Housing: No Longer A Sure-Fire Wealth Builder
I spoke with David Streitfeld of the NYT last week about the future prospects for Homes as an investment (I have a short quote in today’s Housing Fades as a Means to Build Wealth, Analysts Say):
“Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.”
I don’t disagree much with any of the others quoted in the article. (Stan Humphries, chief economist for Zillow; Yale’s Bob Shiller; Dean Baker of Center for Economic and Policy Research). I find our variances are mostly matters of nuance.
The chat I had with Mr. Streitfeld ranged far and wide, and tried to put some context on the entire Housing problem, which remains poorly understood by many. The rest of the conversation was rather intriguing. Some of the ideas batted about include:
• Housing over the past century managed to just outpace inflation (by 1.1%, according to Shiller);
• The bond bull market that began in the late 1970s has driven mortgage rates down from the peak by as much as two/thirds — as high as 15% down to ~5%.
• The post WWII growth of suburbs and the subsequent baby-boom demographic surge created a massive demand for Housing unlikely to be equaled inthe next few decades;
• The three decade long decrease in the cost of credit was an enormous source of Real Estate appreciation over that same period (1980-2005);
• Bull Markets eventually end with a blowoff top; In doing so, they pull forward a decade or more of future returns;
• We remain 5-15% overvalued n home prices nationally; That could be worked off by a big drop tomorrow, or by a 7-15 year period of no appreciation, depending upon inflation and wage gains;
• Housing has problems with both too much supply and not enough demand. Bring in 3 million qualified home buyers from abroad and the Housing issue goes away.
A few other thoughts worth sharing:
It is safe to buy 2 kinds of properties right now: The first is simply math: If you are planning on living in a specific location for at least 10 years , then the calculus of rent vs own likely favors the buyer once you figure in mortgage tax deduction. The numbers are obviously determinative, so do the math of your income, tax situation, and alternative rental options. Renting might put you into a less desirable school district in parts of the country; that is a non-monetary factor that needs to be considered.
Second, I would not be afraid to buy a “unique” or vacation property. By unique, I mean not a tract home or development, but a something special: Beach front, lake side, mountain view, etc. kind of place that cannot easily be replaced or reproduced. The kind that 10 years from now, you kick yourself for not buying. A truly unique purchase avoid Real Estate regret.
I was surprised when he mentioned I was one of the more bullish housing analysts he spoke with! My answer to that was the time to be an über-bear on Housing (or anything, really) is before the collapse — not afterwards.
Lastly, I must always remind people that there are no such things as toxic assets — only toxic prices.
>
Previously:
Prior Housing commentaries can be found under the category: Real Estate.
Source:
Housing Fades as a Means to Build Wealth, Analysts Say
David Streitfeld
NYT, August 22, 2010
http://www.nytimes.com/2010/08/23/business/economy/23decline.html
See also:
Housing Diagnosis: Still Weak (WSJ)
Housing Slide in U.S. Threatens to Drag Economy Into Recession (Bloomberg)
Tweet
Facebook
Reddit
Digg this!
August 23rd, 2010 at 7:37 am
Would you say that an overpriced but unique architect-designed home would qualify as a unique exception? Should a guy be willing to punch a little above his weight in that instance?
August 23rd, 2010 at 7:50 am
“Lastly, I must always remind people that there are no such things as toxic assets — only toxic prices.”
Chernobyl???
Anyways, there’s a website, http://www.condo.com, which allows one to search by “price drop — newest to oldest”. On 8/12 I searched for Skokie, IL., and it returned 47 listings with price cuts in the last 21 days. Yesterday I searched again, and it returned 97 listings with price cuts in the last 29 days (out of 635 listings total.) I am inclined to believe a flush is very much in progress now (post tax credit expiration) and am curious where prices will be next spring. Of course bank lending and approval are a HUGE influence, and a friend living in Seattle (he and wife both with 6-figure incomes) are being asked to put 20% down on a home currently listed for sale at $750k. I advised him to wait until next spring as I sure don’t see the market turning that fast.
August 23rd, 2010 at 8:02 am
BR noted:
… Housing problem, which remains poorly understood by many.
reply:
—————-
Please elaborate. What aspects are still unclear to these people? Understanding this would provide insight into other financial behaviors and beliefs. Thank you.
~~~
BR: See these posts. There are 1120 of them, please read and report back your findings.
August 23rd, 2010 at 8:31 am
Seriously Dead Hobo?
After years of dead on, prescient, money-making fucking housing posts, you have the balls to ask that?
