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Tuesday, April 6, 2010
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46 comments:
WaPo
A Fannie Mae solicited poll of 3000 people showed that 70% still think of home ownership as a safe investment. (as compared to 83% in 2003)
I can't decide if that's delusionally high, or an impressive shift towards greater caution.
I'd prefer a bunch of local rather than a national survey...
Cara-
To be honest I still think housing is a very safe investment over the long term. Not that you will make a ton of money, but over the long run its price movements are very low compared to most assets. Sure housing is down 30%, but find any other investment that didn't fall 30%, and obviously this is the worst housing markets have ever done.
You can also think of the housing market over the past 10 years being like the internet bubble for stocks. The difference is bubbles on housing only change the value ~100% vs. in stocks or many other assets the values can go up many hundreds or even thousands of percents
housebuyer,
I think my objection is to the use of the word house and investment in the same sentence. It's semantic, but I think of houses as a good "investment" only in the sense of (a) an inflation hedge, (b) a way of eliminating the rent portion of future housing expenses, 20 to 30 years down the line by paying off the principal.
In those senses, so long as it's cheaper than renting, then housing is always a good "investment". But that's not what I think most people mean by the word.
I hate polls. I hate reporting on polls even more. We have no idea what they actually asked. Although we may get more details soon.
i'd say that shift is pretty impressive.
Remember while we have 4 Hyper bubble states and probably 25 bubble markets, many markets were quite rational.
consider Pittsburgh vs Baltimore vs DC. I think Pitt never went anywhere.
for people in non bubble markets housing remains a good investment,
if you are in Dallas or OKC, it's not bad. So figure half the population is in bubble markets half isnt'
that makes that shift very impressive and a sign that good buys will be coming.
22% national price drop expected
lets see if my link works, but
this is the historic C-S index,
if the national index drops another 10-15 points what happens in the DC MSA/?
Pat,
the link worked.
Following through that was a link to the Reuters version of the story on the Fannie Mae poll, funny how they could pick out a totally different question to get a completely different spin:
Most Americans say now is time to buy a house-poll
NEW YORK, April 6 (Reuters) - Nearly two-thirds of Americans think the time is right to buy a house, with a majority believing prices will be the same or higher over the next year, according to a Fannie Mae survey released on Tuesday.
The 64 percent that said it is a good time to buy is just shy of the 66 percent that said the same thing in 2003 as the U.S. housing market was racing higher, said the survey.
Same poll, pick your question to chose your spin.
Pat,
The thing about those places with no bubble, is they were also always places that losing money in RE was a real and definite possibility if you had to move within a few years for a new job. Between transaction costs and any minor downward movement or stalling out, most people won some and lost some.
Cara-
I think the problem is for most people the investment uses massive amounts of leverage. Imagine if you bought stocks and only put down 3%-20% of the stocks value.
So if you think of the house as investment in the sense you buy it for cash. Over time it goes up a couple of percent a year in value and it pays a dividend in the form of rent. This is normally ~5% after the cost of maintenance. So your total return is ~7-8% with low volatility. Most financial ad advisers would consider 7-8% a very good long term return for low volatility investments.
Cara: of course that can be a self-fulfilling prophecy. That is, if a bunch of people rush out to buy because they think that prices will go up then, then their increased demand will cause prices to rise.
Of course, once the market has shot it's load and depleted a wave of buyers, demand will fall.
Of course, none of that goes for North Arlington, because it's special.
hb,
That's a good explanation.
But how does the fact that "everyone" does buy using a loan change the picture?
Can you take all investments, run them in a cash method for the comparisons and then just call it a day?
I would think not, since the costs of financing could be higher than the ROI. But I don't know what I'm talking about, so could easily be persuaded otherwise.
hb,
I heard a similar analysis on Bloomberg radio the other day. The guest noted that housing is generally good for a 7% return when calculated in that sense.
Leverage does affect that, as you noted.
I'm not sure I buy into it, though.
