Aug262013
Can it be a good time to buy and a good time to rent?
The conventional wisdom is it’s either a good time to buy or it’s a good time to rent, but not both. Rising house prices and rising rents generally favor buying because the owner can lock in a fixed cost of ownership while profiting from appreciation. Falling house prices or stagnant rents generally favor renting because the renter’s costs are not escalating while the owners are losing equity. But who gets the upper hand when prices are rising but rents are stagnant?
In my opinion, it can be both a good time to buy and a good time to rent, and now is one of those times. House prices are rising, and although appreciation will likely slow significantly from its recent torrid pace, the fact is that prices are still going up, and buyers are benefitting from appreciation. Further, despite the rising cost of ownership, in most markets it’s still less expensive to own relative to rents than most of the last 35 years, so it is arguably still a good time to buy.
However, rents are not going up significanly, and in many markets, rents are stagnant or falling. Renters are not facing escalating costs that would compel them to buy in order to prevent future housing cost increases. This fact makes it a good time to rent as well. I recently wrote a post titled Don’t stress about rising home prices. Many people simply can’t buy because they lack the down payment, the income, or the credit qualifications necessary to buy. If they can’t buy, they shouldn’t stress about what they can’t change. Further, since rents are rising only slowly, there is no urgent need to fix housing costs due to a cost push hurting the family finances.
Southern California renters have an edge over home buyers
While the housing recovery has led to higher prices and bidding wars, an expanding supply of rentals is holding down prices.
By Andrew Khouri — August 24, 2013, 8:26 p.m.
Why buy when you can rent?
To make a fortune on appreciation, right? I heard that a lot in 2005.
With a frenzied housing market shutting out would-be buyers all over Southern California, sending that check to the landlord is looking smarter every day.
It may not look any smarter, but it’s becoming the reality for many who are priced out of their desired neighborhoods by the reflating housing bubble.
The rental market provides a stark contrast to the red-hot housing recovery. In Los Angeles County, apartment rents have risen only slowly, with an expanding supply of rentals holding down prices. In downtown Los Angeles, an apartment building boom has even driven rents down by 5% over the last year, to an average of $1,990 in the second quarter.
Rents also declined in the single-family home market, where an influx of cash investors is driving up prices for home buyers. These new investors, including some cash-rich Wall Street firms, have scooped up properties to hold and rent.
My data still shows MLS rents rising at about 2% per year, but the cities and zip codes with the most REO have shown declines.
Erin Keegan and her fiance decided to keep renting after losing bidding wars on a home — twice.
The couple, who rent a small house in West Adams, lost out to an investor when they tried to purchase a two-bedroom Victorian last summer. This year, after the home was rehabbed and relisted for sale, their second offer couldn’t compete with a buyer paying $56,000 more than the asking price.
“I just couldn’t believe it sold for that much,” Keegan said. “That was definitely the nail in the coffin.”
There are many unsatisfied potential buyers in the Keegan’s place. I believe these buyers will return to the market over the fall and winter to give it another try, particularly now that rising rates and higher prices have squeezed out marginal buyers and made bidding less competitive.
The buyers this fall and winter may not enjoy the low cost of ownership of buyers from last year, but since many buyers this spring overpaid to win bidding wars, they probably won’t be any worse off than those buyers are.
In comparison, the rental market seems sane.
The tide of investors is boxing out prospective buyers but creating new opportunities for renters. The median rent for single-family homes in L.A. County fell 4.1% last quarter compared with the same period last year, according to real estate website Trulia. Contrast that with the county’s 29% year-over-year median home price gain in July.
I don’t look at median rents or resale prices when performing my calculations. They are too subject to distortions from changes in mix. I use the dollars-per-square-foot measure. I have LA County home prices up 26% and rents up 2.2%.
The diverging paths of the rental and buyer markets are an anomaly — they’ve risen in tandem for most of the last century. But the housing bubble, crash and subsequent recovery have exerted starkly different economic forces on the rental and home markets.
This is an anomaly. It’s the only set of circumstances where I could honestly say it’s both a good time to buy and a good time to rent.
The sharp rise in home values and interest rates has made buying less of a sure bet in some neighborhoods, including Westwood, Culver City and the Miracle Mile, said Richard Green, director of USC’s Lusk Center for Real Estate.
“A year ago, it was an easy call to buy” over renting, he said. “Now it’s sort of a pick ’em call.“
I publish the OC housing market report to help find the markets where buying favors renting and visa versa. In two months, I am going to expand to the coverage to most of Southern California.