(THIS is the comment that got ME to register)
August 23rd, 2010 at 8:33 am
” We remain 5-15% overvalued n home prices nationally;”
I think that is too generous, and fails to anticipate continued wage deflation.
~~~
BR: I am only going by the historic relationship between income and other such factors. And that is just to fair value, not careening past it (which could happen)
Wage deflation is a forecast, and I don’t want to make a forecast based on a forecast based on forecast . . .
August 23rd, 2010 at 8:43 am
The rent vs buy calculations is more influenced by anticipated appreciation rate than anything else so you really have to have a crystal ball to get that decision right.
Personally, I factor in a 0% appreciation rate over the time horizon I’m looking at (7-10 yrs) and I still think that is bullish relative to todays interest rates. If you think prices will drop then you really have to be overpaying on rent for it to ever make sense.
NY Times has a good Rent vs Buy calculator:
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
I’ve been looking to buy over 4 years now, I’ve only seen a small handful of houses that if you squint really hard make financial sense. I’ve bid on every one of them (20% down, 800 FICO) and was beat everytime by someone with a FHA loan (3.5% down and I am assuming relatively low FICO) who overbid.
Since the tax credit expiration I’ve noticed a lot more price cuts. It looks like the line being sold to the existing home owner with equity is the following, find a house you like to trade up to and then put your home on market. If the house you want to buy cuts price, match it with a price cut of your own until your house sells so you can buy the home you want.
~~~
BR: Appreciation should not be a factor in Buy vs Rent math. Its simply a cash flow analysis. Any appreciation is gravy . . .
August 23rd, 2010 at 8:45 am
Two comments:
1. According to Shiller, many home buyers are still as stupid as they were during the bubble and expect 10% annual appreciation of house prices.
http://www.calculatedriskblog.com/2010/08/report-home-buyers-remain-optimistic.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
This also seems to be the case among the house flippers from what I can see in my area of Houston. I saw sales for prices in my neighborhood way above what is justified by the many for sale and for rent signs around. This is in the $300k range. Couldn’t figure it out until I saw the work being done on them and the signs out. They are being bought by builders who are redoing them and in some cases sinking big bucks in from the scale of the work being done. I suppose they are trying to repeat what worked 5 years ago, counting on a V shaped recovery
2. Whether it works in the long run or not, I don’t know, but another area being exploited are residences auctioned off for a song and bought by investors to turn into Section 8 properties.
I had heard that investors were competing with first-time buyers at the low end in the bubble areas, but figured the investors were just trying to catch a falling knife as we don’t know where rents will end up on the low end. What’s really going on was explained in a recent story on the CNBC site about a Sec. 8 participant living in a luxury townhouse with her 2 kids.
Snooping on a black sheep niece made it even clearer. She’s disabled and living in Phoenix with a bum. The house is in a neighborhood of single familty homes. The appraisal at that address shows that it was appraised at $150k a few years ago. The current owner bought it for $35k from the bank. He’s now collecting over $1k/month from Section 8, which ain’t a bad return on investment.
The longer term monkey wrench to these investment could be either competition in the Sec. 8 market or the unwillingness of the possible GOP house to spend money on Section 8.
August 23rd, 2010 at 8:47 am
“…something special: Beach front, lake side, mountain view, etc. kind of place that cannot easily be replaced or reproduced”
Except that you cannot find a good price on those. Lots of people are thinking the same way.
~~~
BR: You can find good prices on them, just not GREAT prices . . .
August 23rd, 2010 at 9:16 am
Running on little sleep, I forgot the main point I intended to make earlier: the mortgage tax credit is of little value unless you have a really big mortgage and are in a high marginal bracket. I know this analysis won’t apply to you rich guys up in the Northeast with high prices, high incomes and big mortgages, but am talking about median prices.
The standard deduction for married filing jointly in 2009 was almost $12k.
On a $200k house (which I think is higher than the national median) with a 20% down payment, the total payment won’t be a lot more than the standard deduction so the interest payment is less. You can’t take the standard deduction and the mortgage interest deduction, so for most people it’s not going to matter. Even if you contrive to pay more interest with a bigger mortgage, you only benefit to the extent of your marginal tax bracket times the difference between interest payments and the standard deduction.
This analysis ignores local property taxes which can be deducted if you itemize, but it’s still not going to be a great benefit. The average person isn’t going to get a deduction of more than 25% of the difference between interest+taxes and the standard deduction. And, the interest payment decreases over the life of the mortgage while the standard deduction will likely rise.
