Weekend Reads from Across the Spectrum

Here are a few recent articles of interest that I thought might be worth discussion.

Calculated Risk: The upward slope of Real House Prices

I don’t think we have to choose between real prices and price-to-rent graphs to ask “how far out of line are house prices?” I think they are both showing that prices are not far above the historical lows. Prices might overshoot to the downside because of supply and demand issues; there is a large overhang of vacant housing units and many distressed properties still coming on the market, plus demand is soft with weak employment, fairly tight financing, negative home buying sentiment and some usual buyers excluded because of credit issues. But I don’t think national real prices are that far out of line.

Note: usually near the end of a housing bust – after nominal prices stop falling – real prices decline slowly for a couple more years, and we will probably see that this time too. Of course, right now, nominal prices are still falling.

Reuters: Is real estate for suckers?

Are you a dope for buying a home in the U.S. right now?

If you need and want one, there’s no harm in that. Yet if you think it’s an investment that will actually appreciate, you’re taking a sucker’s bet.

During the bubble years, the “greater fool” theory prevailed. When you bought a home, you were confident that someone would buy it for a higher price than you paid. “Flippers” prospered from this mass psychology.

Right now, it’s a “lesser fool” market: You’re hoping that you’re not foolish for buying a depreciating asset in a troubled economic climate. Millions stay out of the market just to avoid the feeling of doing a fool’s errand.

Home prices are still dropping in many areas with no real bottom in sight. … The U.S. home market is no longer in triage mode. It’s a train-wreck. Zillow said home prices “are no longer due to bottom out” this year. When will they, then? It may take years, and here’s why.

New York Times: Rent or Buy, a Matter of Lifestyle

As this year’s spring buying season nears its peak, the relative merits of renting and buying are closer than they have been since the housing bubble began inflating almost a decade ago. So the best single piece of advice for most people is to make a decision based mainly on their stage of life, rather than on any complex financial calculations.

If you think you are ready to settle in one place for at least five years, if not more, buying often makes a lot of sense. That’s why I bought my first house, in the Washington area, a few years ago, despite thinking local prices remained high.

But if the chances are good that you will move again in the next few years, renting is usually the better bet. The various closing costs, including real estate agents’ fees, are just too high. Owning a house also makes it much harder to move when you want to because selling a house is complicated.

Within this basic framework, the numbers — specifically, something called rent ratios — are the next place to turn.

Thoughts?

  

About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

26 comments:

  1. 1
    don says:

    #humor starts here
    Maybe that means it’s time to buy as an investment!
    After all doing the opposite of what everyone else was doing during the boom served me well. Now everyone says “you’re a fool if you buy!”, “housing prices will keep going down… forever!”.
    This ring a bell with anyone?
    #end humor here

    Rate this comment: Thumb up 0

  2. 2

    Much of the Article(s) Referenced Looked Like Old Stuff Rehashed

    Calculated Risk talked out of both sides of its mouth, just like a savvy politician….not very informative either.

    Reuters did it the political way too, albeit both MSM sources failed to back up their two sided mouth allegations with clear trend analysis evidence(s) that was understandable.

    The NYT’s take was pure garbage, allegations with no backup….they sounded like Forbes, only a bit worse, alleging backup analysis with no clue where it is [even asking teh reader to fish it out themselves]….LOL

    Good examples of why blogs are no worse news references [probably better BTW] than MSM sources….LOL

    Rate this comment: Thumb up 0

  3. 3
    jesse says:

    The upward slope of real house prices can be somewhat confused with lower costs of capital, as the extrapolation of previous rent increases into the future may not be accurate. I would not be surprised to see downside swings as rent increases fail to stick.

    Rate this comment: Thumb up 0

  4. 4
    Ray Pepper says:

    I’m in the buying mood. Went to go look at a used “Mini” and a new “Juke” . As I drove away in my MPV I said forget all that and got my 1.50 Hot Dog and Diet Coke at Costco and I was a happy man!!

    Rate this comment: Thumb up 0

  5. 5
    The Danza says:

    I am transferring to St. Louis for work after renting in Seattle for the last 6 years, I thought I would continue on that path. After looking at rentals around St Louis it seemed backwards of what I have come to know out here. I was looking at rentals listed for 2 grand when my mortgage, tax, insurance was coming out about half that. So my wife and I started the buying process and got an accepted offer today after endless back and forth with a delusioned seller. We paid equivlent to 1995/96 pricing and I am still scared to jump in. It seems like in the St Louis market the numbers made sense to buy and I could buy a house with cash (cash I was saving just for a downpayment in Seattle). So please know, every market is different, consult a REALTOR ;). Anyone want to make me feel better about my decision…?

