Buy vs Rent?
Now that the Spring home buying season is in full swing, I spoke with our real estate agent to see how the "surge" was going. She's one of the good ones -- charming, helpful, knowledgable, honest, a pleasure to work with.
"Horrible."
That was her initial response. "Depressing" was the second word out of her mouth.
What seems to be the problem? I asked her. "Sellers haven't gotten realistic yet. They are still pricing things as if it were 2005."
Granted, this is one agent, in NY, on the toney Gold Coast of Long Island's North shore. She mostly sells houses from half a million up to quite a few million, but I would guess her sweet spot is from $500k to $800k. But her comments echo what we have heard from Home Builder CEOs recently, and I daresay they are probably typical across many areas.
That conversation put a few of today's more interesting columns into perspective today. The first comes from the NYT's David Leonhardt, with the inflammatory title A Word of Advice During a Housing Slump: Rent:
"With the spring moving season under way, The New York Times has done an analysis of buying vs. renting in every major metropolitan area. The analysis includes data on housing costs and looks at different possibilities for the path of home prices in coming years.
It found that even though rents have recently jumped, the costs that come with buying a home — mortgage payments, property taxes, fees to real estate agents — remain a lot higher than the costs of renting. So buyers in many places are basically betting that home prices will rise smartly in the near future.
Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in the Los Angeles area would have to rise more than 5 percent a year for a typical buyer there to do better than a renter. The same is true in Phoenix, Las Vegas, the New York region, Northern California and South Florida. In the Boston and Washington areas, the break-even point is about 4 percent."
The interactive graphic belies the title, however: Its pretty clear that except under the worst circumstances (falling rents, high mortage rates, very high prices) and a short time line, its a better long term deal to own than rent:
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click for interactive feature
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Elsewhere, the coverage of the ongoing Housing mess continues. This WSJ column (Digging Out of Delinquency) noted the increasing delinquency rate of mortgage holders. The accompanying chart show former hot areas such as California, Florida and Las Vegas leading the way delinquency rate increases.
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click for sortable map
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Lastly, we come to this Washington Post article: Housing Boom Tied To Sham Mortgages. It discusses, in brutal detail, how a crooked mortgage broker was able to game the enire system to scam a $100 million dollars worth of bogus loans. He was able to accomplish this due to the lax lending standards, (especially the no-doc "liar loans"), scam appraisals, a lack of regulatory oversight, hungry real estate agents, and naive buyers. He drove up the prices in entire neighborhoods.
After the scam unraveled, prices collapsed as 100s of homes fell into foreclosure. Its an ugly ugly tale.
~~~
As you can see, it is no longer Positivity Day here at The Big Picture. Sorry, Larry!
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UPDATE: April 11, 2007 10:01am
The Times uses as an example a home in Hollywood Florida, that with a few changes in variables, makes owning much less desirable:
click for larger graphic
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Sources:
A Word of Advice During a Housing Slump: Rent
By DAVID LEONHARDT
NYT, April 11, 2007
http://www.nytimes.com/2007/04/11/realestate/11leonhardt.html
Digging Out of Delinquency
RUTH SIMON
WSJ, April 11, 2007; Page D1
http://online.wsj.com/article/SB117624718322565654.html
Housing Boom Tied To Sham Mortgages
Lax Lending Aided Real Estate Fraud
David Cho
Washington Post, Tuesday, April 10, 2007; Page A01
http://www.washingtonpost.com/wp-dyn/content/article/2007/04/09/AR2007040901463.html
Wednesday, April 11, 2007 | 06:59 AM | Permalink
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Unfortunately, none of this matters. The bears will keep getting squeezed, and the market will keep rallying. (Look at China this morning. Ridiculous. And no end in sight.) Between the US government lying about economic figures and running the money presses at Warp 10, there's absolutely no chance we see any sort of market decline unless there's some sort of catastrophe. Don't count on earnings season, either: the companies have figured out that they can stuff their pipelines silly, hide their losses with creative accounting and that the analysts won't question it, nor will the buyers balk at it. I mean, WTF is "before charges"?! If we hadn't had to write so and so off, we'd have made this much. If the dog hadn't stopped to crap he'd have caught the rabbit, too...
