Please vote in this poll using the sidebar.
Best way to determine fair price for a property?
- Rental income must be >= payments. (27%, 50 Votes)
- Pre-bubble sale price + appreciation. (42%, 77 Votes)
- Recent sales of similar properties. (19%, 34 Votes)
- Asking price less a fixed percent. (2%, 4 Votes)
- Zillow it. (3%, 5 Votes)
- Other... (7%, 12 Votes)
Total Voters: 182
This poll will be active and displayed on the sidebar through 06.13.2009.
Kary L. Krismer » Jun 7, 2009 at 7:32 am
Why would rental income ever be greater than the payments (assuming that means PIT)? If that were ever the case investors would be snapping the things up for the tax shelter.
Also, it sort of begs the question–what’s the rent on a place that’s not rented? And what if the rent was set low?
Scotsman » Jun 7, 2009 at 9:23 am
RE: Kary L. Krismer @ 1 –
Rents need to cover PITI, maintenence, depreciation, and provide a profit. The tax considerations alone are probably not enough to do that. It’s the norm, just not what we’ve seen for the last couple of decades. When we have inflation, the underlying asset appreciation counts toward or was the same as a higher rent.
Groundhogday » Jun 7, 2009 at 9:32 am
RE: Kary L. Krismer @ 1 –
What Tim is trying to say is that the property should be at least cash flow neutral. This will depend upon a particular buyer’s cost of capital (interest on credit or opportunity cost) as well as their tax scenario. This should theoretically take into account management costs, maintenance, vacancies, insurance, taxes (benefits as well as costs) and capital costs.
This is the minimum because a true investor (not a speculator) knows that there is a great deal more risk involved than in buying an FDIC-insured CD. Real estate is illiquid, a tenant can trash the place and/or require eviction, rents can decline, neighborhoods can decline, etc…
And yes, in a healthy market investors will be snapping up homes that are a good investment. The owner-occupier has a couple of advantages though: (1) they self-manage the property; (2) they don’t have to deduct for vacancies; (3) the occupier’s interests are directly aligned with the owner, reducing the risk of property damage. Landlords can make money because (1) they have access to capital that renters often lack; and (2) they provide a service for those who are mobile and/or just don’t want the hassle of maintaining a property.
Cash flow positive is a very good metric for most segments of the market, but my experience has been that there are segments with very few rentals that could be used for comparison. In these situations, pre-bubble + 3% annual appreciation is my rule of thumb.
Jillayne » Jun 7, 2009 at 10:32 am
Cash flow positive (or close to it) is so important for a first time homebuyer just getting started. Things happen, life happens. If that homeowner needs to sell but cannot for whatever reason, the homeowner can move into more affordable housing and put a renter in there for awhile. Not everyone is cut out to be a landlord but this doesn’t have to be a permanent solution.
I’d say this idea is still important for the move up buyer as well.
I imagine it may be more difficult to match rent to PITI in the upper price ranges. But then historically a person in the far upper price ranges had cash saved for emergencies. Not so this time.
Rents are still falling, inventory is still high, foreclosures are still rising. This leads me to believe prices will continue to slowly fall.
Ira Sacharoff » Jun 7, 2009 at 10:37 am
“Why would rental income ever be greater than the payments (assuming that means PIT)?”
They certainly have been in the past, and still are in some parts of the country. I used to own rental property in Seattle through the mid eighties and nineties, and the rental income pretty much broke even with PITI, and the rents were a little on the low side.
Historically, there has been a ratio of home price over monthly rent for a comparable property. In 1979 I was renting a house on Capitol Hill, on 17th behind Group Health. The rent was 275 dollars per month. The landlord put the place up for sale, offering me first crack at it , at 39,000 dollars, about 125 times the monthly rent.
I don’t believe that we’re going to see 125x monthly rents again, but the last few years it’s been more like 270x monthly rents. I think we’re headed to more like 200x.
Nick » Jun 7, 2009 at 11:00 am
Other, IMHO. Specifically:
What someone will pay for it, with cash or borrowing at most 80% LTV only from private lenders who will hold the loan to maturity, and not expect of receive a bailout. Basically, whatever someone is willing to pay in the absence of government subsidization, lender risk subsidization (eg: securitized loans), and buyer risk subsidization (eg: less than 20% cash down). Yes, this means there might still be real estate bubbles under certain circumstances, and “fair price” might be higher or lower than what it “should” be at times… but this would be a fair price that I could live with.
jon » Jun 7, 2009 at 11:12 am
The whole concept of a “fair price” as distinguished from the actual price is highly suspect. The price is what the buyer and seller agree to. If neither one is under duress or is committing fraud, then that is the fair price. The fact that some people don’t like that price, or think that they can get a better price later on, does not change the fact that it is a fair price according to the buyer and seller, which are the only people that matter in regards to that particular transaction.
Some other people may not derive as much benefit from the property at that time as the person who bought it, but then those other people are free to look for other property or rent as they see fit.