August 23rd, 2010 at 9:18 am
Re: unique properties, I always like to try to separate the “investment value” of a home from the “consumption value.” The consumption value is essentially the value of having a (perhaps nice) place to live, and your degree of enjoyment of the place figures into that. You estimate this value more or less as an annuity of tax-equivalent rent.
The investment value is the idea that buying the place might make you wealthy through rental or capital appreciation. The key to acting on investment value is that you have to be willing to stop your consumption (or throw out tenants) in order to realize any capital gains appreciation down the line.
So take the price of the home, subtract the PV of the consumption value, and decide if the investment value is a bargain or not, given the risks.
August 23rd, 2010 at 9:22 am
One important plus for real estate investment is being able to borrow at negative real interest. The definition of the latter is controversial, but I would suggest that any interest rate less than the long-term future growth rate of nominal GDP will probably turn out negative.
For me the intuition that present borrowing rates are favorable is confirmed by the observation that individuals can get a 30-year mortgage loan at finer rates than fine companies like GE or Bank of America can get for long term unsecured borrowings.
Obviously, favourable finance does not obviate the influence of location and purchase price. “Unique” may be key in the the market for millionaire homes (bought with surplus capital) but perhaps less important in the market for homes being bought through one or two salaries, whose upside will always be limited to a multiple of median salaries. For those in the latter market, I would presently look for developments that feature useful communal goods (relevant commuter rail link, optimised infrastructures say for broadband or communal ‘green’ energy…, etc.).
August 23rd, 2010 at 9:25 am
My take is simple… Over very long periods of time, home prices have averaged 3x income. During the boom years, they went to 5x. As with any boom, you would expect them to overshoot significantly to the downside to, say, 2x.
August 23rd, 2010 at 9:28 am
“that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg”
A plump nest egg? I don’t understand how this statement gets repeated over and over by the so called experts as gospel. The home you live in is never and investment. The only reason there was a “wealth factor” in housing was due to paper appreciation that allowed for HELOCs and credit expansion. To say that the house you live in is an investment is preposterous. Now, investing in RE (multiple homes) to sell was due to suckers who believe on the “home as an investment” mantra and were willing to pay whatever asking price (or be price out of the market for ever…).
As for the statement: “My answer to that was the time to be an über-bear on Housing (or anything, really) is before the collapse — not afterwards.”
That is probably true on some very selective “samples” out of a busted universe. Did all dot.com sector stayed depressed after the collapse? (yes most of it)
August 23rd, 2010 at 9:34 am
Owning a house is a life style choice.
August 23rd, 2010 at 9:34 am
“…something special: Beach front, lake side, mountain view, etc. kind of place that cannot easily be replaced or reproduced”
Except that you cannot find a good price on those. Lots of people are thinking the same way.
Location,location, location
There’s only one Manhattan San Fran etc but there will always be another FL highrise condo or gated community being built thats at least as nice and affordable as the empty highrises and gated communities down the street. The areas that overbuilt in the sand states contributed to the bust with their permissive bias and now with sky high unemployment in those areas they’ll continue their permissive bias. There’s a push & pull between the interests that already have their piece of the pie and the developers and newcomers.
August 23rd, 2010 at 9:37 am
If we have another pronounced down leg in RE then we’ll zoom past the double-dip discussion back to Great Depression II debate.
BB has stoked and stroked the SM but if people see their #1 asset value tanking again they’ll go turtle. The big motgages lenders who are on the hook for zillions in underwater morts will be back seeking exceptional relief
August 23rd, 2010 at 9:38 am
ZackAttack – yep.
3x to 5x was a 60 pct increase.
5x to 2x would be a 150 pct drop.
Prices have dropped about 30 pct.
The floor has not been found, and I see an entire years worth of inventory to prove it.
August 23rd, 2010 at 10:08 am
In a slightly related note, the stupidity of private equity is once again shown by Blackstone’s investment in with a Chinese developer in a project for about a 1000 new luxury homes and hotel rooms. Nothing like getting in on the ground floor.
Looks like today is a risk-on day. No big news coming out, so there can’t be bad news and the M&A news brings back memories of dot.com profits. Of course, more mergers and acquisitions means more job redundancy and cuts.
August 23rd, 2010 at 10:15 am
For those of us who are used to thinking in terms of numbers, your primary residence is a decision that goes beyond that. As BR mentioned in his write-up, school choices are a huge deal, and not always tied to RE values. Knowing what I know now about buying homes, it makes very little monetary sense to buy a home, particularly if you are in my tax bracket (lower) and move relatively frequently (every 5-8 years). We should have rented a lot longer back in early 04 when we bought, but we bought on the low-mid priced end of homes, so we haven’t lost value, and may have slightly appreciated since that time.
