Wednesday, April 11, 2007

Bubble Sitters: 1 NAR: 0

From the NY Times:

A Word of Advice During a Housing Slump: Rent

A promotional spot for the National Association of Realtors came on the radio the other day. The spot, introduced as something called “Newsmakers,” was supposed to sound like a news report, with the association’s president offering real estate advice.

“This is the best time to buy,” Pat Vredevoogd Combs, the president, said cheerfully. “There’s a lot of inventory in the marketplace. Interest rates are low. It’s a wonderful tax deduction.”

By the Realtors’ way of thinking, it’s always a good time to buy. Homeownership, they argue, is a way to achieve the American dream, save on taxes and earn a solid investment return all at the same time.

That’s how it has worked out for much of the last 15 years. But in a stark reversal, it’s now clear that people who chose renting over buying in the last two years made the right move. In much of the country, including large parts of the Northeast, California, Florida and the Southwest, recent home buyers have faced higher monthly costs than renters and have lost money on their investment in the meantime. It’s almost as if they have thrown money away, an insult once reserved for renters.

Most striking, perhaps, is the fact that prices may not yet have fallen far enough for buying to look better than renting today, except for people who plan to stay in a home for many years.
...
Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in the Los Angeles area would have to rise more than 5 percent a year for a typical buyer there to do better than a renter. The same is true in Phoenix, Las Vegas, the New York region, Northern California and South Florida.
...
[T]here are two big reasons to doubt the real estate boosters who insist that it’s once again a great time to buy.

The first is history. After the last big run-up in house prices, in the 1980s, a long slump followed...Keep in mind that the 2000-5 boom was even bigger than the ’80s boom and that house prices on the coasts, according to the official numbers at least, have fallen only slightly so far. So it is hard to imagine that prices will rise 5 percent a year, or another 28 percent in all, over the next five years.

The second reason for skepticism is that buying has never been quite as beneficial as Realtors — and mortgage brokers, home builders and everybody else who makes money off home purchases — have made it out to be. Buyers have to pay property taxes on top of their mortgage, while renters have the taxes included in their monthly rent bill. Buyers also face thousands of dollars in closing costs....
Rent v. Buy Tool

From CNNMoney:
The National Association of Realtors said Wednesday it expects its measure of home prices to fall this year for the first time since the group began tracking sales nearly 40 years ago. In its latest monthly forecast, the group said it expects a 0.7 percent decline in the median price of an existing home sold in 2007. A month ago it had been projecting a 1.2 percent increase.
...
Slower sales have already produced year-over-year decline in prices in eight of the last nine months through February, according to the group's numbers. The median price in February was 1.3 percent below year-earlier levels, and was 7.6 percent below the record high price set last July.
...
The subprime mortgage mess led the group to cut its sales forecast as well. It said problems some buyers may have getting financing reduced its forecast for sales of existing homes this year by 100,000 homes to 6.34 million. That sales pace would be 2 percent below the 6.48 million sold in 2006.

14 comments:

Patient Renter said...

It's nice, and very wierd, to see some mainstream media advocating the possibility that it might potentially maybe be better to rent than buy... possibly.

Sippn said...

Buying a home wasn't supposed to be a short term thing - even the nice cap gains tax break takes 2 years monimum and is set up for living in the home "2 out of the last 5 years"

Diggin Deeper said...

Imho,this real estate mess is much worse than we are lead to believe. As consumers...the media, markets, industry, and government count on us to drive the engine of growth and prosperity in this country (80% of GDP is based on consumer spending). Institutions won't tell us that a home, our single biggest purchase, is a bad deal right now, and may be for years to come. Better to lie to the consumer than to have him/her turn off the spigot.

We've spent our way out of every recession and fed our legislators with tax revenues they've found a way to squander into higher debt. Now we're tired, up to our necks in debt, and they're calling on us to spend again. But somehow, it just doesn't feel right. And many are saying...not this time because there's nothing left in the bank. We've drained our savings, taken all we could out of the equity in our home, maxed out our cc's and there's nothing left.

Its no wonder that some media outlets are finally willing to tell the truth as most well informed people don't believe most of what's fed to them anyway. What a novel way to gain someone's trust...tell the truth. Renting is better in today's market than buying. Simple math will allow one to come to this conclusion.

