Misunderstanding the Rent vs. Buy Dynamic
There seems to be an underlying misunderstanding about the US Real Estate market — how it functions, the psychology of buyers, and its current problems. Today, I want to take a long term look at these fundamental issues, and put them into some context.
The cause of these thoughts are a pair of studies: The first from Zillow that looks at home values by community, and finds that “Home prices in some of the nation’s hardest-hit metro areas have fallen far below pre-bubble levels, stirring concerns that properties in those markets are undervalued.” The second is a similar study from Trulia looking at the rent vs buy question.
The original WSJ web article had a rather surprising headline: Something like “Are Homes Undervalued?” — thats gone now, replaced with the circumspect Linkage in Income, Home Prices Shifts. But the editor who penned the descriptor may be misguided: “Home prices have fallen below “fair value” in one-third of nearly 130 housing markets examined in a study by real-estate firm Zillow, raising concerns that some housing markets have over-corrected.”
There are several reasons to be concerned about housing at present: First, any economic deterioration, especially a recession accompanied by further job losses, will start another leg down in Housing and an accompanying set of bank balance sheet problems. Second, many asset classes recovering from a Boom & Bust cycle do not simple revert to fair value but often careen wildly past it towards a deeply undervalued state. Third, following a debt crisis, consumers spend a decade or more deleveraging, and tend to downgrade purchases that involve taking on more credit — like a mortgage. Last, any former investor favorite that suffers a collapse can take a long time to recover investor confidence. Its been more than a decade since the dotcom bubble popped, and the Nasdaq at ~2,500 is still off its bubble highs by 50%.
Recall our three favorite metrics for valuing homes:
1) Median Income versus Median Home Price
2) Valuation of Housing Equity as Percentage of GDP
3) Cost of Owning versus Cost of Renting
The first two show that nationally, home prices remain elevated — Zillow pegs Prices at 3.3X Income — about 14% above trend. It varies dramatically by region, with broad differences in median income, economy, and home values. Only the Rent vs Buy metric shows homes cheap, and there are specific reasons not to trust that measure:
• Appropriately Tightened Lending Standards have removed millions of potential buyers from the market.
• Desire for Mobility (or a fear of the lack thereof) may be keeping buyers as renters; Flexibility of tenting allows employees who may need to relocate to obtain better jobs. The fear is getting stuck with an underwater home that is potentially worth less than its mortgage and prevents a job seeker from relocating.
• Deflating Asset: There remains a fear of owning an asset that is falling in price.
• Down Payment Requirements — having the cash to put down on a home purchase is beyond many families abilities. Consider that a mere 20% of $200k homes is $40,000 in cash –far beyond what most families have sitting in their bank accounts.This is beyond the tightening credit qualifications.
Consider the WSJ’s take:
“For the U.S. as a whole, home prices were around 2.9 times incomes from 1985 to 2000. But during the housing boom, values increased at a much faster rate than incomes. The price-to-income ratio peaked at around 5.1 in 2005. Home prices have since fallen so that on average, nationally, prices are around 3.3 times incomes, or about 14% above the historical trend.
Of course, prices have fallen much faster in certain markets. In Las Vegas, home prices are now 25% below their historic price-to-income trend of 2.7. During the housing bubble, that ratio more than doubled to 5.6. Home prices have been falling for the past five years, and by March, prices were just 2.1 times household incomes.
Home prices are undervalued by 35% in Detroit; by 18% in Modesto, Calif.; and 13% in Fort Myers, Fla.”
Detroit is a perfect example of why valuation cannot be considered without understanding the broader context: The Motor city has become The-No-Mojo city, with an exodus of jobs and people leaving the state. The valuation metric based on historical data provides little insight as to the prospects for a real estate recovery anytime soon.
Its the Macro economy, stupid.
The bottom line: The time to be generally optimistic about housing is not yet here . . .
>
Trulia: The 2011 Great Debate — Rent vs. Buy
click for interactive graphic
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WSJ Interactive: Price-to-Income by Metro Area
click for interactive graphic
>
Sources:
The 2011 Great Debate — Rent vs. Buy http://insights.truliablog.com/vis/rent-vs-buy-q3/
Linkage in Income, Home Prices Shifts
NICK TIMIRAOS
WSJ, AUGUST 17, 2011
http://online.wsj.com/article/SB10001424053111904253204576512532609819142.html
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August 17th, 2011 at 7:34 am
Actually I think he’s on to something here. 2008 and resulting carnage tended to make all those with the ability to infuse large amounts of “capital” into the housing market to get very short arms.
And rightly so.
But what is actually needed “here” , at this moment in the cycle and history , is a return to relaxed lending standards.
Yes I know. Sacrilege. I write what needs to be written.
Stop punching holes in the dream that once was Rome
August 17th, 2011 at 7:58 am
In terms of the trough after the last bubble cycle (mid 1990′s prices) residences remain highly inflated.
August 17th, 2011 at 8:01 am
much to ‘budhak0n”s Point, above..
“…One of the incentive program’s popular provisions offers qualified buyers down-payment assistance for homes purchased with a mortgage, as well as a second mortgage of as much as $25,000 that can be used to make down payments and pay closing costs. Buyers of new homes also pay no transfer taxes when a property changes hands, escape paying property taxes for five years and future capital-gains taxes, and pay no taxes on rental income for 10 years. Sellers don’t have to pay capital-gains taxes on profits.
One major goal of the program is to boost demand for the nearly 10,000 vacant homes scattered across the island. Some are foreclosures; others are new condominiums left over from the nation’s construction boom….
…Puerto Rico says the infusion of government funds into the housing market is starting to trickle down to its population of about four million. For the first time since 2006, the commonwealth closed its fiscal year, which ends June 30, with a net gain in jobs…”
http://www.prfaa.com/news/?p=1713
LSS: if the FedRes/USTreas can ‘suspend *Reality’ for the TBTF, We, might, as well, do it for “unter-99%” …
also, this is a great ex. of the Virtues of ‘Republicanism’ — the ‘Republic’ Form of Government … ~a confederation of “Petri Dishes”, each, trying to Culture a “Cure”..
