Feb242012
With prices at 10-year lows and falling, renting is back in style in 2012
When the housing market nears the bottom, despair dominates. Prices have fallen for five straight years and hover at 10-year lows, and real estate is out of favor as an investment class. Evidence of the market’s despair crops up in articles extolling the virtues of renting. Articles about renting were common from 1994 to 1996, and at the time, renting was a good idea; prices had been falling, and there was little reason to believe they would be going up soon, just like today. However, in the big picture, people who bought in 1994 to 1996 were rewarded. They suffered for the first year or two of ownership, but when prices bottomed in 1997, the contrarians who bought early found themselves back in the black.
People who buy today are buying early, but five years from now, will they regret it? Perhaps, but if they are locking in a cost of ownership lower than competing rentals, I doubt they will be upset by the rocky road ahead. Everyone wants to buy at the bottom tick of the market. However, nobody can be certain when that is. The people who do buy at the bottom do so by luck, and at the time they purchased, they bought in a declining market, probably for cashflow savings reasons. Many will chose to wait until the bottom is apparent in the rear view mirror. They will likely face a higher cost of ownership on a monthly payment basis because they are paying a higher price, and they may also be paying a higher interest rate. Many were fooled by the bear rally of 2009-2010. They will be more cautious next time.
Home prices at lowest point in more than 10 years
By Chris Isidore @CNNMoney February 22, 2012: 11:48 AM ET
NEW YORK (CNNMoney) — Home prices fell to their lowest point in more than a decade in January, which helped to lift the pace of home sales, according to a report from an industry trade group.
The National Association of Realtors reported that the median home price in January fell 2% from December to $154,700. That’s the lowest price reading since November 2001, before the run-up in home prices that became known as the housing bubble.
The median price is the point at which half of homes are sold for a higher price, and half are sold at a lower price. (Multi-million dollar foreclosures)
Serving as a drag on existing home prices is a large inventory of homes in foreclosure. Distressed home sales, which includes homes in foreclosure and so-called short sales in which the home is sold for less than what is owed on the mortgage, made up 35% of sales in January.
“Prices will continue to fall through the first half of 2012 due to the high share of distressed sales,” said Stuart Hoffman, chief economist with PNC Financial. “The recent agreement between the big mortgage servicers, state attorneys general and the Obama administration will also result in more homes going to foreclosure over the next few months, adding to downward pressure on prices.” …
Prices are near the bottom. It is cheaper to own than to rent in many markets, and historically this spurs demand. Of course, with so many with bad credit, demand will not be robust, and therefore prices will continue to fall, probably not catastrophically, but with choppy ups and downs as the market headwinds blow and subside.
New American Dream is renting to get rich
By Lou Carlozo
Wed Feb 15, 2012 12:05pm EST
(Reuters) – Rich Arzaga owns a luxury home in San Ramon, California, but he’s not betting on it as an investment.
The founder and CEO of Cornerstone Wealth Management, who bought the 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 improving it, considers the abode a wonderful place for his family. But ask him to rate his home — or any home, for that matter — as a financial investment, and Arzaga balks.
“It’s the American Dream to own a home, but whoever said that didn’t do the analysis on it,” says Arzaga, knowing he’s taking a contrarian stance to conventional wisdom.
If he bought a home in 2005, he obviously didn’t do an analysis on it either. He sunk $2.3M into a property worth far less today. I hope he enjoyed the consumptive value because he certainly is paying a high price for the property.
Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, “100 percent of the time it was better to rent, rather than own.”
That’s right: 100 percent.
In 2005 I would agree with him. There were no houses anywhere that made sense to own in 2005. Today with prices 50% yo 70% lower in some markets and interest rates down from 6.5% to under 4%, owning makes sense again.
The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs – what’s needed to hold and maintain the asset – range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.
Even people who were making money on appreciation during the bubble weren’t making near what they probably thought they were making when the high carrying costs and transaction costs were factored in.