In the second quarter, average rents for Los Angeles County apartments reached $1,652 a month, basically flat from the prior three months and a 2.2% increase over last year, according to a report from commercial real estate brokerage Marcus & Millichap. That yearly increase mirrors wage and income growth in the region.
Renters simply have more options in the market. L.A. County is currently in the first year of a two-year apartment-building boom, according to the report, which predicts builders will finish 6,000 units this year, about twice as many as last year. …
The apartment market is getting quickly overbuilt. The Irvine Company added tens of thousands of units to the OC market, and rents are stagnant because of it.
For most of the last century, home prices and rents tended to rise in line with inflation, according to research from Dean Baker, co-director of the Center for Economic and Policy Research. Starting in 1995, Americans increasingly saw their homes as an investment tool, which drove up home prices faster than rents, he said.
And inflated a massive housing bubble.
But after the housing bubble popped, home prices fell hard. Rents declined as well, but not as much. And rents started rising again as more renters entered the market when they lost their homes to foreclosure.
Look at the crash in house prices and the spike in rent in San Bernardino County. It was extreme.
In general, most people who plan to live in their homes at least five years may still be better off buying, Baker said.
On conversely, those that plan to live in their houses for less than five years are still better off renting.
Real estate agent Brittany Walter, who specializes in northeastern Los Angeles, has seen about 1 in 6 of her clients abandon their home search in the last year. They resolved to rent after a frustrating search for a home
These are the unsatisfied buyers I believe will support the market this fall and winter.
— something Walter advises against, because she believes home prices will only rise further.
A realtor telling people to buy because prices are going up? I’m shocked.
Her clients tell her: “We will just take a break for another year and see the market slow down.”
Some will take a break for a year because they rewed leases, but many more will return earlier.
Some signs of a slowdown are emerging as the number of homes on the market increases. The median home price in Southern California remained flat from June to July, at $385,000, according to DataQuick, …
Keegan and her fiance, who lost out on buying the same house twice, plan to stay in their one-bedroom home, where rent hasn’t increased in five years. “When I feel that mania coming,” she said, “I don’t want anything to do with it.”
That’s a smart home shopper. It didn’t work out badly for many last time.
So am I just talking nonsense to make renters fell better about missing the reflation of the housing bubble? I don’t think so. The cost push of rising rents is weak, and although renters missed the windfall from the recent rally, their family circumstances aren’t harmed by renting.
$3,708 in; $131,708 out
The former owners of today’s featured REO paid $240,000 on 10/26/2001 putting $3,708 down and borrowing the rest. They refinanced in 2004 with a $295,000 first mortgage. The refinanced again in 2007 with a $368,000 first mortgage. Their investment grew 35.5 times, and they were given the proceeds as the value went up. Not a bad deal for them — other than the trashed credit score.
[raw_html_snippet id=”newsletter”]
[idx-listing mlsnumber=”PW13168972″ showpricehistory=”true”]
29384 CHERRYWOOD Ln San Juan Capistrano, CA 92675
$394,900 …….. Asking Price
$240,000 ………. Purchase Price
10/26/2001 ………. Purchase Date
$154,900 ………. Gross Gain (Loss)
($31,592) ………… Commissions and Costs at 8%
============================================
$123,308 ………. Net Gain (Loss)
============================================
64.5% ………. Gross Percent Change
51.4% ………. Net Percent Change
4.2% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$394,900 …….. Asking Price
$13,822 ………… 3.5% Down FHA Financing
4.61% …………. Mortgage Interest Rate
30 ……………… Number of Years
$381,079 …….. Mortgage
$113,616 ………. Income Requirement
$1,956 ………… Monthly Mortgage Payment
$342 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$82 ………… Homeowners Insurance at 0.25%
$429 ………… Private Mortgage Insurance
$126 ………… Homeowners Association Fees
============================================
$2,935 ………. Monthly Cash Outlays
($453) ………. Tax Savings
($492) ………. Principal Amortization
$24 ………….. Opportunity Cost of Down Payment
$69 ………….. Maintenance and Replacement Reserves
============================================
$2,084 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$5,449 ………… Furnishing and Move-In Costs at 1% + $1,500
$5,449 ………… Closing Costs at 1% + $1,500
$3,811 ………… Interest Points at 1%
$13,822 ………… Down Payment
============================================
$28,530 ………. Total Cash Costs
$31,900 ………. Emergency Cash Reserves
============================================
$60,430 ………. Total Savings Needed
[raw_html_snippet id=”property”]
10Y back UNDER 2.80 – monthly durable goods post huge miss.