HB et al.,
I am not sure how this fits into your calculation, but people generally don't have to borrow money and pay interest on it to buy stocks but they do for the house. I know you're not saying this, but I have heard real estate pushers calculate ROI as a function only of what money is put down (e.g., they'd argue: if a $300K house goes up 10%, and you put down only $60K, you're "really" getting a 50% ROI - on the $60K, totally ignoring what it cost you to get that gain). Not many financial advisers would tell their clients to borrow money even at 5% to buy stocks--and it's a lot easy to dump stocks than a house, if you think the market's going down.
I suppose during times when the rent value (for a cash buyer) was approximately the same as the cost of the mortgage, taxes, maintenance, insurances, etc., you could call it a wash by excluding consideration of both. But these days, we know those amounts often are quite different, so it makes the ROI calculation more complex, along with factoring in the higher risk with buying than renting.
Sorry if this is at a more elementary level than the rest of the conversation.
Cara, I completely agree about your view of the WaPo article and poll.
Another way of looking at the word "investment" is that it simply differentiates buying something that lasts versus an "expenditure", such as buying clothes or a vacation.
Without seeing the wording of the question, I don't know in what sense of the word it was used -- investment = opportunity to make $, vs. investment = something that it's wise to spend your limited money on rather than fast cars, lattes, etc.
Ace,
Indeed, you can buy your retirement portfolio piecemeal as you go along in life. You can't do that with a house, you "have" to borrow the bulk of it to own it at all.
(not really true, you could just keep renting until you'd saved up the cash, but since next to no one does this...)
I'm still waiting for hb's explanation of how to correctly factor in the leverage effect.
Cara, Ace, Xpovos-
I imagining using cash because it makes the example a lot easier and although you use a lot of leverage at the start it reduces over time and 20+ years into your mortgage your loan is very little compared to the house value. So it is not totally unreasonable.
For someone using leverage you should use an ROI calculation which involves all of the cash you pay in including mortgage payments and updates to the house and then have what your rent would have been as a negative cash outlay. All this really does is increase volatility and lever the returns.
Ace-
Part of the reason no financial adviser tells you to borrow money to buy stocks is that you can have margin calls on stocks. If you bought stocks at 2x leverage in the recent downturn you would have depleted all money and had a margin call so you could never make it back. With houses you can not have margin calls, so you can sit through the volatility and only care about the long term. There are also a lot of other reasons to not borrow money to invest, so I am not trying to say this is the only reason...
hb,
I ran a sample calc based on my upcoming house purchase with some reasonable assumptions. I ended up with a 5.4% ROI based on a full cash purchase and a 0.71% ROI financed 95% at 4.5%. These are pre-inflation--I didn't want to add that because it gets awkward.
My assumptions:
OER is the 'revenue'. Maintenance, insurance, PMI (95% financed), taxes, and interest were expenses. I figured principal paydown to be a wash over time.
Obviously, the two big differences are interest and PMI. (About 55% of the revenue in this scenario).
The two remaining complications are: this is a month-one analysis. PMI drops off at 78% loan equity for FHA. Interest decreases automatically on a monthly basis due to amortization. So, over time your dividend, and ultimately yield increase independent of inflation.
And, of course, the fact that both PMI and interest are tax deductible, netting you some $0.10 on the dollar back, at a minimum.
Complicated.
But, I'm still not sure I buy into it because it seems off somehow. There's the Sharpe Ratio aspect (relative safe investments net me what?). And then there are all the intangibles we can't really analyze like this. Flexibility in renting vs. pride of ownership. Etc.
In short, buying when there's close to rental parity, or better, and when you are financially well prepared and have good reason to do so--it makes sense. Otherwise it doesn't, no matter the financial math.
As I told my wife. It doesn't matter if that (hypothetical) intrinsically valuable $50M diamond is for sale for $20M; we still can't afford it.
Cara-
To factor in leverage I would just run all the numbers assuming you put 20% down. So you put 20% down and borrow 80%. This means when the house goes up 2% it increases the return to 10%. Your rent is worth ~5% the cost of repairs is ~1% so you net a 4% gain, which levered becomes 20%. To pay for the leverage you pay 5% on 4x your investment which costs you ~20%. So you add your returns and get 10%+20%-20%=10%. You can adjust the numbers if you want, but you will likely get similar returns as long as you assume housing goes up a couple of percent a year instead of 10% a year. So mostly leverage just makes your volatility much worse while only helping the return slightly
Xpovos-
I agree I am not saying that everyone should run out and buy a house becuase it is a great investment. I was just trying to say over the long term (decades) it tends to be a fairly safe pretty good investment. So it is not crazy people think its a good investment. Although most of the people probably think it is a good investment for the wrong reasons. They probably ignore the rental income aspect of it is and think there house will go up 10% a year, which is likely wrong.
hb,
Hmm, that sounds to me the same as the NY Times rent versus buy calculator.