August 17th, 2011 at 8:02 am
“The bottom line: The time to be generally optimistic about housing is not yet here . . .”
Agreed. But I suggest that you have left out an important item relating to the Rent vs. Buy issue- the highly contingent nature of ‘ownership’ in this economy. There exists a permanent lien on residential property in the entire country- whether it’s under a mortgage or wholly-owned. This lien is the hyper-risk implicit in participating in an economy under the sway of kleptocracy as standard operating procedure. The level of criminality at the municipal level is unbelievable. Tipping point has already been passed- we’re just in denial. Bon chance, mes freres!
Natural persons should avoid direct ownership. The only defense is corporate personhood- seek to diminish any interaction with government entities as a natural person- in effect you have no rights under the de facto system.
August 17th, 2011 at 8:09 am
hey arequipa0, you sound an awful lot like my uncle in north miami beach with his silly LLC and a boat tied to the dock ready to sail to Costa Rica.
Hilarious. Believe it or not. America is a constant cycle , not just in terms of immigrants coming and filling in neighborhoods but also in terms of who “owns” and supports what actually makes up the country.
Deciding to hide behind a corporate veil , while you rent something or keep your boat gassed up ready to go is a “plan”. It’s just not a very sane one for a future participant.
August 17th, 2011 at 8:10 am
[...] Barry explains the truth about the Rent vs Buy calculation. (TBP) [...]
August 17th, 2011 at 8:13 am
That’s the ticket! Bring back piracy on the high seas but this time instead of the British pilfering gold from Spanish Galleons, we’ll change the game….
We’ll send units into switzerland and spain and france etc, and just go steal back all that gold they extracted out of the north american continent. We could put a whole generation to “work” and revive the american cowboy.
hehe. Screw stocks… GOLD is through the roof. Fa Shnizzle ma Dizzle.
August 17th, 2011 at 8:14 am
Right. I have read this “rent vs buy” argument more and more this year, and wonder where all of the new landlords will come from, if that’s the case. I can’t imagine that many of those that are left with any capital after the carnage of ’08 are willing to be the early 21st century landlords, or, well slumlords. It ain’t worth the single digit cash flow and probable loss of capital.
Two more factors that will keep the real estate market in a Japan style depression for many years: The Boomers, who laddered up and inflated the housing market over the past 30 years are now dropping into their end game, all 70+ million of them, as they turn 65 at the rate of 10,000 a day or the next twenty years. Most of them, with no to meager savings and mucho debt, will have to unload their MacMansions they can no longer afford just to survive. They certainly won’t be buying any new homes. And then there’s the horribly indebted recent graduates, entering adult life with an average of about $23,000 in student loan debt, which is nearly a trillion and rising in total debt for that generation. How will they be able to afford a nice home with that monkey on their back and limited job prospects? Read the sad, sad comments to this article: http://blogs.wsj.com/economics/2011/08/15/student-loan-debt-climbs/ and you may want to dust off that pitchfork and baseball bat out in the garage and march down to the local Sallie Mae office.
August 17th, 2011 at 8:20 am
The solution to this and all of our economic problems is wage inflation and job creation. At the risk of suffering a mental meltdown due to repeating a statement until my head explodes: we have a problem with allocation of “new” money being pushed into the system at the top (where it stays — useless to the indebted and unavailable to the broader economy for growth), and this misallocation is a choice — not an organic development of a “self correcting market.”
When we apply our curative resources to their proper place in the system, and that we will do so is highly doubtable, our debt and monetary velocity problems will disappear, as if by magic.
Yes, the dollar will devalue, but that is a foregone conclusion no matter where the medicine is applied.
The reason we don’t do this, immediately, is also a matter of choice: To settle the unrepayable debt created by the banks would quickly close the wealth/power gap and reduce the banking/corporatist class to relative parity with the remainder of society.
The banking/corporatist class would rather everyone die than to let that happen.
So be it. At least they had a choice.
August 17th, 2011 at 8:27 am
Jobs instability….any purchase today is likely to be a long term one. If anyone loses their job, they are stuck with a house they cannot sell.
Then there are cost of living increases in heat, food and fuel.
Then there are mandatory proper tax and tuition increases despite wages being flat to down.
Finally, there are over a million foreclosures in the pipeline.
Housing isn’t going anywhere for quite some time.
August 17th, 2011 at 8:29 am
Oh come on, you still see this as a class struggle? Not.
The game is adaptability and portability. Take your skill set. Adapt it to the game before you. If you have to move your actual butt, do that as well.
There’s no class struggle unless you’re still bemoaning the demise of main street suburbia.
We spend way too much time worrying about the “past” these days. Leave it where it belongs.
August 17th, 2011 at 8:33 am
We had this discussion here 3 years ago after Steve Barry shared his extrapolation of the Case-Schiller curve post-bubble. His extrapolation conservatively plotted no over-shoot to the down side:
http://www.ritholtz.com/blog/2008/12/classic-case-shiller-hosuing-price-chart-updated/
There is no basis for assuming no over-shoot and an orderly unwinding of the bubble, given all of the variables in play: household deleveraging, employment uncertainty, flat growth, etc. Here’s how Grantham put it in his August letter:
Twenty years is a long time, so most investors think that dipping to fair value for a minute and bouncing is normal. It is, in fact, highly aberrant historically. Markets staying down and washing away a whole generation’s false expectations, high animal spirits, and excessive risk-taking – that would be normal.
August 17th, 2011 at 8:35 am
I also think we are and will be fighting a generational shift. The post war era was good for housing returns and Baby Boomers grew up believing that housing was a good investment based on their parents’ experience. Their kids and grandkids look at our experience of negative returns on housing and don’t view it as a viable investment.
When the Boomers first started their careers, there was an expectation of being with a company for 10+ years. That is not a valid workforce expectation today. And face it, most kids don’t have fixed land line phones. They are set up to live a life with more mobility.
