Tuesday, June 20, 2023

Paper Millionaries


Are our houses worth more than their weight in gold?  I don't think so.

I logged on to my bank account today and just for laughs, clicked on their "net worth calculator."  It is an interesting thing to look at, but in recent months, kind of useless, as the market value calculated for my home (by Zillow) is off the charts crazy.   According to Zillow, my house is now worth twice what it was three years ago.  And that's not plausible.

Across the country, housing prices are taking a breather in many markets.  In the "hot" markets, prices are still high, but I think that is only because reality has yet to set in. We are in one of those markets.  And it is frustrating, trying to explain to people that this is a bubble - but they don't want to hear it.  I feel like that guy on the Titanic, saying, "the ship is sinking!" while passengers shout back, "Balderdash!  The lights are still on and the champagne is cold! We'll be underway in no time!"

Similarly, back in 2005, I called the bubble as being ready to burst.  But it took another three years - until 2008/9 for it to finally fail.  Funny-money mortgages kept the game going for a few years more. Instead of people pulling back and saying, "That house is over-priced!" they decided instead to use a payment-optional balloon note which was predicated on housing prices going up and up indefinitely.

They didn't.  And many a millionaire-on-paper fell back to earth.  Many declared bankruptcy.  When property values skyrocket, people who own property feel "rich" and at least on paper, some are.  Others "cash out" this phantom equity with home equity loans or refinancing and then spend the money on things like credit card bills and cars.  It is akin to financing the hamburger you shat out last week or the car that will be sold in three years, over a 30-year period.

And a lot of people did just that.  I did - on a smaller scale, of course.  But over time, I had to sell off properties and eventually, downsized to just one, which, once again, is skyrocketing in value.  This time around, however, I don't feel "rich" because I know the score. And what's worse is I have a premonition that when this blows, it will be worse than 2008, just as 2008 was far worse than 1989.  It is an unstable pattern that is getting progressively wilder in its swings with each iteration.  On the upside, homeowners spend spectacular amounts of money on housing.  On the downside, investors snap up the houses for pennies on the dollar.  With each iteration, the rich get richer and the poor get poorer.

And right now - this very minute - someone out there is saying to themselves, "Well, housing prices are crazy, but I'd better buy now before I'm priced out of the market forever!"  That latter phrase was told to him by a real estate agent, and it is a phrase I heard in 1989 and again in 2008.   For some reason, people never seem to get "priced out of the market forever!" but instead end up in foreclosure when they overpay for a house.

The price tag on a house is only a part of the cost.  In addition to the monthly Principle and Interest (P&I) are the increasingly staggering property taxes and insurance payments - as well as a host of ancillary fees, such as a fire fee, trash fee, water, sewer, electric, and gas.  These other fees can sometimes exceed the mortgage payment.  And as we saw in Florida in the 2000's, the property taxes are "reset" a year after you bought, based on the overblown price you paid for the property.  So you buy a house with a $2500 annual property tax and pay $800,000 for it.  The next year, your taxes are $7000 as the price you paid is now the "fair market value" for your home, even if you homestead it (and if you don't, well, it just keeps going up).

And let's not even talk about maintenance.  Condo owners (such as here on the island) are shocked to discover they owe $50,000 "special assessments" when balconies started to fall off (as also recently happened to an older hotel here as well).  Homeowners are discovering that a new roof can cost tens of thousands of dollars to install.  And appliances that once sold for hundreds are now asking for thousands - and often for a basic, no-frills appliance!

A friend of ours is renting a house from the church.  It was a "thing" back in the day that old widows would leave their house to the church, to be used as a parsonage or something.  But since church attendance is dwindling, the parson comes here part-time, often on an off day or after doing services on a mainland church.  So the donated house is either used as a party hut (as the Baptists do) or is rented out to offset the maintenance and utility costs of the church building.

For years, such houses rented out for $1500 to $2000 a month here on the island.  If they weren't on the beach, they were not considered desirable as vacation rentals.  Some "winter residents" would rent a house year-round and occupy it for less than six months!  It was cheap living on what was then, "Georgia's abandoned island" as I called it.  Well, we've been discovered, and a new generation of 50-somethings with bags of money are moving here - often paying cash for houses and then gutting them to rebuild.  It is a major paradigm shift, to be sure.

So my friend faces the first of several rent hikes.  She has been renting for below market value for years, and the church isn't really making any money on it.  The property taxes are going up (it is not exempt from taxes as it is not a place of worship and thus subject to the UBIT).  But a new roof one year, and new appliances the next and, well, you have an operating loss for several years in a row.  What's more, if the church needs a new roof and the rental property is now worth crazy dollars, do you ask parishioners for money for a new roof, or do you sell the house you have that is losing money every year, and pay for church maintenance?

Fortunately, my friend found a reasonably-priced house to buy on the mainland, for less than the cost of monthly rent.  It was also a chance to downsize, which as you get older, starts to make more and more sense.  You want to enjoy your final decades on the planet and not spend them doing home maintenance.   And of course, living on an island where it takes a half-hour just to get to the mainland, gets tiring.  She now lives across the street from a grocery store.  Gee, I may move there myself.

But even with the rent hikes on her old home, it was still cheaper to rent that house than to own it.  According to Zillow, the house is worth a cool $800,000 and even with an $80,000 (!!) down payment, the Principle and Interest at 6% would be over $4200.   Add in another $1000 a month for utilities, taxes, and insurance (not counting maintenance!) and you can see, the house is far cheaper to rent, even at $3000 a month or more.

