When Will the Housing Market Bottom? 37 comments
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I saw a chart in the European WSJ yesterday on my flight to Berlin that showed housing sales are now lower than they were 20 years ago and with the recession in full swing, it appears they will go even lower.
That begs the question 'when does it end?'
I've always liked to look at rent vs buy analysis to tell me when real estate is fairly valued. Rents can and will go up and down (likely down in this market) but it's been my experience that rents, particularly residential rents, are more stable than residential sale prices.
People need to have a place to live. They can make the choice of rent vs buy, but they have to do one or the other (I know that in tough times there are other scenarios for some on the lower end of the economic spectrum).
If its costs $2000 per month to rent a home for your family and the same home can be bought for $200,000, then it might cost less to purchase the home than rent it.
And even if the bad economy is forcing families to sit on the sidelines because they can't come up with a down payment, they can't get a loan, or they think prices will go even lower, there are real estate investors who will step in at some point and buy.
Let's look at that home you can buy for $200,000 and rent for $2000 per month. If you assume carrying costs (real estate taxes and maintenance) are $6,000 per year, then you can get a net rental income of $18,000 per year on the rental. If you pay $200,000, that's a 9pcnt yield. But if you can borrow (and that's an if in the current credit market) $160,000 at 5pcnt per year interest only, then your net rental income is $10,000 per year on an investment of $40,000. That's a 25pcnt yield.
I think that's the next leg of the housing market. Smart investors will step in and buy homes and rent them. They'll probably start in the distressed/foreclosure market so the impact of these buyers coming into the market will not be felt in the traditional real estate market for a while.
But there's a price where the market clears and I think we may have already reached it in parts of the housing market. A rent vs buy analysis will tell you a lot. When it's cheaper to buy than rent by a meaningful amount, then you know the market has overshot and a bottom is near.
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This article has 37 comments:
Home ownership is tax advantaged due to the deduction of interest and the lack of capital gains taxes. Because of this, potential homebuyers will respond logically to alternative costs such as rent vs. own.
If the new administration can restore confidence and avoid a further meltdown in the economy, housing may recover faster than many anticipate.
Where do this "Experts" get their numbers from?
We are not far off.
(1) Considered as an investment, house prices have a long way down before they stabilize at what they were in 2000 or 2002 or at a lower price than that.
It was all a bubble based on economic reality. After all, the NASDAQ still is way below what it was in 2000 during that other bubble.
(2) The housing market probably is the most imperfect market there is. Unlike stocks or bonds (or ETFs and mutual funds), one cannot sell whenever one wants to.
With financial markets, one can get out when one is down, say 10%. With housing, one usually can't. And the market may never come back to what one paid. Think of Detroit, for example or any other rust belt town, where home values have disappeared.
Since homes are a lousy investment, there must be some psychological and emotional need that is satisfied by real property. I guess it is that one can go and touch the House. But then so can arsonists and termites.
I'm not saying, never buy a house to live in. Americans are so incredibly rude, that living in an apartment or a condo sucks. The more space between one self and one's "neighbors," the better. But the house one lives in is entirely an expense and never a investment. And houses other than the one one lives in are a truly lousy investment.
1. there are a lot of dual-home (north & florida or arizona) retirees. with reduced savings and retirement income, many will dispose of one or another; already, many formerly retiree-only communities in Florida are admitting and even encouraging families as their owners are otherwise unable to find buyers or tenants.
2. In tough economic times, many young-marrieds double up with their parents. Since the advent of the McMansions for the middle class, this is a lot more plausible than when homes averaged 1200 sq ft.
3. In even tougher economic times family formations drop like a rock, further reducing the demand for housing. The last thing a college grad who was just fired by Citi or Bank America wants to do is get married. Moving back with mom is a lot easier.
It may be a while until the demand for housing moves prices back to the 2006 peak.
On Dec 25 10:18 AM Tim Plaehn wrote:
> My sources are telling me that investors are buying distressed housing
> in Las Vegas 20 to 25 at a time. Cash. Some pretty serious money
> thinks the bottom in near..
A home is your place for sanctity and reflection, rest and happiness. If you love a home, in a great neighborhood and it brings you satisfaction, this is a better investment. The price of your family's well being, or your own, is not monetary. You comfort and lifestyle are priceless.
Further, a home is a great investment providing you buy in the right neighborhood, a the right time and the right price. Old addage, location, location and location.
This cyle will turn too and when it does, those how held on will not lose but will make money as long as you followed the previous rule of advice.
So I do take exception to Jan814 because with the houses we own, both where we work and where we play, I would not sell either unless I wanted to exchange one house for another in a home or play area. Which is when we'd have a problem in that if you need to sell a home to get another, that market is dead. No one can sell now.
I am hopeful that at some point the market will turn. You wil have to sell for less but in turn you'll get more for your buck on the other end.
