Despite the fact that house prices crashed, wiped out millions of loanowners, and wiped out the illusory equity of an entire generation, people persist in believing owner-occupied housing is a good investment. Most people believe house prices appreciate 5% to 10% or more each year and by simply owning real estate they can become wealthy. It doesn’t work that way. Over the long term, house values increase with wage inflation as buyers bid up prices with their increasing incomes. An amortizing loan is a forced savings account — assuming the owner doesn’t refinance or HELOC this money out and piss it away — so houses can serve as a retirement savings vehicle, but only if the owner is disciplined. The false belief that rapid appreciation of a highly leveraged asset can create wealth prompts speculation. This speculation is what drives home prices up to unsustainable heights that inevitably lead to a very painful crash.
Robert Shiller Destroys The Idea Of Investing In A Home
Sam Ro | Feb. 7, 2013, 7:25 AM
Robert Shiller, the Yale economist who nailed the housing bubble before it burst, was on Bloomberg Television with Trish Regan and Adam Johnson on Wednesday afternoon to discuss the U.S. housing market.
As usual, Shiller was reluctant to declare that home prices had bottomed. He explained that the housing market is a speculative one and that there’s no telling, which way prices would go tomorrow. He also explained that there wasn’t much reason to believe that home prices would appreciate back to levels seen during the last cycle.
Regan followed up with a question that got Shiller perked up.
“Then why buy a home?” she asked. “People trap their savings in a home. They’re running an opportunity cost of not having that money liquid to earn a better return in the market. Why do it?”
This woman’s question reveals much about how twisted people have gotten about housing. Her underlying assumption is that without the investment component, there would be no other reason to own a home. The false belief in investment returns is certainly the only justification for overpaying for a house, but it’s not the only reason to own a home. There are valid emotional and consumptive reasons to own. If Americans purged themselves of the delusions about financial returns, prices would fall to stable levels of incomes and rents.
“Absolutely!” Shiller exclaimed. “Housing traditionally is not viewed as a great investment. It takes maintenance, it depreciates, it goes out of style. All of those are problems. And there’s technical progress in housing.
Most people when the consider buying real estate completely ignore these realities. When it’s owner-occupied, they pay the maintenance as a lifestyle expense and fail to realize this cost of ownership weighs against the returns on their property (renters don’t pay for big maintenance items). The quality of the structure deteriorates over time and becomes dated. The owner must replace the roof, refresh the landscaping, update the kitchens and baths. This big-ticket items are also ignored. Further, owners tend to over-improve their properties changing them to suit their tastes. Such improvements add far less in value than they cost. That isn’t to say all such improvements are foolish. People can consume whatever they choose, but it invalidates the investment reasoning they used to justify the purchase in the first place.
So, new ones are better.”
Perhaps, but not in California. New homes have onerous Mello Roos fees which generally negate any savings from lower maintenance costs.
These were some of the issues Shiller addressed in his classic book, Irrational Exuberance.
He continued.
“So, why was it considered an investment? That was a fad. That was an idea that took hold in the early 2000′s. And I don’t expect it to come back. Not with the same force.
It probably will come back in California. Rising prices stoke fears of kool aid intoxication. People want to believe. It’s like a lottery. Believing your home will go up dramatically in value provides hope for the future. There’s nothing wrong with hope, but it makes for a poor financial plan. Many people fail to save in other ways because they falsely believe the house will do all the saving for them. This costs them dearly in their retirement as the must suffer a loss of entitlement or work longer because they foolishly believed the house would provide for them. Rather than face these consequences, the federal reserve is currently reflating the bubble ensuring the moral hazard of a lack of savings due to the false belief in housing riches will persist for another generation.
So people might just decide, “Yeah, I’ll diversify my portfolio. I’ll live in a rental.” That is a very sensible thing for many people to do.”
Whenever Shevy works with a client, he prepares cost of ownership reports for each property someone wants to bid on. These reports compare the cost of ownership to the cost of a comparable rental so people can evaluate for themselves whether renting or owning makes more sense for them.