“I don’t have the emotions a lot of people do surrounding real estate,” Arzaga says. “I have steely eyes for how investing in real estate works, and I’d better be a prudent investor for my clients.”
The guy who is nearly a million dollars underwater has a steely eye for how real estate works? ~~ giggles to self ~~
Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners “not to meet their financial goals. They were going to fail.”
Even though conventional wisdom today says borrowers can afford a 31% debt-to-income ratio, when you look at the after-tax impact of that decision, over 50% of a borrower’s take-home pay is going to pay the mortgage. That doesn’t leave much for consumption and saving. Without HELOC supplementation, such high debt-to-income ratios are debilitating.
Some real estate experts thought there was some truth to Arzaga’s argument, albeit with several conditions.
“To state that owning a home is or isn’t a good investment is too simplistic,” says Jeffrey Rogers, president and COO of Integra Realty Resources.
When you read this “expert” was the president of a real estate company, was your first reaction that what he says is complete bullshit? That was my first reaction.
“It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn’t be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead.”
His statement wasn’t as bad as I thought it would be. However, buying in a low interest rate environment doesn’t mean you will profit on appreciation. Rising interest rates will hurt appreciation moving forward.
“Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return,” says Jed Kolko, chief economist at Trulia.com, a real estate search and research website. “But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it’s probably a bad investment for you. It also depends on your job market. If you’re in a one-company town and the company goes down, there goes your job and there goes your home value.”
Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga’s. “Home ownership is not so much a creator of wealth as a store of wealth,” he says. “The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn’t rebate a dime.”
He is correct that home ownership historically has been a store of wealth going up roughly with inflation. However, the idea that it can rebate your costs is a fantasy.
The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.
“You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children,” McBride says. “There’s no sense in buying a home if it’s going to deplete your emergency or retirement savings.“
Unfortunately, during the housing bubble most people came to believe owning a house was the only retirement savings they needed. The house was going to provide them a steady income through double-digit yearly appreciation and endless HELOC money.
McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga’s view credence: “Homeownership may not be the moneymaker you think it is.” (See the full chart at link.reuters.com/hej66s)
Then there’s the emergency fund, a must for when a home requires unexpected repair work.
“As far as emergency savings is concerned, six months of a cushion is adequate,” McBride says. “But only 24 percent of people have that kind of cushion, and about 65 percent own homes.”
So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn’t pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid.
That’s $800,000 less than he has into the property.
So why not sell? For Arzaga, it’s a lifestyle choice, and one that he doesn’t regret, since his big money-making investments are elsewhere.
I hope he is making money elsewhere because this white elephant is eating a huge hole in his balance sheet.
Renting is back in style because ‘labor mobility’ is no longer a concept but a requirement, corporations are in the wage suppressing business and the fact that well over half of all US households are not bankable.
A friend of mine who rents has been interviewing for jobs out of Orange County. One of the first questions he is consistently asked is whether he rents and can move to take the job.
I’ve wondered about that over the last few years – that if I were to interview in an area far outside of OC, they would probably ask this question. Would I need to bring my financials and a couple bank statements to prove that I could “get out” of my house for the right opportunity?
Oooh… is that a legal question to ask of a prospective employee? I mean, I understand from the company’s perspective, but I could see asking whether you rent or own a home, if factored into a decision to offer a job or not, as something that could be considered discriminatory. Maybe not, though. I could be off here.
Neither renters, nor owners, are members of a “protected class.”
Mobility is important and I think when doing your due dilligence, it should be quantified so you can compare. Obviously the value of mobility is different for everyone, but rental parity is not always ok since you have equity risk, interest rate risk and lack of mobility.
Although the rental market is good right now, I believe everything will be valued by income and since income has not gone up since 1999 we are still in dangerous waters. With all the apartment projects in SoCal, I bet supply will be increasing too.