But being able to put a trampoline for a little girl to play on in the backyard sure is a nice feature of owning versus renting.
August 23rd, 2010 at 10:41 am
[...] great news for real estate investing does it? But Barry Ritholtz, who is quoted in the article, had this to say afterwards on his blog: It is safe to buy 2 kinds of properties right now: The first is simply [...]
August 23rd, 2010 at 10:43 am
Everybody seems to focus on the investment implications of housing, US & tax stimuli but the employment component of the equation is key too, the labor & materials going into residential construction is much more domestic than most other segments of our economy, the labor is all domestic (ignoring the illegals) and the construction materials are mostly local I think (notorious Chinese sheetrock excluded!)
If residential construction is going to be in the dumps for a protracted period then employment especially in the sand states will be piss poor.
An unvirtuous circle.
August 23rd, 2010 at 10:44 am
> • Housing over the past century managed to just outpace inflation (by 1.1%, according to Shiller)
I would like to see how this treated tax deductions, property taxes and maintenance costs in the analysis/modeling.
August 23rd, 2010 at 10:47 am
“But being able to put a trampoline for a little girl to play on in the backyard sure is a nice feature of owning versus renting.”
I’m sorry how does renting prevent you from putting a trampoline in the backyard? Should I go take mine down because I’m renting?
August 23rd, 2010 at 10:50 am
not only is it no longer a wealth –builder it will strangle the retirements of tens of millions. That should be emphasized. Boomers are retiring with paid off homes but little or no retirement savings and that was when we thought somewhat rising wages and employment were a given. No way is the average middle class person going to be able to pull off both paying off a house and funding retirement accounts going forward. Put it this way the more people buy homes, squandering terrific investments oppourtunities (by comparison), the more pressure it’s going to put on the govt’s long-term entitlements liabilities.
August 23rd, 2010 at 11:01 am
“Housing: No Longer A Sure-Fire Wealth Builder”
No shit, Streitfeld.
August 23rd, 2010 at 11:08 am
Is it just me or is the market sending out major signals here, that its about to take a big dump. It just seems to ez, but in times like these i guess you really shouldnt over think it. Does anybody know what the bear/bull stats are. Is bearish sentitment really that high or does that not really matter either?
August 23rd, 2010 at 11:10 am
‘ how does renting prevent you from putting a trampoline in the backyard? Should I go take mine down because I’m renting? ‘
If you are renting one of my houses you had. It is written right there in the lease, no swimming pools and no trampoline.
It is an insurance issue, my liability insurance excludes both.
Jack
August 23rd, 2010 at 11:11 am
@Effective Demand Says:
“I’m sorry how does renting prevent you from putting a trampoline in the backyard? Should I go take mine down because I’m renting?”
Well you never ask me for permission so yes take down you non-home owner pariah.
@rktbrkr Says:
“If residential construction is going to be in the dumps for a protracted period then employment especially in the sand states will be piss poor.”
Best thing that could happen for a “housing recovery” would be for many builders to go under to stop supply. However, the government kept that from happening because capitalism for the oligarchs is just so un-American
August 23rd, 2010 at 11:17 am
And in addition to the trampoline,
no you may not paint the livingroom lime green and put papermache clouds on the ceiling.
Home owners get to do so much more to their property than renters.
Jack
August 23rd, 2010 at 11:20 am
At least here in the northwest suburbs of Chicago, there are very few decent single-family homes for rent. At the peak of the housing bubble there were almost none at any price, as nearly every home that might once have been a rental had been bought by a flipper and was undergoing rehab.
Although the MLS now lists many home nominally for rent, the asking rents are what the owners of the vacant property need to cover the mortgage and taxes on the excessive price they paid at bubble peak, so most of the listings in the upper-mid-scale range are many, many months old. They’re not really for rent — you can buy more house for a much lower monthly payment at today’s prices.