Another common mistake people make when considering a home an investment is to ignore the additional costs of ownership versus renting. If an owner is spending $1,000 a month or more owning, this quickly negates the long-term lump sum they receive when they sell. Most also fail to consider transaction costs at both ends of the deal as well. This can be 10% of the price or more, and it often represents a huge portion of the gross profit on the deal.
Adam Johnson also noted that this was in line with Shiller’s assessment that real U.S. home price appreciation from 1890 to 1990 was just about 0 percent. This is explained by the falling costs of construction and labor.
For people who can’t wrap there heads around this, Shiller offers an analogy.
“If you think investing in housing is such a great idea, why not invest in cars?” he asked. “Buy a car, mothball it, and sell it in 20 years. Obviously not a good idea because people won’t want our cars. It’s the same with our houses. So, they’re not really an investment vehicle.” …
Are cars really like houses? During the crash, houses depreciated like cars, but ordinarily they don’t. People will find the same value in houses twenty years from now that they do today. Technology doesn’t make houses obsolete like it does with cars. Houses don’t need to be replaced, simply remodeled.
A better way to view this is to look at the behavior of private equity hedge funds. If houses were truly a good investment, hedge funds would be buying at every price point in every market like owner-occupants do. They’re not. Instead, hedge funds are only buying properties at the lowest price points in the most beaten down markets because those are the only investments that make sense. Owner occupants bid prices of houses up to levels that don’t make investment sense, mostly out of a desire for consumption, but increasingly out of a mistaken idea that it really is a good investment.
Wells Fargo recoups their HELOC losses
I recently reported that Lenders will target near-equity squatters for future foreclosures. Today’s featured property is an example of what I’m talking about.
The former owner only refinanced one time with a $722,400 first mortgage, but he also took out a $200,000 HELOC. With prices down, Wells Fargo, which owned both loans, was in no hurry to foreclose. However, with prices up lately, this squatter was near the surface, so Wells Fargo foreclosed on him. If they get their asking price, they will recover all their lost HELOC money. Expect to see more foreclosures like this one as underwater squatters reach the surface.
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Proprietary OC Housing News home purchase analysis
2910 3RD Corona Del Mar, CA 92625
$949,900 …….. Asking Price
$700,000 ………. Purchase Price
12/12/2003 ………. Purchase Date
$249,900 ………. Gross Gain (Loss)
($75,992) ………… Commissions and Costs at 8%
============================================
$173,908 ………. Net Gain (Loss)
============================================
35.7% ………. Gross Percent Change
24.8% ………. Net Percent Change
3.3% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$949,900 …….. Asking Price
$189,980 ………… 20% Down Conventional
4.11% …………. Mortgage Interest Rate
30 ……………… Number of Years
$759,920 …….. Mortgage
$183,370 ………. Income Requirement
$3,676 ………… Monthly Mortgage Payment
$823 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$237 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$4,737 ………. Monthly Cash Outlays
($856) ………. Tax Savings
($1,074) ………. Equity Hidden in Payment
$275 ………….. Lost Income to Down Payment
$257 ………….. Maintenance and Replacement Reserves
============================================
$3,340 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,999 ………… Furnishing and Move In at 1% + $1,500
$10,999 ………… Closing Costs at 1% + $1,500
$7,599 ………… Interest Points
$189,980 ………… Down Payment
============================================
$219,577 ………. Total Cash Costs
$51,100 ………. Emergency Cash Reserves
============================================
$270,677 ………. Total Savings Needed
The property above is available for sale on the MLS.
Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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30 Responses to “Shiller explains why owner-occupied housing is a poor investment”
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From the Video when Shiller asked the host, “How sure are you of this 5 year house rally you are predicting?”
This reminds me of 2007 with these hosts where just pulling numbers out of the air making predictions. I can see the average person doing this, but these are hosts on Bloomberg. I remember a video where on another financial channel the hosts were laughing at Peter Schiff because he was predicting a major price decrease.
I SFR is an low cash flow investment unless you hold it for a very long time and then do 1031 in the future to a multi-family property OR if you were able to purchase in a dip like Las Vegas. Only when the mortgage is paid do you finally get good cash flow. Also concerning multi-family they really don’t become efficient investments until you are investing with properties that are 20 plus units.
Most of the things Peter Schiff says earn the resulting targeted laughter.