Ohh, eventually the game has to end; eventually the government and the corporate types will run out of lies to tell. Eventually the CNBC crowd won't be able to spin this bullish/drink it pretty. The resultant decline will be horrific. But until then, fundamentals be damned; buy 'em to the sky, and never question why. The only way to make money right now is to be a Booyah Bozo Buyer.
Posted by: John | Apr 11, 2007 7:51:31 AM
I wonder how David Lareah will spin things in the next few months. Continue with the same old rhetoric? Or does he have something new in his bag of tricks?
Posted by: Chad | Apr 11, 2007 7:56:15 AM
and this is why the market continues to power higher. Housing is getting worse but BigBen won't let it get out of hand. He will cut interest rates sooner rather later, supply the system with more liquidity, and the markets anticipate this. Inflation can be assuaged one way or another for as long as it takes to keep housing from tanking the economy. Remember, Ben is in charge of the printing presses and the banking fractional reserves at an effective one percent will keep the juices flowing. Die housing die!
Posted by: fat mary | Apr 11, 2007 8:14:04 AM
Pssst.
I heard this one last night.
AA is in the crosshairs of Rio Tinto & BHP.
May take a while to line up that much financing, so I'm goin for the June 40's.
Posted by: tjofpa | Apr 11, 2007 8:25:27 AM
from the NAR's newest radio spot -----
“This is the best time to buy,” Pat Vredevoogd Combs, the president, said cheerfully. “There’s a lot of inventory in the marketplace. Interest rates are low. It’s a wonderful tax deduction.”
sounds credible to me !!!!!
Posted by: jj | Apr 11, 2007 8:25:33 AM
I see the Kool-Aid has worn off from yesterday. :-)
Posted by: semper fubar | Apr 11, 2007 8:26:13 AM
The observation from your agent is right on, but it is odd that she seems surprised by this. Housing is still used almost exclusively for shelter (as opposed to speculation). As such, when the market slows, sellers simply do not sell. Unlike a business owner, homeowners do not post firesale prices to clear their inventory. Homeowners sit on their properties, even if they leave them on the market, and wait for the market to recover.
My sense is the housing slowdown will be longer, but less detrimental than most fear.
~~~
BR: Its not that she's surprised -- she thought that after a VERY SLOW winter, some sellers would have found religon already (not happening yet -- for existing sells, as well as new listings).
But you are correct -- they are not highly motivated sellers (at least not yet).
Posted by: REW | Apr 11, 2007 8:42:28 AM
I don't think the Fed will come to the rescue at these mkt. levels. Add gas with a 3 or 4 handle and food skyrocketing, internationally fed inflation....no way.
Notice the long rates on bonds lately?
At least the bond guys see it. I wonder when those higher long rates might sink in to the U.S. equity mkts.
Gotta love the USD against just about any currency. It's getting to the point where old confederate money is worth more.
I think we get one or maybe two more big pushes up, and then all the deals will have been done and it will be time for the big money to leave the building.
Posted by: Craig | Apr 11, 2007 8:43:42 AM
Here’s Michael Panzner on the subject of “Cliff Risk:”
http://tinyurl.com/2avdo4
Here’s Rex Nutting doing the most concise piece I’ve seen on the potential systemic risk arising from “lemming loans:”
http://tinyurl.com/37kncj
Here’s a Google search result when the question is posed, “What are CDOs squared?:”
http://tinyurl.com/ypowfj
Here’s the Big Pic topic and related comments from quoting David Malpass regarding his discussion of a “Global Boom:”
http://tinyurl.com/2kjslq
--
Now, stick with old Eclectic, because I’m going to sort of discuss the above referenced material and hopefully ultimately derive one magical word that describes what ties all this together. Let’s start with Malpass.