Admittedly there was plenty of fraud during the bubble, but hopefully that is greatly reduced now, and there is no reason that I can see why taking years old actual sale prices and extrapolating forward would be preferable than taking current actual sales prices for comparable properties.
If anyone would like to buy some WaMu stock at the fair price from before the bubble, please contact me, I will help them find some for a small fee.
One Eyed Man » Jun 7, 2009 at 11:28 am
This poll begs that one ask what I believe is a very important question regarding the future of residential mortgage financing in America. In preface to that question, many Bubble Heads are strong free market advocates who believe that governments thru regulation more often than not cause distortions and inefficiencies rather than enhancing the effectiveness of markets and the economy in general.
But regulation can in many cases be defined as the agreed definition and structure for the market without which the market lacks the transparency, enforceability, and other characteristics essential to its operation and effectiveness. For example, markets require rules for formation of enforceable contracts and means of dispute resolution to determine the breach and remedy for breach. Disclosure regulation is probably necessary in the securities markets to make them something more than just a legitimized arena for fraud. Broader regulation such as polution regulation is sometimes needed to control the consumption of resources like air that all people need but because no one possesses it, the consumption of which is not otherwise capable of being limited by a supply and demand market price mechanism. With that in mind query whether the residential mortgage market should be redefined as follows:
Should the appraisal requirements for residential mortgage lending be redefined thru regulation to require use of the income method of valuation at least in supplement to the comparative sale method? The supplemental use of the income method would arguably promote loan underwriting more in line with the fundamental economics of housing as a commodity and avoid the excessive lending resulting from market momentum and irrational exuberance of buyers. It will limit the ability of those who want to buy based solely on their own desires to consume by forcing them to come up with a larger down payment. But that is probably reasonable if lending should limit risk through reasonable and conservative underwriting.
Use of an income approach in addition to comparative sales will probably cost more. As many of us know, income method valuation such as that used in the commercial real estate markets is commonly more expensive, employing MAI appraisers charging 10 times what residential appraisers charge. But I don’t see any reason why it couldn’t be done on a cost effective basis. Even if it cost twice as much as using only the comparative sale method its probably cost effective If it prevents the economic chaos of the last year. The income method should probably be employed only as a limit on the valuation dervived by the comparative sale method to force larger down payments and limit formation of inflated bubble markets. But even if it should be used, should it be required by regulation for all institutional residential lending, or for all FDIC insured lending, or just for conforming loans to be sold to the GSE’s?
How to structure the regulation would also be difficult. For example, what rental rates would be used and what if they were depressed on a short term basis. And should the regulation use a “true” but fictitious income method analysis or just some sort of average historic multiplier to the areas appraised current market rent for similar properties.
Has anybody heard any discussion of the above in political or economic circles? Am I the only one who thinks it might be a good idea? Unlike selling residency to aliens, which I suggested sarcastically on the weekend open thread, I think this is probably an idea with some merit.
I’m trying to be a let’s fix it, less cynical guy these days in honor of not leaving too big a mess for future generations. But is this reasonable and feasible or is it just another source of market distortion.
Groundhogday » Jun 7, 2009 at 11:44 am
By Ira Sacharoff @ 5:
I actually do think we’ll see 125x rents again, adjusted for interest rates.
Dave Lincoln » Jun 7, 2009 at 11:47 am
I voted “other” also, and I agree John, that “fair” price is maybe not the best word. I assumed it to mean the price at which I would be willing to buy the house for.
Option (1) is the best way, it seems, for people who are buying the house in order to rent it out.
Option (2) seems like a good method to determine a “non-bubble” price for the home, as it were.
However, Option (6) – Other is my choice as (and this is something I’ve stated before) I only want to pay what a house is WORTH. Maybe that is not clear to people, as anyone will tell you ” the market knows it’s value, and whatever it sells for, that’s what it’s worth”. I understand the concept of a free market, so maybe it’s just my terminology that is different. I want to buy the house for what it is INHERENTLY WORTH.
An example in the stock market, which gets tricky due to the value of goodwill, etc, is how much a stock in, say Pets.com was worth in the year 1999 or 2000. I would never have bought a share of it, unless it was totally just to sell as soon as it jumped up, but I don’t trust myself to time things right. That is equivalent to a flipper in the housing market. Now, back in 1999, people would have told me “Pets.com is worth xx Million dollars in capitalization, as it’s a NEW ERA, and things are different and people like Jeff Bezos are smart (not!), etc.” They would tell me “the value of Pets.com is $120/share as that’s what the market says it’s worth”. At some point some of the internet companies with no assets besides a few thousand computers were “worth” more than Boeing, which has built-up airplanes, many huge plants, tooling, know-how, etc. It was ridiculous, and I did not by a share in these .com companies.
Why? Because I don’t have the personality to be either a day-trader (.com business) or a flipper (housing business). I think I don’t have the nerves for it. But, I would have bought shares in whatever.com if I though that one share was close to the true values of their equipment, know-how, and short-term potential divided by the number of shares out there. It was not so, for most of those companies.