“crash proof” lays out in detail exactly what has happened, what is happening, and what will happen. the only thing he missed is he underestimated the level of government intervention and the extent of can kicking.
or are you talking about his entire mortgage bankers speech?
I like hearing what contrarians have to say, so I subscribed to his podcast a couple years ago. After listening to him for 10 or so hours, he just sounded like a chicken little hawking his financial products. If his extreme forecasts are realized, I won’t be worried about my financials. I’ll be worried about survival.
Also, anyone who touts returning to the Gold Standard as the cure-all for our financial system is “not a serious person.”
Currency must be backed by gold or the market mechanism of keeping government spending in check can no longer function.
is Howard Buffett wrong?
http://www.lewrockwell.com/orig12/buffett1.1.1.html
I understand what the Gold Standard is supposed to solve. The problem its proponents have is that it comes with its own very messy problems. i.e. There’s no magic bullet.
I disagree with “Warren” Buffett on many things. He thinks you can keep taxing wage income at higher rates with little to no effect, yet doesn’t want taxes on investment income raised. A bit self-serving, eh?
I DO think housing is going to go up in value but only in absolute terms and not in inflation adjusted terms. Housing will track inflation which I predict will go higher and higher in the next few years as the Fed pumps up the printing presses. Inflation could be as high as 6-7% and housing could rise yearly that amount. WHICH makes housing a good buy…why? because wages and savings are not going to be flat. Having money in housing at least would preserve capital. This is why investors are in a mad rush to pour money into housing. It’s a hard asset that many believe will be a good hedge against the upcoming inflation.
I meant to say “wages and savings ARE going to be flat”
Unfortunately I cannot edit the response.
Bingo.
Problem is, OC condo’s/TH’s/SFR’s remain mis-priced as investment, instead of shelter.
That is the effect of residual kool aid intoxication.
“Owner-occupied housing is a poor investment.”
Fixed mortagage payments don’t go up, rents do. Your $1000 rent in 1983 is now $2500. This was a poor investment? What am I missing?
“A better way to view this is to look at the behavior of private equity hedge funds. If houses were truly a good investment, hedge funds would be buying at every price point in every market.”
You’re no longer talking about owner-occupied. Hedge funds decide whether to buy or not buy, not buy vs rent.
“Fixed mortagage payments don’t go up, rents do. Your $1000 rent in 1983 is now $2500. This was a poor investment? What am I missing?”
Fixing the cost of ownership has tangible value that increases as the holding period increases. However, this value is eroded very quickly by overpaying up front, which many people do. Paying $3,500 today to own a property that you can rent for $2,500 a month, a common occurrence in OC, negates the value of fixing the cost of ownership.
Personally, one of the financial reasons I will buy is to fix the cost of ownership. However, I don’t consider this an “investment” as much as a financial planning tool.
When calculating cost of ownership, it’s amazing how many people only factor in mortgage payments. I know several homeowners who brag about their low mortgage while at the same time saying they just spent many thousands in repairs/improvements in the last couple of years. Sometimes tens of thousands of extra cost. Add property taxes, insurance, water (which most renters don’t pay and can in the summer be $300/month) and there are so many additional costs – many of which are unpredictable. Even people living in 1,000 sf 2 br house with a tiny useless backyard pay more monthly than I do to rent a much bigger place, and when you factor in repairs and maintenance, they pay WAY more. Yet they still brag about their low mortgage…
Orange County, specifically Irvine, and the immediately surrounding areas benefit from The Irvine Company’s ability to control rents as they own over 40,000 apartment units with more on the way. They used that in the recent market downturn to sustain the price of their SFD projects. But without a strong underlying move-up market (with so many low end condos/etc. being bought by investors) building equity, it’s doubtful that can be sustained. It will become more and more apparent as incomes do not rise as fast as “asking prices”. Then, they might just do what they did in the ’80′s and put a ton of apartments into condo-converstions and really screw up the market. But if you get out of Irvine….down to Mission Viejo, etc. it’s a very different story. And many of those areas have low or no Mello Roos to drive up the monthly cost.