Sept-taper LITE?
Maybe a smaller Taper? I still think they need to Taper.
Look at Wells Fargo Mortgage Rates and MBS
30-Year Fixed 4.625% 4.799%
30-Year Fixed FHA 4.375% 5.893%
15-Year Fixed 3.625% 3.921%
FHA back under 6%
http://www.mortgagenewsdaily.com/mbs/
Commentary: Déjà vu All Over Again
In the spring and early summer, more lenders, as surveyed by the Federal Reserve, said they were easing standards for mortgage loans than were tightening.
In the spring and earlier summer, the median price of an existing-single family home was increasing by an average of 1.8 percent per month as sales increased about 0.5 percent per month. Personal income, according to the Bureau of Economic Analysis, was increasing at about 0.5 percent per month.
In the spring and early summer, the Case-Shiller Home Price Index was increasing by an average of 1.5 percent per month
In the spring and earlier summer, the nation added about 230,000 jobs per month, about one quarter to one half of them retail and leisure and hospitality them retail and leisure and hospitality, the two lowest wage industry sectors tracked by the Bureau of Labor Statistics.
That was 2005, the year before the housing bubble burst brought the economy down with it.
In 2013, numbers look eerily similar:
According to the latest Federal Reserve Senior Loan Officer Survey, an average of 4.6 percent of lenders surveyed acknowledged easing lending standards for prime residential loans and 16 percent of lenders surveyed reported an increase in demand for loans to subprime borrowers.
So far this year, the median price of an existing-home has increased an average of 2.5 percent per month and sales are increasing an average of 1.4 percent per month.
The Case-Shiller index has increased an average 1.3 percent per month.
Of the average monthly increase of 192,000 jobs per month, retail and leisure and hospitality jobs have accounted for nearly one-third.
While some of the 2013 numbers look better than 2005, other coincidental indicators are reason for concern. In 2005, sales at furniture stores and building and garden supply stores—retailers who thrive when homes are purchased—increased an average of 0.3 percent and 0.4 percent respectively. In 2013, those stores experienced average monthly increases of 0.2 percent and 0.4 percent. Sales at appliance stores went from an average monthly growth of 0.8 percent to an average monthly contraction of 0.1 percent.
Access to credit continues to tighten
The perfect storm of economic and regulatory conditions is shifting gears for underwriting standards in the mortgage lending environment.
While mortgage rates tick back up, some economists caution the market to not forget that rates were roughly the same, at 4.5%, two years ago.
Additionally, housing affordability is at an all-time high, while existing home sales posted solid numbers.
The biggest road bump in the sector that’s impacting credit availability is refinancing, explained Equifax chief economist Amy Crews Cutts.
“There’s options out there, so you have flexibility,” Crews Cutts said.
She added, “A house is not like a gallon of gasoline, it’s not at a fixed price. From a demand side it’s more of a psychological effect than a real effect, and even if we have a bump earlier on it’s not a deal killer for someone to buy a house.”
Although the housing data supports a full recovery and is enticing buyers into the sector, the market is dealing with a tighter underwriting landscape.
The repurchase risk that is currently on lenders from both government-sponsored enterprises has caused them to step up quality assurance. Consequently, mortgage insurers have set their quality assurance standards high, fearing any type of backlash, Crews Cutts explained.
The housing bubble was characterized by a complete abandonment of all lending standards. Standards tightened suddenly during the credit crunch of August 2007, but they have been on a slow, relentless march toward sanity ever since. When we finally get back to the prudent standards of the mid 90s, credit standards will finally stop tightening up.
The title of the article is misleading because for the past several months the exact opposite has been happening. At least one of quotes from the article gets it mostly right.
According to Trulia chief economist Jed Kolko:
“Also, rising mortgage rates could have the unexpected effect of opening up credit, because refinancings have plummeted as rates rise, some banks might increase their home-purchase lending,” Kolko stated.
He continued, “For both reasons, therefore, we could see mortgage credit expand next year.”
Typically, credit would tighten until delinquencies on new loans hit historic norms. You’re on the inside. Is that were we are right now with new loans?
Also, have the new requirements under Dodd-Frank been fully implemented by lenders (most comply well before the deadline)?
We should be near the bottom of the tightening cycle, but it’s difficult to ascertain where we really are due to all the changes with requirements and interest rates.
