Unless you’re a professional foreclosure investor, on a company relocation package, too rich to care, or desperate to get away from a bad landlord situation with plans to live in a purchased property for the next 7-10 years, now may not be the best time to buy. This is hard to say as a Realtor, but it’s what I’ve been honestly thinking for a while now, especially given the Option Arm/Alt A wave yet to come.
A few days back, a comment from Commerical Lender caught my eye, and he articuated some good resons not to buy better than I possibly could have. In his words:
"1) Nobody but nobody can predict rates, period. and I’m in that business daily. But of course its fun to try.
2) If you are planning to own the home for the long term, then buy the house. If the market continues down and you maintain your ability to pay the mortgage, then fine. Might be upside down for a while, but all’s fine if you are not overextended.
3) Nobody but nobody can market-time, either, any better than flipping a coin. Sometimes you get it right, sometimes wrong, but making investment decisions on market timing is a great way to lose repeatedly. Read the tea leaves, but don’t cross the fine line into market timing.
4) Like Buffet, ‘buy when nobody is buying’, like now and the months to come. You have leverage and could get a comparatively good deal.
5) Don’t let anyone tell you that a mortgage or interest rate is a REASON to buy a home or investment property. We are swimming in a pool of foreclosures for this very reason, people who thought because they could GET a mortgage, somehow they should. Same with rates: a 4.25% or other rate is not in and of itself a reason to put yourself into debt, otherwise you’d go buy 20 Fords or other cars offering 0%. Its a nice to have, but not a reason! My industry is about to get hit for some of this very reason…
6) that said, I just re-upped my lease yesterday. Sitting on cash, no debt, great job (uh, knock on wood), housing in my area coming down… but I feel oddly complacent and somewhat OK with waiting another year. Certainly its a low-risk, sleep-at-night option for my family."
Personally I wish I were renting right now…
Sully
Yeah Roger, only the realtors tell you that owning your home is a money making proposition. Until this current bubble, it never was anything more than what you said – in all areas. This bubble had so much nitro in it, that you could almost buy one month and sell the next for a profit! This was never possible before – ever!
….and it won’t be again. 🙂
BanteringBear
inclinejj-
I suppose gross or net is immaterial. But, 40% seems way too high. I think no more than 25% of income should be the rule of thumb. Certainly total debt comes into play, but I think that when individuals or couples exceed 25% of their total income, that’s when you can get into problems.
Debbie
I have to agree with Roger. My experience is the same as his. Over a 20 year period that ended in 2002, when the craziness of the bubble began, there is little doubt that I would have been better off renting than owning. Now don’t call me a bitter owner. Iv’e enjoyed being an owner. But the notion that the path to financial success and independence is through home ownership is one of the Big Lies perpetratred by the realtor industry in partnership with the mortgage industry. What we hear all the time is about Mr. and Mrs. So and So who bought a house and sold it 20 years later for a nice big “profit”. What we never hear is how the rate of return didn’t even keep pace with inflation, especially when you consider costs of repairs, etc. over the years. The realtors and the bankers have been very successful in getting people’s egos involved in owning a house. Very successful in selling the idea that if you own you are a success and if you rent you are a failure. But it is a Lie.
Walter
Yes, Debbie, and the logical extension is that if you are really, really, really successful then you own two houses, or even more.
Move to Reno
BB wrote: “Pardon me, Move to Reno, but this sounds like nothing more than happy talk and pure fantasy. Did you miss the fact that this was the largest credit bubble in the history of mankind? Have you an explanation as to how the job destruction will cease, and where the job creation will come from? How will we transition from a consumer driven economy, to a more sustainable one? In the meantime, who is going to buy all of the houses which sit idle, and with what money? What is the driver of this turnaround of which you speak? I’d like you to cite something to back up your assertions.”
(Sorry it has taken so long to get back to you but my computer went on the blink has night and I had to run down to Wal-mart this morning to buy a new one.)