I guess we have to add the impact of all the people not paying their mortgage to the economy and rent (which is like a bailout), but eventually it all stabilizes to income per capita. We need to get to levels that are sustainable so individuals have disposable income to spend on food, gas, computers, retirement etc. The days of 50-60% DTI are over.
FYI – Lost my free membership to dataquick, but I wanted to see if Mr. Rick Arzaga pulled any equity on his house in after he bought it and might be chillin in a 5K SF house for free. If he pulled any equity on that thing. there is no way he’s paying for the mortgage and is probably just waiting for the bank to kick him out. I’m jealous.
The recent decline in inventory may be due to an increase in short sales. Banks are approving these sales to clear delinquencies from their books.
California Short Sales Reach Highest Level in 3 Years
Pending homes sales in California were higher for January compared to the previous month and year, and short sales rose to the highest level in three years, according to the California Association of Realtors (C.A.R.).
Based on signed contracts, C.A.R.‘s Pending Home Sales Index (PHSI) climbed from a revised 91 in December to 102.4 in
January and was also up from last year when the PHSI was 93.1 in January 2011. Pending home sales are indicators of future home sale activities, providing information on where the market might be heading.
Of all distressed properties sold in California, 23.8 percent were short sales, the highest level in three years since C.A.R. has kept record. Previous month’s data was at 22.2 percent and also 22.2 percent a year ago.
The share of REO sales were higher in January as well at 25.9 percent compared to the previous month of December, which stood at 24.6 percent. A year ago the numbers were higher at 30.8 percent.
Overall, the share of distressed property types that sold went up to 50.1 percent in January, an increase from 47.3 percent in the previous month, but a decrease from 53.5 percent a year ago in January 2011.
Non-distressed sales made up 49.9 percent of home sales in January, a decrease from the previous month, which stood at 52.7, but up from 46.5 percent last year.
Do you think the banks are expecting more shadow inventory coming on the market? And with 14 million homes underwater more strategic defaults?
I think the banks need the money. If they approve a short sale, they get some of their money back. When it’s tied up in a non-performing loan, it’s dead money.
These recently approved short sales explains why prices dropped hard in December and January, and why the inventory went away. I expect we will get a bump in prices over the next few months until more inventory is brought to market.
I had forgotten about BofA needing money, that was in….October. Wells Fargo stated to they wanted to use non-GSE funding for their loans. BofA is also not doing business with on the GSE’s. Something might be changing with the major banks.
I know there have been talks by the government to reform the tax laws with some mentions of mortgage deductions and possibly reducing it. I realize that it is probably unlikely to be eliminated at this point in time with the state of the economy, but looking at it as a possibility in 5 years, that would definitely increase the renting advantages even more so especially with appreciation unlikely to come close to what we experienced a few years ago.
You’re ignoring the other side of the equation. Elimination of the MID would cause house prices to drop, and therefore purchasing a home after the drop could be more attractive then renting.
Definitely a possibility. Perhaps we will see bailout for homeowners where they are reimbursed a % based on factoring in the MID as part of their purchase price?!?
While I’m definitely in favor of simplifying tax laws, the MID is enjoyed by a decent amount of the voting population so if anything, we’d only probably see a minor change as IrvineRenter points out in another comment.
If the lower the limit on the HMID, something easier to do than eliminating it entirely, it will have the greatest impact in places where people take out loans over $500,000 — places like Orange County.
High mortgage interest paid (& then deducted) + high income (& therefore high marginal Federal & CA income tax rates) = huge benefit to MID.
e.g. In 2011, the MID & property tax deduction resulted in ~$1,400 less paid monthly in federal and state income tax for us; and that’s after the AMT took back $4,800! (property tax is “thrown back in for the AMT calculation, but mortgage interest is not).
