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.
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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)
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?
“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.
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.
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BR: See these posts. There are 1120 of them, please read and report back your findings.
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)
” We remain 5-15% overvalued n home prices nationally;”
I think that is too generous, and fails to anticipate continued wage deflation.
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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 . . .
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.
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BR: Appreciation should not be a factor in Buy vs Rent math. Its simply a cash flow analysis. Any appreciation is gravy . . .
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.
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