    Rate this comment: Thumb up 0

  6. 6
    Ross says:

    RE: The Danza @ 5 – If rent is that far above PITI, then it’s time to buy. Sounds like you did fine as the fundamental value of the asset you purchased (it’s rent-carrying capacity) is in line with or possibly even better than the price you paid.

    Rate this comment: Thumb up 0

  7. 7
    Ray Pepper says:

    RE: The Danza @ 5 -I would NEVER buy a home because of a job in a certain area unless thats where your family is and have roots. Even if the numbers make sense.Sounds like your gonna buy anyway so if it doesn’t work out you can unload on this guy:http://sellasisstlouis.com/He will buy your home AS IS if he is still open!

    Hey Danza! Look! You won’t even have to clean the house:

    Do I have to clean the house to have someone come out?
    No.. absolutely not. We buy homes As Is. Don’t worry about it! We’ve seen way worse!

    Rate this comment: Thumb up 0

  8. 8
    The Danza says:

    RE: Ray Pepper @ 7 – The wife and I are both originally from St Louis so the plan is to stay in the house for a long while. But as the great philosopher Mike Tyson said, “everybody has a plan until they get hit.” We shall see how it goes…

    Rate this comment: Thumb up 0

  9. 9
    Lurker says:

    RE: The Danza @ 5

    PITI would be half of the cost of renting something similar? If that is the case and you are hoping to stick around there for a while it seems like buying could be a very appealing option. Good luck!

    Rate this comment: Thumb up 0

  10. 10
    Jonness says:

    By The Danza @ 5:

    Anyone want to make me feel better about my decision…?

    I’d a bought in your shoes too (as long as you plan on staying a decade). You don’t have to hit rock bottom prices, you just need to get a good deal relevant to the horrible economy we are in. Meanwhile, Seattle house prices are still 5x incomes. Run the measure in your area over time, and you will feel a lot better about your decision. :)

    Rate this comment: Thumb up 0

  11. 11
    Macro Investor says:

    RE: The Danza @ 5

    Consult a realtor? I mean, really, will a realtor ever tell you it’s better to rent?

    Rate this comment: Thumb up 0

  12. 12
    Macro Investor says:

    Deleted by author.

    Rate this comment: Thumb up 0

  13. 13

    By Macro Investor @ 11:

    RE: The Danza @ 5

    Consult a realtor? I mean, really, will a realtor ever tell you it’s better to rent?

    Yes, it is like going into a butcher shop and asking if meat is healthy.
    But there are some Realtors who only do rentals and not sales. They’ll always tell you it’s better to rent:)

    Rate this comment: Thumb up 0

  14. 14
    David North says:

    By Ira Sacharoff @ 13:

    By Macro Investor @ 11:
    RE: The Danza @ 5

    Consult a realtor? I mean, really, will a realtor ever tell you it’s better to rent?

    Yes, it is like going into a butcher shop and asking if meat is healthy.
    But there are some Realtors who only do rentals and not sales. They’ll always tell you it’s better to rent:)

    I give that advice quite frequently, even though I don’t generally get involved in rentals except very rarely (like less than one per year). Whether you get honest advice based on your goals, situation and best interests certainly depends upon which broker you consult.

    Rate this comment: Thumb up 0

  15. 15
    Pegasus says:

    RE: David North @ 14 – David…you seem to say all the right things here. Let’s hope you did them when they were important. We wouldn’t want a fox loose in the hen house here would we?

    Rate this comment: Thumb up 0

  16. 16
    David North says:

    By Pegasus @ 15:

    RE: David North @ 14 – David…you seem to say all the right things here. Let’s hope you did them when they were important. We wouldn’t want a fox loose in the hen house here would we?

    Words are cheap, aren’t they? It’s difficult to really know what my actions are or have been in the past unless you’ve been a client, prospect or colleague who has heard my opinions and advice and seen my work.

    Rate this comment: Thumb up 0

  17. 17
    Macro Investor says:

    By David North @ 16:

    By Pegasus @ 15:
    RE: David North @ 14 – David…you seem to say all the right things here. Let’s hope you did them when they were important. We wouldn’t want a fox loose in the hen house here would we?

    Words are cheap, aren’t they? It’s difficult to really know what my actions are or have been in the past unless you’ve been a client, prospect or colleague who has heard my opinions and advice and seen my work.

    Well, maybe we can solve that right here. Suppose you tell us which neighborhoods you are familiar with, and which ones have good buys/rents.

    Rate this comment: Thumb up 0

  18. 18
    David North says:

    By Macro Investor @ 17:

    Well, maybe we can solve that right here. Suppose you tell us which neighborhoods you are familiar with, and which ones have good buys/rents.

    Sorry, answering the question for an individual client or prospect starts with what their goals and situation are, not with neighborhood market mathematics. And, as I said before, I seldom get involved in rentals, opting instead to refer that business to others who specialize in it.