BB, I don’t expect that our consumer driven economy will change that much. Job losses will continue short-term but eventually the economy will come back and so will those jobs. My authority is Warren Buffett who says to buy stocks here at the bottom. Job creation will come from both the government and private industry. I see that prosperity also going back into the housing market eventually although it will take some time.
Yes, this credit bubble has caused a lot of money to go to Money Heaven but there have been manias before and the world did not come to an end.
Who will buy all some houses sitting empty. New families, move-ups and folks currently renting. I think that there is still a lot of demand for SFR out there but the potential buyers can’t qualify for mortgages. I think there is a good chance that the government will come up with some kind of new program to qualify people based on verified income and then slice and dice those mortgages to investors. Same old gig but with the gov’t backing 50% or so of the face amount of the securities.
As for houses keeping up with inflation, as you correctly pointed out housing is a depreciating asset. What has the potential for appreciation with or above inflation is the land the house sits on. Real estate is all about location and some locations are better than others.
Move to Reno
Question: If owning a house is such a money losing proposition, why are there landlords willing to rent year after year?
I think buying a house does make economic sense as long as one buys wisely. Those who bought at the top of the bubble will have to live in that house for a long, long time in order to break even. However, people who buy today at below replacement cost, with a good size lot and a good location (schools) will probably make money on the purchase if they live in the house for 10 or 15 years.
I know several people who bought a new house in the early ’70s for $21k who paid off their mortgages in 20 years, and whose houses are now worth at least $400k. If they would have been renters, all they would have right now is a bunch of cancelled checks and would be paying $2000 a month in rent.
Walter
MTR,
Would you please furnish us with some of the several property addresses of a house in Reno that sold for $21K in the early 70s and that is now worth more than $400K?
thanks.
Sully
Using your own math Move – someone that buys today for 400K would have to sell in 30 – 35 years for 7.6 million to get the same % results. Some things are just not possible.
BanteringBear
Move-
Sorry about your computer. This is not meant to be harsh, but all I see from you are blanket statements, with no evidence to support them. Until you can provide details or evidence to back them up, they are nothing more than baseless assertions. You are a realtors dream.
Move to Reno
Walter, the houses in question are not in Reno. They are in Odenton, Maryland.
Scully, are you implying that these houses appreciated more than the inflation rate?
BB, I will try to get my poor I-book fixed one more time. *sigh*
I guess that what you are saying is that the people who are buying these relatively new REOs for $95 or $106 a sq ft. are making a mistake? Do you know what the average price per sq ft for housing is in Reno?
DonC
BB says “However, I DO NOT believe there is any sort of urgency whatsoever, as DonC suggests. Furthermore, I dispute the suggestion that, historically, Reno real estate increases at a rate of tow points ABOVE inflation.”
I actually don’t think there is any urgency since I doubt that housing will have a V shaped recovery. I was just agreeing with CL that if you have the money and you want the house then if the buy/rent ratio looks OK you should feel free to buy it.
As for the whether real estate appreciates, I agree that the house may be depreciating but the land is not. I also don’t have any real data on Reno but, with the exception of a few economists like Robert Shiller who claim housing tends to be flat, the consensus is two points over inflation. So I’m pretty comfortable with this since I think in general that housing in the western states have appreciated more than average. Individual houses and areas will of course vary. Perhaps Incline makes up for Reno?
Walter
Move says: “Those who bought at the top of the bubble will have to live in that house a long long time in order to break even.”
Move may be the master of the understatement.
RI refernced two listings in Somersett than are about 50% down from the bubble top. If a house drops 50% in value, do you know how much that house then has to appreciate “in order to break even”?
100%. Yep, after a house loses half of its value, it then would have to appreciate 100% in order to get back to its original value.
Move, what would you say are the chances that houses in 2009 will appreciate 100% in the coming years? And how long will that take?
I don’t profess to be clairvoyant and won’t claim to know the answers, other to say a long,long,long,long time. Or, perhaps NEVER.
This is precisely why people in the hundreds of thousands are giving up paying the mortgage and walking away.