Back to housing, I would only buy a house for a price that I think covered the building materials, the construction materials, and the lot (I know, location x 3 !, and I would include the value of a good location for sure – both small scale (as in, next to a park or away from too many Seattle left-wing neighbors) and large-scale (in Seattle, not in S. Louisiana). Yes, maybe I could not buy a house here for a long time – I could according to the bank, but not by my standard. So what? If it’s not worth it, I don’t buy it. I don’t like getting ripped, and every single buyer who bought a house in Seattle in 2002 – 2008 got ripped! I said it, and I stand by it. Flame away, if you must, but you know in your heart you were wrong.
jon » Jun 7, 2009 at 11:48 am
RE: One Eyed Man @ 8 – One problem with your proposal is that when you rent a property, you are just getting use of the property, which is only one of many of the benefits of getting ownership. So you can’t really compare the two. You can find the income equivalent of the short term use of the property, but there is no way to measure the income equivalent of the long term appreciation of the neighborhood, the inflation hedge, the ability to settle into a place that you can improve as you like, or simply live without worry from year to year what the owner is going to decide to do with the property. For many businesses, those are not issues because the focus and expertise of the business is elsewhere, so they will just rent and move as needed. But if a business has to invest substantial specialized equipment in a building, they are not going to lease the property. Home ownership is often the equivalent of that specialized investment, where the investment is in nearby friends or family, church, schools, etc.
The effect of your proposal would be that people to have to increase their down payment because they see more value in ownership than simple renting.
Groundhogday » Jun 7, 2009 at 11:52 am
By One Eyed Man @ 8:
I think this is a great idea, not to supplement but to be the primary basis of the appraisal. Remember that appraisal’s don’t set a cap on the sales price, someone with a larger downpayment can willingly pay more than the appraised value. This would be a great way for lenders to prick asset bubbles and reduce lending risk. Fundamentally the value of a house is the value of living in it. The way to remove LEVERAGED speculation on asset price appreciation is to base assessments on equivalent rent.
Now if someone wants to bet on asset price appreciation with their own money, that is fine by me.
Just bought a house » Jun 7, 2009 at 11:58 am
Rental income must be >=payments???
It might work for some houses in the middle of nowhere but not in Seattle.
Take a look at this Seattle area home price to rent ratio: http://seattlebubble.com/blog/wp-content/uploads/2009/04/home-price-to-rent_2009-01.png
The average ratio is 320. (1990-2001)
320!!!
Let’s take a median house in Seattle area, let’s say 3 bedroom and 2 bath. How much can you rent it for? I would say you can get it for at least $1300 (a crappy one). That means the price of the house should be $1300*320=$416000.
But it’s already way below that!
The Tim » Jun 7, 2009 at 12:01 pm
By jon @ 7:
I think the thrust of my poll question is a little unclear. If I had used more words, I would have said: “When you are considering buying a property, how do you determine what is a fair price that you are willing to pay?”
I don’t think that question is “suspect,” but rather highly relevant. Sorry I was unclear.
The Tim » Jun 7, 2009 at 12:07 pm
RE: Just bought a house @ 13 – You seem to have missed this part of the post in which I placed that chart:
Ben » Jun 7, 2009 at 12:10 pm
RE: Groundhogday @ 9 –
You don’t need to adjust for inflation when you talk about 125x rents, because this is expressing a ratio of current dollars. Inflation is irrelevant at this point.
jon » Jun 7, 2009 at 12:10 pm
RE: The Tim @ 14 – ““When you are considering buying a property, how do you determine what is a fair price that you are willing to pay?—
When I am considering going to a restaurant, I don’t worry about what the fair price for the meal should be. It is just a matter of how much I will enjoy the experience versus other potential uses of the money. A house is a little different, because unless I am sure I will be living the rest of my life in that house, then the resale value is an important consideration. So I think the way to look at the price of a house is how much I will enjoy it, or how much it will assist me in earning an income, plus consideration of its resale value at some future date. So I care about the resale value, but not the fair value, whatever the heck that means. The resale value is what the highest bidder will pay for it, less sales and tax costs. To predict the resale value, you look at what the market is willing to pay for similar properties. Using recent sales data will almost always be preferable to using years old data for predicting the future price, although using both can be valuable to smooth out short term fluctuations.
David Losh » Jun 7, 2009 at 12:19 pm
The value of a property is based on the rental income based on 20% down and 10% interest the rental income should cover the PITI.
There is a fudge factor for the tax considerations.
Real Estate Investors want commercail property. No one wants residential Real Estate except the novice. You have to deal with renters. Renters are difficult. Maintainence is a big issue and expense. It’s a tough way to make a buck and you are tying up your cash for at least fifteen years.
Appreciation is a gift that may be a long time coming back. Also in residential a borrower has limited ability to borrow more. It’s easier to borrow for an apartment building if the numbers look good to an investor than residential.
The Tim » Jun 7, 2009 at 12:24 pm
By jon @ 17:
It seems to me like you answered your own question there.
