The Center for Economic and Policy Research has released another report on the prospects for building home equity over the next four years, and much like their April report, their conclusions are not good for current home buyers hoping to build short-term equity.
Despite the collapsing housing bubble and consequent fall in house prices in bubble markets, the prospects for accumulating equity still look grim for homeowners as prices are still far from reaching their historical norm. The relative merits of owning and renting will be affected by the extent to which homeowners can accumulate equity. Even with the general increase in house prices at the same rate as the overall rate of inflation, homebuyers are at risk of facing plunging home values in bubble inflated markets.
Based on calculations that compare the cost of buying a home at 75 percent of the median house price, they predict that current home buyers in the Seattle area will have between -$117,471 and -$123,373 equity by 2012.
Here’s how Seattle’s situation compares to other areas around the country, according to CEPR’s calculations.
Figure 2 shows the updated projections of equity in the 100 largest metropolitan areas after four years for a household buying a home at 75 percent of the median price. Blue circles indicate positive equity, while red circles imply negative equity. The calculations deduct 6 percent of the projected sale price for realtor fees and other selling costs.
The only metropolitan areas outside California predicted to have a larger amount of negative equity than Seattle are Honolulu Hawaii and Bridgeport Connecticut.
To calculate the projected negative equity, CEPR assumed that the (75 percent of median) house price will adjust over the next four years to a value of 15 times the annual rent (adjusted upward by 33% to adjust for the difference between apartments and houses and then again by 12.6% to account for rent increases). For full details on CEPR’s methodology, download the pdf (which has been added to the Library for future reference).
vboring » Oct 30, 2008 at 10:32 am
so, all real estate is local again?
or does the CEPR not consider the impacts of macro forces like interest rates and global economic slumps?
if anyone cares, 30 yr fixed interest rates are back up to nearly the highest they’ve been in at least 5 yrs at 6.35%.
rose-colored-coolaid » Oct 30, 2008 at 11:38 am
Hurray! We’re #…4?
jon » Oct 30, 2008 at 11:54 am
It’s interesting that the overpriced areas are the ones I would be most interested in living in. Boston is small for some reason, but I already lived there, so I’m not interested in going back.
My guess is their house price data does not take into account the varying fraction of high income people who are buying newer, larger houses. Houses that get rented are generally ones that are older and the seller is avoiding taking a capital gains hit by renting it out.
The Democrat’s plan to wipe out 401Ks will have an interesting effect, because people will be looking for new ways to shelter income. Buying houses in currently depressed growth areas would be a reasonable strategy, and that may account for the high sales being seen in California.
Dave » Oct 30, 2008 at 12:23 pm
Jon -
Democrats wipe out 401k’s? Put down the bong, Jon.
Dave
Mike626 » Oct 30, 2008 at 12:33 pm
I’m confused by the report, so confused that I actually read it–but I’m still unclear.
From my interpretation, if someone were to purchase a residence at 75% of the Median SFH price in the Seattle Metro at a 6% interest rate, and then sold that home in 2012, they would realize an approximate $117,000 loss.
The median price of a single-family house sold in King County is approximately $415,000. The CEPR report takes 75% of that or $311,000. A 117k Loss over the next four years would mean a 38% loss of equity, or a 9.3% annual loss. This projection along with the already realized slide in housing prices would mean that by 2012 housing in the Seattle metro would have lost 45-55% of its value from 2007.
I realize that housing is overpriced, but is it currently twice what it should be? Am I interpreting this data incorrectly? (By the way, they also show the median 2 BR apartment rental price as $987. If that means an in suite w/d with an easy commute to downtown, sign me up. I can’t find anything that fits that description under $1200.
Ben » Oct 30, 2008 at 12:40 pm
@5,
Some could argue that it is currently twice what it should be. Nobody actually knows how overpriced it is – that is like asking what the true price of a stock is.
It sounds like the methodology is to compare rents to prices. This is sound because rents are tied to income and long term houses are too.
The median 2BR is probably median for all of Seattle. I bet that you could find a cheap 2BR in White City or Northgate. The median price in Belltown is probably higher, and the house prices will be too.
deejayoh » Oct 30, 2008 at 1:29 pm
That would be 201K, at this point
Another Tim » Oct 30, 2008 at 1:52 pm
I’m not sure about the “wiping out” label but both McCain and Obama have put forth proposals allowing people to withdraw funds, penalty free, from their 401k plans.
softwarengineer » Oct 30, 2008 at 1:58 pm
ITS ONLY WORTH WHAT THE ESCROW PAPERS THAT GET APPROVED AND SIGNED SAY ITS WORTH
Not a penny more.