DonC
Debbie says “But the notion that the path to financial success and independence is through home ownership is one of the Big Lies perpetratred by the realtor industry in partnership with the mortgage industry.”
Housing is at heart consumption. Claiming it’s an investment skews this perspective. You have to live somewhere, so you can’t sell it like a stock or a bond. During the bubble years people lost sight of this and started treating their houses like a piggy bank.
smarten says “but I would suggest we’re currently planting the seeds for hyper-inflation – and that means a return to 20% mortgage rates.”
With the money supply you have stocks and flows. The problem we have now is that the stocks are adequate but the flow is gone — banks aren’t lending. The Fed plan is designed to get the flows going. When the flow returns the Fed can reverse the process and sell assets and take the money it gets in return out of circulation. Of course doing that in a timely way takes a deft hand, so it’s quite possible there will be a few slip ups and inflation will be introduced. But that’s a long way from hyperinflation.
FWIW in hyperinflation real estate will perform relatively well. It’s a real asset and in an environment of hyperinflation all real assets are better than paper assets. The loan rate would be irrelevant because on one loans money when you have hyperinflation, that’s one of the problems. In fact the best possible position in an environment of hyperinflation would be any fixed rate — you’d be paying nothing in real terms for the house.
inclinejj
inclinejj-
I suppose gross or net is immaterial. But, 40% seems way too high. I think no more than 25% of income should be the rule of thumb. Certainly total debt comes into play, but I think that when individuals or couples exceed 25% of their total income, that’s when you can get into problems.
40% back end ratio includes all debt..car payments credit card payments all debt..
Back 15 years ago we had to beg to get the lender to approve someone over 40 percent ratio
From what I hear these lenders are having fits doing these loan modifications..Everyone over stated income on stated income loans..Lenders want to see the tax returns and people won’t show them..
Reno Ignoramus
People won’t show their income tax returns. Imagine that. They were not called liar loans for nothing. How can ANYBODY be the least bit surprised that people don’t want to acknowledge just how big of a felony they committed.
How can ANYBODY be surprised to now discover that the butcher at Raleys really didn’t make $140K a year, and that the valet runner really didn’t make 95K a year in tips?
stjoe56
I live on Manzanita. I bought my house 10 years ago. I paid $297K. At least $35K was for the view. I have an unblockable view of downtown. At the height of the bubble, Zillow estimated my house was worth $550. Today, Zillow estimated $345.
Now maybe my spreadsheet is off (I am not an excel wizard), but my roughly created spreadsheet says that for the past ten years, my house has appreciated 1.38% a year.
Move to Reno
Walter, I would say that Reno prices will be back to where they were in 2006 in 2016 to 2018. Just my opinion.
Roger
Thanks for the comment stjoe. You make my point. But at least you are doing 1.38% a year, which is better than I did from 1981 to 1999.
And I don’t believe that even the loudest of the “it’s always better to own” supporters here will suggest that 1.38% a year has come even close to pacing inflation over the past 10 years.
inclinejj
How can ANYBODY be surprised to now discover that the butcher at Raleys really didn’t make $140K a year, and that the valet runner really didn’t make 95K a year in tips?
The guy who worked at Home Depot made 150k cause he picked up side jobs working there..rite!!!!
Walter
So, Move, you are saying that by 2018, a house purchased in 2006 will be worth what it was purchased for in 2006?
Let’s see. That appears to be an overall appreciation over 12 years of 0.0%.
Yea, Move, youv’e convinced me there is no better use of my money than to buy a house.
MikeZ
Well, I’ve not yet bought *here*, but I’ve owned (and sold) 4 houses in my years and all kept pace with inflation.
The last one (bought ’99@$110K, sold ’04@$260K) was a gold mine.
I agree with the rent v. own analyses.