This topic hits square to me, but I guess the “good time to buy” hasn’t extended down to O.C. or Irvine yet, not by a long shot. I am moving into a 2-bed, 2-bath, 1,000 +/- s.f. apartment owned by Irvine Co. in the Woodbury area next month. Based on our monthly rent amount, and even with the ridiculously low interest rates currently, in order for it to truly “save” us money each month by buying, I would have to be able to buy a comparable quality condo for approximately $250,000 in the same Woodbury area. A quick search of MLS showed me that the absolutely lowest priced property currently selling in Woodbury is around $380K, and that won’t even get you two full beds or baths. Sure, I could substitute in Lake Forest, or maybe Tustin, but those areas are definitely not as desirable as Woodbury. Sure, Woodbury will cost more than others, but there’s still waaaaaay too large of a gap between buy vs. rent. And furthermore, rents may be “rising”, but at a certain point, Irvine Co. will run out of households and potential households who require at least a 2 bedroom dwelling unit and are truly able to afford a $2300 per month average rental nut. You have to have a household salary of about $75K+ to even qualify for that amount of rent. Who are these people? And furthermore, who are these people that are buying even more expensively than that??
Isn’t the median Irvine income around $90k? It would seem that well over half of households could afford that amount of rent.
People who buy today are buying early, but five years from now, will they regret it? Of course they will! Prices have not bottomed. And incomes have not risen. The income component is the most important aspect of this mess. You can’t have it both ways….sustaining high prices, without loan that require no income verification. That’s what got us into this mess. The real scary part now….is rentals. The cost of homes has a market based limit. But what about rentals?
You can only raise rents by what the local economy can support.
OC wages remain flat or continue to fall + [email protected] or >$110bbl = current OC rents do NOT pencil-out. Reality is, sometime this Summer, local landlords will be facing the prospects of lower rents or enduring demand destruction.
In theory, I agree with the above, but based on my recent couple months scouring the Irvine/Lake Forest area, rents still ain’t going down, let alone even staying flat. The Irvine Co. sent me a letter mid-January raising my rent and when I asked them to reconsider, they told me we’d either be getting a jump to market rate, or a 6% increase, whichever was lower. They quoted the OC Register hack page claiming OC rents had risen 6% YOY. That’s why my family and I packed it up and we’re moving out of there. (Granted, into another IAC place, but it’s much larger. And I anticipate a 5-10% jump every year from IAC. Not sure how rents keep rising with the local state of economy, but it has been in my limited experience.
The Bulk REO sales might bring more empty homes on the market as rentals. It might stablized rents….might.
Consider the possibility that they know they are just about to release a big chunk of new apartments onto the market in the next 18 months, so future supply is going to prevent future rent increases. It might make sense for them to hike the rent a little extra this year, knowing it’s going to be unusually hard to do so next year and the year after. They do think in long terms, like 5-10 years out.
Now here’s a gem from the archives:
el ORACLE says:
August 8, 2011 at 3:32 pm
dumbo pink says: ”Dow 13K”, and the icing on the cake follows: ”the past helps establish a trend dumbo”.
Lollllolllllllllllllllllllthatisrich
LOL
point being?
It’s sad to see you thoroughly outwitted by such a low IQ individual.
outwitted?
details….
Thx in advance
It seems one of you was right and the other was wrong about the direction of stocks. Maybe I misinterpreted this statement?
el ORACLE says:
August 15, 2011 at 1:15 pm
Last warning before the Autumn 2011 shock, when $15 trillion of financial assets go up in smoke.
As usual, your post has a deceptive angle to it.
PT was calling for an imminent Dow 13,000……. back in early July 2011 Lollllll. Meantime, the market sold off heavily shortly after his call, hence, the feds operation twist commenced that Oct. Hilarious!
PinkTaco says:
July 7, 2011 at 6:53 am…More bad economic news for the resident bears. Can anyone tell me how the markets have been doing lately? Gotta be tough selling stocks short nowadays? 13,000 DOW here we come!