Sorry for the rant

Diggin Deeper said...

sippn

Do you really believe NAR's party line? You made your money if you were in real estate over the last five years. In fact a good real estate agent probably made 10 years income over this period. Now its over, and lean times are ahead. How many...who knows? All we really know is that its not the time to be buying.

Hopefully, you weren't part of the crowd that said this era will never end. Those poor people have amped their lifestyles and there's nothing to support them right now.

Let's tell the truth about the numbers...new home, existing homes, housing starts, inventory, foreclosure rates...are horrible and don't appear to be getting any better by each months passing!

Owning a home today is a Vegas gamble. Those that took the free money before the party ended are renting and sitting pretty.

Sippn said...

wake up call!

inventory is a fact
Housing starts numbers are facts

whether buying a home is a good or bad decision now is opinion.

Consumer markets are funny, people don't rush out to get loans until rates bottom out and start moving up. Consumers don't jump into a market (dot com stocks, real estate, etc.) until late.


Media telling the truth? do you think the "media" knows as much about real estate as these blogs?

Not even close.

Let me expand - a newspaper writer who has writing a story about real estate 1 x per month for 5 years has about the equivalent exposure to real estate as one college semester of RE 101, without the benefit of a knowledgable professor - add the editor who has zero exposure. Same for business writing, etc. Unless these people were plucked from the industry, they're media.

Diggin Deeper said...

sippn

And your point is?

Facts are facts creating opinions and buying patterns that drive markets. If the FDA says there's some weird virus in milk supplies, no one's buying milk until the problem goes away.
Nothing can be said that can alter present day facts. Only facts forthcoming can change the fundamentals of the market. Until these fundamentals change we go by what we know. Pretty simple concept no matter what market's your pleasure.
What was true in real estate in the past may not be true today or in the forseeable future... "It's always better to buy than to throw your money down the sewer by renting"... "Buy now before you are priced out of the market". "Real estate is always your best investment and anytime is a good time to buy"...People aren't buying into old addages anymore when they can't see a bottom in sight. Are they foolish? Maybe, but they're the ones that have to live with the decision of whether to buy or rent in this environment. And so far they're sitting on their hands...fact!

Sippn said...

"Imho,this real estate mess is much worse than we are lead to believe...."

Depends on who lead you to what belief...

If you believe the blogs... it is probably not as bad as the blogs say. If you are citing traditional media, they'll tell you the problem long after it happened and long after its getting better. Traditional media is spread so thin that its rare to find expertise in certain subjects anymore. Wasserman, if you're listening, I'm not picking on you... because you've been around, its just general observation.

Thats my point.

Diggin Deeper said...

from briefing.com:

http://www.briefing.com/Investor/Public/MarketAnalysis/Calendars/EconomicReleases/starts.htm

Real estate (new starts and permits) has had a great run from 1991 to about 2006 as shown on the chart above. If this was the equity market it would mark a typical bull market run in duration. By the graph this market peaks in late '05 or early 2006 and basically falls off the cliff and continues to decline up to date. At no time over the period has the data weakened as deeply as we see from 2006. Those looking for trends would find this graph compelling. If a bull market cycle runs 14-18 years on average, then who's to say we're not entering a bear market in real estate based on the 16 years of data provided. Nothing's certain but if markets hold true, this could be the beginning of a new cycle in the real estate market.

Perfect Storm said...

Considering March is 10.7% longer than February, I’d say March volume is flat.

Sippn said...

Good point PS.

Diggn, the cycles prior to that were 9, 7, 9, 6 years with each downturn caused by different issues (Interest rates, war, employment, etc.)

find data here:
http://www.census.gov/const/www/newresconstindex_excel.html

The dot com type gloss has left the real estate market, yes. Even in a bear market, stocks are usually valued well above "book" or replacement costs, cash, etc, if not someone usually comes in and takes over and sells it off.

In real estate, when that happens, builders stop building homes as your chart shows. When supply dwindles, prices will stablize as it has done in many places. If builders keep their production down 35% as shown....? They will continue to slow down building supply until prices recover some.

Real estate is not a bottomless pit with prices that move easily, its sticky. After a few months, workers will permanently move to other industries, investment dollars move elsewhere, etc. It took 14 years to build it to this level.

