who purchased (however misguided) houses that were in accordance with their perceived means . Even if population continues to grow at 1-5% per year, we simply will not be moving enough people into a demographic that can reoccupy the quality of housing stock that is currently (and will be increasingly) vacated by Baby Boomers as they downsize and die.

Aside from all of the other major problems and issues, we simply do not have the population profile to support a functional transition of existing housing.

I expect to see a lot of empty (mc)mansions and continued downward price pressures on mid-range housing stock. Ultra-High End Urban, Multi-Unit rentals and micro-homes would probably be the best place to invest. Anything else seems really risky, regardless of your expectations on the overall economy.

 

 

Wed, 02/29/2012 - 03:20 | 2207054 MoneyMagician
MoneyMagician's picture

A house is not a attractive investment. It's a thing, like a car, or vacuum cleaner. You need it to live, but not a investment. Thing with housing market is the facade of a great investment, buy now, sell higher later is gone. I don't believe that higher home prices reflects purely legitimate growth, but also obviously fluctuations on access to money. There is people who think that the housing market is the core of the american economy, that housing is the key to growth. The actual productive economy needs to grow so that housing can grow sort of speak, not necessarily with "higher" prices, but just like any other good, houses sold in sustainable supply. Government policy can try to stimulate demand all they want, they get nothing out of it in the long run, because demand is a result of production. Real wages have to increase, more productive jobs need to be created. Simply subsidizing, and throwing more cheap money at the problem isn't going to solve it.

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