I posted a video of my pal James Altucher on Yahoo Tech Ticker this week, declaring he was “Never going to buy a home ever again!”
Whenever I hear that sort of declaration, it tells me we are closer to the end of down cycle than the beginning. The psychology is reaching a negative extreme, and that means we are nearer to a capitulation.
Lets take a closer look at Jame’s thesis: I do not agree with much of what he states here — from buying the home builders (why?) to being a renter (maybe) to not owning a home (huh?) to homes being illiquid (exaggerated). And while there are many reasons to buy a house, as an investment is not really one of them.
Indeed, I find myself noting the following in response to Jim’s concerns:
"¢ Home ownership allows you to live in one place for as long as you like, without worries that the property owner will not renew your lease.
"¢ You get to select the school district you like for your kids’ education.
"¢ Those of us who lived in a city know what its like to be subject to the capricious whims of a landlord. (no fun).
"¢ When you own your home, you have the option of painting the walls whatever color you want, doing capital improvements, renovations, etc.
"¢ Homes are less liquid than stocks, but price any home correctly and it will sell quickly.
"¢ If you buy a home you can actually afford, there is no more stress about mortgage payments than paying your rent.
"¢ For middle class Americans, the mortgage deduction is a huge tax savings.
There are lots of reasons to choose between Owning and Renting — it is a personal life choice — but since you have to live somewhere, its simple math to determine what the price differences are. Are the marginal cost differences worth the perceived advantages? That is your calculus.
Currently, our 3 metrics for measuring home prices show prices remain elevated by various degrees.
1. Median Income to Median Home Price — it is still about 10% too high nationally. This is the most reliable of our indicators, and it shows the most expensive home prices of the three.
2. Cost of Renting vs Cost of Ownership: This metric is now reasonable — rents have gone up, people are fearful of buying an asset whose price is falling — so it makes Ownership look more attractive, depending upon the region. But it is the most volatile and least reliable of the three, as it is easily influenced by risk aversion psychology and rising rent prices.
3. Housing Value as a % of GDP: It shows only a slightly over-valued housing market, but that is due to the weak economy. A more robust GDP makes housing look pricier.
Nationally, home prices remain somewhat elevated, but not absurdly so. The local region you are in, and the specific price you negotiate determine if you paid fair value or worse. Given the many variables, there are no broad declarations to be made that reflect every sale of every house. The answer to our title question (“Should You Buy a Home?”) is it really depends.
My biggest issue when it comes to Home prices is the lack of pendulum swing. All over-priced markets that crash typically swing to the downside until they not only achieve fair value but become cheap. Unfortunately, that has not been allowed to happen in the residential real estate market. The government’s HAMP/Mortgage Mods, the foreclosure abatement plans, the new purchaser tax credit, and even the Fed’s ZIRP have all conspired to prevent market forces from repricing homes.
If we want home prices to bottom, well then we must let them fall.
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
I guess I am talking my own book –we own one home (50% LTV) and a 2nd outright.
But that situation was the same 6 years ago, when I was railing about home prices and an overheated credit bubble.
I distinctly remember Mr Altucher stating that he wasn’t going to allow his children to attend college. That it was a waste of time that they could be using to start a business. I realize this sentiment has gained momentum in recent years, but I fell like it’s a tad “overstated”.
to be fair, i do say that housing is a buy. I just dont think people should own a home.
Btw, sadly, I both own a home AND rent (i’m divorced).
"¢ Home ownership allows you to live in one place for as long as you like, without worries that the property owner will not renew your lease.
??
Property, Fifth Amendment, Due Process, Eminent Domain, Public Use In 1998, the small town of New London, Connecticut saw a dramatic turnaround in its economic fate when pharmaceutical giant Pfizer announced its development of a waterfront global research facility in the city’s Fort Trumbull area. New London created a development corporation to revitalize the area around the new facility, and granted this entity the power of eminent domain. This power has long enabled governments to condemn"“essentially take"“private property for “public use,” so long as they conform to due process and provide just compensation. In this case, the development corporation filed condemnation proceedings against the petitioners in an attempt to condemn their homes"“some of which had been in their families for over a century. This property was to be used to create an office park, a parking lot, and a new park. This case tests the limits of the government’s power to take private property for “public use” under the Fifth Amendment of the United States Constitution in circumstances when the “use” is largely commercial… http://topics.law.cornell.edu/supct/cert/04-108
http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Kelo+v.+New+London
An addition to the benefits list of home ownership:
You effectively fix a significant portion of your overall expenses with a fixed rate mortgage. People aren’t to focused on that now, but during the 70′s I believe it was a life-saver for more than a few families.
It is frustrating to see how everyone wants free markets, until it means their assets go down in value. Bargain prices allow a market to clear. Japan diddled around with forbidding prices to fall for a long time, and all they did was end up being exhausted and selling at the market bottom outside of Japan, and having a market that is still a mess in Japan.
We got on our high horse to demand that Asian markets allow market forces to clear their markets (via the IMF with Geithner the most vocal) during the Asia crisis. Most did, and it actually went well for them, clearing out idiots and getting capital back to work in more productive areas. But now its our turn to take our own advice, and…well…its unthinkable! Therefore, it is now inevitable that the housing market is going to be a mess for many years…probably a decade or more.
Housing is NOWHERE near a bottom.
Bearish factors affecting housing:
1. Cost of living – at record levels relative to wages. This makes housing much more expensive and means you can throw the traditional metrics (ie 2.5x income) out the window. Tuition, gas, food, clothing, appliances etc.
2. Supply – at 9 months not including shadow inventory. Until this hits 6 months withOUT the shadow inventory, we have excess supply.
3. Job stability – Making a 30 year commitment is much easier for us NYers than for those in Detroit, Seattle, Chicago, Atlanta etc. There has never been more career instability and fluctuation. This keeps people renting.
4. Property taxation – at an all-time high (in % terms). More reason to not buy anything and get the cheapest rent you can.
5. New home tracts are garbage. People will chase crappy investments during booms and buying panics but once the dust settles, they realize quickly that the 800 sq foot duplex in Mineola that cost $350K with $7K n taxes jussssst might have been a TAD expensive!
6. No more refis and few HELOCs and housing ponzi.
7. Banks are reticent to lend so buyers will need better credit and more cash at a time when both are hard to come by.
etc etc etc
The time to buy isn’t when people are negative or positive but when you hear nothing but silence.
Home prices represent the battlefield for ongoing fight between The Fed and Mr Market or more succinctly: inflation versus deflation.
Explaination:
The Fed seems desperate to build inflation into the price structure. Unlike times passed, inflation is the aswer, not the problem, to all the Federal government’s problems today.
However, Mr Market wants to deflate and everytime a foreclosure happens, Mr Market takes another step towards declining prices. As a major asset, home prices dictate movement in other prices, too.
That’s my worldview: The Fed wants to inflate while Mr Market (BR’s term) wants to deflate.
The battle continues…
BR: James Altucher is way out there, so I would not consider him a good contrarian signal. I like reading his stuff, as he forces people to confront conventional wisdom (blindly sending $200k to a small, liberal arts college for 4 years of Junior’s eductation, as he spends 3 night a week drunk / hungover prime example). If you are still lurking out here James, perhaps readers of the BP comment section would love to hear if you really believe what you say most of the time, or if you overstate to draw attention to a never considered issue (The Media Owes Everyone An Apology For Over-Hyping Japan Nuclear Crisis prime example – I’ll personally avoid drinking Tokoyo’s water for the forseeable future!).
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