On Dec 25 12:00 PM jan814 wrote:
> One can think of houses in two ways--as a place to live, and as an
> investment.
>
> (1) Considered as an investment, house prices have a long way down
> before they stabilize at what they were in 2000 or 2002 or at a lower
> price than that.
>
> It was all a bubble based on economic reality. After all, the NASDAQ
> still is way below what it was in 2000 during that other bubble.
>
>
> (2) The housing market probably is the most imperfect market there
> is. Unlike stocks or bonds (or ETFs and mutual funds), one cannot
> sell whenever one wants to.
> With financial markets, one can get out when one is down, say 10%.
> With housing, one usually can't. And the market may never come back
> to what one paid. Think of Detroit, for example or any other rust
> belt town, where home values have disappeared.
>
> Since homes are a lousy investment, there must be some psychological
> and emotional need that is satisfied by real property. I guess it
> is that one can go and touch the House. But then so can arsonists
> and termites.
>
> I'm not saying, never buy a house to live in. Americans are so incredibly
> rude, that living in an apartment or a condo sucks. The more space
> between one self and one's "neighbors," the better. But the house
> one lives in is entirely an expense and never a investment. And houses
> other than the one one lives in are a truly lousy investment.
On Dec 25 10:18 AM Tim Plaehn wrote:
> My sources are telling me that investors are buying distressed housing
> in Las Vegas 20 to 25 at a time. Cash. Some pretty serious money
> thinks the bottom in near..
Homes prices have been falling and various sources suggest they have fallen approximately 12% in the past year, taking more homeowners underwater. And prices are expected to fall further taking more homeowners underwater; it's the homeowners underwater that are most clearly exposed to either voluntary or involuntary foreclosure.
The next wave of foreclosures, which will tied to conventional and jumbo loans, will add to the supply and place further downward pressures on prices. In turn, this will take more homeowners underwater and lead to increasing foreclosures. It's a viscious downward deflationary spiral.
Purchase of foreclosed properties performs a useful function by reducing the inventory of available housing but it does not suggest a bottom. The bottom will be reached when a balance between supply and demand has been reached, when prices stabilize and when more people can qualify for conforming loans which are contingent upon much tighter lending standards.
The rent vs own costs are always local. In my area (Raleigh, NC) rentals for new and nearly new houses are in the $1000 range for $200K prices. There may be some markets in which the bottom is near, but certainly not on a national scale. Are the Las Vegas investors making the right call about their market (Tim Plaehn & Korn)? I don't know. The situation mentioned by Korn (purchase for 25 cents on the dollar) is a good move if the $300K is a legitimate value and not a bubble-top price that couldn't sell before everything went south. Maybe $75 is close to market value today? I don't know the Las Vegas market, so I won't try to make a call.
With regard to the second home and investment home situation, Steven Hanson wrote an excellent article on SA a few days ago. He included some excellent references, including the demographic burden on that market.
I am writing a comprehensive article on analysis of the factors affecting the outlook for the housing market nationally. My findings are supportive of the opinions expressed by PMjan814. Of course, I repeat, local conditions will vary significantly from the national averages.
I hope that readers (and authors) will continue to present local anecdotal reports for housing because it provides a valuable comparison (and contrast) to the national data.
Took note that you say you are working on an article on the future of the housing market. I am doing the same, which I plan to submit to Seeking Alpha. Maybe we could collaborate? I live near Raleigh (in Clayton). If you would like to investigate this, please leave a comment on my website. I will be able to see your e-mail address and get back to you. No other readers of my website will see your e-mail.
I agree with most of your comments. One thing, who is PMjan814? I assume you mean jan814?
Bottom in housing by the end of 2012.
One last note, in past recessions...since 1973...new housing has recovered prior to the conclusion of the recession as defined by the NBER. Stated differently, if the housing market has bottomed then the recession is over........by historical performance. I don't think this is the case, though.
2569 63rd Avenue $200,000, sold 11-14-08, 4 bdrms, 1560 sq. ft., 1922 (Scroll down to Oakland.)
HUD Fair Market - Alameda County
SFRs on the Hiway 4 corridor from Richmond through Pittsburg to Antioch are being snapped up by investors who stopped whining and bleating back in September. All those deadbeats who tossed in their keys are going to be renting for years - and wondering why that rent just keeps going up. If you can Section 8 a dump in Oakland and pull 1% per month cash on cash you're not the dumbest investor who ever walked.
Oakland house: www.sfgate.com/cgi-bin...
HUD Fair Market: www.huduser.org/datase...
The prices actually went up further to 160k, but then came back. Today the same homes are on the market for about $115k to $120k. This is still about 70% above the original price, though much more room to come down.
By the by, we were lucky with the homes, but lost the profits in the stock market.
as a nevada homeowner, las vegas is in a employment slump also due to the gambling sector. these speculators on las vegas homes as buying them dirt cheap because it is hard to find humans to rent them.