More people believe that home ownership incentives like interest and property tax deductions will be eliminated in the next five years, changing the rent vs. buy equation.
August 17th, 2011 at 8:35 am
MEH,
You find some of the most interesting articles, thanks& congrats!
http://www.prfaa.com/news/?p=1713
Puerto Rico seems to been completely passed over when it comes to sand states RE boom and a nest for snow birds.Puerto Ricans I have spoken to expressed disappointment that their island never benefitted much from the Cuban-US economic divorce. Somehow PR has acquired a lot of bad mainland traits like high costs and high crime rates
I don’t think it would be a comfortable situation for a mainlander to buy a foreclosure in a PR neighborhood where a local family was put out, buying a unit in a condo tower where most owners are not local would be different situation.
At least the local government in PR is doing something.
August 17th, 2011 at 8:38 am
The “game” is rigged in favor of the corporatists. To deny that is to ignore reality.
If the future holds less promise than the past, the smart person looks to the past to find what was different then than it is now.
Skill set?
Tell me how a laborer, secretary, admin assistant, mid-level manager, or factory worker exploits their skill set on an entrepreneurial/independent contractor/freelance basis.
If they want to move their skill sets — along with their butts — to a location where demand is greater, they should consider moving to China.
August 17th, 2011 at 8:52 am
Ok Petey. The “game” is rigged and if you are a person who has gotten to a point in life where you have allowed yourself to be defined by a job title.
Then the change that needs to take place is in you.
Even today , I sit here with 2 kids thinking that the world has changed and that “this” is bad or that sucks.
What I have actually lost is the ability to think like a 20 year old. That doesn’t mean that I’m going to go back on the bar stint and go enroll in philosophy courses while packing bowls and neglecting my kids.
But it does act as a source to remind me that the “world” only closes when I allow it to be closed.
If I were a secretary, and I’m dissatisfied with my place in the world, maybe I’d like to train dogs, or become a landscape architect.
TV is the demise of America. People sit . Staring at a static screen assuming that what others say about their world is true.
Even if it is, it doesn’t matter one iota. Go to a local college. Take courses in Mandarin and advertise services to “train” chinese nationals. That’s better than sitting around bemoaning the loser on your block who just gets stewed everyday.
Losers , and bad things in life are a given. Everybody falls into that trap. Present company included. It’s what “you” do to shape your own world that matters..
Screw China by the way. No more of a threat than the Japanese. They just have land masses to hide behind.
August 17th, 2011 at 8:53 am
Eventually chickens come home to roost and the TBTF have been hiding an awfully big flock in their shadow inventory, their pipeline of foreclosures slowed down by fraudulent paperwork and their avoidance of mark-to-market.
I think there will eventually be a crescendo when they finally take their lumps and there will be a selling climax that will implode property values in the sand states, the alternative is for the US to step in with another massive bailout and I think this time not even bank lobbying and bribery will be able to ram thru more corporate welfare.
August 17th, 2011 at 8:54 am
In Canada where house prices continue their meteoric rise the baby boomer effect is also clearly at work. Walk in Toronto or Montreal downtown core and you see a proliferation of high price Condo projects (we are talking $1,000 sqf here which is expensive). The baby boomers are selling their McMansions here too, downsizing because they just don’t need the 4,000 sqf house with 5 bedrooms — the kids are gone!
BTW Canada’s demographic are similar (a little worse) than U.S. The availability (and price) of large suburban homes has already been hit here (its takes up to 9 months to sell a $2MM plus suburb large house in Montreal and the region). This in a market were house prices are up by 6% p.a. The demographic trend at work in the U.S. and Canada as the BB retire is a real issue.
Someone calculated that its a reduction in demand (in sqf terms) from babyboomers reduced “housing demand” equal to the entire increase in new household formation requirement. In other words, new household formation demand for housing is equal to the reduction in the BBers reduction in space.
This takes no account of the recession in the U.S. and 9% unemployment.
August 17th, 2011 at 8:58 am
As Puerto Rico isn’t officially a state, I’m just not sure if their economic numbers can be put on a table and compared to the official 50. Still too great of a difference between a state and a territory for my tastes of comparison.
Back to topic though, I would say that anyone who works for someone else, or anyone who owns a business that is reliant on continuous cash flow, should probably avoid long term committments like mortgages. Where’s the stability and belief in a better future? Not to be found, so I’ve not much confidence. I’ve been in the same mortgage for nearly 8 years now, and no way I’d do it again. Nice memories, but it’s a money pit. And our little placid neighborhood was just shocked by a distressed sale of a home, some 10-15% less than the house next door a year earlier. It’s upsetting the apple cart.
Question for anyone who might be so kind to answer: if you were struggling like hell financially, in a financially depressed place with no family or job ties, why would you not move to a place with better prospects and struggle there until the prospects came to fruition? This is a dilemma for many people, me included.
August 17th, 2011 at 9:00 am
The Baby Boomers are the root of the problem. Especially because they can’t seem to understand the concept that Generations X and Y weren’t put on this earth to float their bank roll.
But hey , this is America, life rolls right along. It’s actually fun to watch Boomers freeze and be unable to roll with the punches after decades of snot nose talk … hehehe. Not all of them mind you. Some are tougher than others.
August 17th, 2011 at 9:11 am
Agree with BR. My problem with the Trulia info, at least here in Houston, is that it is based on an average of a very large area and a pretty diverse market. As always, it’s location, location, location. You also have the problem that sale prices are kept secret so much so that we are not even on Shiller’s survey.
It’s the local mantra that Houston didn’t have a bubble, just like the one that Rick Perry created jobs due to his wonderful economic policies that left the state $12B in the hole this year. On average, Houston didn’t have a huge bubble because developers just kept building new houses further out so the average price stayed relatively moderate. Prices have however, dropped back to levels from the 1990′s even in the far out burbs; they just never rose as much.
But, if you look at the graphs of valuations Zillow or Trulia in the more desirable close-in areas inside the loop, you can see there was a pretty substantial bubble that appears to be still deflating. So, if you take Trulia’s advice, you are trying to catch the proverbial falling knife.