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Also, you failed to provide the link to the piece I posted re: $15 trillion of financial assets go up in smoke. So, it wasn’t me who said that.
http://www.leap2020.eu/GEAB-N-56-Special-Summer-2011-Contents_a6680.html
”For our team, it’s now the other half’s turn, the 15 trillion USD of ghost assets remaining, purely and simply vanishing between July 2011 and January 2012”
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Time to get a life muchacho! 😉
tsk, tsk… Accusing me of deception and not having a life in the same post. It hurts when you say these things.
“PT was calling for an imminent Dow 13,000……. back in early July 2011 Lollllll. Meantime, the market sold off heavily shortly after his call”
And you were calling for an imminent loss of $15 trillion in financial assets. Instead, the market rallied shortly after your call. The problem with blaming it on the article is you weren’t quoting, but speaking with your own words. We both know that had this come true you would have taken 100% of the credit.
Let’s face it brochacho, your crystal ball has been a little hazy lately. Maybe you should take it to one of the psychics on PCH for a tune-up.
By Andrew Scoggin• December 29, 2011 • 11:51am
The Federal Housing Finance Agency will increase guarantee fees on single-family mortgage-backed securities charged by the government-sponsored enterprises by 10 basis points effective April 1, 2012, in response to the new funding mechanism for the payroll tax cut extension passed by Congress.
Passage of the payroll tax cut extension requires Fannie Mae and Freddie Mac to raise g-fees by at least 10 basis points from the average charged in 2011.
The FHFA will also evaluate in early 2012 whether it needs further g-fee increases to comply with the new law, Acting Director Ed DeMarco said in a statement Thursday. The law, he said, requires the FHFA to make a schedule for g-fee increases over a two-year period to satisfy other conditions.
DeMarco said the FHFA will take “into consideration risk levels and conditions in financial markets” when the agency contemplates rates.
President Barack Obama signed the temporary two-month tax cut last week after House and Senate leaders reached a last-minute deal prior to the holiday break.
The g-fee increase will remain in effect through Oct. 1, 2021. The Congressional Budget Office estimated the g-fees would offset about $35.7 billion in the costs of the tax cut. Mortgage Bankers Association CEO David Stevens said the increase could mean an extra $4,000 in fees on a $200,000 mortgage
With Steve Thomas’ market time back at 2005 levels, it would appear homebuying is back in style:
http://lansner.ocregister.com/2012/02/20/fastest-pace-for-o-c-home-market-since-2005/158846/
Thomas mixes his demand and supply math to create a “market time” measure that shows how long it would take to sell all homes on the market at the current pace of new escrows. This time, expected market time for Orange County is 2.1 months — lowest level since August 2005, or 78 months ago. It was 3.65 months a year ago.
For homes priced below $500,000, demand is up 32% vs. last year with just a “blistering” — as Thomas called it — market time of 1.6 months.
Thomas concludes: “For Orange County housing, the beginning of 2012 has proven to be remarkably robust. Demand, the number of new pending sales over the prior month, has been steadily growing, but the last two weeks have been extraordinary. … This is more than just an encouraging start to 2012, it is a real sign of a much different housing market.”
Considering what happened to the market shortly after 2005, one would have to question the logic of anyone who would make reference to it in a positive manner.
just say’n 😉
bahaha….next you will be quoting NAr statistics as proof the market has bottomed.
Steve Thomas!
(tears in my eyes)
I realize that it’s a sport to bash Steve Thomas on most RE blogs, yet his market time report correctly foreshadowed the uptick beginning in ’09 and the subsequent downturn that began in mid-’10. That can’t be said for anything coming from NAr. Maybe you should focus on the numbers and not so much on the spin that accompanies them.
Steve Thomas’s time on the market data has forecast several bottoms before. I don’t use the indicator because it is very unreliable. Back in 2004, the months of supply went way up foretelling a market crash. Instead what we got was a huge rally.
Any investor (correction–speculator) ‘worth his salt’ would know that a metric based on pendings, in an environment where cancellations are running near record highs and ‘flips’ are not filtered-out(double counted), is essentially useless data.
Reality is, this metric is a marketing tool, targeting ‘retail’. Nothing more.