    Rate this comment: Thumb up 0

  19. 19
    LocalYokel says:

    By Pegasus @ 15:

    RE: David North @ 14 – David…you seem to say all the right things here. Let’s hope you did them when they were important. We wouldn’t want a fox loose in the hen house here would we?

    Just saying what my old pappy used to tell me:
    Trust no one in business, especially those who have a financial gain in your decision.

    Be especially cautious with those who act indigent or “huffy”, if one asks probing
    questions.

    Rate this comment: Thumb up 0

  20. 20
    David North says:

    By LocalYokel @ 19:

    Just saying what my old pappy used to tell me:
    Trust no one in business, especially those who have a financial gain in your decision.

    Be especially cautious with those who act indigent or “huffy”, if one asks probing
    questions.

    Your old pappy was a wise man. There are some trustworthy people in business, including some with a financial gain at stake in your decision. They are the ones who have figured out that the long term gains of doing right in the short term, especially when it is hard to do so, are greater and more satisfying than short sighted gains made at the peril of others by deception or pressure. There are a whole lot of non-trustworthy people in business, too, as we all know, and like your old pappy said, they tend not to like probing questions from their prospects and clients.

    Rate this comment: Thumb up 0

  21. 21
    Dirty Renter says:

    RE: The Danza @ 8
    What high school did you go to?

    Rate this comment: Thumb up 0

  22. 22
    Frank says:

    My wife and I are planning a move to Seattle w/ two little ones and our mindset is we don’t want to move after that — ever. So, we’re definintely in the buying mood. However, we’re probably going to rent an apartment or stay in short-term housing until we figure out where we want to live. David North sounds like a good guy and the advice is true: “find someone you can trust.” Unfortunately, realtors aren’t stamped with “I’m trustworthy” on their foreheads, or by any independent organization that I know of. There’s no Consumer Realtor Reports magazine out there that rates such folk… We’ll be going on recommendations, I suppose.

    Rate this comment: Thumb up 0

  23. 23
    Frank says:

    Also… I presume you saw this story in today’s NYTimes?
    http://www.nytimes.com/2011/05/23/business/economy/23glut.html?_r=1&hp

    Bank-owned glut of homes hurting sales and prices?

    Any truth to that in Seattle? I see TONS of foreclosure listings in MLS… Never bought one… Not sure what to make of that…

    Rate this comment: Thumb up 0

  24. 24
    Ray Pepper says:

    RE: Frank @ 22

    Frank , NEVER trust any profession where the financial incentive for YOU to do something results in THE GOLDEN CARROT for the person representing you!

    Good Luck!

    Buying an REO is very easy and do NOT let anyone tell you different.

    Rate this comment: Thumb up 0

  25. 25

    By Frank @ 22:

    There’s no Consumer Realtor Reports magazine out there that rates such folk… We’ll be going on recommendations, I suppose.

    Not at the individual agent level, but there are ratings of brands. JD Powers has ranked Keller Williams highest on the buyer side for three years in a row.

    http://businesscenter.jdpower.com/news/pressrelease.aspx?ID=2010129

    That said, even though I am a Keller Williams agent I will say that there is so much variability in agents that ranking really doesn’t mean much, if anything. It’s really a pointless exercise (as is most of what JD Powers does). As an analogy, I once owned a Fiat X1/9, which Consumer Reports rated poorly, but which was a very reliable car during the time I owned it.

    I would also add that consumers are unlikely to know how good or bad their agent is. They’ll know how quickly phone calls are answered and a few other things, but they really won’t know the overall competence of the agent. So JD Powers is getting their information from a questionable source.

    My analogy for that is a story from when I was a practicing attorney and had a bankruptcy client who thought her divorce attorney was great and her husband’s was horrible. I had to go to superior court for some matter, and discovered it was exactly the opposite. Her attorney was horrible in court and didn’t understand basic community property law.

    Rate this comment: Thumb up 0

  26. 26

    By Ray Pepper @ 24:

    Buying an REO is very easy and do NOT let anyone tell you different.

    Buying an REO is easy, but it is generally more risky. For example, they typically have an election of remedies if you default, rather than merely the forfeiture of your earnest money. And the way the contracts are written, it’s unclear when exactly they have to make that election. Also, inspection repairs are a bit more problematic.

    On the other hand we recently had an REO transaction where the bank’s contract provided for liquidated damages in either direction! If the buyer defaulted the bank got to keep $1,000 of the earnest money, no matter how much the earnest money was, and if the bank couldn’t close the buyer would get back their earnest money and $1,000. Those are incredibly fair terms, and better than your typical P&S agreement on downside risk if the buyer defaults.

    Rate this comment: Thumb up 0

Leave a Reply

Use your email address to sign up with Gravatar for a custom avatar.
Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Please read the rules before posting a comment.