We’ve been renting in a nice, close-in area (though not really high end) and I’ve been keeping a pretty close eye on the market near us. I saw lots of homes come onto the market over the past year to 18 months. A few more desirable ones sold fairly quickly, although I’m handicapped by the secret prices here. Many others sat and sat and were taken off the market. There are dozens and dozens of McMansions within a couple of miles that haven’t sold. Idiot developers are building more from teardowns; I guess, like the Fed, they only know how to do one thing. No idea where they are getting financing.
The Houston Association of Realtors, which is about as reliable as NAR, just came out with mumbo jumbo about the market being up, but when you read the details it’s been fairly flat and that’s not even seasonally adjusted. The selling season is over. Of course, the stats reported are from actual sales, so they don’t capture the houses that sat, prices fruitlessly reduced and then withdrawn from the market After the house is taken off the market, it looks like the inventory has declined even though the house is still part of the shadow inventory.
Here’s an example of one that was on the market for almost a year. Nice looking house, BMW in the driveway. Take a look at the Zestimate and listing history.
http://www.zillow.com/homedetails/8823-Linkmeadow-Ln-Houston-TX-77025/27958594_zpid/#{scid=hdp-site-map-bubble-address}
An even more extreme example is a group of townhouses built nearby just after the peak of the bubble in 2008. Been watching them since construction in 2008 or thereabouts. A few were apparently sold for outrageous prices in the 400-500k range based on assessment values. There was one on the market since 2008 and I noticed the sign went away earlier this year. Looks like the developers are still stuck with it.
http://www.zillow.com/homedetails/3812-Glen-Arbor-Dr-Houston-TX-77025/2141295229_zpid/#{scid=hdp-site-map-bubble-address}
Take a look at the Zestimate over the past 10 years and tell me there was no bubble. Or that it’s fully deflated.
August 17th, 2011 at 9:11 am
The MEH comment lead me to an Ed Yardeni blog that requests the Govt start a new Homestead Act. Dr Ed equates what has initiated in Puerto Rico to favorable outcomes.
http://blog.yardeni.com/2011/08/new-homestead-act.html
Espousing Govt participation in tax credits over 10years.
August 17th, 2011 at 9:18 am
One more item of note about the baby boomer effect. This will extend will past just the housing issues. I think that is the biggest, most expensive effect, because home prices elevated SO high, and left behind will be much less expensive large homes with smaller families living in them, if anyone at all.
But the other effects will be large as well. I expect less demand for virtually everything. Right now, I’m seeing a lot of silver haired foxes and foxettes driving around in the cars of their dreams, as these are probably the very last big purchases a lot of them are going to make. Yet people in my generation X, where I live, are struggling to get by in much older cars with lots of repairs. Retirees or soon-to-be retirees are spending a chunk on this last big purchase. That demand is going to fall out soon.
Other things that will have less demand needs as the boomers age include places like Sam’s Club and Costco, as these arose while the boomers were feeding big families. Births aren’t keeping that same pace where I live, except for the exploding hispanic population, who are by far, less economically equipped.
It paints a scary picture for the future to me. Less of everything. For an X’er, it’s an in-your-face shot to see how so much greed and excess, of which perhaps I thought I might be a part of :D, is now fading away with the incomes of a generation.
August 17th, 2011 at 9:22 am
On the other hand, if you have been a saver and now have cash, you are in the driver’s seat. You can negotiate hard, get a mortgage for 4% and put your cash in a divvy stock like AT&T that pays over 5% and have your savings buy your house for you.
August 17th, 2011 at 9:27 am
gosh i had no idea markets were “fair”
this is an assessors concept with a long laughable history
tellin us we were way below “fair value” in 2008
August 17th, 2011 at 9:27 am
Freudian or intentional? – in ‘Desire for Mobility’ you said:
“Flexibility of tenting allows employees who may need to relocate to obtain better jobs.”
Do you mean ‘renting’? Although ‘tenting’ does work in this discussion IMHO.
August 17th, 2011 at 9:37 am
budhak0n Says:
Ok Petey. The “game” is rigged and if you are a person who has gotten to a point in life where you have allowed yourself to be defined by a job title.
_______
I’m in no position of career weakness (although the boom days have definitely gone away), and I have developed a broad set of in-demand skills. Then again, I’m not what anyone would describe as typical (and that’s not always a good thing).
You seem tho think that the vast majority of the populace is intelligent, adaptable, and self-sufficient (even though they have no resources of their own and have been cut-off from exploiting our mutually owned resources), and that they can quickly and at little or no cost, retrain or remake themselves.
If your observation that people can prosper by choice, please explain why you and the rest of “hard-working Americans” are not uber-wealthy.
BTW: Many of our upper level management class sit around packing bowls of pot (and snorting coke, and drinking to excess). Been there. Done that. Got the hangover. If there’s anything separating the “winners” from the “losers,” it’s not smarts, or drive to survive. In my experience, it’s luck and the almost psychopathic willingness to get over by crossing the legal/ethical/moral lines our society draws (and has recently redrawn), in order to keep the system fair and working. (As evidence of this, I can only ask you to try explain away the blatant criminality that allowed us to be fucked-over to the point of collapse of of our system by these folks).
“Losers,” being those people we would formerly describe as “the poor,” are not a new phenomenon. They are in every culture and always. What sets a successful society apart from a shit hole is how the poor are incorporated into the system.
August 17th, 2011 at 9:38 am
@ budakon
1) ‘future participant’- good luck with that
2) were you see ‘cycles’, I see deterioration. a chacun, son gout
Re Puerto Rico:
PRIDCO is a mechansim that the PR govt has been using to dissolve small land holding by natural persons (that’s for you boody) for a long time. Principal tool- outsized assessments for improvements to irrigation systems. Run the Spanish thru Google translator- or ask boody’s uncle (o sea, tío en cristiano)
From Act No. 62 (2009): http://www.lexjuris.com/lexlex/Leyes2009/lexl2009062.htm
Artículo 7.-Utilización de agua para riego
El Departamento de Agricultura, en colaboración con la Autoridad de Energía Eléctrica, y cualquier otra agencia o corporación pública, facilitarán el acceso al sistema de riego público para fines agrícolas, asegurando abastos continuos de agua para riego a las compañías de biotecnología agrícola, conjuntamente con los agricultores de la zona.