Isn’t it interesting that as the elite [federal government bullies] buy their picks on bank stocks with our federal money, there’s a mild sucker’s market surge going on in the stock market. Yet the banks are not lowering interest rates on home loans to free up credit and automobiles are getting hard to finance too.
The stocks aren’t worth a penny more until they’re sold either, so if you’re one of those buy low, sell high stock market gamblers; how in Hades do you time the peak when to sell in this witches brew roller coaster economy?
Homes are no different, in fact the longterm health of real estate follows the stock market’s longterm trends.
The good news during this credit mess: if you’re going to college with cash, perhaps loans for the masses will dry up and the classes will get smaller and less crowded. Probably less inflation on tuition too.
jon » Oct 30, 2008 at 2:14 pm
“Democrats wipe out 401k’s? Put down the bong, Jon.”
http://www.usnews.com/blogs/capital-commerce/2008/10/23/would-obama-dems-kill-401k-plans.html
Eliminating that deduction is a backdoor way of increasing taxes.
silver9 » Oct 30, 2008 at 2:20 pm
Now that the money-tree seems to have died, national folks are talking about a return to normal lending practices. Hopefully that means using comparable rents as standard for lenders. IF the loans dry up, home prices will have to fall or there wont be any sales. Im kind of suprised it hasnt happened more here already.
Anyway 15x rental income would be great! That would definately make housing affordable for families like ours.
We are currently renting an older, remodelled house in the east side. We pay $2k/mo. 15x rents values the house at $360k which I would consider reasonable.
However the house was appraised at almost $700k and almost all the houses in our neighborhood have equal lot sizes and are selling for over $1M. The house next to ours is vacant and asking $2M. There are a LOT of homes on the market — not selling.
So 15x rental prices would be a huge drop in our neighborhood. Much more than a $100k loss.
Good for future buyers; terrible for recent buyers.
Thomas B. » Oct 30, 2008 at 2:55 pm
Pretty bubbles…
casey1167 » Oct 30, 2008 at 3:19 pm
In my wine…..
casey1167 » Oct 30, 2008 at 3:34 pm
What is amazing about the chart is Florida as compared to California.
Sorry, but the numbers simply cannot be correct. The ARMs that reset in Seattle and Portland in 2009, 2010, 2011 would all default if the calculations were even close.
No, it is all fiction.
Civil Servant » Oct 30, 2008 at 4:00 pm
Does anyone know when the data was gathered for the October report? Is there a reporting lag a la Case-Shiller? Otherwise, how does it make sense (Appx Table 1) that with median prices here having declined over that time, CEPR is saying that ownership costs have gone up slightly? Thanks.
Nick » Oct 30, 2008 at 6:58 pm
While a 38% decline may restore the Seattle market to a natural historical relationship between house prices and rents, I just don’t think our government is letting a natural relationship develop. We are already intervening in the markets by trying to clean up the bad loans. Now the FDIC is discussing ways to limit foreclosures. All of this means limiting the decline in prices.
So, while I expect some more declines, I doubt we will see what the CEPR suggests. Because of the intervention in the markets, the return to the natural historical level will probably never happen. But hopefully once we reach this artificially inflated “bottom”, my hope is we will progress forward from there more reasonably, especially if we have more normal lending standards.
jonness » Oct 30, 2008 at 8:07 pm
“Eliminating that deduction is a backdoor way of increasing taxes.”
Yeah, wouldn’t it be great if we republicans could borrow 2 trillion per year forever and never have a tax increase? Hey, while we’re at it, how about waving a magic wand and making me richer than Bill Gates?
The facts are, when you borrow 12 trillion dollars, sooner or later, your taxes are going up or you are going bankrupt. Maybe you can put it off for 4 more years, but then it’s really going to hit the fan. My suggestion is to curb your addiction to borrowing money you can’t afford to borrow, bite the bullet, and start paying back the money you owe!
Or of course, you can go with the status quo and borrow another couple of trillion over the next 4 years to service the interest on the debt you already owe and pretend you are a fiscal conservative in favor or lower taxes.
Amarjit » Oct 30, 2008 at 8:43 pm
“loosing massive equity”. Here is my prespective:
We all know about American Dream. What happened to that dream? No more a dream in the mid 90’s. A house was which you buy for a long time, raise your family if you have one, enjoy it if you don’t, but for a long time. No worry about the equity or not, a dream fulfilled. In the mid 90s the housing market gets the treatment of a commodity market. You buy, you sell make money, make profit. And guess what, if you do that, you should be ready for UP’s and down’s. Everyone was ready for UP’s but not the DOWN’s and now they are ruuning for covers (that they no longer could afford).