Groundhogday » Jun 7, 2009 at 2:25 pm
By Ben @ 16:
I didn’t say inflation, I said that you need to adjust for interest rates. And yes, you do need to adjust for interest rates because that directly impacts holding costs or opportunity costs.
One Eyed Man » Jun 7, 2009 at 2:27 pm
RE: jon @ 11 –
I generally agree that your conclusions. As a matter of fact American law has always recognized that each piece of real estate is unique and therefore a buyer is entitled to the remedy of specific performance rather than just damages when a seller defaults (unless the contract limits the buyer’s remedies). But a loan underwriter should be looking at the value of real estate as collateral for a loan and the aspects of a property that make it uniquely valuable to any particular buyer should probably be given little weight. The property should probably be viewed more like a commodity that can quickly be liquidated like a fugible good to any of a number of buyers. The appraisal is required by the lender for the lender’s use and should probably reflect the lender’s considerations and not those of the buyer.
Incidentally, we bought our current house in 2003 at what I anticipated to be near the top of the market. We bought it the day it came on the market for full asking price and our offer stated that it terminated at 6:00 on that day. There was an open house scheduled for the weekend and I told the listing agent that if they rejected our offer and held the open house any new offer by us would be at a decreased price. I thought the house was over priced at the time but it had unique value for my wife and I for a number of reasons and we were willing to pay a premium for it. By the same token, the only reason we have a mortgage is because I’m egotistical enough to think that I could make more than 5% on the relatively small amount we borrowed.
Groundhogday » Jun 7, 2009 at 2:30 pm
By jon @ 17:
Long term, price vs. rent ratios are very consistent for individual cities, neighborhoods, etc… Price/rent is analogous to the P/E ratio for stocks, and a useful tool to determine whether a stock is over or underpriced. So if you are truly worried about resale value, looking at equivalent rent is probably your best tool. Looking at comps is like buying dot.com stocks at the peak because everyone else is doing it.
jon » Jun 7, 2009 at 3:05 pm
RE: One Eyed Man @ 21 – I didn’t mean to imply that property wasn’t fungible in most cases, simply that there is a difference in value between control and use of property. For example, for accounting purposes a majority holding of stock is more valuable than simply the market price of the shares. In the case of homes, the extra value is because the personal involvement that evolves as a person lives there for several years. It is not economic value that you can base a loan on, but it will cause people to be willing to pay extra to own property. Historically when owning cost less than renting it would have been because of fears of deflation or because mortgage law used to be much more severe than it is now. Now that the internet has made marketing real estate easier for the seller and determining the value of property more transparent for the buyer, the value of owning is even higher.
When looking at rental property, then rental income is the major concern, but if the property is commercial property next to a rapidly growing company or downtown center, then a savvy investor will be willing to take a loss on rent to make it up in appreciation.
Kary L. Krismer » Jun 7, 2009 at 4:32 pm
RE: Groundhogday @ 12 – The income approach is a valid method of determining what a property is worth, but typically the appraiser pick the higher of multiple values. Thus if property is actually selling for more than it’s rental value, it will be priced higher than that value.
It’s sort of like how if a given property’s current use isn’t it’s highest and best use, it will be valued higher based on other permissible uses.
David Losh » Jun 7, 2009 at 4:48 pm
When people go out to look at property to buy they should have a yard stick to measure the property.
In my opinion we are talking about mom, dad, and the kids looking for the family home. I think people should be asking themselves what they or a reasonable person would rent a place for.
I think that’s the only every day reliable way to make an informed decision. Every one can get familiar with what rents are in a neighborhood. OK, if you want to add or subtract for personal comfort, great, you can base that on the income value approach.
I would also say this is exactly how we got into this over priced mess. Income based valuations are the only way to determine if a property is viable economically. The 20% down payment would cover selling costs, but selling is more problematic than renting.
Kary L. Krismer » Jun 7, 2009 at 5:06 pm
RE: David Losh @ 25 – I think it’s absurd to suggest that the value of owning a property is only the rental value. Look how upset people get over government or HOAs controlling what an owner can do with a property. Ownership obviously has greater rights than a mere tenancy, and thus is more valuable. Also, just the certainty of knowing that you are not going to be kicked out if the landlord decides to sell, do something else with the property, or gets foreclosed.
Mike2 » Jun 7, 2009 at 6:28 pm
Pre-bubble sale price + appreciation? As nice as that sounds, figuring out what the appreciation rate should have been in a particular neighborhood over the past decade is no simple task.
I’d love to hear what forumlas people have been using for this. I have a few “back of the napkin” calculations that take into account increase in incomes, whether the neighborhood has improved, rental rates and interest rates.
Each of those factors, unfortunately, depend on both the aggregate effects of the bubble and the mid term direction of the economy.
deejayoh » Jun 7, 2009 at 6:49 pm
how about “triangulation”?…
Ira Sacharoff » Jun 7, 2009 at 6:55 pm
RE: Kary L. Krismer @ 26 –
To follow up on what Kary said, “fair” and “fair market value” may not be the same thing.
for example, an appraiser will look at recent sales of the closest similar homes, taking into account size, style, vintage, etc to determine the price a ready, willing, and able buyer is most likely to pay at the time the appraisal is made. That’s fair market value, unless you’re looking at apartments or retail, in which the income approach is given greater weight.