El Departamento de Recursos Naturales y Ambientales, agilizará el proceso de evaluación y aprobación de franquicias de agua para pozos profundos a ser utilizados en áreas que no tienen acceso a distritos de riego o para complementar o limitar el riesgo de falta de agua en las áreas que tienen acceso a los distritos de riego. El Departamento de Recursos Naturales, proveerá un mecanismo expedito para la otorgación de permisos para nuevos pozos en las áreas donde la reglamentación pertinente lo autorice, de manera que, los planes de expansión de las compañías de biotecnología agrícola tengan un horizonte razonable de cumplimiento. Además, considerará en el desarrollo de su Plan Integral de Uso de Aguas de Puerto Rico, las necesidades de las compañías de biotecnología agrícola y tendrá en cuenta sus planes de expansión al sugerir y reglamentar el uso del agua en Puerto Rico.
El Departamento de Agricultura utilizará el asesoramiento científico del Servicio Geológico de los Estados Unidos (USGS, por sus siglas en inglés), en cuanto a la buena utilización de los acuíferos y los abastos de aguas de Puerto Rico; y así mismo la “Ley para el Manejo de los Cuerpos de Aguas del Estado Libre Asociado de Puerto Rico”.
August 17th, 2011 at 9:46 am
Everybody who is an ultimate loser in a game sees the game when they are exiting it as somehow not as great as in prior years.
It’s like listening to Hank Aaron bemoan the accomplishments of the later power hitters.
Seriously, when are the Boomers in the media just going to retire? Or better yet, just go off and hide somewhere collecting more government benefits.
Nobody cares about the absolutely idiotic pawn shell game you’re trying to prop up here.
The Tea Party are the most hilarious group. They strike me as the last gasp of a group of almost rans who never really “ran” anyway.
IF you don’t like the way the game is played, your options are plain and simple and laid out before you. Stop whining.
It’s difficult coming from me because I can sound the siren with the best of them. But that’s the past. Nobody cares at this point.
It’s like people bringing up today what happened under Clinton. Seriously, who really cares at this point? I sure don’t.
August 17th, 2011 at 9:48 am
–”It’s what “you” do to shape your own world that matters..”
And that is why housing has a long way to go. Keep digging, follow the money.
http://www.youtube.com/watch?v=BN8OfPc_aQ8
August 17th, 2011 at 9:51 am
budhak0n Says:
“It’s like listening to Hank Aaron bemoan the accomplishments of the later power hitters.”
__________
Your analogy ignores both the “lively ball” and steroids.
How many homers do you think Ol’ Hank would have hit if he was using HGH?
We’re not in a new system (game) if we are using the old metrics (rules).
August 17th, 2011 at 9:52 am
It would be interesting to see the median price to median income adjusted for the current economic conditions.
My point is that 2.9 might the the long term average, but maybe it should be 2.5 when unemployment is higher than 7 percent, or 3.3 when unemployment is lower than 4 percent. Those numbers are guesses.
My point is that 3.3 might be more than 14% overvalued when you consider the fact that unemployment is high and GDP growth is low.
August 17th, 2011 at 9:53 am
You didn’t just kick my ass. Your performance was “enhanced”.
ROFL
August 17th, 2011 at 9:54 am
Two things that were not mentioned within the post:
1. It is unlikely that tax benefits such as the mortgage deduction are going to be around for homeowners much longer.
2. The scam of the property tax valuation (one of the biggest local taxation authority ripoffs) to keep the gravy train afloat at the local levels is in dire need of class action lawsuits across the country.
August 17th, 2011 at 9:57 am
The point is NOT how many home runs hand ” woulda, shoulda, coulda” hit.
The point is that nobody cares. You have your retirement communities where you can bemoan the whipper snappers.
Now please do us all a favor and get out of the way.
We’ll tip the cap once a year. Stop being a major drag Kerouac.
August 17th, 2011 at 10:17 am
Now you’ve gone full nihilist/retard.
Nobody cares? Then why all of the clamor?
You wrote:
“How will they be able to afford a nice home with that monkey on their back and limited job prospects? Read the sad, sad comments to this article: http://blogs.wsj.com/economics/2011/08/15/student-loan-debt-climbs/ and you may want to dust off that pitchfork and baseball bat out in the garage and march down to the local Sallie Mae office.”
That doesn’t sound like no one cares. Apparently, you do.
The “whipper snappers” are who will eventually thrash your ass like there’s no tomorrow. If they aren’t allowed to participate in a system of rules, then all rules are off the table.
I didn’t know I was blocking you. If you want me moved (and I don’t know if you are referring to me, personally, or some demographic you place me within), you’ll have to push, and I don’t think you have the ass to do it.
“We’ll tip the cap once a year.”
I can only assume that by “we,” you mean yourself, Kochs and the Queen of England.
August 17th, 2011 at 10:21 am
@Petey says:
“Skill set?
Tell me how a laborer, secretary, admin assistant, mid-level manager, or factory worker exploits their skill set on an entrepreneurial/independent contractor/freelance basis.”
Spot on.
@budhakon says:
“If I were a secretary, and I’m dissatisfied with my place in the world, maybe I’d like to train dogs, or become a landscape architect.”
Your comment is unrealistic, I would love to do what my passion desires, but I have a mortgage to pay and can not afford a 50% decrease in pay.
August 17th, 2011 at 10:24 am
A few points to consider:
1. Taxes are going up — no matter what. The only place to get the revenue in income taxes is in the $80K~$200K range, roughly.
2. Buyers will be less inclined to overpay in the expectation of appreciation — that is, housing will be viewed less as an “investment.”