What do you think? This is just my prespective.
Amarjit
[didn't read the comment policy]
jon » Oct 30, 2008 at 8:45 pm
“Yeah, wouldn’t it be great if we republicans could borrow 2 trillion per year forever and never have a tax increase?”
I’m just pointing out that raising taxes on one form of savings will cause people to seek other ways of saving and that historically investing in real estate has been a way that has been done.
andyl » Oct 30, 2008 at 8:54 pm
Seriously: Why is anyone taking this report with anything more than a giant grain of salt? Why are we giving it any more credence than Todd Britsch saying we’ll have double-digit appreciation soon? I don’t know diddly about what CEPR as an organization does, their biases, and what conflicts of interest they have, if any. But I do know this: If their staff could really see into the future like this report suggests, they’d probably be working for someone else, keeping their mouths shut and instead using their foresight to make a killing in the market.
2k » Oct 30, 2008 at 9:30 pm
Multiplier of rent is picked at 15, OK. Arguably multiplier number would strongly depend on prevailing interest rates at the time. OK fine, 15 it is. But do they find rentals at those prices? $949 for two bedroom? Studios are renting over $1,000.
jonness » Oct 30, 2008 at 9:47 pm
@19
Sorry Jon. I’m being touchy. :)
TJ_98370 » Oct 30, 2008 at 10:41 pm
What do the little numbers by the circles mean? I must be missing something here.
buyStocks » Oct 31, 2008 at 12:18 am
look at all the pretty bubbles
Is the rent multiplier assumption fundamentally sound? That just seems too easy.
Robert Wojciechowski » Oct 31, 2008 at 6:14 am
I was wondering back in 2006 how some apartments in Kirkland are still being rented out when the price of equity is so high and the rent relative to equity is low.
I was renting out a 2br apartment in Juanita Village in Kirkland for 1600 USD per month. It was new property right by the lake with underground garage parking etc. For this much money those guys had to do maintanence, had to change carpeting etc. So normally you would think that they paid on average $400 to maintain the apartment and the staff over there.
So their real income was not 1600$ but more like 1200$. I am sure they had to pay some real estate taxes on top of this. Let’s assume they were able to rent out the apartment for say 11 months out of the year – so their profit was 13,200 USD per year.
Now – the same apartments – maybe only slightly upgraded were selling at that time for 500,000 USD. If they sold the apartment for 500,000 USD put the money into a CD for 5% annual yield – then they would have made – 25,000 USD.
So insted of running the whole rental company – they were better off by just selling the apartments and keeping the cash and just relaxing. Insted they decided to employ people, manage property, take the time to do it when they could be easily resting somewhere in Hawaii.
But still not all decisions are sane? Is that correct?
stephen » Oct 31, 2008 at 7:38 am
I lived in a new place in that area for a couple of years ($980 when I move in $1500 when I moved out) and really can’t imagine they spend $400 a month or even half that. Did you know new carpet for a 2 bedroom 1600 apartment over there cost about $600. I only know this because my pooch caused me to pay for it on the way out. I was all upset thinking it was going to run 2-3 grand :-)
2k & Mike626,
No you can’t find a 2 bedroom apartment for 949 in a decent area and no, KC medium prices are not going to be 194k in 2012. Lower, but not that much lower…
mukoh » Oct 31, 2008 at 8:18 am
If Dems wipe out 401ks I will use my SEP account which is up to $40k a year to contribute to.
David Losh » Oct 31, 2008 at 8:57 am
their historical norm
That’s the term I’ve been looking for. Real Estate is over priced, and it will go down in price. The value will continue no matter what the price is.
The comparisons to rental income are very true, but in my opinion far from accurate. Rents went up when they should have gone down.
The units in Kirkland usually are only a part of the income averaging land lords do. I worked on a very crummy apartment the day before yesterday that rents for $750 and the woman is happy to pay. There is no up keep, management, or over sight. There are five units to the building that when it’s torn down will be a perfect building site for eight units.
As mortgages payments went up rents went up. Comparatively rents were cheaper. The price per unit went up because as condo conversions they could sell for more. In that regard as prices, mortgages, and no buyers for condos marches on rents will go down.
Buceri » Oct 31, 2008 at 9:20 am
Sadly enough; this group’s predictions are more in tune with the economic realities of our country. By now we are all tired of “turnaround/bottom out” stories that lack data to support them.
