Forget real estate as a wealth-building investment
08-23-2010, 07:27 PM
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Forget real estate as a wealth-building investment
Housing Fades as a Means to Build Wealth, Analysts Say
By DAVID STREITFELD
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”
Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.
The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.
Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.
“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.
The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.
That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.
“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”
Other buyers have grand and even grander expectations.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Not everyone views the notion of real appreciation in real estate as a lost cause.
Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.
Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.
Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.
His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”
http://www.nytimes.com/2010/08/23/bu...line.html?_r=1
By DAVID STREITFELD
Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield rewards like those enjoyed in the second half of the 20th century, when houses not only provided shelter but also a plump nest egg.
The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming.
More than likely, that era is gone for good.
“There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. “All those theories advanced during the boom about why housing is special — that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land — didn’t hold up.”
Instead, Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment.
Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up.
“People shouldn’t look at a home as a way to make money because it won’t,” Mr. Baker said.
If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The data is expected to show a drop of as much as 20 percent from last year.
The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 30 percent in home values.
Set against this dismal present and a bleak future, buying a home is a willful act of optimism. That explains why Adam and Allison Lyons are waiting to close on a $417,500 house in Deerfield, Ill.
“We’re trying not to think too far ahead,” said Ms. Lyons, 35, an information technology manager.
The couple’s first venture into real estate came in 2003 when they bought a condo in a 17-unit building under construction in Chicago. By the time they moved in two years later, it was already worth $50,000 more than they had paid. “We were thinking, great!” said Mr. Lyons, 34.
That quick appreciation started them on the same track as their parents, who watched the value of their houses ascend for decades. The real estate crash interrupted that pleasant dream. The couple cannot sell their condo. Unwillingly, they are becoming landlords.
“I don’t think we’re ever going to see the prosperity our parents did, but I don’t think it’s all doom and gloom either,” said Mr. Lyons, a manager at I.B.M. “At some point, you just have to say what the heck and go for it.”
Other buyers have grand and even grander expectations.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom’s peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up.
“People think it’s a law of nature,” said Mr. Shiller, who teaches at Yale.
For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up.
The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as their bumper crop of children grew up and bought places of their own. The inflation of the 1970s, which increased the value of hard assets, and liberal tax policies both helped make housing a good bet. So did the long decline in mortgage rates from the early 1980s.
Despite all these tailwinds, prices rose modestly for much of the period. Real home prices increased 1.1 percent a year after inflation, according to Mr. Shiller’s research.
By the late 1990s, however, the rate was 4 percent a year. Happy homeowners were taking about $100 billion a year out of their houses, which paid for a lot of good times.
“The experience we had from the late 1970s to the late 1990s was an aberration,” said Barry Ritholtz of the equity research firm Fusion IQ. “People shouldn’t be holding their breath waiting for it to happen again.”
Not everyone views the notion of real appreciation in real estate as a lost cause.
Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.
“It’s entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame,” said Mr. Humphries of Zillow. “The demand doesn’t exist.”
Owners in those foreclosure-plagued areas consider themselves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly within their grasp.
Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000.
Freedom beckoned. “I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world,” said Mr. Austin, 56.
His home is now worth about what he paid for it. As for that cruise, “it may be a while,” Mr. Austin said. Showing the hopefulness that is apparently innate to homeowners, he added: “But I won’t rule it out forever.”
http://www.nytimes.com/2010/08/23/bu...line.html?_r=1
08-23-2010, 07:33 PM
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So... if you were a first time home buyer right now... would you buy a $300-315k townhouse that you'd grow out of in 5-6 years (starting a family) or would you splurge a bit and go $350-380k for a single-family you could live in for 20+ years?
With mortgage rates the way they are right now that's a difference of about $250-400 a month (all else being equal).
With mortgage rates the way they are right now that's a difference of about $250-400 a month (all else being equal).
08-23-2010, 08:49 PM
#3
I feel the need...
So... if you were a first time home buyer right now... would you buy a $300-315k townhouse that you'd grow out of in 5-6 years (starting a family) or would you splurge a bit and go $350-380k for a single-family you could live in for 20+ years?
With mortgage rates the way they are right now that's a difference of about $250-400 a month (all else being equal).
With mortgage rates the way they are right now that's a difference of about $250-400 a month (all else being equal).
If you plan on sticking around for a while, why not go for the house you'll grow into if you find one you really like?
It sounds counterintuitive right now of course, but who knows what financing costs will be like 5-6 years from now, plus you eliminate transaction costs of moving/closing/commission, etc. Just food for thought.
Oh, and when I read articles like this it reminds me that it makes sense to buy an asset when everyone else hates it.
08-23-2010, 10:17 PM
#4
So... if you were a first time home buyer right now... would you buy a $300-315k townhouse that you'd grow out of in 5-6 years (starting a family) or would you splurge a bit and go $350-380k for a single-family you could live in for 20+ years?