Harvard Study Examines Role of Investors in Atlanta
Atlanta, one of the metros hardest hit by the foreclosure crisis, has experienced an uptick in the role investors play in its housing market.
Also, since the foreclosure crisis, the investors’ activities and strategies in the market have shifted, according to a new report from Harvard’s Joint Center for Housing Studies.
At the start of the foreclosure crisis, investors stepped into the Atlanta market to buy up REO properties and flip them. However, starting in 2008, more investors began shifting their focus to renting their REO purchases.
Investor activity tended to vary somewhat by neighborhood, according to the Harvard study.
Investors appeared to be more active in the south and southwest parts of Atlanta, where poverty and vacancy rates are high and median home values are low.
REOs in these lower-income neighborhoods have also been slower to resell after being purchased by an investor.
REOs in neighborhoods with 90 to 100 percent REO-investor tracts were 60 percent less likely to resell within one year than neighborhoods with at most 50 percent REO-investor tracts.
Additionally, the type of investor varied by neighborhood with smaller investors more likely to purchase properties in areas with lower percentages of REO-investor tracts, and larger investors tending to be more active in more distressed neighborhoods with higher REO-investor tracts.
Investors also tended to sell to other investors more often in more distressed neighborhoods. In neighborhoods with at most 50 percent REO investment, investors only flipped properties to other investors 10 percent of the time. In neighborhoods in the 90 to 100th percentile, 64 percent of flipped homes were resold to other investors.
The majority of investors in Atlanta properties are based in Georgia or have Georgia addresses, according to the Harvard study. In fact, in 2011 84 percent of REOs that had been likely purchased by investors were owned by companies with Georgia addresses.
Investors noted a perceived increase in out-of-state investors in 2012 with much of their activity concentrated in less-distressed neighborhoods.
Investors cited several concerns to the Harvard researchers, including possible negative impacts of bulk purchases, “difficulties posed by current appraisal and home lending practices when trying to sell to owner-occupants,” and the “challenges of renting properties to low-income tenants who are highly vulnerable to economic shocks and without substantial financial reserves.”
Acknowledging Government’s Interference, Firms Now Predict Policy To Gauge Future House Prices
Coinciding with Wednesday’s House committee hearing on the Federal Housing Administration (FHA), Keefe, Bruyette & Woods, a boutique investment firm, released its predictions of what actions the government is and is not likely to take to further assist the housing market.
Generally speaking, “any large program expansions which require congressional approval are, in our view, not likely to go far,” said Brian Gardner, SVP of Washington research at Keefe, Bruyette & Woods.
The government’s two flagship housing programs introduced in 2009, the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP) are set to expire at the end of this year.
HAMP and HARP have assisted 1.4 million and 1.8 million homeowners, respectively.
President Obama has already expressed his support for expanding government refinance programs, but thus far Congress has resisted.
Obama proposed expanding access to refinancing through FHA, a program that would draw funding through a tax on banks. He also proposed a program to allow borrowers whose loans are not backed by Fannie Mae or Freddie Mac to refinance through the GSEs.
Both programs required congressional approval, and both programs were denied.
Gardner suggested FHA’s current financial state “makes it almost impossible politically that it would be a vehicle for any mass-refi program.” However, Gardner does not anticipate the FHA will require a draw from Treasury this year.
Sens. Barbara Boxer (D-California) and Bob Menendez (D-New Jersey) introduced the Responsible Homeownership Refinancing Act to extend HARP for one year and expand eligibility. The bill was held up in Congress last year, but Gardner believes the senators will push for its passage again this year.
“While we think there is a modest chance that Menendez-Boxer may pass the Senate, we think chances of the bill passing the House are quite low,” Gardner stated.
According to Gardner, housing market assistance measures that can be passed without congressional approval have the best chances of being implemented.
Rancho Mission Viejo, LLC Closes Escrows With Eight Builders for 941 New Homes in 11 Neighborhoods (Including 286 55+ Homes) at Sendero on The Ranch
Escrows have closed and construction is now underway on the model homes for the 11 distinctive residential neighborhoods slated to open early this summer at Sendero, the first mixed-use residential village within the new master-planned ranch community of Rancho Mission Viejo.