August 23rd, 2010 at 11:23 am
Barry,
you say:
I would concur with you regarding markets like Miami, Las Vegas, or San Diego that this is the time after the collapse, although there could still be some more downward pressure taking into account hat the economy is falling back into recession mode, currently. But how do you see this for the NYC market? Have we been after the collapse already? Here I rather doubt it. Perhaps you don’t see it as much, since you are rich, and I’m only someone with the salary of an academic working his/her ass off for the good of humankind, so for you it’s just a matter of choice to buy or not to buy a 2-bedroom apartment for 3 million dollars (or any other x-bedroom priced proportionally), for me it’s not. Median price to median nominal household income in NYC is in the range of 11 to 13, currently, and price to rent ratio, if one compares listings in the same building, are in the range of up to 20. The historically normal price to income ratio for NYC is more around 6 to 8 (but not the national average of 3 to 4). This implies a coming decrease in the price to income ratio of about 30 to 50% for NYC over the next years, either by decreasing prices, increasing nominal income, or a combination of the two. I’m rather optimistic about prices in NYC over the next 5 to 10 years. It is said that there was a glut of more than 8000 empty condos in Manhattan, many new constructions, and that builders are running out of their reserve funds, and that NYC was at the point where Miami was in 2008. This will be in favor of further significant price decreases in the NYC area. Hopefully.
August 23rd, 2010 at 11:39 am
Sloppy thinking on the ‘mortgage deduction is a reason to buy versus rent’. All the mortgage deduction does is reduce your effective interest rate, they’re subsidizing your mortgage loan is all, so to be a comparison you simply compare the cost of ownership including the deduction, that’s all. It’s not an a priori justification to buy.
Furthermore, by the fallacy of composition, because everybody can take that deduction all it does is raise the price of houses nationwide. Zero sum.
August 23rd, 2010 at 11:49 am
Deflation Dan:
I think you are looking at the deduction askew. The deduction effectively reduces your total tax payments each year.
Assume you apportion $XXXX dollars per month of income to shelter, and your choices are own or rent. To grossly over-simplify, someone in a 33% tax bracket with a $1500 interest payment of their monthly mortgage is roughly the equivalent of a renter paying $1000/mo.
August 23rd, 2010 at 12:08 pm
It will be nice just to get back to where being a homeowner doesn’t cause wealth destruction …
think about all those hard earned $ put into home improvements
new granite counter tops, appliances
new flooring
upgraded trim, fixtures, lighting, drapery …
new roof
landscaping
add on garage, shed or room
…. the money pit …
If are now caught in the situation of either losing the home to foreclosure or otherwise forced to sale to buy down or rent, the bank thanks you for all of those upgrades.
With the decay in home prices all of those $$ towards improvements were the first to evaporate … might as well have bought an overpowered garbage disposal and tossed in the money.
August 23rd, 2010 at 12:12 pm
Barry,
Can you explain what the Schiller figure of housing outpacing inflation by 1.1% means? If it means that an existing house that’s 30 years old is today valued at 1.1% per year higher, inflation-adjusted, then this number is missing three important factors: first, cost of repairs made to the house; second, depreciation; third, real estate taxes paid.
If the Schiller figure just compares the cost of a house today to one years ago, then they’re comparing apples to oranges, as today’s houses are larger, on average, and constructed differently.
And finally, there’s two components in housing price. Cost to build, and land cost. Land cost increase is at least partly due to the huge increase in the US population, so while the growth rate may decrease, total US population is unlikely to reverse and go back to what it was 50 years ago, though an increasing percentage of the population will likely be living in one room in nursing homes in the next few decades.
August 23rd, 2010 at 12:13 pm
“@Robespierre Says:
Well you never ask me for permission so yes take down you non-home owner pariah. ”
Since when do I have to ask for permission? If it is in the lease as whskyjack I can understand but my lease is a boiler plate one from a large landlord association and has nothing of the type in it.
As to the non-home owner paraiah comment, You seem to have a need to think you are better than someone just because you own a house, it’s fascinating. Personally I can own a home, it looked like very overvalued and so I didn’t buy. It’s turned out alright for me hopefully your homeownership has worked out well for you because clearly your ego is wrapped up in it.
@BR
I agree appreciation shouldn’t be factored in the rent vs buy decision. As I said when I do mine I factor 0% appreciation. But as far as looking at it strictly on cash flow basis that only makes sense if you are going to pay off the mortgage, otherwise you have to factor in the possibility of depreciation because you will be on the hook for the difference if you have to move. It makes for a conservative purchase decision, as it should be, but out here in the Wild West it is clear people aren’t thinking like that, they are living very close to the edge hoping not to fall off.
August 23rd, 2010 at 12:21 pm
“As to the non-home owner paraiah comment”
I read the remark as a bit of snark not meant to be taken seriously, your milage may vary.