I read the Malpass excerpt, and I don’t agree that he is necessarily displaying any cognitive bias. Actually, what he says is well-grounded logically and is indeed pretty “Cog” in my opinion. It is true that (at least in the excerpt – I’ve not read the entire WSJ piece) he does move pretty easily through the Fed’s monetary expansion, post 9-11, and notes the positive results of that expansion without giving a hint of concern regarding the negative issues of that same expansion that are written about by Panzner and Nutting in the referenced pieces.
However, let’s allow him the intellectual freedom to come to the conclusions he makes without simply assuming he is totally ignoring all the risks that (we) perceive. David Malpass is an intelligent and well-spoken man and I have no doubt he fully believes some of the utopian-like projections of his referenced remarks.
For example, regarding Mexico, quoting Malpass: “Mexico, vital to U.S. immigration concerns and behind in global job creation, has the opportunity to take an economic leap forward, using today's plentiful liquidity to expand housing, raise living standards, and transform energy exploration and development.” End quote.
Mr. Malpass, what a magnificent statement! How true that is. What a wonderful economic shot in the arm for the Americas, and North America in particular, were we able to assist our great neighbor to the south in accomplishing such a transformation.
So, instead let’s examine what the U.S. is indeed helping Mexico to accomplish: First I suppose is the drug traffic with its attending corruption and violence that we cause to be funneled through that enchanted land, while our own population is hell-bent-for-leather to stick the stuff up their noses, in their veins or inhale it through their lungs, all the while weighing the possibilities of substituting the imported fare with an ever growing domestic supply of crystal met, the same met of course that’s crippled our justice department and courts in most states, destroyed families, lives, and hung a millstone of economic malaise around the necks of our young people (and not so young) that will sink them in a world they already can’t compete in, and further help their chances of competing go from slim to zip.
Next would be the trade in people from and through Mexico into the U.S., and the very same demand for them is being experienced in a similar fashion to the demand for drugs. Just like you can not prevent willing users and buyers from obtaining drugs, you likewise can not prevent the buyers of labor from obtaining the people they need, when they can get them in no other way than by hanging out a “workers wanted” sign and taking all comers, no questions asked.
And third, rather than providing the leadership to our southern friend in the ways of responsible capitalism, we generally substitute for that leadership a kind of hocus-pocus gamesmanship of irresponsible accountancy, benevolent and politically based monetarism, and an ability to cast their desperate emigration to fill the jobs demanded by our people as their problem and not ours to solve.
No, Mr. Malpass, the shoe is on the other foot. Never before has the U.S. had a better opportunity to change much of what it does to create its own problems, both internally and with Mexico and other Latin American cultures. Beginning to deal realistically with those problems would be a reason to buy into the U.S. economy and its corporations with reckless abandon.
Here’s the fellow that changed my mind on the whole U.S. immigration picture with Latin America, Jorge Ramos:
http://tinyurl.com/29fazu
I changed my mind about the whole subject of U.S. immigration policy virtually overnight, with the completion of this one book. Reason - It’s a logical and eloquent debate that he wins, hands down. Read it and you’ll discover that, unless you’re the type who enjoys arguing with stop signs on street corners.
So, what is it about all the pieces above that demonstrate how we may see the world so differently when we all are able to observe the same facts?
The word that comes to mind with Panzner’s writing is not the final word I’ve looked for, but I see his work as an expression of: incredulity – his, experiencing absolute incredulity at the financial pickle we’ve gotten ourselves into, and incredulity that so few people can conceive of what the problems mean for us all.
Now, my final word is: Fog. Simple fog, the type of fog that often long chains of drivers move through at 70-80 mph, on 6-lane superslabs, without the slightest regard for the danger they’re placing themselves and their fellow drivers in.
I’ve even caught myself doing something similar, and yet when I finally realize I’m moving down the road at over 90 or 95 feet per second, with only the barely visible lane marker outside the windshield to let me know I’m just competently where I’m supposed to be, notwithstanding some 18-wheeler or some young mother with an infant strapped in the back of her Honda stalled a mere few more feet in the white blindness, I do finally overrule my own denial and pull off the road. Even slowing to a crawl won’t protect you from the driver behind that has not faced down his denial yet.