Encompassing 23,000 acres in South Orange County, Rancho Mission Viejo is comprised of more than 17,000 acres of permanent open space and approximately 6,000 acres of future residential and mixed-use development. The Ranch is Orange County’s last working ranch, home to the open spaces of The Reserve at Rancho Mission Viejo and very soon, the village of Sendero (and its gated 55+ enclave of Gavilan), where a broad range of new homes will be offered for sale in mid-2013.
“We are very pleased to welcome this exceptional group of neighborhood builders to The Ranch,” said Don Vodra, Chief Operating Officer of Rancho Mission Viejo, LLC., stewards of Rancho Mission Viejo and community master planners/developers. “The builders have taken possession of their parcels, their model home designs have been approved, the construction crews have moved on site, and now the start of model home construction at Sendero places us firmly on track for a simultaneous grand open early this summer.”
Vodra explained that a total of 11 different neighborhoods will be built at Sendero by Del Webb, Meritage Homes, Ryland Homes, SeaCountry Homes, Shea Homes, Standard Pacific Homes, Tri Pointe Homes, and William Lyon Homes. Four of the 11 neighborhoods are within Sendero’s gated 55+ enclave of Gavilan. Ultimately, a total of 941 attached and detached homes (as well as apartments by Western National Group) will be offered at Sendero.
Among the homes to be constructed at Sendero are a variety of townhomes, duplexes, courtyard homes, and a broad range of single-family detached homes, designed in distinctive Spanish Heritage, Western Ranch, and Ranch Adobe architectural styles. Interiors will range from approximately 950 to nearly 3,000 square feet with a host of open and flexible floorplan arrangements designed to foster California-style indoor/outdoor living. Prices are anticipated to range from the $400,000s to under $1 million.
Sendero neighborhoods commencing construction include the following:
* Lyon Cabanas: Townhomes offering one and two bedrooms in floorplans ranging from 950 to 1,378 square feet.
* Lyon Villas: Townhomes offering two and three bedrooms in floorplans ranging from 1,284 to 1,552 square feet.
* Shea: Townhomes offering three and four bedrooms in floorplans ranging from 1,420 to 1,779 square feet.
* SeaCountry: Single-family detached homes offering three and four bedrooms in floorplans ranging from 1,803 to 2,020 square feet.
* TriPointe: Single-family detached homes offering three and four (optional bonus room/fifth bedroom) bedrooms in floorplans ranging from 2,050 to 2,412 square feet.
* Ryland: Single-family detached homes offering up to four bedrooms in floorplans ranging from 2,310 to 2,655 square feet.
* Meritage: Single-family detached homes offering up to five bedrooms in floorplans ranging from 2,678 to 2,996 square feet.
Neighborhoods within the gated 55+ enclave of Gavilan include the following single story homes:
* Standard Pacific Bungalows: Single and duplex bungalows offering two to three bedrooms in floorplans ranging from 1,278 to 1,809 square feet.
* Standard Pacific Casitas: Courtyard homes offering two to three bedrooms in floorplans ranging from 1,624 to 2,059 square feet.
* Shea: Single-family detached homes offering two to three bedrooms in floorplans ranging from 1,770 to 2,041 square feet.
* Del Webb: Single-family detached homes offering two to three bedrooms in floorplans ranging from 2,000 to 2,300 square feet.
I was intrigued ’til I saw the location. “Rancho Mission Viejo” is a bit of a misnomer. This development is directly below Ladera Ranch!
I will probably go with my wife to see this development. However, I still think my plan is to stay in the Fullerton, Brea, Placentia area. I prefer a smaller much older house, but with a yard and no mellow roos or HOA
Sorry to go off-topic here, but…. Jim Rodgers now joins other ‘bashers’.. warning about treasuries.
Can you imagine the carnage….. if the ”great rotation” from bonds into stocks (as many prominent pundits + mainstream media suggest is likely to happen), actually turned out to be, instead from stocks into bonds….
Are TBT holders about to get whacked???
“safe haven”
FYI squatters in Florida are using adverse possession laws to occupy empty multi million dollar mansions.
They’ll never get to keep them. It takes 10 years of “open and notorious” possession to acquire property that way. The owner only has to file a single objection to negate the claim. Lenders will foreclose before this window of opportunity closes on them.