3. The Fan/Fred jumbo line has been pulled down — this will put downward pressure on high cost markets.
4. We’ve had ~40 yrs of debt-fueld “growth.” This has ended, and won’t/can’t return for years to come. Real wages will have to come down.
5. There will be a massive wealth transfer from creditors to debtors. The debtors will be shut out and the creditors will be poorer and very reticent to borrow or loan.
6. All this casts doubt on the validity of using past affordability metrics going forward. I fear that housing prices, especially in the $400K~$1.2M range will fall much further than expected.
August 17th, 2011 at 10:26 am
Pete , I respect that there are morons out there who will cross moral lines to get what they want.
Heck I’m one of them.
My main point is simple. Yesterday doesn’t matter really. Some of it was fun. Some of it was not so fun.
Has very little bearing on today unless I’m already on welfare living in a shotgun shack screaming about how the guberment took my chance to be somebody.
Rick Perry is a major loon btw and anyone who thinks any different. Well you’re entitled to your opinion.
August 17th, 2011 at 10:26 am
It was easy to buy a home during the last 40 years given the market psychology of forever rising home prices but as magical thinking erodes and reality becomes the norm much of the hype around homeownership for the middle and lower class will disappear along with the idea that granite counter tops adds value.
August 17th, 2011 at 10:34 am
bm let me tell you what a very wise person (my father) once told me: “there is no good time to do anything so get off your ass and just do it.” YOU made the choice on the mortgage and the kids do don’t bemoan it as if you are entitled to goodies because you did. You aren’t entitled to anything, and neither are your kids. I heard this excuse from a relative of mine when I suggested she go back to school 5 years ago, you know where she is now? She’s lost her job 3 times, been unemployed for most of the last two years, has lost her house, has no money to help with her kids education, and has no money for retirement. If she had gone back and, you know, really sacrificed for two years she’d be making 35$ an hour in the medical tech field she wanted. Sure it would have been hard, as it was when I made the decision to work full time and get a master’s full time, but the increase in my pay was MORE than worth it.
Your comment just steams me and is the reason, I believe, we’re where we are. WAAAAAA it’s unrealistic! translates to it’s too hard! Bullhockey. You just don’t want to do it and hide behind the kids.
Now let’s get back to real estate. I have no idea why on earth you’d want to buy if you aren’t planning on keeping something for at least 5 years. I have no idea why you’d want to sell to “downsize” if you’re older, seeing as how you now have NO mortgage and only pay taxes. This is like telling my mom to sell her big old house that she pays a grand total of 450$ a month to live in (all inclusive) to do what? Deplete her savings and equity so she doesn’t have to dust? She can hire a maid for 50$ every two weeks and it’s still cheaper, just like she hired a landscaper. Let’s get this solid, moving back into expensive condo towers in the city and selling for boomers is an urban myth. Sure a tiny percent do it, but once you’re older no one is giving up the emotional attachment to a house they had for their life to be close to restaurants and further from grocery stores (also more expensive) in the central city. Houses aren’t a financial transaction people, they are an emotional one. Say that three times out loud. I didn’t buy my house for a financial transaction, I bought it for a place to live and so that when I retire I have no housing payment….which was the only financial consideration. I NEVER thought about selling it for more. Not once. It’s NOT an investment, at least not foremost. It’s a lifestyle. Ugh, everyone is still captivated by the Real Estate agent speak evidently by the comments here.
August 17th, 2011 at 10:41 am
Here . Try this on for size.
Sometimes the hardest thing in the world to do each day is to wake up in “America”.
And SOMETIMES, heck most times, the greatest thing in the world to do on most days is to wake up in “America”.
It’s a package deal.
August 17th, 2011 at 10:44 am
@econimonium
Your Mom is lucky. She can afford to heat her too big house, landscape the too big yard, and pay the ever increasing property taxes, I suppose. Many Boomers can’t or won’t in the near future. Besides, most can’t sell their homes, even if they re paid off, to move to Florida, a place that is much cheaper to buy and live. Check out the market down there. Still one of the worst in the country. Where are all the Boomers? Seems like a no brainer for me to move to a no income tax / no winter clothes / cheap real estate locale for most. They’re all stuck up north, stuck at the top of the ponzi scheme that RE has been for thirty years. Just stuck.
August 17th, 2011 at 10:46 am
Whether it’s a bargain or not IMO is how profitable would it be to rent out the property. A lot of the metrics are thrown out if I’m comfortable I’ll be able to earn a profit on turning it into a rental upon moving out. Take the going rent for the home, subtract taxes, insurance and general maintenance on the property and divide by the price. Are you comfort with that profit versus the interest and principle you are paying on your mortgage?
August 17th, 2011 at 10:50 am
budhak0n:
Your morals are your choice, but they are someone else’s problem.
Try telling someone out picking wild mushrooms that past experience doesn’t matter. “Sure, Joe died from eating mushrooms that looked like these, but that was yesterday.” Yesterday does matter, because we have to choose what our future holds. Yesterday, we had the rule of law. Today we do not. This is by choice/consent.
Go ahead and eat the mushrooms, if you think it doesn’t matter. Just don’t cook them up and sell them to others as nutritious food.
“Has very little bearing on today unless I’m already on welfare living in a shotgun shack screaming about how the guberment took my chance to be somebody.”
This is where you seem to go off the rails and over the cliff.
I don’t hear anyone screaming any such thing. I do hear lots of noise about the government having been taken over by special interests, and in doing so PREVENTING people from having the chance to be somebody (by moving their job to a sweat shop overseas, or by insisting they are self-made, and hard-working, when, without the “game” tilted in their favor, they would be squat, for instance).
As for Rick Perry, you must really have me confused with someone else.
August 17th, 2011 at 11:01 am
@ BennyProfane. The “boomers” responsibility if they had wanted to go to Florida was to have already done those things.
Don’t be angry because someone who is faster on the trigger beats you to the draw.