Demersus » Oct 31, 2008 at 9:51 am
I think it’s very reasonable to believe that the median price of a SFH should be no more than 3.5x the annual income of the median family. Around these parts median prices should be about $240K or so. Financing more than anything will be the force which reverts things to the mean. Bankers aren’t going to loan more than what someone can afford to repay. That’s going to be based on sound, conventional terms. If you make $50K, you’re not buying a $350K property unless you’ve got about $200K down. But, since you make only $50K it’s not likely that you’ve even got $5-10K down.
b » Oct 31, 2008 at 10:06 am
Nick -
All of these bailouts, programs, etc, have unintended consequences. The great part of the market is that it will seek proper value no matter these interventions because they are not sweeping enough to just remove the market all together. So things like massive subsidies will just devalue the dollar, forcing banks to rewrite loans will just contract credit further or shoot up interest rates, etc. And the fact we already have 11 trillion in debt with more each day will eventually limit them from being able to do anything at all. The bailouts will certainly prolong the process, but they cannot stop it from reverting without going to a soviet style assigned home.
Ira Sacharoff » Oct 31, 2008 at 10:38 am
…It wasn’t as if only one segment of the population went crazy. Lenders went crazy changing their lending standards to ” Do you have a pulse?”…Buyers went crazy tripping over themselves to make offers on homes they couldn’t afford. Commercial investors went crazy buying apartment and retail complexes, throwing out the traditional criteria for investing ( CAP rates and comparisons to 10 yr T bills as a safe standard) and just deciding that everything will go up forever.
I hate to use the word because it’s so overused, but this thinking just isn’t “sustainable’”.
Right now, a 500,000 dollar house can rent for something like 1800 dollars, but even with 20% down, the monthly payments including taxes and insurance will be in the neighborhood of 2850 per month. Sustainable?
It wasn’t always like this. When I owned rentals, the rents would cover the mortgage or at least come very close, and as time progressed rents would increase making it a better deal, but at no point would I subsidize the rents by 1000 dollars + per month, that’s just insanity…So I think Amamrjit is right…real estate became seen as something other than a low risk, low reward proposition.
People saw it as a high reward investment, even over the short term, and were fed a bunch of lies by people trying to sell and finance these “investments”, being convinced that this was easy money. It was, for some, for a while, but people have blinders on and only believe what they want to believe, and have a tendency to ignore history.
Angie » Oct 31, 2008 at 7:58 pm
When I owned rentals, the rents would cover the mortgage or at least come very close, and as time progressed rents would increase making it a better deal, but at no point would I subsidize the rents by 1000 dollars + per month, that’s just insanity…
That thinking hasn’t shaken loose yet. I just overheard some folks at work talking over the prospect of turning a residence into a rental. One guy said, “You want to charge less than your mortgage payment so you can get a break on your taxes.” Mmm, not really. That might work when prices are skyrocketing and you can make it up in appreciation, but in this day and age, not such a smart strategy.
mikal » Nov 1, 2008 at 12:22 am
What moron ever says don’t get as much as you can. The right off on a loss is never as good as coming out ahead. PERIOD.
Matthew » Nov 1, 2008 at 1:55 am
Probably the same kind of moron that would “right” off a loss instead of “writing” it off. ;)
mikal » Nov 1, 2008 at 10:45 am
For one moron to another, thank you for correcting my spelling, mom.
Scotsman » Nov 1, 2008 at 6:27 pm
I think you mean “from.” ;-)
mikal » Nov 2, 2008 at 12:41 am
Thank you.
Matthew » Nov 2, 2008 at 7:33 am
People that live in glass depreciating assets…
Angie » Nov 2, 2008 at 1:19 pm
What moron ever says don’t get as much as you can. The right off on a loss is never as good as coming out ahead. PERIOD.
I know. I think some people get so fixated on the idea of lowering their tax bill that they don’t think things through thoroughly.
Same sort of deal when people advocate borrowing as much as possible for a house, or never paying off the mortgage, “for the tax break”. Well, in order to get any tax benefit, you need to pay OUT thousands of dollars (~5K for a single person, ~10K for a married couple) in mortgage interest first. That money is of course gone forever. What tax break you do get is based on how much you pay *above and beyond* those threshholds. Certainly isn’t bad to get a tax break, but it arises from pissing a lot of money away….*that’s* what really ought to be minimized!
mikal » Nov 2, 2008 at 6:48 pm
Mathew, my glass depreciating assets will pay me an extra $18,000 a year this coming year becuase rents have risen that much. Did I spell this comment up to your standards? That is for four units.