The current credit environment has been in place since ’09 and delinquencies for new loans are at their lowest levels in history (comparing like products). Dodd-Frank is a moving target so there’s no way that banks can have it fully implemented yet, but I think a certain comfort level exists that didn’t exist even one year ago.
Rising rates take toll on US housing recovery
It seems interest rate shocks may have finally taken a toll on the U.S. housing recovery. After a busy week on Wall Street, a new government report showed a 12.4% drop in seasonally adjusted new single-family home sales. The decline prompted market analysts to assume potential homebuyers are beginning to feel the pinch of rising interest rates, the Motley Fool noted. Rates have been edging higher ever since the Fed began teasing the markets with the idea that a curtailment of QE3, or massive Treasury and MBS purchases, could come as early as September.
New York City and the entire state of New York may have lost as much as $100 million in damages stemming from mortgage document fraud, the New York Post claims. The paper reported on an unsealed lawsuit filed by a whistleblower over the weekend. The whistleblower claims dozens of banks and servicers violated the False Claims Act when dealing in mortgage-backed securities during the years 2004 and 2007. The suit has already been partly settled, but the Post says attorneys are still trying to figure out which mortgage-backed securities were purchased in New York to continue on with another critical part of the claim.
“The decline prompted market analysts to assume potential homebuyers are beginning to feel the pinch of rising interest rates”
I thought this wasn’t going to happen? Didn’t the mainstream media put out hundreds of feel-good articles telling us that rising rates won’t impact housing?
“I thought this wasn’t going to happen? Didn’t the mainstream media put out hundreds of feel-good articles telling us that rising rates won’t impact housing?”
Feels like thousands. I think my wife must have read them all…
NonTaper
Some much for that business model
American Homes 4 Rent Said to Fire Employees After Loss
American Homes 4 Rent (AMH) yesterday fired a group of workers, with a focus on acquisition and construction staff, after the housing landlord reported a fiscal second-quarter loss, according to a person with knowledge of the terminations.
The company, owner of almost 20,000 single-family homes, has cut about 15 percent of its workforce this year, including an earlier round of terminations before its initial public offering last month, said the person, who asked not to be identified because the information is private. The Malibu, California-based company, which raised $705.9 million in the IPO, had a net loss of $14 million, or 15 cents a share, on revenue of $18.1 million in the quarter ended June 30, according to a statement this week.
Single-family landlords have struggled to turn a profit while acquiring homes faster than they can fill them with tenants. Hedge funds, private-equity firms and real estate investment trusts have raised more than $18 billion to purchase more than 100,000 rental houses in the past two years. American Homes 4 Rent, founded by B. Wayne Hughes, is the largest single-family landlord after Blackstone Group LP’s Invitation Homes, which has spent more than $5 billion on 32,000 homes.
American Homes 4 Rent executives Peter Nelson, Jack Corrigan, Sara Vogt-Lowell and Janice Stack didn’t respond to e-mails and telephone messages seeking comment on the firings.
The company’s shares fell as low as $15.97 after the firings were reported, and were at $16 at 1:43 p.m. in New York. Trading began July 31 at $16 a share.
“…had a net loss of $14 million, or 15 cents a share, on revenue of $18.1 million in the quarter ended June 30, according to a statement this week.”
Those are really bad numbers. So they spent $32M to earn $18M? Ouch! Here are a couple of takeaways: 1) They won’t be buying any more houses until they get their operations under control; 2) They are going to be aggressively filling empty properties which means rent reductions; 3) Stock prices will continue to be hammered unless and until they can turn a profit. They need to turn non-performing assets into revenue generating ones, and damn quick. They aren’t going to make up for this loss just by cutting costs.
When I was in negotiations with a large private equity group to form one of these companies, they were attracted to us because our plan was to keep the overhead as low as possible and contract out nearly everything. This is the opposite approach to what most REO-to-rental companies are doing.
For example, Waypoint Homes has staff for every conceivable function. They contract out almost nothing, and they have an enormous overhead. Apparently, American Homes 4 Rent is built on the same model.
Unless they achieve an enormous scale, and unless they also become very efficient at internal management, they end up experiencing a huge drag on returns due to all this overhead. Or in the case above, they actually swing to a loss.
Most of these companies created these huge bureaucracies to feed the egos of the principals who wanted to have some huge management company staff and “be the man.” Well, they are “the man” now, and they aren’t making any money. Better to leave the ego at home and focus on making money.
The founders of American Homes 4 Rent probably don’t care though. They cashed out in the IPO. What happens now isn’t their problem any more.
Yes, lean and mean is the only way these guys will survive. I doubt they will survive.
