Thursday, May 28, 2015

Good Time To Buy A House?

Should a personal decision such as buying a home be influenced by national trends?

This morning on National People's Radio, a story about the housing market.   The market is doing OK, which for many of us, after the shark feeding-frenzy of 2003-2008 is a nice reprieve.   Nice slow growth and a stable market is far superior to rapid increases in prices and dramatic drops.

But what about the first-time buyers?   Well, they do seem to be under-represented in this market (note:  not "missing" as the NPR story implies).   And why this is, is a good question with a number of probable answers:
1.  Many young people are burdened with student loan debts, and thus cannot afford to buy a house.

2.  Many young people have bad credit (see #1 above) and have trouble qualifying for a loan.

3.  Banks are tighter with money, due to government regulation, so oddball loan deals are harder to get for people with bad credit.

4.  Houses are still too damn expensive in this market and it may be cheaper to rent in some places.

5.  The younger generation might not place such a high value on home ownership, after seeing their parents "lose it all" in the recession of 2009.

6.  The population of younger people has leveled off, and we are an older nation, thus demographics are shifting older, and there are fewer younger people (as a percentage of the overall population) than before.

7.  Many younger people may be more peripatetic, and thus not ready to "settle down" in an economy where jobs are held for only months at a time.
It may be a number of other factors as well.   Of course, the people at NPR find it horrific that our younger generation has rejected granite countertops as "the American Dream."  Perhaps they grew up with this false value and see through its superficiality.

I think a big part of the problem is tight credit, even in a low-interest market.   When I bought my first house, at age 22, I was working as a tech at Carrier Corporation in 1982.   The house cost an astounding $22,000 (about $55,000 today, according to one calculator).  This was in a depressed neighborhood in an area with bleak employment opportunities.   And one reason house prices were so low then, was that interest rates for mortgages were well over 10% at the time, often 12-14%.  Do the math on that!  Low prices plus high interest means high monthly payments - and houses are sold on monthly payments.

I was able to get around the interest rate debacle by getting a loan from the Farmer's Home Administration (FmHA, not to be confused with FHA) which had loans which subsidized interest rates based on your income.    It was not a "giveaway" program, as the lost interest was "recaptured" when you sold the house - and as a result, I did not make a lot of money on the sale five years later, even though the sale price had increased to $35,000.  (I am not sure if this program still exists.  It applied only to homes in rural areas.)

A few years later, I bought my second house, in Alexandria, Virginia for the whopping sum of $189,000 - the most paid in the development at the time!  Interest rates were still staggeringly high, particularly for a young person with an iffy credit record.    Rates were still in the double-digits, but we managed to "buy down" the rate to 8-5/8% in a "3-2 buydown" loan which lowered the initial rate to 8-5/8% the first year, 9-5/8% the second, and 10-5/8% the third year on out (do the math on that!)   Using this "funny" mortgage (and a 10% down payment from Mark's Dad) we were able to get a mortgage - but still had to buy the mortgage insurance, which added to the price of the loan.

And this was after I quit my job at the Patent Office, making $35,000 a year, to get a job with a law firm making $53,000 a year.   In order to afford the house, I had to go out and make more money.  And yes, this meant giving up partying and going back to law school.  Eventually, we refinanced the loan, as rates dropped.  Stupidly, we folded in other debts, so the balance never went down, but in fact, up.  But that is another story.

At the time, we were renting an apartment for $900 a month, including utilities.   The house payments were more than this, of course, but with the home mortgage interest deduction, perhaps not much more.   Unfortunately, we bought at the height of the 1989 "bubble" market, and by 1990, prices had collapsed by 10-30% or more.   If we had to sell during that time period, we would have lost money.   By 1995, however, prices started to recover, and houses in our neighborhood started to sell for $250,000 or more (a quarter-million dollars!).

So, in both instances, some "creative financing" helped me buy houses, when I was young and had no real assets, other than a steady paycheck.    Today, these sorts of loans are harder to come by, even if interest rates are a fraction of what they were for me.  That may explain why the millenials are having a harder time buying a house.

Today, I still own a condo in Virginia, and a young "Millennial" couple is renting it from us - a real-world example of the choices real-world millenials have to make these days.   The rent is an astounding $1250 a month (including utilities), which sounds like a lot, until you realize that when I was renting in 1988, I was paying $900 a month.   According to the same inflation calculator, that rent would be about $1800 today and the same apartments are renting for $1300 to $1700 according to their website.   So despite what you hear about "high rents" stifling the 20-somethings today, the cost of renting isn't really much higher than when I was that age, at least in the greater DC market.

And yea, I bitched about the high cost of rent back then, too.  I mean, 1/3 of my income went to taxes, and the other 1/3 went to rent, leaving me damn little to buy beer with.   Right?   We all have to live with that, in our lives, so just get over it.   If you are not paying 1/3 of your income in rent, you are either living with your parents, or in the ghetto.  Both are bad options, as the temptation is to squander that free income on electronic junk, clothes, and cars.   Paying more to live in a better neighborhood pays off, in the long run, even if you can't afford as much "bling".