That is the problem with text, you can never see the grin or the wink :-)
Jack
August 23rd, 2010 at 12:24 pm
In the location, location, location formula for value appreciation, the changing income demographic trends in the USA, unless reversed, do favor certain areas. If an area or town caters to those in the 99th percentile for income, and is fully built-out, prices will probably continue to rise over time at a rate higher than inflation.
August 23rd, 2010 at 12:32 pm
@whskyjack The thought definitely crossed my mind, lets just hope that is the case.
August 23rd, 2010 at 12:39 pm
Recent headlines about the death of R/E, the abandonment of equities by small investors, the supremacy of bonds and / or gold all have me thinking maybe we’re going to see a change reasonably soon.
Just waiting for the “Home Shi**y Home” cover on a major magazine.
Rest assured if that opporutnity knocks, I’ll ignore it.
August 23rd, 2010 at 12:44 pm
In 2006, we sold a house in a nice, urban market. We’ve been renting in a much, much more expensive market since then at a rental rate roughly 1/4 to 1/3 of what the payments on the mortgage/taxes/insurance would be. We’re in the ideal school pyramid for my kids, and when they threatened to redistrict my kids to a different elementary school, I picked up and moved to a different rental house to stay in the same school. If we lose a job, or something else happens, we cancel the lease and move back to where it is cheaper. The flexibility of renting instead of owning, even in this very healthy (and actually appreciating) market has been worthwhile, even if getting the evil eye from the owners of million dollar houses up at the school has been somewhat trying. That, and the value of renting in this neighborhood is flat-out insane compared to that of buying.
But I strongly suspect that the powers that be will still find a way to screw me – like somebody will declare a general jubilee, and I’ll end up the only person without a house free and clear.
I cannot conceive of buying a house at present. Sure, there are benefits to owning – among them not having to move when you are told to. Among them putting up whatever amenities your children desire. But the end of mobility occasioned by the changes in the housing market has profound costs, and renting is the only way to reliably avoid those. I also cannot see the utility of purchasing a huge asset when the current conditions in our economy seem to call for keeping one’s powder dry. And finally, $600,000 for a 1500 sf house is just insane – full stop. Until the prices come down, I can’t wrap my mind around buying a house here when I can rent it for a fraction of the cost. That last one is just the country girl in me talking.
August 23rd, 2010 at 12:46 pm
Re Trampolines and other rent-vs-buy talk:
When I rented a crappy New England appartment with leaky windows I put shrink plastic over the windows in the winter.
When I owned a crappy old New England house with leaky windows I replaced them.
When I could afford it, I bought a McMansion in a South Eastern US cookie cutter neighborhood. R40 insulation just to hold in my central AC.
August 23rd, 2010 at 12:53 pm
Dead Hobo@8:02
According to the article people purchasing in SoCal are convinced that house prices will increase 10%/year in the next decade. Sort of a self-selected group (they are the once purchasing now), but a clear indication of substantial misunderstandings regarding house prices.
August 23rd, 2010 at 12:55 pm
1% above inflation seems reasonable, however I wish to point out two points that make this expected return far more bullish than readily apparent.
1) This is tax deferred
2) Fixed income(consider the ten & thirty year long bond) as well as equities, may not do nearly as well.
August 23rd, 2010 at 1:18 pm
Barry,
Not sure if you will see this…
I am in the market in West LA. Somewhat in the category of “unique.” Any regional or even finer detail data sources you can point us to? Actual Realty Trac press releases would be great, but I could not hunt one down last week.
August 23rd, 2010 at 1:33 pm
http://www.youtube.com/watch?v=XjSVRsoBYNY&p=88F383992BA88F3B&playnext=1&index=14
August 23rd, 2010 at 1:38 pm
BR-
dude- what of the Standard Deduction that is forfeited once you itemize your deductions? @ 5% on a $250,000 mortgage you get an interest deduction of $12,500- but you forfeited a standard deduction of $11,400 (married filing jointly)-
$12,500 minus the standard deduction of $11,4oo = $1100 net deduction. @ 33% tax bracket = $363 yearly tax savings- and then we divide by twelve to get the big savings in cash flow of $30.25/mth-
AWESOME savings!!!!!! Where do I sign to get in on a depreciating asset so I can save the big bucks?
kind of reminds me of the the sales pitch- “the more you buy- the more you save”
you have to look at the whole picture there BR- you know- The Big Picture
August 23rd, 2010 at 1:59 pm
@effective demand
You are also “assuming” that ashpelham2 was renting a house. For all you know, he was renting an apartment and so putting a trampoline in his back yard was not an option.