Are they purchasing these home with cash with financing? I’m assuming it’s borrowed money either per unit, or borrowed those bonds to purchase with cash.
I just going to take a small component of the landlord costs, maintenance. If 5% of their 20,000 house have major maintenance issues like HVAC, roofing, plumbing, foundation, etc that alone with kill the profitability. And I doubt these homes are being repaired with an economy of sale like 100 unit apartment building. These breakdowns are occurring over country, so the owners are dealing with local constructors which they don’t have establish relationship (read expensive).
They most likely slapped on a huge amount of bond debt which is what’s causing them to lose money right now.
Russ is right that they will need to focus on bringing down their vacancies if they want to make any money.
There is a reason for the unprecedented move into SFR homes. The reason is low interest rates. The reason it is unprecedented is because high overhead makes it impossible to scale up this business model profitably. Big money only tries to do it because they are being forced further out on the risk curve chasing yield. Suckers.
Was ‘American Homes 4 Rent’ some of those cash buyers?
I think I remember the investors described as the smart money.
American Homes 4 Rent was a cash buyer at auction. I believe it was the founder of a storage company that started buying up rentals.
Chicago loses court challenge to vacant building registry
Vacant buildings in foreclosure with mortgages backed by Fannie Mae and Freddie Mac do not have to follow Chicago’s vacant building ordinance, a federal judge has ruled.
The decision, filed Friday in Chicago by U.S. District Court Judge Thomas Durkin, deals a blow to the city, which is trying to grapple with thousands of empty buildings caught up in a lengthy foreclosure process and dragging down neighborhoods.
It also has national implications. More than 1,000 municipalities around the country, by one count, have laws that require the registration and maintenance of vacant properties. The court’s decision could prompt the FHFA to file suit against other cities’ local laws, or municipalities themselves may have to retool their own ordinances if they decide they are no more enforceable than Chicago’s.
The local law, which took effect in November 2011, requires not just owners of vacant buildings but also mortgagees — the holder of the mortgage but not necessarily the owner of the mortgage — to promptly register a building after it becomes vacant, pay a $500 registration fee and maintain certain property standards. Violators of the ordinance incur fees of $500 to $1,000 for each infraction.
Less than a month after the ordinance took effect, the Federal Housing Finance Authority, the overseer of Fannie Mae and Freddie Mac, filed the federal lawsuit against the city, claiming properties they backed in foreclosure were exempt from the ordinance. The FHFA has argued, among other things, that Chicago could not make law for the federal agencies and that the registration fees amounted to a tax on the federal government.
In oral arguments in June, Howard Cayne, an attorney representing the FHFA, said the law amounted to “an incredible power grab” by the city. Fannie Mae and Freddie Mac have their own property maintenance standards that are not as demanding as the city’s ordinance.
During that June hearing, Durkin said he was sympathetic to the city’s efforts to get a handle on its vacant building issues because of the “rampant crime problems.”
In his ruling siding with most of the FHFA’s arguments, Durkin reminded the agency of its responsibilities, and the city of its limitations.
“…buyers are benefiting from appreciation.”
How exactly do buyers benefit from appreciation? I never really understood this concept. If my house price goes up, my property tax bill goes up. If my house price goes up, my homeowner’s insurance premium goes up. If my house price goes up, the move-up house price goes up even more.
Unless you are willing to borrow against equity, then you never realize the gain until you sell and either downsize or relocate. Either way you are sacrificing square footage or location, and paying a 6% commission and moving costs to do it.
If you are willing to borrow against equity, then your payment goes up, for the SAME HOUSE. Since we no longer have falling rates, mortgage payments will actually rise this time. So where’s the benefit (to the homeowner, not the realtor)?
The only real benefit I see is in paying down the principal, and not having a mortgage payment during retirement. Fixed payment is nice too. But appreciation is only good for Ponzi borrowers. Otherwise, it just makes your balance sheet look good.
If, however, I save a thousand per month renting instead of owning, then I can “hire” an extra 12,000 employees every year. These employees work 24/7 earning me money. Some are good employees, and some aren’t. On average they make me 7-8% every year. Renting, in my experience, is always cheaper than owning. You will rent far less than you will own. There is something about that rent check every month that makes you think hard about whether you need that extra empty bedroom. After a year of paying $500/mo. for something you don’t use, you either get a roommate or downsize. Hard to do if you have to pay a realtor 6%.
“With a frenzied housing market shutting out would-be buyers all over Southern California, sending that check to the landlord is looking smarter every day.”