That’s the picture of Econo-Americana I want to leave you with right now. We’re merrily barreling down the superslab, all in the same fog, and until we have an accident to illustrate our folly to ourselves, we’re just a society ignorant of the growing risks.
Posted by: Eclectic | Apr 11, 2007 9:08:49 AM
re: the interactive chart. I think a couple of the initial settings are not very realistic, leading to skewing in favor of buying. Specifically, I'd say rent would increase 3 percent annually (more in line with the cost of living) and investment returns should be greater than 5 percent (that is simply an interest-on-cash rate). Change these two things and the chart moves quite a bit. In short: the better you think you can do as an investor, the worse bargain a house becomes.
Posted by: wally | Apr 11, 2007 9:09:49 AM
Eclectic,
The fog analogy is spot on. The thing is, thanks to infinite liquidity and all-around dishonesty, the accidents never actually slow anyone down, because unlike a real stalled car, we can simply pretend that subprime or semi gluts aren't a valid concvern, and barrel on by. No, we don't have to 'rear-end' anyone any more; the powers that be have seen to this. Only when an earthquake breaks the slab apart in a yawning canyon too far to jump will this farce come to an end. And as I noted in my original post, the result is going to be rather horrific, as the broken bodies pile up at the bottom.
Posted by: John | Apr 11, 2007 9:28:08 AM
rent vs owning . . . get real. I wouldn't want to live for very long in what I can rent in the city I now live when I can afford to finance a great place to live for not much more . . . . and I'm not talking about some shame mortgage. nope, renting is not an option for someone who doesn't want to live in a "rental"!
Posted by: cbk | Apr 11, 2007 9:44:07 AM
In 2002 I purchased my principal residence for $940K. Last year my neighbor sold his substantially similar house for $1.55 million.
Even if housing prices fall 15% a year for three years, I am still ahead of the game.
Prices have to my knowledge never fallen 15% a year for three years running.
Speculators and flippers are much more likely to be hurt than owners and true investors. It's really no different from the stock market, where buy-and-hold investors like Warren Buffett and Benjamin Graham make the big bucks, while day traders and price-arbitrageurs usually lose most of the time.
Posted by: Nova Law | Apr 11, 2007 9:50:04 AM
timing the market is typically a losing proposition. when you're fiscally and emotionally ready to buy than do so. over the long term you'll make out.
Posted by: Richard | Apr 11, 2007 9:57:01 AM
Here is an example of how bad it is. I works as a real estate attorney in Buffalo NY. There is very little being advertised for sale and very little being sold.
Normally when I close a sale and record a deed it takes a month or more for the County Clerk's Office to return the deed to me. I did a sale on March 30 and had the deed back on April 9.
One week! The spring market is dead!
Posted by: dave | Apr 11, 2007 10:15:09 AM
In the last three weeks I have seen at least three bank repo's (as advertised by the agent) in just my neighborhood alone. Wait until the sellers start dropping prices...this will cause another new glut of inventory to appear because the sellers will feel they are missing the boat, so to speak, and put it on the market in hopes they get a higher price.
Nova...just because you've never seen it does'nt mean it's not going to happen. Sellers are unrealistic about paper losses vs. real losses and I'm sure everyone is just so friggin happy for you about your house as only a wanker publishes what he paid for a house to try and impress others.
And yes you're little attack on my patriotism is classic neo-con...when in doubt question patriotism...as if that had anything to do with the subject matter. Are you John Ashcroft BTW....
Ciao
MS
Posted by: Michael Schumacher | Apr 11, 2007 10:23:57 AM
"where buy-and-hold investors like Warren Buffett and Benjamin Graham make the big bucks"
Well, yes and no. Buffett sometimes buys and sells, too... and he does time the market. He calls it "buying at the right price". Different words, same idea.
Posted by: wally | Apr 11, 2007 10:32:46 AM
"where buy-and-hold investors like Warren Buffett and Benjamin Graham make the big bucks"
Well, yes and no. Buffett sometimes buys and sells, too... and he does time the market. He calls it "buying at the right price". Different words, same idea.