What will be interesting to see is if delinquent mortgage squatters can use adverse possession to ward off foreclosure proceedings in the future. If the bank waits too long to foreclose, do they lose that right?
Good question. I think in California it’s only 5 years.
Can you imagine the stories if a mortgage squatter gets a free house by adverse possession? Squatters everywhere will be hoping they hit the lottery.
Adverse possession – another topic you spend many hours on in first year law school, that has no application to real world practical legal work. However, the worst offender is “The Rule Against Perpetuities.” Man, what a waste of time…
They might get the title in the end, but they have some free temporary luxury housing. The banks will learn how to secure their vacant house, but what the small guy how goes on vacation to find some one living in their house?
TX has mules that will squat in a vacant house. They know if they are found and don’t leave, it won’t end well.
What could go wrong?
Americans Are Tapping Into Home Equity Again
Published: Friday, 8 Feb 2013 | 11:04 AM ET
Nearly 11 million borrowers are underwater on their mortgages, owing more than their homes are worth, according to CoreLogic, and yet home equity lines of credit are suddenly on the rise again.
During the housing boom of the last decade Americans withdrew over $1 trillion in home equity. They did it through cash-out refinances, home equity loans, and home equity lines of credit. The latter allowed them to use their homes like an ATM. They spent the money on cars, televisions, vacations and fancy home upgrades. It was seemingly endless equity, until suddenly that equity was gone.
“Home prices are definitely a factor” in the recent rise home equity lines of credit, said Brad Blackwell, an executive with Wells Fargo Home Mortgage. “As they increase, people have more available equity.”
Blackwell also pointed to increased consumer confidence, meaning borrowers now feel better about their ability to repay these loans. Both factors fueled a 19 percent jump in originations of home equity lines of credit at the end of last year, according to Equifax. In 2008, as housing was crashing, home equity line originations dropped 55 percent.
“Nationally we’ve seen a 31 percent increase in HELOC’s year-over-year,” said a spokesperson from JPMorgan Chase.
With home prices up 8 percent year-over-year in December, according to the latest reading from CoreLogic, homeowners are regaining home equity at a fast clip—1.4 million borrowers rose above water on their mortgages through the end of September. That number likely increased as price appreciation accelerated toward the end of the year.
Does this mean a return to the reckless equity withdrawals of the housing bubble? Likely not.
“I would guess that most of the current home equity line borrowing is quite prudent. We know that it is being very conservatively underwritten with plenty of equity,” said Guy Cecala, editor of Inside Mortgage Finance.
While it is too early to say exactly what borrowers are spending this new cash on, anecdotal evidence shows borrowers are largely sinking the money back into their homes.
“We are seeing more responsible uses today, like home improvements, education expenses or other major expenses that would be a more responsible use of a customer’s home equity,” Blackwell said.
The average home equity line in October of 2012 was just below $90,000 compared to October 2006, when lines averaged just over $100,000, according to Equifax.
Despite the recent surge, volume is still down dramatically from the height of the housing boom. Borrowers in 2012 took out a collective $7.2 billion in home equity lines through last October, compared to just over $28 billion in 2006.
The numbers are expected to go up in 2013, not just because home prices are rising, but because interest rates are rising. With higher rates, borrowers will not want to give up their rock-bottom fixed rates to do cash-out refinances; rather, they will turn to home equity lines instead. While these lines usually carry variable rates, banks are now offering new products with fixed rates. Wells Fargo recently promoted a line of credit where a portion of the loan is fixed for up to three years.
“We clearly want to lend, and we want to lend to the types of needs that our customers have,” Blackwell added.
FWIW, I bought this house in Austin,TX, back in 1992 $11K down to $1.03K due to ‘deficiencies’ (total cost to fix ~$20K). Today the county sez it’s worth $240K. That looks to be a good investment but I remember 8.5% CDs,,, If you readers are all that concerned about inflation, what about today’s interest rates of 0.2%?
[...] explains why owner-occupied housing is a poor investment – OC Housing News – … “Absolutely!” Shiller exclaimed. “Housing traditionally is not viewed as a [...]