Which is the calculation I've been doing all along, which tells me that with my assumptions housing (flat for the foreseeable future) is purely a break-even investment with no positive returns in the first 4-7 years.
Or put another way, if housing is at rental parity on a 1st year basis, then the ROI in the short term is purely the leveraged appreciation or depreciation. (Exactly what you got with 10%+20%-20%, the 20% rent and 20% mortgage costs canceled). Which, since you can only really cash in on it if you move somewhere cheaper, makes it purely a housing-inflation hedge, with a huge leveraged downside risk.
It's only as you get closer to owning the whole thing that it starts to make sense as an investment... (which is kind of the same thing you were saying, about eventually you'll own a lot more of it.)
HB, actually, the "margin call" on a house is "life." People get fired, get job offers in other cities, get married, get divorced, have twins, get sick, etc.
Ace,
bravo!
This flipper was discussed a while back. Asking price has now been lowered by $100k.
Ace-
True although a lot of those also cause margin calls on your stock portfolio. Although obviously the cost of selling a stock is much less than a house.
Cara-
I agree that seeing that you own very little of your house the investment effectively boils down to a rent vs. buy calculation.
Seeing that most of us think housing will be pretty flat over the next decade my calculation would have shown with a normal downpayment the investment has no return (positive or negative). If this is the case the reason to buy would either be to set your housing costs or for the intangibles. Since neither of these have huge monetary values it basically comes down to people should buy when they are comfortable and their life circumstances say its time to buy.
hb,
"it basically comes down to people should buy when they are comfortable and their life circumstances say its time to buy. "
Exactly. Which is not about investment at all. Buying a home as most people do with a sizeable downpayment but still a factor of 3 to 4 leverage, is not a great investment strategy, but that doesn't mean it's a terrible idea either.
Hence why I think the 70% is still high. As Xpovos put it, it doesn't matter how good of an investment it would be if one had all cash, if no one actually has the cash.
housebuyer said
Sure housing is down 30%, but find any other investment that didn't fall 30%, and obviously this is the worst housing markets have ever done.
Bonds, Treasuries, CDs, savings/checking accounts all did not fall 30%. Have bonds ever come close to dropping 30%?
I think the whole argument about real estate being a safe investment was that it was almost as safe as Treasuries, CDs, etc. Not that it was no worse than stocks.
cara said
It's semantic, but I think of houses as a good "investment" only in the sense of (a) an inflation hedge, (b) a way of eliminating the rent portion of future housing expenses, 20 to 30 years down the line by paying off the principal.
Agree 100%. That's why I've never understood the extreme bear position of encouraging lifetime renting. I want the ability to retire without any major housing expenses other than the occasional maintenance payment and insurance premiums.
And if you make $52k or less and are 65 and older you owe no property tax in Fairfax County. :) Arlington has a similar program and I would imagine other VA jurisdictions do as well. These might be gone by the time I'm that age but I imagine there is some reason it's better for these counties to have it than not (so they don't all move to FL?)
tbw,
To be offensive: let the old geezers move to Florida. We want the young vibrant, educated, and hopefully flush tax payers. Not the ones getting by on a smattering of savings and tax breaks.
Seriously, though, I'll have to look to see if PWC has a similar program. That $52K had better be inflation indexed, though.
Xpovos,
I'm guessing there has to be some reason why this is not a huge loss to the system. Perhaps it's been proven as a way to lower foreclosures (since many seniors are on a tight fixed income) which thereby keeps property values up which means more tax revenue overall.
Of course, I'm sure a huge factor is that seniors are more likely to vote.