When the cost of ownership (Fixed-rate PITI + water/sewer/trash + HOA + 1%/yr for maint. – home int. ded.) is close to the same price as renting, it’s probably a good time to buy.
doofus
I bought my first house in SF in April 1990 for $264,000 and gave up a rent controlled $375 flat on Nob Hill to do it. I think my initial interest rate was 12.75%, so it was a big lifestyle change, and I was probably 20% negative at the worst of it. I sold in January 1997 for $275,000, and I wouldn’t change a thing – I loved my home and was proud to live in it. Was it a dumb move an purely financial terms? You betcha, by golly.
House 2 was bought in November 1997 for $348,000, and sold in July 2005 for $910,000. I maybe put in 25K in improvements (maple floors, new roof). I miss the Bay view from my shower every morning. I was just freaked out by the housing values and loans being approved, and knew it would all have to crash. And I was a year EARLY selling out before the SF crest. SF got just insane(my buyer managed to get out 3 years later without losing too much – it was profiled on SocketSite)
House 3 is where I am now here in Washoe. Purchased in February 2001 for $268,000. I think 2 previous owners died here (literally, but NV disclosure law is weak in this area), and I probably will, too. I’ve put about $100K into improvements (if I ever use the term “upgrades” just shoot me) and the house topped out on Zillow at $585,000 and would have sold easily for $625,000 at the peak. Zillow now has it at $417K and I could probably move it today at $450,000, $650,000 if I have Ms. Honeybuns list it.
I haven’t lived my life based on rent/own formulas, only on what I could afford and where I want to be. I’ve made some bad deals if R/O is all you look at, and lucked into at least one right place-right time situation.
Rocco
I’m sorry, but all stories about the big profits made after 2002-03 are immediately subject to one huge caveat. IT WAS THE BIGGEST BUBBLE IN HISTORY, FOLKS.
If I hear one more story about all the money made on a house sold between 2002 and 2005, especially in California, I am going to throw up. Anybody who suggests that what happened in that time period is in any way usual or normal or ordinary or repeatable is in la la land.
smarten
Walter asks “do you know how much th[e] house [that has dropped 50% in value]…has to appreciate in order to break even?” I ask how much your IRA which has dropped 50% in value has to appreciate?
100%! Yes Jim Cramer – your job is to keep me in the game!
nvmojo
Are any of you renters? Some of us are getting hosed out here in renter land Reno.
SmartMoney
Well, the good news is that there will be money to be made at the bottom, as at that time real-estate will be under-valued. It is also good to see some of the “professionals” turning bearish on real-esate, I have been waiting for this. Like the stock market, that is what is needed to make a bottom.
Move to Reno
Walter, sounds like you are the Happy Renter.
What I did say was that one had to buy a house wisely, and by that I meant not at the top of a housing bubble. Folks who are buying REOs at 50% off original the builder’s selling price should do ok.
DonC
I’m being a broken record but it’s a mistake to look at your home as an investment. It’s consumption. Buy it and enjoy it.
That said, there are some financial advantages to owning — the tax advantages. The argument that a mortgage is a “good idea” when compared to a cash sale has always struck me as misplaced. Assume you have $100K and can get a 5% return. Now assume you buy a $100K house and take out a loan at 5%. You’ll pay $5K/year and get a tax deduction for $5K — the deduction will cancel the $5K in income. If you just paid cash for the house you wouldn’t have a deduction but you wouldn’t have any income. Same result.
However, there is an advantage if the choice is between buying and renting. If you were going to pay $5K/year to rent, then when renting you’d pay $5K and get nothing whereas if you bought you’d pay $5K but you’d also get a $5K deduction. That’s a big difference and demonstrates how the tax code distorts the buy/rent decision.
That’s not, however, why I firmly believe that most people will be better off buying. That reason has more to do with human nature than with financial analysis. Basically most Americans don’t have the self discipline to make the buy/rent decision truly rational. Say you can rent for $3K/year or buy for $5K/year. Leaving tax considerations aside, what happens is that the renters spend the other $2K/year on other things – vacations, cars, whatever.