I’m frankly stuck in a property I’d much rather be able to dump at this point. Finding somebody to pick up this trash and float my move may be a pipe dream. But it’s paid for and it’s home.
But yeah everybody’s got their eyes on the florida market right now. Only problem is if everybody winds up THERE, there will be even fewer jobs down there then there are now. So you’ll have whole communities of people staring at each other saying , and so .. “what do YOU DO? ” Oh I don’t know .. I guess I DO the same thing YOU do.
Which is nada.
Heck that’s not just FLA, that’s every where these days. Only difference is the casino floors are less crowded because the gamblers all lost their bank rolls . hehehe
August 17th, 2011 at 11:01 am
BennyProfane the grand total of my mom’s monthly income is 1400$ from a city pension (and 65 a month in SS because she can’t double-dip so there goes your “unions and pensions are ruining everything” meme). She lives very comfortably on that and in the northeast. Can you imagine that everything everyone’s been told by the investment industry about having millions for retirement is wrong? Can you imagine living comfortably on 1400 a month in what is a classically expensive area? How does she do it? Because she doesn’t need anything at her age. She gets a small tax abatement for her age, she has no credit card bills in fact zero debt, and utilities aren’t an issue as she knows how to budget. She also travels, eats out, and does everything she wants. She does have savings but has never dipped into it. So I hate to burst the current talking points but there you have it.
How? Her house is long paid for. She doesn’t give a hoot what it’s worth, it’s where she’s spent most of her adult life and she’ll die there. It’s emotional. Do you think this retired teacher is going to start a winery? A B&B? No she wants to be retired, and she has everything she’ll ever need including a new car she paid cash for (a hybrid too!). My parents bought the house over 40 years ago, and they kept paying the mortgage into the bank until the day my dad died. That’s what you’re SUPPOSED to do, you know the old fashioned way. All the rest is marketing hype stupid people bought hook, line, and sinker. And that’s why we’re in this housing mess.
August 17th, 2011 at 11:34 am
@econimonium
What’s her property tax? In some towns in Westchester it’s up over 20 grand. And rising.
Oil heat? You did say the northeast. She cut her own lawn? Do her own roofing?
August 17th, 2011 at 11:50 am
@econimonium
> How? Her house is long paid for. She doesn’t give a hoot what it’s worth, it’s where she’s spent most of her adult life and she’ll die there. It’s emotional
She would, if she had 3% property tax , like in Houston. That is 10K a year on 300K house . I think for people over 65 they do wave the school tax, so it comes down to 1.5%.
There is no way I could afford to live in my house if I retired with $300 a month electiricity bills and $200 water bills. That is the reality for most people.
August 17th, 2011 at 12:04 pm
“Pete , I respect that there are morons out there who will cross moral lines to get what they want.
Heck I’m one of them.”
I’m not.
August 17th, 2011 at 12:16 pm
[...] to this morning’s post on RE, have a look at these charts (via JP Morgan) — none of suggest anything other than more [...]
August 17th, 2011 at 12:36 pm
Was hoping to see some intelligent discussion here. Guess I was overoptimistic.
August 17th, 2011 at 12:39 pm
“Sometimes the hardest thing in the world to do each day is to wake up in “America”.”
Budhakon, you have some interesting things to say, but you blunt your points by being bombastic. If you have ever spent time in a third world country, and you reflect, you know this is an incredibly silly and arrogant thing to say. I can name you 100 things, off the top of my head, that are harder than waking up in America. Use your imagination.
Wallysays, thanks for holding to your personal integrity. It can be very difficult.
August 17th, 2011 at 12:40 pm
@BennyProfane in MA, how’s that? You know, taxachusetts. Her property tax is 2400 a year after her abatement for senior and residency. Since we have State income tax, and she’s now retired, she doesn’t pay that. So much for the Perry miracle huh? Yes and oil heat. The house was completely insulated and new windows were put in.
So what @Benny? You can’t live on 1400 a month? Perhaps you’re just in the wrong state or believing the wrong ideology. Seems to work fine here where it shouldn’t be working. And, after all, we all have a choice where to live don’t we? I choose to live in a town where the property taxes are under control (Not a place like Newton MA where they lavish the school system needlessly). And even if her pension didn’t cover her expenses, do the math on 10,000 worth of property taxes for 20 years and that’s what you need in the bank, not millions.
August 17th, 2011 at 12:52 pm
It seems to me that much of the churn in housing over the years was facilitated by the fact that you rarely lost money on the transaction even if you were in the house for < 5 years. That's just not the case anymore. If you don't need a larger home and don't need to move for a job… why would you move today? It's not worth it. Were those "trade-up" purchases a big part of the bubble? One could also raid home equity to pay for a second home or vacation condo and those purchases are now much harder to pull off.
I think this has to be part of the explanation too.
August 17th, 2011 at 1:08 pm
@econimonium
Well, that’s nice, but, do some simple math. If your Mom, and everybody elses’ Mom in Mass is being treated so well by the politicians who know how to buy a vote when they can smell one a mile away, and give her such nice tax treatment, then where will they find the revenue to support the schools and roads and other essentials? Maybe young, first time home buyers who are are barely able to buy into a still bubbled housing market? How long will that sustain itself? Visit upstate NY or western PA and you’ll see where that leads. The first thing a young person does is leave, if they can. They won’t be buying a home there, that’s for sure.
August 17th, 2011 at 2:18 pm
Look at companies like Verizon. They’re growing yet they’re doing what they can to strip thousands of their employees of a middle class lifestyle. When all big companies treat their employees like pawns, no one is going to have the money to buy a house.
Wall St. pressures these companies for quarterly numbers. They respond by hiring McKinsey to help them become more efficient. McKinsey says, “fire people and cut everyone else’s benefits”.
Didn’t Henry Ford make a point of paying his workers enough so they could buy a car?
Oh, and why buy a house? In this job market a house is an albatross.