The author makes several good points, what he does not mention is that there is a large population of people who cannot be financed (self employed, recently BK and recently forclosed) and will only be able to purchase a home through non-traditional methods (owner contract, family monies, etc...). This large pool of captive renters are driving the prices of rents up for typical low and middle income housing. The product in the higher stratifications of the market is not desirable for rentals in this market and probably is difficult to pencil in most.
The author makes several good points, what he does not mention is that there is a large population of people who cannot be financed (self employed, recently BK and recently forclosed) and will only be able to purchase a home through non-traditional methods (owner contract, family monies, etc...). This large pool of captive renters are driving the prices of rents up for typical low and middle income housing. The product in the higher stratifications of the market is not desirable for rentals in this market and probably is difficult to pencil in most.
The author makes several good points, what he does not mention is that there is a large population of people who cannot be financed (self employed, recently BK and recently forclosed) and will only be able to purchase a home through non-traditional methods (owner contract, family monies, etc...). This large pool of captive renters are driving the prices of rents up for typical low and middle income housing. The product in the higher stratifications of the market is not desirable for rentals in this market and probably is difficult to pencil in most.
So - Either the rents have to go up or the home prices have to come down.
To answer these type of comments, I recommend the readers look at property away from all the "hot zones" like Florida, the entire West Coast, and New England, and maybe even Texas now. Look at other places, and you'll see cap rates that substantiate the author's claim. Problem is, most of the population simply doesn't live there for good reason. Parts of the MidWest have cap rates over 12%, and that is after factoring insurance, taxes, maintenance, etc.
You people are looking in the wrong places. I'm not saying that you should go buy there now, but the author's claims are more accurate than yours.
On Dec 25 07:24 AM maverta wrote:
> you are assuming a $200k home would rent for $2000/mo. you are wrong.
> A $200k home woukd probably rent closer to $1200/mo. Re-figure your
> numbers.
On Dec 26 07:05 PM doublebeta wrote:
> The author is stating a valuation methodology, he did not state anywhere
> in his article all $200K homes will rent for $2K/ month. I have been
> buying $50K condos and renting them for $650 per month in the Portland,
> OR MSA. To value against this benchmark, I am getting $2,600/ month.
>
>
> The author makes several good points, what he does not mention is
> that there is a large population of people who cannot be financed
> (self employed, recently BK and recently forclosed) and will only
> be able to purchase a home through non-traditional methods (owner
> contract, family monies, etc...). This large pool of captive renters
> are driving the prices of rents up for typical low and middle income
> housing. The product in the higher stratifications of the market
> is not desirable for rentals in this market and probably is difficult
> to pencil in most.
The author's assumptions are debatable and simplistic, in that the effect of taxes, house price appreciation, inflaton, etc are not included.
However, his thesis that buy vs. rent decisions are a useful way of looking for a potential bottom in housing prices is logical: and based on the Yahoo methodology and my estimates, housing may be near a bottom - as soon as potential buyers are willing to assume that a house will appreciate at a rate equal to inflation.
I agree we are close to a bottom nationally. In fact, the data shows some markets are now moving up.
Believe it or not, in the third quarter of 2008 according to the National Association of Realtors, "28 out of 152 metropolitan statistical areas showed increases in median existing single-family home prices." That is over 18% of the MSAs. Said another way, one in five major metropolitan areas are experiencing a rise in the value of their homes.
Additionally, mortgage applications are surging by the largest amount on record in the last 4 weeks. In fact beginning in the last week of November, the Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended November 28 "soared a by a weekly record of 112.1%"
Mortgage applications are skyrocketing. I doubt they are sub-prime.
The National Association of Realtors also reports that "California in particular has seen an exceptional turnaround in buying activity."
Investors perhaps? Very probable. I am quite familiar with rental rates in my little town. Given the recent drop in rates, investors can now cash flow just about any single family home on the market right now with 100% financing.
I don't know if we are at a bottom. But there is no doubt a feeding frenzy going on right now. If mortgage rates stay where they are, I suspect that frenzied feeding will persist for quite some time.
GNE
www.goodnewseconomist....
1) Renting costs are on parity with owning
2) Income meets purchase price.
#2 is an especially important basic equation, and no amount of funny money can change that. Even though prices have come down, they still have a ways to go. California, for example, will still come down another 20-30% this year, and with the recession, that's assured.
I also personally know someone who bought 6 homes in Las Vegas. I hope they are going to be renting these homes, as the Las Vegas economy is so non-diversified, there is no way there are enough homeowners to go around anytime soon. An entire economy built on tourism is going nowhere until the recession clears. Las Vegas is also now prone to competition from Macau, which is going to dig into their asian visitors, when the economy comes back.
And never trust any numbers or predictions from the National Association of Realtors. They've been painting a rosy picture during this whole time.