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Housing must be nearing a bottom..

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August 23, 2010 – Comments (23)

Because now I'm starting to see more articles about how housing is a lousy investment and no one should buy a house.  Anyone who's been paying attention knows that this statement is just a wrong as home ownership is always better than renting.  Both statements are just flat out wrong. But that doesnt stop the pundits.

Case in point. I saw this article posted by one of my friends on Facebook this morning:

Seven Reasons Not to Buy a Home

See full article from DailyFinance: http://srph.it/9l2X2O

The writer starts the article off with:

After the fall that housing has suffered, I think that that, as an asset class, housing will probably be a decent investment going forward. But nobody should ever consider owning a home.


I just commented on someone else's blog about the use of "absolutes" in giving advice: Always, never, only, every, nobody, everybody, so on and so forth.  Blanket statements like that ruin your credibility.  Simple fact is homeownership isn't for everybody. But that doesnt mean NO ONE should own a home.  The article goes on to explain the downsides of homeownership.  Yes there are some cons to homeownership but there are also cons to renting.  As with any financial decision you must weigh the pro and cons before entering into any transaction.

Then theres this article by the well respected NY Times (sarcasm intended).

Housing Fades as a Means to Build Wealth, Analysts Say

"There is no iron law that real estate must appreciate,” said Stan Humphries, chief economist for the real estate site Zillow. 

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.

Really Mr. Humphries? Really.  And how many years did it take you to figure that out? My understanding is, up until the housing bubble, housing generally increased at the rate of inflation unless something extraordinary happened at the local level.

But thankfully there is some sanity out there.   This Yahoo Tech Ticker echoes my sentiment on the current and future housing market.

Now They Tell Us: Experts Say Housing Is A Lousy Investment And Always Will Be

 But wait. Just a few years ago, weren't the experts saying that housing was always a great investment? That house prices would always go up? Yes, they were.  [My sentiments exactly]

One thing you can be sure of with respect to market punditry is that experts will extrapolate recent trends into the hereafter.  As will most people, actually.  That's why, no matter how many times markets overshoot, people get burned.

But are the experts right this time? Will housing always be a lousy investment?

Of course not

At some point, house prices will fall far enough that housing will become a very attractive investment, just as it was in the early 1990s, before the great housing boom began.

At that point, housing will probably be one of the greatest investments ever because it will actually be cheap. In many areas homeownership will actually be cheaper than renting. (Currently in my area it is not.)

The key to buying a home is, was, and always will be

 1. Location

 2. Don't overpay (either through price or interest rate) and

 3. Buy what you can reasonably afford.

Don't worry about the house appreciating in price. Its a place to live for crying out loud. If the price does appreciate then wonderful. But we need to get out of this mentality that we need to trade houses like stock.

23 Comments – Post Your Own

#1) On August 23, 2010 at 4:09 PM, binve (< 20) wrote:

outoffocus,

excellent post!

>>Always, never, only, every, nobody, everybody, so on and so forth.  Blanket statements like that ruin your credibility.  Simple fact is homeownership isn't for everybody. But that doesnt mean NO ONE should own a home. 

I have ALWAYS said that NO ONE should NEVER own a home. .... :)  (yuk, yuk). I totally agree. Someone who speaks in absolutes is almost as dumb as someone who thinks in absolutes. There are very few things in life that are absolute, maybe just extremely probable.

>> Don't worry about the house appreciating in price. Its a place to live for crying out loud. If the price does appreciate then wonderful. But we need to get out of this mentality that we need to trade houses like stock.

Amen to that! 

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#2) On August 23, 2010 at 4:34 PM, allstarvulture (< 20) wrote:

So, does this mean that we should 'never' use absolutes?  :-)

Kidding, of course.  Good post all around.

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#3) On August 23, 2010 at 4:38 PM, Griffin416 (99.98) wrote:

Not sure what your gut tells you, but RE has bottomed. Remember stock bottoms look like spikes, but RE bottoms (i.e. the early '90's) look flat, then turn up really slowly. The case shiller index shows up basically flat for a year with 100 out of 145 areas turning up a bit (month by month). To me, the bottom has already occured. But like I said, it is not like a stock, you do not need to buy right now.

As Binve said, if it is a single family house, live in it and if the price goes up, take it as a gift, do not expect it.

If you are looking at it for an investment, for rental purposes it needs to be at least a 3 family house to make money. All the same cash flow rules apply and the fact the you need to understand the business. The economy matters less at this point if your cash flow model is good.