With mortgage rates the way they are right now that's a difference of about $250-400 a month (all else being equal).
With mortgage rates the way they are right now that's a difference of about $250-400 a month (all else being equal).
08-23-2010, 10:20 PM
#5
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Also, the townhouse may require monthly association/maintenance fees that the SFR would generally not have (unless it is in a gated/private community), so the difference in monthly payments between the two residences would be less than the $200-400/mo. added mortgage payment for the SFR.
08-23-2010, 11:39 PM
#6
Drifting
The answer depends on what you're going to do in the future.
For example, if you want a place now and can only afford 300K then the townhouse (or cheaper SFR) is the way to go- especially a condo/townhouse if you plan on renting this out a few years down the road anyway. Condos make a pretty good rental investment because you can depreciate more of the value than a SFR and the gardening/main infrastructure expenses are amortized via HOA fees.
The advantage to a SFR is that you have the option to remodel if your lifestyle needs change in the future which you can't really do in a Condo. For example, try adding a bedroom to a Condo where that might be a simple expansion in a SFR. As long as you actually stay in the SFR for an extended period of time, this will be the better deal for most people in the long run. You get a larger place, front/back yard, windows all around the hours, and space from your neighbors.
Given the price difference 300 .vs. 350: I would go for the SFR as long as I could afford the payments and any fees. With interest rates as low as they are now, they can only go up from these levels which may make a SFR an even more expensive prospect in the future payment-wise. It might be good to lock in a good loan and depressed price now with prospective inflation coming down the road later.
The main rule is to buy what you can afford and not expect your salary to automatically go up each year to grow into the house payment- I'm afraid those days may be over for a while.
For example, if you want a place now and can only afford 300K then the townhouse (or cheaper SFR) is the way to go- especially a condo/townhouse if you plan on renting this out a few years down the road anyway. Condos make a pretty good rental investment because you can depreciate more of the value than a SFR and the gardening/main infrastructure expenses are amortized via HOA fees.
The advantage to a SFR is that you have the option to remodel if your lifestyle needs change in the future which you can't really do in a Condo. For example, try adding a bedroom to a Condo where that might be a simple expansion in a SFR. As long as you actually stay in the SFR for an extended period of time, this will be the better deal for most people in the long run. You get a larger place, front/back yard, windows all around the hours, and space from your neighbors.
Given the price difference 300 .vs. 350: I would go for the SFR as long as I could afford the payments and any fees. With interest rates as low as they are now, they can only go up from these levels which may make a SFR an even more expensive prospect in the future payment-wise. It might be good to lock in a good loan and depressed price now with prospective inflation coming down the road later.
The main rule is to buy what you can afford and not expect your salary to automatically go up each year to grow into the house payment- I'm afraid those days may be over for a while.
08-24-2010, 07:05 AM
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I totally agree with you guys. It's my fiancée who's having heart burn over a $370k+ price tag. We found a place a few weeks ago that $375k 4, BR, 3.5 baths, on 1/3 acre and the payment was $2,500 a month with taxes, HOA ($80) and PMI.
That was $1,000 more than we're currently paying in rent for a 1BR apartment but we would adjust our withholdings due to the mortgage tax deduction and we'd end up with around $500 more each month in our pay checks making the difference only $500 a month. Seemed like a no brainer to me. Just trying to talk sense into her now...
That was $1,000 more than we're currently paying in rent for a 1BR apartment but we would adjust our withholdings due to the mortgage tax deduction and we'd end up with around $500 more each month in our pay checks making the difference only $500 a month. Seemed like a no brainer to me. Just trying to talk sense into her now...
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08-24-2010, 08:45 AM
#8
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Given today's market conditions I think if I was only planning to be somewhere for 5 years I would rent. 5 years into a 30 year mortgage isn't going to knock down much principal.
Go for the house since you think you can hang in there for 20+ years. Also consider that you probably aren't at your peak earnings age yet so the mortgage will get easier to pay over time. That holds true unless you live in this f'd up state of NJ where everyone feels like they have an adjustable rate because property taxes go up 500-1,000 a year.
Go for the house since you think you can hang in there for 20+ years. Also consider that you probably aren't at your peak earnings age yet so the mortgage will get easier to pay over time. That holds true unless you live in this f'd up state of NJ where everyone feels like they have an adjustable rate because property taxes go up 500-1,000 a year.
08-24-2010, 01:57 PM
#9
05/5AT/Navi/ABP/Quartz
It is doubtful that you will stay in a house for 30 years, most don't. How about buying a little less house for a little less money. In these times you might want to be very comfortable with the payments just in case you end up there for around 10 years.
My wife and I have had 5 houses in a forty year period but had planned on maybe two. I'm just saying.
My wife and I have had 5 houses in a forty year period but had planned on maybe two. I'm just saying.
08-24-2010, 06:30 PM
#10
I feel the need...
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