Here’s the thing: everyone talks about the financial benefits of owning, buy no one talks about the financial benefits of renting:
1) You can rent somewhere you would never want to buy. When you are just starting out, you don’t need good schools. You need to live close to work (reduce commuting costs) and you need to keep your expenses low. If you don’t currently have kids, then you have at least a 5 year window. Southern California is one of those strange places where you can have really nice homes surrounded by urban blight. You can rent in a nice gated community in a marginal area and save thousands per year. Hop on the freeway, and you are in a nice area in 5 minutes.
2) No HOA fees. While the HOA fees are no doubt included somewhere in my rent check, I’m not subject to any special assessments as a renter. If a special assessment comes through to repave the roads, paint the building, or replace the roofs, I call the mover when the landlord tries to raise the rent.
3) No maintenance. None. I don’t have to fix anything — I also don’t have to pay to have it fixed. Termites? Not my problem. Leaky faucet? Call the plumber, take it out of the rent.
4) Rent almost never goes up while you are there. You only have to pay more when you move. I have been in the same place for the last 3 years. Never had my rent go up. The place I was at before, I was there for 4 years. No increase.
5) Easier to rent where you can commute to 2 jobs. Dual income families who rent can locate between the two job centers, and minimize commuting time and costs. How much is it worth if both income streams are maintained vs losing one? This is one of the main reasons we continue to rent. The place we want to buy makes it impossible for my wife to keep her current job. By renting for 5 years until our oldest starts school, we can sock away an extra 20% into retirement, and about the same into savings. That really helps to offset any housing equity gains that we are “losing” by renting. And that 40% of income is real money that is there if we need it. It is also growing every year. We’ve more than doubled our net worth since the stock market crashed in 2008 — how many homeowners (not flippers) can say the same?
I’ve run the numbers. Financially, it makes no sense for us to buy. We are far better off continuing to rent. But life isn’t always about dollars and sense. Is it? At some point, you can afford it, so you buy. You want some place to call your own, so you rationalize. I am hoping the mania recedes into the shadows this fall, and attractive properties at rational prices are again the norm. We’ll see, said the Zen Master.
“On conversely, those that plan to live in their houses for less than five years are still better off renting.”
I can’t imagine someone buying a house they think they would only live in for four years. It takes me two years just to figure out where I put everything once I move. It takes two more to get it organized. Year four is when I start hanging pictures…
After our 2007 purchase and on-going attempt to sell currently, and researching rental homes nearby for two months, my wife now fully understands the benefits you’ve outlined.
After failing on buying a home this summer and also getting sticker shock at the amount we would have shell out monthly and the huge hit on our life savings, my wife is also singing a different tune. We are still looking to buy but wife now knows how lucky we are to have a nice apartment for so cheap that is minutes from our respective jobs. The places we can afford doubles our commutes although that is still under half an hour of commuting one way.
This past weekend was our first without a tour and it was bliss for me hehe. Went to the park on Saturday, YMCA on Sunday for a swim.. aah the weekends.
“How exactly do buyers benefit from appreciation? I never really understood this concept.”
Everything you outlined is true, but most buyers and owners feel good about appreciation even if they don’t spend it. It does add to their net worth, and it creates future buying power.
If you are a loan owner with a small down, raising prices or inflation will cause your equality to increase. Upon a sale, the increase (inflated equity ) can be extracted and used to have a larger down for a higher priced house. Owners, bankers, RE agents and govt. love it due to leveraging, increased number of sales (commis) and higher fees/taxes.
If you are selling a starter home that rose 20% in value, and want to buy a move-up home that is 1.5x the starter home, you are going to pay 1.2*1.5=1.8 times the current cost of the starter home. If the starter home is 100k, you have realized a gain of 20-.06*120=12.8k – assuming no amortization. The 12.8k will have to cover the costs of moving, loan origination, and down payment. After about 5k expenses, you have 8k down. This is only 8/180= 4.4%. So, your new loan balance will be 175.6k vs 100k on the starter home. When you consider that rates are rising, not falling right now, the payment is likely to be much, much higher. So, I don’t see how appreciation really works in this market when incomes aren’t rising and rates are.
To earn that 12.8k, you have paid mortgage interest, maintenance, property taxes, and insurance. Depending on the amount of time it took for the prices to rise by 20%, you may or may not show a gain over the amount invested.