That’s not to say that it won’t be worth less a year from now. Appraisers aren’t predictors. When agents do a market analysis, they also often include similar homes currently for sale in the mix, but I personally think that’s kind of worthless…But is fair market value fair?
If you believe that home prices are going to fall another 60% and not come back up anytime in the near future, then paying current fair market value for a home wouldn’t seem fair.
If you believe that rent to home price ratios and income to home price ratios are an indicator of future prices, then you might believe that it would be a mistake to pay current fair market value now for a home.But if you find a home you like, and you can determine fair market value, and find that you can purchase the home at a 20, 30, or 40 % discount from that, then maybe you’ve gotten a real fair deal.
David Losh » Jun 7, 2009 at 6:56 pm
RE: Kary L. Krismer @ 26 –
Kary, we are talking about when people are out looking to buy a home. There is no discussion here about renters and home owners.
Rental income valuation is a simple quick and easy measurement for getting a rough idea of what a property is worth. You can add and subtract from that base value depending on your abilities and wants in a property.
Most people have limited access to fair market valuation by CMA and even if they did it would be moot to fair market value. Housing units are over priced.
Some properties do have intrinsic value. Some properties are like comparing a 1957 Chevy to a 2009 Prius, but even at that there is a base price to be determined before you offer whatever the market will bear.
It’s how we got into this mess. People bought by CMA calculations.
ray pepper » Jun 7, 2009 at 7:15 pm
I don’t like any of the choices. Best way to find a fair price? Well, I always ask myself what could I sell the property for tomorrow if I had to.
This question is more important NOW then ever.
I know I know all you keep telling me “Ray, not everyone sees their home as an investment!” I say BS!! A home PURCHASE is ALWAYS an investment. If you find yourself in a position that you MUST move in this next decade you better make sure what you are Buying is a GEM!
Now go find them!
You will know when you get one!
http://www.cnbc.com/id/15839285
Groundhogday » Jun 7, 2009 at 7:18 pm
By Kary L. Krismer @ 26:
There are advantages and disadvantages to owning vs. renting. Some people prefer to own and others prefer to rent (my guess is that you have a lot more contact with the former group.) Who cuts the lawn, repairs the broken furnace? Who has more flexibility to follow a job? But the predominant value of a house is that you get to live in it! Therefore equivalent rent is a very good basis for estimating the fundamental value of a house. Now, if you REALLY prefer to own, you can pay more than fundamental value. Knock yourself out. But I certainly don’t want government guaranteed mortgages covering that purchase.
Ron » Jun 7, 2009 at 7:50 pm
Why do people Here Seem so focused on Where the Price is going, when you talk about price.. many here just put Some Magic Number in there head and say “I Believe its going to Be Such..
Here is my Analogy- Prices are Based In CREDIT/ INTEREST RATES- OR AVAILBILITY Of LOANS.. More credit and Loans MORE BUYERS Higher the price- This is Why prices are so High to begin with..
Bottom line is that people base there Decisions on Security of there Job and how much they can afford to pay every month.
For every 1% of HIGHER INTEREST= IS EQUAL to $100.00 Dollars higher payment Per Month on every $100,000. Dollars Borrowed..
I Believe We are LIVING IN A WORLD OF DEFLATION.. Currently… this Money the FED Is lending to the Banks is Not for the most part being lended… Why would they lend this money out?? we need any more Strip malls, Home Depo’s or Fast Food Restaurants? BOTTOM LINE THIS ISN’T CREATING INFLATION… Its currently creating DEFLATION.
My take is that Real Estate will not have any chance of any recovery at the earliest for the Bottom is 2012.. anything sooner your not close to a bottom… By that time it will be on the Front Cover of Some major money Magazine Probably Touting it as probably the Worst Investment…. ~!!
Groundhogday » Jun 7, 2009 at 7:57 pm
RE: Ron @ 33 –
We shouldn’t care about price but you are emphatic that prices will continue to decline, with capital letters no less? Okay Ron.
jdc98119 » Jun 7, 2009 at 8:18 pm
When I value real estate, I assume that I will have to move in about 10 years (new job, outgrow house, etc). So I take the purchase price, the assumed sell price in 10 years, closing fees, interest, etc. and calculate what the monthly cost is going to be. I compare that with rent for a similar property and voila, if it is fairly close then it is time to buy. Even now, it is about 2-3X to buy than to rent, assuming I break even in terms of all other factors. Why would I rent from a bank when I could rent from a landlord at 50%?
Ron » Jun 7, 2009 at 9:00 pm
There is So many Variables to making a Decision to Rent from the Bank: Lets call a Spade a Spade.. Home Ownership for many to most is really not ownership, In fact its Been Slavery for about the last 10 years. Of Course if I was to win the Mega Lottery then why not just pay for the house and you would only have to deal with Maintenance and Taxes- However what do you really Own???