The re tax benefit for low income seniors is only a deferment until sale (I'm fairly positive).
just a quick update - crazy lady's house removed from trustee's sale. at least she didn't want till the day before this time :)
VA_Investor/tbw/Xpovos,
The elderly people also have to have net assets, excluding the value of residence and up to 1 acre of land the property is located on, worth less than 340k. Wouldn't the value of most people's annunities, 401ks, IRAs, etc. exceed this amount especially in the first decade or so of their retirement? PWC has the same program eligiblity requirements as Fairfax, too.
Looks like Fairfax gave 25M in tax relief to just over 7700 participants in FY09.
TBW-
Most financial bonds actually did fall 30% in the recent downturn. Many other industries only did slightly better. 10 year and 30 year are actually down 15%-30% since December of last year. They also fell far more than that during the 80s when interest rates skyrocketed. So overtime all of these investments have had time frames where they have done worse than the recent housing market decline.
Hayfield,
My only experience with the RE deal was this little old lady I used to take grocery shopping. She was on food stamps and I arranged meals on wheels.
I'll look into the pay-back on sale.
hb,
You forget some factors in your reasoning...
#1: It is critical when you buy. This is true for any asset including a house. It is very likely people who bought at the peak will not get back to even for next 10 or more years. Let alone the cases when they had to sell it at loss (foreclosure or short sell)
#2: You can earn decent almost no-risk real return on your principal while housing can only match wages/inflation.
#3: On average, people move every 7 years.
Over a really long term, you can make any foolish investment look great. Opportunity costs are key considerations that most people forget to back-up their bad investments.
I am not saying you are completely wrong, nor I am saying one should keep on renting their whole life. I just don't think housing is really a great "investment" or is as "safe" as you seem to think. In fact, I can see many different ways - one can actually do much better without it.
I believe the real value comes from the fact that home ownership provide intangible returns including ability to raise family in a community, satisfaction to call a place your own home, customize/design your home the way you want etc. This is exactly why one should own home.
Add to that,
#4: You are locking yourself to a tiny area of a single country for such a huge amount of your portfolio . You have zero idea how wages will perform over future years. For example, many who purchased in Detroit few years back will never ever come out even (never say never..but u know where I am going)
#5: With other investments, you can diversify across many countries and re-balance as many times you want.
Spider-
I was not proposing buying now. I was talking about long term historical and future average returns.
Realistically since I was talking about housing as an asset class I could have said returns on REITs rather than the house you own. This way you could have a low leverage investment with fairly safe returns that are diversified across a large number of houses.
Also I was just trying to say what the unlevered returns are. So clearly you would take that return and compare it to your other opportunities.
Spider
People who bought houses in 1987 are barely at breakeven, which is an indication of how badly the market there collapsed.
Of course i was working in Chicago in the 80's when Detroit started the first wave of Layoffs, you could buy a lake house in central michigan as a weekend place for 20K with dock and boat because the market was negative.
It just came to my attention that many of the new jobs in our rosy March jobs report were a direct result of all the temporary workers employed by the census. The number varies depending on which source you look at, but it is a substantial amount of the "improvement" reported in the news. I bet they'll be sure to call out the census completion as the reason for the poor numbers later this summer, but I definitely didn't read anything about it in the "record breaking month of jobs" reports the past week or so.
Jeremey-
Everything I saw mentioned the census. I was actually surprised it was only ~40-50K people. Most sources originally thought it would be 60-90K people
Spider & Pat-
I agree Detroit is a disaster. Their economy has been falling apart for decades. So like any other asset class some parts of it do much better than others. So I still stand by my comment that over the past 100 years and likely in the next 100 years housing will return ~7%, which will beat many other asset classes.
HB,
Our discussion has always been a house that you buy for yourself to live in. Essentially, by buying a property in one tiny little corner - you are speculating on wages going higher in that region for future years. There is absolutely zero guarantee that it will come to fruition. Your seem to claim this is a safe bet - it actually isn't...not even close.
Diversified REITs are a different story - of course. But, these are actual investments - you can't live in them or save on rents as your calculations seem to suggest.
spider,
But someone has got to be renting them out, right? That's where you'd get the 5% dividend. Otherwise they wouldn't make a very good investment.
I could be wrong, maybe REIT is all about speculative buying and reselling or holding of empty homes. It could be for all I know... I would read the prospectus, but I don't own any (that I know of).
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