As time goes on rent goes up but the mortgage does not. So after twenty years the home owner is in much better shape. In the best case at 65 years old the owner will have no mortgage while the renter will be paying $10K/year in rent.
For sake of argument I’ll accept that had the renter saved the money he/she saved they’d be theoretically better off. I just don’t believe they’d do that. I think they’d spend it on other things. In a sense, I’m suggesting that for most people a big plus for buying is that it forces the owner to save rather than spend. (Similar to the benefit you get from opt out versus opt in 401K plans).
inclinejj
Doofus
You did it right..congrats!!!
inclinejj
People bought for the wrong reason..of course we can not afford it but put the over priced can’t afford house on the cheapest loan payment. People where sold on payment, just like at the car dealership..People didn’t care if they where buying a 500k house they just cared about the monthly nut..Oh and don’t worry cause that 500k was supposed to be worth 600k the next year and 700k the year after that..2 years of hanging on to the lowest monthly payment and presto an easy 200k made..would have taken the average working guy how long to make 200k? 3 or 4 years..Just buy a house and like magic presto get rich..
Was talking to a buddy of mine..all his co-workers where trying to fight over each other on who can buy the most rental property in Vegas..They where laughing at him all along during the boom days..Buy you should come buy..Here is a guy who works in the sheriffs dept and makes the same pay check these guys do..He asked me a couple years ago..How do they afford to buy stuff..I said easy they must have taken the money out of the primary and bought more and more property..Great idea in priciple either keep them and let the rents(which didn’t cash flow) on interest only loans. or make a quick hundred or 200 grand. My buddy didn’t buy a thing and kept paying down the payment on his house and summer cabin at the lake..presto..all these guys have either given property back or regreted the decissions they made..
He was telling me the other day these guys are misrable at work, getting calls the properties are vacant and they still have to keep making payments or walk away in a market that is still going down in Vegas..
Another buddy of mine bought a house in SF back in the mid 80’s he basiclly went to every one he knew and scraped up the downpayment and borrowed begged and even got a part time job bartending at night to help pay the payments..he got the property rentable and got a couple good renters in the property and would slowly pay everyone back..The people who gave him the money for the downpayment would come by and wonder why he bought that old tired POS property..Well he kept it all these years and even in rent Control SF he makes a good monthly income from the property..
That is why Real Estate is and always considered a long term hold
CommercialLender
StJoe said:
“I bought my house 10 years ago. I paid $297K. …Today, Zillow estimated $345. … my roughly created spreadsheet says that for the past ten years, my house has appreciated 1.38% a year.”
Well, no. First, I would not trust Zillow for any sort of accuracy. But for sake of argument, let’s assume that would actually be your sale price. Next, subtract 5-6% commissions, another what, 1-1.5% title, fees, etc., closing costs or repairs to sell the house, clean up costs, staging if any, ect. Let’s say 6.5% all-in on the seller’s side, nets you the seller with an 8.6% gain over ten years. Simple non-compounded return is 0.86% per annum, much less than CPI over the same time. It is fully tax free, though, and you did offset some income over 10 years thru your mortgage and your ‘rent’ never went up, etc., etc. and you likely amortized the mortgage down so you have cash coming to you. Now, that’s fine and certainly better than a poke in the eye with a sharp stick, but I find that nearly always when people talk of how much money they made, etc. its never the true net cash figures. THis is one reason why people say a ‘house is not an investment’ as a way to rationalize lower than expected returns.
*****
DonC,
For as long as I’ve been bothered by the phrase “real estate always goes up”, I have also been bothered by the phrase “a house is not an investment”. Hogwash. In fact, its likely both the biggest risk and biggest financial gain the vast majority of homeowners will EVER face. Over time, generally, homes do meet or exceed basic CPI nothwithstanding bubbles and busts. But it is absolutely an “investment” of both cash and risk with the hopes of some future gains. Oh, and you have ‘utility’ in the home’s use over the years, something many ‘investments’ don’t offer.