Diggin Deeper said...

sippn

And it may take 14 years to shake it out. Fundamentals are basic to any industry. Supply meets demand and over supply meets waning demand with price considerations that allow equilibrium to take place. Right now, as of today, supply keeps adding and demand keeps waning. Very simple whether your talking oil, stocks, tulips, or antiques. There are paradigm shifts taking place every day and they tend to either catch those unsuspecting by surprize, or move visionaries toward courses of action taking advantage of the shift. Real estate might very well fall into that category. And then, again, it performs no better or worse than any other market. No one doubts that, because of generational aging, demand for housing should not be accounted for. Its a given. People need homes. In fact it's part of the real estate mantra we've all heard all these years. The question remains, have home prices outstripped the general market's ability to pay? Are they valued reasonably based on what the general public expects in the areas they are looking? Have real wages risen to such a level that the belly of the market can buy, maintain, and hold that property while addressing all the other financial needs they may have? It appears there are flaws in each those questions and that holds back discerning buyer's from making the commitment to buy. Frankly, they may be tapped out, need a breather, or generally just can't stomach the thought of raising their debt load as much as its going to take to put them in that overpriced property. Psychology? Could be. But unless it changes fundamentally, real estate, in my very humble opinion, goes nowhere and maybe for quite some time.

Sippn said...

agree with you 98%

I just don't believe that median income determines demand.


65% home ownership levels, except that its not the middle 65% (that would make median income really matter) its the top earners, the top 65% that own and determine prices. You will see some version of LA/SF effect here as our prices will be some multiple higher than 3x as long as CA practices land rationing (developible).

And your 14 year horizon makes sense if all stayed the same, but ... will wealth (wealthy persons needing housing) from China flood CA? next India?

Will the prices of commodities affect supply.. fuel, copper, concrete, etc.

I don't know either.

Diggin Deeper said...

sippn

To put Sacramento into the LA/SF category is a bit of a stretch as far as wealth driving pricing levels. The Chindia potential is there. All one has to do is look at Vancouver and Victoria, BC to realize thats a potential. But Sacramento as the recipient of such wealth? Where's the draw? The weather? The scenery? World class charm? Where are the truly exclusive areas that wealth will be drawn to and why? This isn't a "Field of Dreams" type of town. I would be inclined to believe this connection would resemble Garden Grove/Westminister scenario in SoCal and that would be the flip side of your argument.

Sacramento basically has no industry and its economy remains stable because of one factor...government. And in every capitol city the "down trodden" coddle close to the help they need. Its a stigma that takes away from its potential. Its out of way in relation to the bay area, and not in the money corridor of the state. Its too far out to be a bedroom community. Unless a formidible industry comes to Sacaramento and distinguishes the location, providing high priced jobs,I don't see how anything but median income can drive prices in the future.

Now the part of your argument I agree with is a two edged sword. The inflation of hard goods will either impact prices to the upside or lower the margins of builder who continue to build. But this inflation could permeate to the consumer in other ways that affect their ability to pay. Food and energy costs are sky rocketing, maybe even stagflating if you want to carry it out. I've been in the energy business for 30 years. Supplies of raw oil are dwindling thus higher prices today and likely even higher prices in the future. Inflation will pump up prices but you bette hope that gross income comes to the rescue.

Diggin Deeper said...

Now the PPI is tamed. Core prices up .2%. Everybody's nudging a cheer from the crowd. Why aren't they buying it? Because the real numbers that affect all are continuing to rise monthly. Unless we find a way to stop eating, or filling our gas tanks, we're going to pay more. Just a snapshot of 4 month period shows food costs up 1.4% in the month of March after rising 1.9% in February, after rising 1.1% in January after rising 1.5% in December '06. Food has risen consistently over the last 4 months. Energy costs rose 3.6% in March, 3.5% in Feb, -4.6% in Jan, and 2.2% in Dec '06.

Looking at a 4 month period:

Food costs are up 5.9%

Energy costs are up 4.7%

But since the government doesn't look at these volatile numbers, we've basically got inflation under control.

So let's all stop eating and park our cars in the garage until gas prices come back down under $2 per gallon.

Prediction: more pressure to the upside on both food and energy costs from here due to rising ag commodity costs across the board, and a continued supply/demand imbalance in oil

If this continues, that mortgage gets tougher and tougher to pay and continues to pressure those who are thinking about buying.