The people buying these houses and then throwing another $200,000 in remodeling expenses must be confident they will be million-dollar homes someday.  And maybe they will, someday, if they are not wiped off the face of the Earth by a hurricane in the meantime.

So we see a pattern here - one that I saw back in 2005 in Ft. Lauderdale.  It was far cheaper to rent than it was to buy.  You had to invest in the "greater fool theory" - that down the road, some idiot even dumber than you will pay even more for the house.  It is the same theory used to sell gold, crypto, and "stonks" - enriching a few, and impoverishing the many.

So, could this bubble go on for years? Or is it ready to burst?  The article cited above noted that many houses in "hot" markets like California are dropping in value.  Oakland has seen drops of 16% or $174,500.  Think about that - if 16% of the average housing price is $174,500, then the average housing price was over a million bucks.  No wonder people are coming to our island and thinking housing prices are "cheap" and paying cash!

But that is a mistake I made twice in my lifetime.  When we left Alexandria - with a wad of cash, as we had been "bought out" by a developer who paid twice market value just for our lots - we decided to buy a house in the Finger Lakes, where land was cheaper, as I was "working from home" two decades before it became fashionable.   Funny thing, the local real estate agents saw us coming, and knew we would think houses were "cheap" in the area.  We probably overpaid for that house, but we enjoyed it for nearly a decade.  Today it is finally worth a lot more - but the property taxes are well into the five figures.

Similarly, when we moved to Jekyll back in 2006, we probably overpaid for this house.  And the neighbors scratched there heads (as I am today) wondering who these "new people" were and why they paid so much for a freaking house.  We were probably even-Steven for the first decade we owned here.  It has only been in the last few years that prices have gone up - in the last three, dramatically.

So, having ridden this roller-coaster several times now - and gotten off at the top and the bottom. I don't get exuberant when prices are up, up, up - but rather, I get nervous.  You can't create wealth from thin air, without work.  So it is nice to see paper millions, but don't confuse them with real wealth.

Right now, there are few properties on the market, and prices are staying high.  But the few on the market have been lingering longer and longer - months instead of weeks.  Seems like there are fewer showings and fewer buyers.  The shortage of listings is propping up prices.  People like me who have been here are reluctant to sell, as where would we go?  Since other properties are over-priced, nationwide, we would be just trading one over-priced property for another - and restarting our homestead exemption at a higher number.  We are sort of trapped in the house - particularly when I turn 66 and my property taxes will drop by 2/3 (unless they repeal the law, as they are talking about).

Unless you can downsize to a cheaper neighborhood, or go back to renting, you can't "cash out" of your own home, until you die.   It take courage and foresight to say, "This bubble will burst on such-and-such a date, I'll sell now and rent for a year and then buy it back for half price!"   Like I said, I thought the last one would burst in 2005, but it went on until 2008.  And sometimes, you call it too late, and then you are screwed.  Timing markets is hard to do, except in retrospect.  And it is often more a factor of luck than skill.

So, unless I was willing to live in my RV for a year, it isn't a great idea.  Compounding this is how people get attached to houses and want to have their "things" with them.   I have another friend who moves quite frequently, often making money on each strategic move, much to the dismay of his wife.  "We're moving again?" she says.  "I've got a great deal lined up on a house across the country - we can re-hab it and flip in three years and make money, tax-free!"  And so far, he's done well, but like with musical chairs, you want to be sitting down when the music stops.

And in 2008, there weren't many chairs left.  My friend's last house was in California.  Ouch.  But I am guessing that even with the prices dropping there, he still made out (and for all I know, he already sold at the peak!).

Anyway, despite what Zillow says, I don't feel "rich" because they say my house is worth a lot of dough.  I still need to pay the taxes and the insurance and maybe next year it will need a new roof and the appliances are 18 years old.  It is just a thing - a machine for living that needs a lot of care and costs a lot to maintain.

After owning nine properties, well, I don't get so excited about Real Estate anymore.  Sure, I made money on almost all of them (damn you, New York!) but on the other hand, I spent a lot of money maintaining them.  It all ends up being a wash - if you're lucky.  If not, it gets even more expensive!

That right there is why the IRS doesn't tax Capital Gains on most personal residences.  Houses are simply not money-makers - if you live in them.

UPDATE:  When housing prices crash, the most over-valued homes crash first.   So the mini-mansion takes a big hit, as in a recessionary economy, no one wants a maintenance and utility bill and property tax nightmare, particularly if it is older and everything needs replacing or soon will.

Condos also take a hit as they tend to rise even faster than houses.  As houses become "unaffordable" real estate agents push buyers to condos and townhouses, which they argue are a bargain at 2/3rds the price of a free-standing home.  However, with special assessments and skyrocketing condo fees, the value of a condo can fluctuate far more than free-standing real estate.

Vacation homes are also subject to wild swings.  When the shit hits the fan, the first thing on the chopping block are luxury items.  We have folks still working, buying houses here on the island and staying in them one weekend a month.  It would be cheaper to stay in the Presidential Suite at the Club Hotel.   If one of the couple loses their job, the vacation home will go on the market - they can't afford to even visit there, and they are struggling to make payments on their primary residence as it is.

So while our market is running-on compared to the rest of the country, it will likely crash harder when the time comes.

Small, free-standing homes in places where taxes aren't too high and there is steady work to be found, probably won't fluctuate in price - as much.

Just my experience, as a homeowner since 1982.