I concede however that the word “investment” can be defined differently by various people – to some, like any cash investment such as stocks or bonds that are generally meant to return some yield on initial invested principal over time; to others, it’s defined as the adverse thought of risking or gambling your family’s assets for potential returns, but excluding from the definition anything you receive utility from, such as the roof over your head. In other words, the latter group would be OK to buy a house using debt and stretching on income, but absolutely not investing in stocks, etc. I think I hear you defining it as the latter – neither right or wrong, just different from how some others look at it.
Further, your comment above leads people to think a $5K/yr mortgage payment is fully deductible on one’s taxes, but of course its only the interest, only up to $1M, and only to the extend there exists any income to offset, etc. Your point is made, though.
Not picking on you, but thought I’d expand a bit. Great posts, both of you.
CommercialLender
Re-reading my own post, I must also state that StJoe’s returns are on his purchase price, not on his cash ‘invested’. In the income-property world, you’d take one extra step and state that his net after the supposed 6.5% costs/fees would be $322,575 for a profit of $25,575. Say he put 20% down when he bought 10 years ago (assume a full 10 year I/O loan, neverminding any capital improvements to the property and tax ramifications), then he’d have made $25,575 on his $59,400 initial cash downpayment, or a 43% total return, or 4.3% per annum return. This is the ‘cash-on-cash return’ but many would not think in this way about their personal residence … because their “home is not an investment”.
Again, neither right or wrong, just a different perspective.
More Strong Buy Signals; Reno Realty Blog Throws in the Towel . . . |
[…] Now May Not the Time to Buy […]
Sully
Ron Bell, you have it wrong. The bottom isn’t in until the most agressive (such as yourself) realtors start saying now is not the time to buy.
Guy and Diane, have not been buy now types for quite a while, on the other hand when was the last time YOU said – maybe we should wait a while?
My guess is never, how far off am I?
Drive by Poster
My wager is that Ron is just trying to churn up the relevance of his own blog, as one of the more important measures of a successful blog is having other blogs point to it.
BanteringBear
I was sitting here wondering who Ron was and then it occurred to me that it was probably the link. I’ve always considered those spam, and it of course, was. I think that Diane and Guy should warn him against spamming, and ban him if he does it again. I know that other blogs do the same.
I read about three sentences until it was apparent that the guy’s just another yahoo from the Lawrence Yun school of the deluded, and I lost interest. He’s the epitome of everything that is wrong with real estate.
Move to Reno
Have to agree with all comments here. When I heard the name Ron Bell I thought of somebody selling real estate in Pahrump.
Move to Reno
BTW, MERRY CHRISTMAS ONE AND ALL!!!
EvilTwin
Might not a search on the aforementioned party on the Recorder’s site turn up some interesting information? Looks like a lump of coal in the stocking this year. Oracle of ArrowCreek indeed.
smarten
Well our friend Ron [from the SAME office as our friend Juan] is now “recommending that buyers buy between now and June 12th…The longer buyers wait, the more they risk losing the home and investment potential desired. The big drop in many areas in Reno real estate is BEHIND US, [so] don’t wait much longer…Anyhow, this is my story and I’m sticking to it…The people on the sidelines keep rationalizing while the market gets away from them again, and goes up. It ALWAYS goes up; sometimes like a rocket, sometimes slow and steady, but it always goes up in the end. [And now my personal favorite] The last I checked, they aren’t making any more dirt and the population is still increasing, especially Reno and Nevada” [ http://renohomestalk.com/2007/12/28/ron-bell-on-real-estate-market/ ].
Well, now he’s on the record. I suggest we keep Ron in our thoughts and come June 11th [why wait unit the 12th]…
Merry Christmas to all [for you out-of-towners, 18″ of overnight snow and another foot as we speak]
inclinejj
Merry Christmas
Happy Holidays
Happy New Years to all
Major congratulations on the blog 3rd Birthday
DownButNotOut
Thanks for the weather report. Another of the many reason why I want to buy there. Merry Christmas.
inclinejj
He said buy before June 11th cause it is my birthday???