August 23rd, 2010 at 2:04 pm
“…Bring in 3 million qualified home buyers from abroad and the Housing issue goes away…”
I wonder how many racist morons protesting against the Cordoba House in NY would be angry at a Muslim computer programmer moving in down the street and keeping that empty house out of the hands of crack dealers? … Hmm… let me think… I guess they’d have to stand on principle, at least until the election is over.
August 23rd, 2010 at 2:24 pm
Mike in Nola Says:
the mortgage tax credit is of little value unless you have a really big mortgage and are in a high marginal bracket. I know this analysis won’t apply to you rich guys up in the Northeast with high prices, high incomes and big mortgages, but am talking about median prices.
This doesn’t make sense since 8 grand will be a larger percent of a smaller amount. My tax credit (well hopefully – I’m still waiting for it) should cover 5% of my mortgage amount. The graph also does not take into account that rents may be currently artificially inflated as well as home prices. We were forced to buy a home because of the insanely high rents. 1200/month for a townhouse in rural VA is ludicrous! We paid half of what other homes are currently selling for around the corner. I still feel “good” about the purchase.
August 23rd, 2010 at 3:08 pm
Effective Demand Says:
August 23rd, 2010 at 12:32 pm
@whskyjack The thought definitely crossed my mind, lets just hope that is the case.
And that was actually my intention. I believe that the mantra: “home you live-in is an investment” is crap push by interested parties (REs, builders, banks, etc) to make money from a gullible public. The fact of the matter is that most people’s homes are a “buy and hold” medium to long term. Does anyone here actually think that the majority of the home owner population will make any real money out of their own home? Now that the baby boomers are retiring they will all trade down and pocket the difference? In my opinion nothing proves to be a good investment until you sell and realize your gains – Most people didn’t do that about their own homes and were never wealthy!
August 23rd, 2010 at 5:29 pm
[...] Ritholtz makes roughly the same point in a different way: “I was surprised when he mentioned I was one of the more bullish housing analysts he spoke [...]
August 23rd, 2010 at 5:48 pm
‘..home ownership will never again yield rewards like those enjoyed in the second half of the 20th century..’
Some of the factors over looked IMO
1. Debt induced demand with easy credit especially after 1997.
( Canada still doesn’t allow mortgage interest deduction, hence their housing bubble is not as precarious as here. Plus no sub-prime securitization!)
2. Preferential tax treatment for capital gains for minimum 2 years stay in between switch from lower to higher ones
3. Mortgage deductible deduction exemption from AMT, encouraged upgrades to McMansions, retaining all tax advantages (up to now, at least)
4. Demographics favoring with house hold formation with Baby Boomers, with reverse trend now.
5. Easy mobility due to sustainable Economy on average through out Nation, until Globalization’s impact on labor wages.
The above factors acted as TAIL wind and NO MORE, going forward!
August 23rd, 2010 at 8:07 pm
A few points:
Demographically, housing will not recover for a generation. Why? Because the largest chort in history are entering their retirement years, (many are jobless or underemployed) and will be selling their houses as the years go by and few have enough savings for retirement under any scenario.
Who would be their natural buyers? Their children. Those children now make up another huge cohort of the unemployed, unable to save for a home, and saddled with enormous student debt. Every year that they remain jobless is another bad year for housing as the income cannot be replaced.
When the last housing meltdown took place 1988-89, it took 4-5 years to restart the housing market and for prices to rise in my suburb.
What we are seeing is a downward spiral that will take decades to break.
Also anecdotally, we just sold our vacation home, whichis a unique property, and one of the few homes sold almost at the initial asking price. Other homes in our area are being marked down by the hundreds of thousands in some cases because everyone wants to sell and not have to carry that vacation house another year and sell it for less next year.
In my home suburb, some new and newer houses are selling, but most are being marked down $200-400k on average just to move them. Mostly 90′s era. On Trulia it looks like a bloodbath.
So there is good and bad, mostly bad. And I don’t think conditions will change for a long time.
August 24th, 2010 at 1:09 am
@ Call Me Ahab,
You’re pretty spot on on this one. You just forgot to mention that you’re going to spend that $363 replacing the water heater this year, the dishwasher the next, and combine the two years after that to fix a leak in the roof, all things that would have been fixed for free with your rent.