Posted by: wally | Apr 11, 2007 10:32:48 AM
worth noting that the default tax rate on the interactive feature is 20%...if mortgage interest is deductible at the marginal income tax rate (I'm not sure it is), buying becomes incrementally attractive.
Posted by: 23 | Apr 11, 2007 10:34:41 AM
BR said "What seems to be the problem? I asked her. "Sellers haven't gotten realistic yet. They are still pricing things as if it were 2005."
I continue to say to these agents, get your darn clients to lower their prices. Who is the professional here?
When we sold our home in 2005, every agent we interviewed provided us a nice work up of our home (neighboorhood comps, etc) and each had over 15 years experience, some over 25 years. Who is the professional here?
In 2004, all I heard from friends who bought or wanted to buy was that their agents were telling them to counter counter counter with higher prices or someone else was going to get the house. And boy did they do that with insane offers.
So what's the problem this time? If you don't price it at where they want you to then you won't get the listing? What's the point if the house won't sell for 12+ months?
Get your fucking clients to lower their fucking prices if you want this market to get moving!
Posted by: Michael C. | Apr 11, 2007 10:59:48 AM
BR's ancedote is similar to what I have been hearing. IMO, it means that we will have our housing slump for another quarter or so. We will not see a housing crash until the sellers start to really feel pain, and come to grips with reality and drop their prices. Then the proverbial excrement will hit the fan.
I see the bull running (or at least hanging around) for another 4-6 months. End of the year might get ugly. That said, I'm already in semi-defensive mode.
Posted by: LAWMAN | Apr 11, 2007 11:04:49 AM
Nova, I think you need to break out your calculator again. And this time don't forget to figure in transaction costs for sale of your home and three years of inflation.
As for a 45% price decline over 3 years, yes, that has never happened before. Busts are usually more gradual and drawn out. But if you simply change your assumptions to a more realistic 5% nominal decline per year for 6 years, plus the effects of 3% inflation, you end up in the same place: underwater. Just ask a Japanese businessman who was a real estate tycoon in the late 80's.
Posted by: Fiver | Apr 11, 2007 11:05:48 AM
About the rent/buy chart.
I changed the real estate commission to 1% based on me selling with Iggys House. (It is supposedly free, there are bound to be some costs) My buy side turned positive very quickly.
When the time comes for me to sell, I'll go with Iggy and I'll put $25k in my pocket.
Posted by: Paul | Apr 11, 2007 11:29:50 AM
Michael Schumacher, thank you for calling me a wanker for making $600,000 on my house. I'm laughing at your joke all the way to the bank.
Fiver - I think my math's right. Let's assume current value is 1.55 million. 15% off this year is 1.31 mil. 15% off next year is 1.12 mil. 15% off the year after that is 952K. I bought for 940K, so I'm still in the black. Yes, if I wanted to sell at the end of this, counting costs, I could in theory be slightly in the red. But that doesn't include pay down of my mortgage, or the fact that I had to pay for a place to live anyway.
The wealth creation for true investors and owners of real estate over the past five years has been nothing short of phenomenal. In 2005 I re-financed my mortgage for 30 years by paying two points, and have an interest rate of 4.875%. After tax deductions I'm really paying less than three percent to rent the money.
People who are looking for a quick killing are almost always going to have something go wrong. When they fail at currency markets, day trading, precious metals speculation, or condo flipping, the fault will never be with them, but with somebody else: Bush, the Fed, the auditors, the Chinese, mortgage companies, take your pick.
Posted by: Nova Law | Apr 11, 2007 12:08:35 PM
Nova, you are a breath of fresh air here in an otherwise gloom and doom group. I think your thoughtful analysis is spot on.
One thing I haven't understood is if sellers are in that bad of shape, why won't they lower their prices? If I'm in the bear camp, I would say that they will have to or be foreclosed on. I don't think they are really in that bad of shape, but I could be wrong.
Posted by: Jdamon | Apr 11, 2007 12:26:24 PM