This is why I/O and Option ARMs were so harmful to the move-up market. Without amortization, i.e. building the move-up down payment through principal repayment, the move-up market won’t have buyers. Without the Chinese buying thousands of move-up properties in California this year, the move-up market would be more or less extinct. I’ve had several conversations with realtors at open houses that keep telling me that the only people that have money is the Asian buyers, and they pay all in cash. Everyone else is lucky if they have 20% down.
Fantastic post!
I bought a home in May, but you outlined beautifully why renting can make so much sense. It’s flexible when YOU need to be flexible, and it’s low risk.
Our family has reached school age, our careers have matured and we found an area we absolutely love; it was time to put down some roots and take more control. We don’t need or necessarily want the flexibility of renting anymore, we want the stability of a fixed payment and consistent neighborhood community.
We put 20% down on a conventional loan we can totally afford; I don’t care about home values anymore (so why do I keep visiting this site??).
“(so why do I keep visiting this site??).”
I’m glad you do.
My next door neighbor has rented his place for 10 years because he wanted to keep his kids in a good school district, and not deal with the hassle of moving after his divorce. We rent in a great neighborhood where 1/3 are renters. who says you need to buy to live in good community and go to good schools? Im finding more of the original owners (at least 10 years or longer) out here are old, poor, prop 13 shelters. They don’t take care of their homes and could never afford to buy the same old run down rancher if they tried today.(3 bed 1960 no upgrade runs around $900-$1.2M ) Proof the Bay Area is turning into a true 3rd world.
Prop 13 Shelters. Good one!
Leverage. You have to time it and use leverage, and you can come out ahead. You are good with numbers. If you run the numbers using a 10% down payment and wage increases, you can more than pay for the expense. When you rent you pay most of the same expenses, and as you pointed out, they are included with the rent. If you move, you still have to pay them, and if you pay less when you move, then generally speaking, you are lowering your standard of living. When you rent, you are paying for someone else’s leverage, so basically it comes down to timing.
The mother in law made a strange suggestion this past weekend. She said to get a loan from Japan and buy a house that way. We looked into it and it’s nice to see a loan for half a million with a sub-2% interest rate but I am wondering how the conversion rate from dollar to yen will factor into it when we start paying back the loan. My wife qualifies because she is still employed in Japan although she works here. Well if we go ahead I’ll spill the details on how it will all work.
I was playing around with the rates in Redfin it’s over $800 less a month from 5% to 2% for 600k home. Very enticing.
The currency exchange rate will absorb the difference.
“but I am wondering how the conversion rate from dollar to yen will factor into it when we start paying back the loan.”
This is an added risk to the transaction. Your repayment will be in Yen, so unless you are also going to hedge in the currency futures market, you will either benefit or get crushed by changing exchange rates. It certainly does NOT fix your cost of financing.
As an investor, I don’t think right now is a good time to buy. As a homeowner, it could be, especially with a long enough time horizon. If you are buying an entry level place, it’s still possible to get a PITIA payment that is the same as rent, after interest and property tax deductions are factored in. So why not buy and capture the forced savings through principal amortization instead of paying off a landlord’s mortgage? This is one of those times when if you need to sell in less than 5 years, you probably shouldn’t buy, but for a longer time horizon it’s not very risky.
Regardless of what people should do, I believe they will continue to buy houses and push prices up for awhile longer, forming another real estate bubble that will crest in 2-3 years. The opportunity to profit from this bubble would be another reason to buy right now, as today’s prices will look like relative bargains in a few years. Speculators will be a self-perpetuating source of demand that contribute to ever higher prices. With stocks showing weakness and gold in the absolute gutter, speculators need some place to play, and housing makes the most sense.
Today’s prices may or may not look like relative bargains in a few years, particularly if prices to crest and start to slowly deflate after lenders get out from under their bad loans.
Where I do agree with you in concept is that the cost of ownership is not likely to decline. In a few years, the monthly cost of ownership people are locking in today will look like relative bargains.
I have to agree with Irvine Renter on the monthly cost of ownership. I put together a spreadsheet that takes the Case Shiller index, the current Freddie Mac interest rate, and calculates an “effective” indexed annuity number based on the CS number as the Principal, and the Freddie Mac as the rate. This rate affordability index shows that this spring was the best time to buy since 1996. Unfortunately, no homes. My low number was 40.4 at the beginning of the year, and has since risen to 55.8. The prior bubble low was 34.0 in April 1996. The peak was 106.2 in August 2006. So, based on the Case Shiller index values, and working in interest rates, we are about the same as April 2011. I think the rates are going to drive this number back down into the 40s, but even if it doesn’t, we are a long way below the 106.2 we saw in 2006. I was hoping to see something in the mid-thirties before I bought, but cest la vie. If the investors and the banks hadn’t got in the way, I probably would have.