Who ever came up with the term Ownership?? What Defines It?? Ownership- Once I start making Payments on A Brand New Car do “I Actually Own It??—
What Happens what I Quite Paying?? Hell “I Own It– —- RIGHT?? Or does the Bank actually Own IT??
Hell- With Fractional Reserve Banking: Do They Actually Even have the MONEY??
Ron » Jun 7, 2009 at 9:12 pm
I Understand the Whole Rental Value…. THING…
However What’s going to happen in this World Of Musical Chairs– when everyone actually Finds there SEATS in the next 12 Months or So,
THE MUSICAL CHAIR ARRANGEMENT IS GOING TO REARRANGED…
I Know and many of you here also know there is currently a LOT of Apartment Buildings finishing Construction in the next 6-12 months- What About all those Apartment To Condos that need Residents? I don’t see things getting any easier for Real Estate or the Job Market as a whole.. Bottom Line all Real Estate serves the Same Purpose however in this current world and the world coming forward over the next at least couple years its going to be rough for Rental Values and Real Estate Values in general- Commercial isn’t going be spared either.
PERSONALLY: I Think the Blogger: Scotsman .. is Probably or very likely the Most Financially Educated one here Blogging.
Kary L. Krismer » Jun 7, 2009 at 9:13 pm
RE: David Losh @ 30 – I’d agree the rental rate has to be taken into account. For example, it you had a sweetheart deal renting a nice apartment or house, it would be really tough to make the buy decision. Sometimes that will save you a fortune and sometimes it will cost you a fortune, but either way it’s something you’re going to take into account.
Kary L. Krismer » Jun 7, 2009 at 9:16 pm
RE: Ron @ 37 – It’s interesting you mention that.
I was just thinking this morning about how the life of an average apartment renter (as opposed to house renter) had to go downhill in recent years, because even crappy apartments were getting converted to condos. That had to really limit the selection.
But now we have stuff that was originally planned as condo, or apartments that were renovated to go to condo, being switched to apartments. That has to be really improving the selection.
Softwarengineer » Jun 7, 2009 at 11:03 pm
RE: One Eyed Man @ 8 –
HELLO ONEEYEDMAN:
You’re right, whether you’re someone that was born in America or not; this has absolutely nothing to with the “scientific” economic mess solution. Let’s be honest and pragmatic, we’ve over-built for uncontrolled population with current resource shortages, making it impossible to fund the current uncontrolled debt.
Now, call me a Hater for echoing the same Earthday logic that Martin L King Jr, John Kennedy and even Richard Nixon vehemently supported in America [and its far worse now] and the world….population control. But you’d better call them Haters too and wake up too….calling any scientist a Hater for supporting controlled population in America to support our only real economic mess solution [can you think of another?], makes you liable for a clear defamation of character lawsuit against you.
Our American economic mess’ solution has nothing to do with politics. Depopulation will take at least 20-30 years to implement, so don’t expect a quick fix either, but we must begin now. Thank God, overpopulation is starting to getting more news coverage lately….our denial stage is coming to an end I pray. How can anyone claim to be a real environmentalist fighting global warming and not consider overpopulation a problem? Its totally unscientific and a ludicrous lie.
Scotsman » Jun 7, 2009 at 11:32 pm
RE: ray pepper @ 31 –
Agreed that the strongest consideration should be given to what the house will likely sell for when you want to move on. This is probably the best way to value a property in a declining market where both values and rents are trending down. While rents/multiples and some minor consideration for emotional benefits have traditionally been the most consistent valuation tools, neither really work in markets where prices, rents, and disposable income are all falling. Until a sustainable bottom appears, I’d say there is no such thing as a real value established, only data points on the downward slope. What we see in current sales prices aren’t really “values” but temporary intersections, markers of completed transactions. They are almost immediately invalidated though- continually falling prices suggest that the same or similar transaction will almost certainly never happen at that price point again. At least when prices are rising you have a floor to work up from, and a price that can be replicated in a subsequent sale. (although it may be sub-optimal.)
In a falling market, comparable sales are non- existent. While you can pick a percentage to subtract from the last comparable sale, it may or may not reflect actual market declines, especially in the current environment. Rents are at least somewhat stable, since they’re fixed for the length of the lease, guaranteeing a sustainable valuation going forward.
Oddly enough, it’s fair to say that any sales price in a declining market is too high, and only guarantees a loss.
Ross » Jun 8, 2009 at 2:54 am
RE: Mike2 @ 27 – Not really. inflation is generally the right number. I can’t think of many neighborhoods that became so much more desirable in the last decade (Living on the lake was desired even 10 years ago =)
Kary L. Krismer » Jun 8, 2009 at 6:46 am
RE: Scotsman @ 41 – All you ever have is temporary data points showing value. We’re talking real estate, not currency.