So anyway, suppose my millennial tenants want to buy the condo they are renting?  According to Zillow, the value of the place is $135,000.   If they put down 35,000 and finance a hundred grand at 4%, they will pay about $500 a month in principle and interest.   Add in the $565 monthly condo fee (which includes utilities) and the $90 a month to cover taxes and insurance, and you are looking at.... well, about what they are paying in rent.   And if they have bad credit, or put down less as a down payment, they may be paying more than they are in rent.

So you can see, the market value of the property is roughly about where it should be, but purchasing the condo is certainly no bargain (particularly when there is still another assessment due this September for $3000) and they really have no real incentive to buy the place, particularly when they are young, just starting out, and might want to move to a different part of town, or even a different city, as their careers take them.

And that is where the decision whether to buy or rent should be made - based on personal circumstances, not national trends.  The NPR story disturbingly made the "you'll be priced out of the market!" argument that sold so many overpriced homes back in the mid-2000's (and in the late 1980's as well).   "You'd better take this crappy deal NOW!" goes the argument, "Or you'll get an even CRAPPIER deal later on!"  It is a false choice.

We just returned from a trip to South Florida, and one thing I found fascinating, revisiting "ground zero" of the building bust (where we also owned two condos - but got out in time) was the number of apartment buildings going up around the greater Miami and Ft. Lauderdale areas.   People argue there is a shortage of rental apartments, and the builders are listening.   And new units are going up everywhere, it seems.  A lot of the condos that went bust were converted to apartment rentals as well.

What this will do to the rental market will be interesting.  With more supply, demand will slacken, and prices may drop.   This in turn will make renting even more attractive to many folks (including the very young and the very old) and thus make buying a home or condo seem even less attractive.

This in turn could drive housing prices down over time.    It is possible.   Or it is possible that many millenials will wait a few more years, and then all decide at once, like lemmings (as the NPR piece posits) to buy a house, and we'll have 1989 all over again.

And in markets we see this pattern.   We see a lot of "tri-5" Chevies (55-56-57) still on the road, and not as many 58's or 59's.   Detroit sold a lot of cars in the mid-50's, as the economy boomed.   By the late 50's, however, a steep recession cut back on car sales.   We saw the same pattern in car sales in 2009-2011, with no one buying, even though prices were low.   Then the pent-up demand burst, and they couldn't make cars fast enough to meet demand, and everyone bought at once, at the highest possible prices.   It is funny how markets work that way.   As consumers, we buy high, sell low.

In 1989, I bought high.   And in the subsequent years, no one bought, but many sold.  I had friends sell in the early 1990's and lose money on houses.  By the mid-1990's, I was buying foreclosures and doing OK.  By the 2000's, the great unwashed masses decided they all had to "invest in Real Estate" by borrowing money on onerous terms (you really aren't "investing" if you are borrowing money, are you?).   And by 2008, it all came crashing down yet again.   These things go in cycles.

Trying to time the market however, is an exercise in futility.   Unless you have a working time-machine, you are going to get creamed.  And working time-machines are hard to come by.

Instead, you have to "do the math" on your personal situation, and decide whether it cheaper to rent or to own, including all tax deductions and other calculations, and whether you plan on staying in a given location for at least five years or so (just to recover transaction costs).   If it makes no sense, on a personal level, to buy, I am not sure that a bad deal becomes a good one, simply because someone says that it will be an even worse deal down the road.

That being said, there may be some bargains out there today.   Perhaps.  Get out a pencil and paper and "do the math" and figure it out.   The real estate market is not homogenous.   Values in the greater DC area or Atlanta or New York, or San Francisco are far different than those in Syracuse, Detroit, or Bangor - as are their prospects.  A given property may be a bargain - or a nightmare.  There is no one universal "buy" or "rent" recommendation, for an entire nation or even an entire town.   It is a personal decision that has to be based on personal circumstances.

Myself?  Well, I already own a home and a condo, and I am not interested in "investing" in more Real Estate at this point in my life.   Why?  Well, when I bought the condo in 1998, it was a no-brainer positive cash-flow deal from the get-go.  As you can see today, it is less so, as the cost of carrying it (at today's market values) about equals the rent.   I may make $5,000 a year by renting the property, but I probably could do better investing the $135,000 in stocks or bonds, quite frankly.

I just don't see - on a personal level - any screaming bargains out there, at least for me.  And of  course, I am at a point in my life where risking money buying real estate seems like a bad idea.   If I could only get that damn time-machine to work, I would go back to 1998 and buy four more of those condos - or maybe a dozen.  Sadly, Amazon is back-ordered on time-machine parts.

But your mileage may vary... for some, this may be the time to buy, and some properties out there may be good bargains and good long-term investments.   You just have to do the math.

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