Sounds pretty sophisticated. Do you include property taxes too or is that built in the index?
I have a feeling a big mortgage rate and underwriting shock will knock it back down in the low 40’s again.
I like buying an asset when it is in the gutter. But hey, that is just silly me, what the heck do I know?
Then you may want to wait awhile. As an asset class gold is in the gutter, but that doesn’t mean it’s cheap yet.
1. Why, in your opinion, has the gold bubble popped?
2. At what price will you consider it cheap?
3. Which Quantitative Easing (part 4, 5, 10?) will create a lasting recovery?
Thanks in advance.
I’ll wade into this discussion.
IMO, gold prices are driven almost completely by the perception of the soundness of fiat currency. In 2008, we had a near collapse of the financial system, so people turned to gold just in case we had worldwide currency Armageddon. With the fear of an imminent currency collapse behind us, the price of gold is dropping. It isn’t until the broader public wakes up to the ramifications of endless quantitative easing that gold prices will rise again. Unless or until that happens, people will still (perhaps erroneously) believe in the safety of the US dollar, and they will not pile in to gold.
Mellow Ruse says:
June 28, 2013 at 12:43 pm
”el numeraire is toast.”
”My prediction: Gold will bottom at $500 and stay there.”
———————————————————
June 28: $1190oz
Aug 23: $1419oz
Cheers!
el O – I do not remember the exact date, but the on the third try when gold went above $1000 I said you would never see $1000 gold again. I stand by it.
IR – When Lehman Bros. collapsed, so did gold. The pog decreased for most of 2008.
el O – Only another 33% increase needed to get gold back to peak value. It’s been 2 years with absolutely no benefit to owning gold. How long until gold bulls can actually benefit from compounding once again?
matt-
1. Opportunity cost is better in stocks, real estate, even bonds.
2. $500
3. I don’t know.
Funny, I do not know even one ‘gold bull’ who bought at peak value.
Matt – I know you did not ask me, but I want to answer anyways.
1. There has not been a gold bubble since the 80’s, so it could not have popped.
2. $1410
3. There is no quantitative easing that will create a “lasting” recovery”, any more than going further into debt when one is insolvent can make one properous.
I have to agree with you that for investors it’s not that good. It’s highly dependent on location, location, location. Overbuilding rental, lack of jobs or pay increases need to be factored in, but outside of the landlords’ and renters’ control. Too bad inflation on replacement cost of HVAC, refrigerators, etc. are dramatically inflating due to price increases and significantly lower life of the products.
For a principle resident, it’s better. However, many companies are not paying relocation expense and asking do you rent or own. Figuring that the owners will likely decline the offer due to not being able to sell.
“. With stocks showing weakness and gold in the absolute gutter, … “
ABSOLUTE gutter? And it isn’t cheap yet? What is beyond absolute? The absolutist absolute?
Gold went from $1,900 down to $1,200, losing about 37%.
In 2009, many homes were down by a similar amount and nobody would have blinked an eye if you had said housing was in the absolute gutter, and yet it would have been perfectly fine to state that housing wasn’t cheap yet and had much farther to fall.
Housing was in the gutter, absolutely. And not only was it fine to say it, but it was correct. And it had further to fall. And on a a real, currency depreciation adjusted, basis, it will fall even further.
And you are wrong when you say that gold is in the gutter, absolutely or not. It had a correction.
Something else to increase volatility again.
US Treasury to reach debt limit by mid-October
Treasury Secretary Jack Lew pressed Congress on Monday to allow the government to borrow more money, saying that it could default on its obligations if lawmakers do not act by mid-October.
“Congress should act as soon as possible to protect America’s good credit by extending normal borrowing authority well before any risk of default becomes imminent,” Lew said in a letter to congressional leaders.
The borrowing limit lift does not lead to increase in spending; rather, it allows the Treasury to pay expenditures Congress has previously approved, he said.
“If investors should become unwilling to loan the United States money, the United States could face an immediate cash shortfall,” Lew said.
In the summer of 2011, a fight over the government’s debt limit turned into a crisis that weighed heavily on markets.
Lew said earlier this year that the debt ceiling was unlikely to be reached until September.
“People shouldn’t relax—Congress should deal with this right away,” he said at that time. “The uncertainty caused by putting this off is not good. The anxiety caused to the U.S. and world economy by putting this off until the last minute is not good.”