Kary L. Krismer » Jun 8, 2009 at 6:54 am
RE: Ross @ 42 – It’s not merely desirability. It’s supply and demand. As people move into our area, any given neighborhood will increase in value. As property is sub-divided (including condo declarations) and developed, values will decline.
David Losh » Jun 8, 2009 at 7:29 am
This thread of comments shows exactly why home prices went up so much.
Real Estate is a constant. It’s value is when it’s paid off. The bank, your mortgage, is the enemy. You get rid of the mortgage as quickly as possible. Interest rates and what the bank is doing goes to how the Note will be paid and in what time frame.
Real Estate is worth what it will rent for.
The bank knows that. The lenders and investors who buy the Notes know that. So why are they so surprised today? Why did banks lend more than what property is worth?
You can debate all kinds of wild theories about how to value property, but banks, lenders, and investors know the only value is the income value.
Groundhogday » Jun 8, 2009 at 8:20 am
By Kary L. Krismer @ 39:
Yes, selection is way up… BUT given how many accidental landlords are out there, you have to be very careful.
Groundhogday » Jun 8, 2009 at 8:39 am
By Scotsman @ 41:
Good point that I’ll illustrate with an example. A good friend owns two small houses in the Gallatin Valley (Bozeman, MT). He and his now wife both owned homes prior to marriage. Then his career took him to WA state. Rather than sell the Bozeman houses, he decided to rent them both out as they were cash flow positive. Then he bought a house in his new location with the mortgage payment roughly equal to equivalent rent.
Problems: (1) The value of his most recent house has declined by 20%+ and he is now underwater. (2) He didn’t fully account for maintenance, taxes, insurance, etc… relative to rent; (3) Those cash flow positive rentals in Bozeman are now alligators as rents have fallen ~30% (massive overbuilding); (4) His position here in WA state is not very secure due to the state budget cuts.
No exotic mortgages, frugal living, no cash-out refinancing, etc… But this guy is really struggling financially. In a collapsing market, rents as well as purchase price can fall… so who knows where the bottom will set in. For most of Seattle there simple isn’t enough inventory for this to happen, but I would be very nervous about a condo investment even if the price/rent ratio made sense.
Scotsman » Jun 8, 2009 at 9:21 am
RE: Kary L. Krismer @ 43 –
Not true. As I noted when prices are rising you have a repeatable sales point, or floor to work from. It may not be the most you can sell for, but it is a guaranteed price. When prices are falling no one knows where the next sale can take place. How far down do you need to go?
Kary L. Krismer » Jun 8, 2009 at 9:49 am
By Scotsman @ 48:
Oh, so I guess those who bought in July, 2007 are safe because they bought when prices were still rising, and thus have a guaranteed floor that is no lower than what they paid, right? ;-)
Seriously, the future is uncertain, has been uncertain, and will be uncertain. What a property is worth now, or was worth in the past never is a guarantee of what it will be worth in the future. The only thing certain is that the price will go up, down or stay the same.
So I repeat–all you ever have is temporary data points. Value is dynamic.
Ross » Jun 8, 2009 at 10:53 am
RE: Kary L. Krismer @ 44 – I was using “desirability” as a proxy for relative supply/demand. But regardless, I’d contend that over the long run, the price of housing moves, on average, at the rate of inflation. There’s a great article from the new york times showing that an affluent neighborhood in amsterdam only increased in price by inflation over a period of 400 years: http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html?_r=1
The common counter-arguments are:
- All real estate is local: True, but long-term trends only deviate in rare cases (a city/neighborhood really needs a change of status for this to happen, i.e. city becomes a world class city, or a city dies (Detroit))
- Recent history: My claim is that long-term pricing of real estate follows inflation; but shorter-term, i.e. periods of 10-50 years may have bubbles or depressions. We’ve just seen one!
I’d say the “value” of a home is really just a function of 3 main factors:
1) Local aspects (location, condition, design, construction)
2) Wages (which is more or less a proxy for inflation)
3) Credit availability and multiples
- In an affluent neighborhood, generally the “local” factors don’t change significantly. A craftsman will remain a craftsman; generally condition is maintained; a good location generally remains a good location. Obviously some individual units can decay or not be maintained (while others will be upgraded), but its relativily rare for an affluent neighborhood to completely go downhill (there’s always exceptions; i.e. Detroit). i.e. Queen Anne has been a desirable neighborhood for the history of Seattle.
- Wages generally follow, on average, the rate of inflation. The key here is “on average”. Some industries might get devastated, but typically a new one will spring up to take its place. But GDP/population is generally proportional to inflation. If there’s significant wage changes in an area, that will affect the local inflation and in turn cause housing prices to change.
- Credit: The availability of credit can change, as recently witnessed in the housing crisis. During the runup years, I understand that borrowing power went up 2x to 3x. In real (inflation adjusted terms), its probably closer to 2x, and I would content the easy availability of credit was really the sole contributor to the real estate run-up locally. Now that’s unwinding, and we’ll see the housing prices scale back similarly.