August 17th, 2011 at 2:32 pm
@econimonium
Well YOUR comment STEAMS me. I am THAT secretary that you talk about. Like you did, I went back to school, while working full time (and plenty of overtime) and got my masters. When I got out, I was told that companies were looking for 25 year old kids from an Ivy league school. Nevermind the fact that I had over 25 years of work experience and a proven track record. Can’t tell you how many first year associates, in the field that I work in, are not up to par but don’t get fired lest the company gets a bad rap. As I mentioned, I can not afford a 50% cut in pay and that’s what I would have had to take to take basically what would have been an entry level job. Because of the downturn, I have lost anywhere from $25,000 to $30,000 income. I have no kids. I don’t expect any entitlement from anyone nor am I hiding behind anyone. And to your comment, “I don’t want to do it”, it makes no sense for me to sell because two bedroom apartment on Long Island rents for a minimum of $2,000 a month. That’s a mortgage payment.
August 17th, 2011 at 2:57 pm
I find it interesting that only in Washington D.C. does it appear on the Trulia chart to be “cheaper to buy.” That is the single most transient city in the U.S., I would submit — meaning that renting is artificially a higher market than buying for a host of reasons. Not only is it massively transient, the turnover is short and cyclical. I’m sure that anyone here can figure out several reasons for that. And even THERE, it is barely on the line. . . .
You are right: for the reasons you cite, renting is currently seen as a more attractive, realistic proposition than ownership — widely. It’s good to see some sense on this issue when the mainstream seems to be itching to cheerlead for another RE boom.
Naturally, all markets are local. But considering that D.C. looks like an outlier on the Trulia chart, I thought I’d mention at least one reason why rents are artificially high in that particular market. Another reason is that residents of the District of Columbia have no representation: if you just rent there during your sojourn, and your primary residence is elsewhere, you can avoid being completely disenfranchised. Believe it or not, that still matters to a few people.
August 17th, 2011 at 3:55 pm
@budhakon;
I am glad you have that youthful energy and optimism intact. Good luck with it I hope you eventually get as successful as Petey and can look at the whole thing in a new light. Problem is that your solutions are good for certain lucky individuals, but not working for the majority, or for society as a whole. You might blame all those individuals for their inability to do what you prescribe as an easy solution, yet the fact is still that it does not work. Even in a good economy most new small businesses are dead within a year (and all the investments of money and hard work lost). In a bad economy it is a lot worse. The young man who I hired to cut my grass 4 years ago, used to have 2 guys working for him, now he comes alone. I have had several unsolicited offers from others who wanted to cut my lawn for less than what he charges. In order for this “just get out there and make your own business” thing to work, there has to be enough costumers for all those new businesses. There are only so many dogs to be trained and only so many landscapes that can afford an architect.
August 17th, 2011 at 5:22 pm
DeDude:
I’m not all that successful (but thank you), considering some of the people I’ve worked with and for (and depending on the definition of “success”). OTOH, I write my own ticket, and I’ve never failed spectacularly (in business). I think the difference is where we started, and our willingness to game the system.
So far, I’ve been involved with major players in the S&Ls (leading up to their just deserts), the dotcom bubble (many millions were “made,” many millions were wasted, many fools were fleeced), and with those involved, on all fronts (land acquisition/development/building/bank and private investment financing on both ends of every deal), in the housing bubble (by far the most egregious group of greed-driven criminals, to date). In addition, I’ve also worked with defense contractors, healthcare providers, fast food companies, and a plethora of smaller businesses that have not earned infamy.
We have lots to be concerned about in our society considering what has taken place between the two bookends of the S&L crisis and the housing bubble. This time it’s different. This time, no one went to jail, and no one went broke (although both things should have happened).
I was going to give you a back story (I didn’t realize how interesting it was until I started writing it down. Apparently, I’m like the freekin’ Zelig of bad economic scenes), but thought better of it, as it would be heavy on name-dropping, and I’d be identifiable, by some, if I did.
I will drop one name. I once worked with this convict, for a brief period, just before the jig was up:
http://www.thehallofinfamy.org/inductees.php?action=detail&artist=tom_billman
Nice guy, for a criminal mastermind.
August 17th, 2011 at 7:52 pm
Petey;
I wasn’t trying to sell you as the secret “Steve Jobs” of this site. Just using you as an example of someone who (from what you have previously reveled) has been there and successfully done that “create my own job/business” thing – (but obviously not lost his head, values or sense of how the world works, in the process).
August 18th, 2011 at 1:04 am
[...] are several reasons to be concerned about housing at present,” economist Barry Ritholtz said. “First, any economic deterioration, especially a recession accompanied by further job [...]
August 18th, 2011 at 6:11 pm
[...] http://www.ritholtz.com/blog/2011/08/misunderstanding-the-rent-vs-buy-dynamic/ [...]
August 19th, 2011 at 8:32 am
[...] Misunderstanding the Rent vs. Buy Dynamic | The Big Picture [...]
August 20th, 2011 at 12:07 am
The price-to-income ignores the actual cost of ownership, which the rent vs buy calculation does include. Because mortgage interest is less than half of what it was historically, the cost of ownership is actually quite low by historical standards. I am considering buying a condo which would cost about 20% less to buy vs rent. I am willing to take a gamble when the odds are 20% in my favor. Why should I care about the price of the condo if I’m not going to sell it? (If I wanted to move, I can just rent it out and make money. This condo is so cheap that I don’t need to sell it to make down payment on another house, but this may be a problem for most people. )
Remember, there are lies, damn lies, and statistics. You can pick and choose data to show whatever you want.
~~~
BR: And if there is a recession and uptick in unemployment, what happens to Home Prices? Thats the reference to dynamic vs static . . .
August 29th, 2011 at 1:34 am
The single biggest problem with the economy is over-leveraged consumer balance sheets, and the single biggest piece of that is mortgages, a high percentage of which are under water. The fastest way to fix consumer balance sheets is for consumers to default on their seriously under water mortgages. I am beginning to believe this should be encouraged in a populist movement. It is the only way to get the attention of policymakers to develop a scheme to allow it to happen in an orderly fashion, through resets at fair value, for example.