To be fair, your rent will probably go up faster than your taxes, HOA dues, insurance, etc. combined, but the bottom line is that for us mere mortals not in the top tax bracket, the math isn’t very pretty. At today’s interest rates, that tax break really doesn’t kick in on the first $150-$200K worth of home, which is how much home a large portion of home buyers are looking to buy. I say that instead of $250K because the truth is that you’ll probably get to deduct a few thousand that you wouldn’t have otherwise (e.g. state taxes, car registration fees, etc.), so maybe that $363 on $250K home turns into $1000 once you pile on those additional deductions. But it’s still not that unreasonable to think that you’ll put, on average, $1000 in repairs and maintenance into a $250K house every year since for every few $300 years there will be a $3000+ year when you need to replace a furnace or A/C, roof or carpet or similar big ticket item.
I totally agree, Occam’s Razor that some are applying doesn’t work for this for the married middle class (as defined outside of California and the Megalopolis) once you factor in giving up a big standard deduction. It works OK for a single guy or gal making $80K a year buying a $240K home at 3x income, but that’s easily pushing into upper middle class. That’s not the norm. I’ve been thinking for a while that this deduction is beyond it’s usefulness at this point. We’d be far better using that money to fund (hard to outsource) homeowner energy efficiency improvements that would actually create jobs, since the new build housing market isn’t going to be creating jobs with or without the mortgage interest deduction.
On a completely unrelated note, I think a lot of things are afoot, culturally, that will only further depress single family home prices. The generation that will be doing the buying on the low to middle end of the market is less interested in living in the burbs than the generation selling, which translates to more condos and less SF houses once condo prices come down and urban land owners capitalize. Many, but certainly not all, burbs are becoming the place where the “unwashed masses” of the lower-middle and lower class can rent without a landlord telling them what to do. Plus they get to send their kids to the “good” public schools. The college graduates with jobs are looking in city instead (they’ll be using their commute savings to send their kids to private school, because they know how bad those supposedly “good” schools they went to have become). I definitely see a reversed trend, a kind of reverse “white flight,” though the name may no longer apply since it’s less about race and more about social attitudes (for example, it may be college educated people of all colors getting away from “white trash” instead of whites getting away from blacks as it was in the past). Intolerance cuts both ways. I don’t necessarily agree with it all, but that’s how I see it playing out. I think this will become an important factor in years to come. After a few decades of urban renewal, the cultural makeup of several inner cities are looking more like the burbs and vice versa. Location, location, location, right?
August 24th, 2010 at 3:50 am
So, I was thinking about money in my family and when I first started trading the stock market in 1990. I was studying Real Estate but was interested in stock and options. One of my uncles who is?/was a labor law attorney with a pretty high net worth was telling me, “most everyone he knows who is self-made did it in Real Estate.” I have a couple other wealthy uncles who amassed their wealth as builder/investors in the 80′s and 90′s and pretty much retired before the Big boom. All have houses and investment property in different parts of the country. My Grand Father was the stock and oil investor in the family who grew up during the depression. He had a investment strategy similar to Warren Buffet (very industrialized). I think he memorized the WSJ every morning. As the 90′s progressed the stock market was always the hot topic at family events. After Gpa passed away in 2006, we had all been out of touch. We had a family get together last weekend and I was curious to know what everyone was doing with their money. So I made the rounds and did some math. It seems other than RE (which is paid for) most of the wealth concentration in my family is basically 90% cash and bonds, 10% stocks. Which is a complete 180 from 1992-2006. The problem here is, the money in cash and bonds isn’t going back into stocks, it is not sitting on the side-lines waiting for a dip. These people could care less what the market or economy are doing anymore. They are getting older and are comfortable with their wealth, following the climate to their most comfortable residence enjoying themselves. Maybe the next generation will inherit their wealth and put it into stocks. But, everyone is still fairly young and healthy, so that isn’t going to be happening any time soon. I don’t think this is just an anomaly in my family. So my question is, other than foreign investment, and the fed, with all of the other economic turmoil, where are the catalysts that are going to be expanding our equity valuation models going to be coming from,?
I liked this quote on truth
If you cannot find the truth right where you are, where else do you expect to find it? ~Dogen
August 24th, 2010 at 9:39 am
Something to consider as we await today’s NAR shoe drop…
Immigrants Can Help Fix The Housing Bubble
by Richard S. Lefrak and A. Gary Shilling
I mentioned this in Bailout Nation, and yesterday morning wrote:
“Housing has problems with both too much supply and not enough demand. Bring in 3 million qualified home buyers from abroad and the Housing issue goes away.”
Mauldin mentioned this here
August 24th, 2010 at 4:41 pm
[...] Next up: My Caribbean cruising buddy Gary Shilling, in the WSJ OpEd pages last year. (hat tip). [...]