I disagree that a desirable neighborhood will increase at a rate different from inflation, if the desirability of the neighborhood doesn’t significantly changes. Put another way, the desirability of a neighborhood was priced into the home initially, and will continue to be priced into the home in the same way, as long as the neighborhood keeps a similar level of desirability.
-Ross
Groundhogday » Jun 8, 2009 at 12:24 pm
By Ross @ 50:
This is a common fallacy that Shiller addressed in his book. More desirable areas are more expensive, but they appreciate at the same % rate as less desirable areas. But in defense of Kary, I’m not sure that is what he was saying…
Groundhogday » Jun 8, 2009 at 12:28 pm
By Kary L. Krismer @ 49:
Touche’! But when conventional lending dominated and most single family homes were owner occupied (ie pre-speculative bubble), single-family homes neither appreciated nor depreciated very fast. Barring a major external change (GM closed down the local plant, new overpass build through the neighborhood), you could generally buy a house and not worry a great deal about losing your shirt.
Scotsman » Jun 8, 2009 at 12:34 pm
RE: Kary L. Krismer @ 49 –
Kary- read the first sentance: “when prices are rising…” And remember, the discussion is about current methods of valuation, not 2007.
Are prices rising now? Or don’t we know, what with so much being “unknowable?” At least to some.
silver9 » Jun 8, 2009 at 1:46 pm
Awesome poll!
It gets right to the heart of how people decide about housing and shows some of the convoluted thinking people have as well as the way folks rationalize overpaying.
I personally look at the rental value which has been completely out of line with actual prices recently. To me rental and construction appraisal methods are closer to price fundamentals than comparable sales are.
I can understand why someone would pay a slight premium to own a home (often you pay a lot more than you expect due to maintenance and repairs) but I find it hard to believe people will pay 2x or more for very long.
jon » Jun 8, 2009 at 2:03 pm
RE: silver9 @ 54 – “I can understand why someone would pay a slight premium to own a home (often you pay a lot more than you expect due to maintenance and repairs) but I find it hard to believe people will pay 2x or more for very long. ”
Then why don’t bookstores go out of business when a public library is a few blocks away?
Groundhogday » Jun 8, 2009 at 3:10 pm
By jon @ 55:
You are comparing a hotel room to home ownership.
reader » Jun 8, 2009 at 3:51 pm
Can someone explain how property taxes for a house (esp. new one) are determined? or pass on a link? Also, once you buy a house, is there a way to apply for lower property taxes if they are unreasonable?
Kary L. Krismer » Jun 8, 2009 at 3:53 pm
By Scotsman @ 53:
That’s why I picked July 2007. Prices were still rising. Assuming it would continue to go up had no more validity then compared to assuming it will continue to go down today. Price trends do change direction.
The only thing that made valuing property easier, from an agent’s point of view, in a rising market was that if you were slightly high the market would catch up rather than fall further away. But regardless of whether the market is heading up or down, the value of a house that sold yesterday isn’t the value of it today.
Angie » Jun 8, 2009 at 6:33 pm
Hey reader, this one’s for you. (You may need to reconsider your pseud.)
Jonness » Jun 8, 2009 at 8:11 pm
“That’s why I picked July 2007. Prices were still rising. Assuming it would continue to go up had no more validity then compared to assuming it will continue to go down today. Price trends do change direction.”
I don’t believe, in July 2007, it was difficult to predict we were nearing a local peak in housing prices. Fundamentals were screaming out loud, and CA was providing a clear indication of Seattle’s future. Of course, a lot of crazies were loudly claiming “Seattle was special” and wouldn’t experience a correction.
By contrast, numerous people without a vested interest in selling houses were talking economic sense at that time. For instance, Patrick over at patrick.net has been a beacon of common sense debunking much of the deciet being memed out to the uniformed public. A great example is his debunking of one of my favorite classic RE cons, which is meant to rush unsuspecting victims into buying before they have a chance to think–the old “interest rates are going up” con. Patrick points out:
‘It’s a terrible time to buy when interest rates are low, like now. Realtors just lie without shame about this fundamental fact. Prices fall as interest rates rise, because a given monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. To buy at a time of very low interest rates is a mistake.
It is definitely far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.
First of all, your property taxes will be lower with a low purchase price [with respect to CA].
Second, a low price gives you the ability to pay it all off instead of being a debt-slave forever.
Third, prices will definitely fall as interest rates rise — so paying a high price may trap you “under water”. Then you will not be able to refinance, and won’t be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. A low price minimizes this possibility.”
Groundhogday » Jun 8, 2009 at 8:48 pm
RE: Jonness @ 60 –
I agree with all of your points, but another big reason to not buy when rates are low, is that you can refinance the loan later if interest rates go down, but you can’t reprice the house after you buy it.
Kary L. Krismer » Jun 9, 2009 at 7:39 am
By Jonness @ 60:
Obviously it wasn’t. People had been doing it for over 5 years by that point! ;-)
reader » Jun 9, 2009 at 10:33 am
RE: Angie @ 59 – Thanks Angie