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#4) On August 23, 2010 at 4:38 PM, chk999 (99.97) wrote:

Excellent post.

When we see similar things about equities, that will be the time to strike! 

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#5) On August 23, 2010 at 4:44 PM, outoffocus (22.75) wrote:

Not sure what your gut tells you, but RE has bottomed. Remember stock bottoms look like spikes, but RE bottoms (i.e. the early '90's) look flat, then turn up really slowly. The case shiller index shows up basically flat for a year with 100 out of 145 areas turning up a bit (month by month). To me, the bottom has already occured

Griffin416  

I wish I could agree with you but that data is skewed by the homebuyer tax credit. I need to see at least 6 months of data without the tax credit to know if housing has really bottomed or if the government merely pulled demand forward and set us up for a double dip.

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#6) On August 23, 2010 at 4:59 PM, rd80 (98.26) wrote:

Not sure what your gut tells you, but RE has bottomed.

My gut doesn't tell me houses are overpriced, the price does.  I just refinanced a home we bought in '97.  My income has outpaced inflation since then.  Even at current rates, we would not be able to afford the house if we had to buy it today at the appraised price.

The problem with 'housing has bottomed' arguments is buyers have to be able to afford the houses to bid the prices up.  And, I don't think there are enough prospective buyers out there who can afford to soak up all the supply.

'course, I could be wrong.

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#7) On August 23, 2010 at 5:13 PM, ElCid16 (95.85) wrote:

I just recently heard a clip on NPR's Planet Money that in 2003, the government back around 50% of all mortgages and in 2006 around 30% of all mortgages.  The government is currently backing around 89% of all mortgages.

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#8) On August 23, 2010 at 5:26 PM, outoffocus (22.75) wrote:

Now Thomas Hoenig, president of the Kansas City Fed is on the bandwagon.

http://www.minyanville.com/businessmarkets/articles/thomas-hoenig-hoenig-housing-market-own/8/23/2010/id/29752

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#9) On August 23, 2010 at 5:33 PM, ragedmaximus (< 20) wrote:

the bottom is 6 months to a year after this impending stock market crash then when the market bottoms from that the housing bottom clock starts. for now no bottom or people would be buying and dey aint!

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#10) On August 23, 2010 at 6:28 PM, Griffin416 (99.98) wrote:

Let me see, I have been in the RE biz for 20 years now and have seen a few boom and bust cycles...so things are looking familar.

Phoenix was one of the hardest hit areas, no doubt. California was hit bad too. Well, as a proxy, california home prices are up, I think 7 months in a row. And Phoenix is patchy, but the commercial properties are up about 10% in the last 3 quarters...you do the math.

In your particular city, or area or type of house, housing may not have bottomed. Just like the stock market has sectors and countries that bottom at different times. Again, unlike stocks, a bottom does not mean the price will go up. Every situation is a bit different.

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#11) On August 23, 2010 at 6:53 PM, awallejr (85.54) wrote:

Don't worry about the house appreciating in price. Its a place to live for crying out loud. If the price does appreciate then wonderful. But we need to get out of this mentality that we need to trade houses like stock.

Well we never really did trade houses like stocks until Congress and Clinton  let the guys on Wall Street into the game by changing Glass-Steagall Act.  Generally a house should first and foremost be a HOME.  You were given certain tax breaks as well as hoped the house's value would keep up with inflation.

However, you have seen houses appreciate well beyond inflation for people who bought well before the current crash.  To see comparable price appreciation from a percentage point of view you really would need to see massive "Weimar Republic-type" inflation even with the price declines.

The one positive is the low volume in New Houses.  I keep saying that is a good thing (well not to the homebuilders).  As the years go by you will eventually see a housing shortage since the population is still growing.

And in response to #10, yup, location, location, location.

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#12) On August 23, 2010 at 7:39 PM, Option1307 (29.65) wrote:

Not sure what your gut tells you, but RE has bottomed.

Floridabuilder2 and that Chimpcontest fellow ;) have basically said the same thing recently, see here and here.

I'm not sure if RE prices have completely bottomed around the country, there are likely local patchs of volatility, and things will certainly turn south in general if our economy continues to stall out. However, I have to agree with FB that now may be a great time to start nibbling on homebuilder stocks for the long term.

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#13) On August 23, 2010 at 7:46 PM, SockMarket (40.37) wrote:

outoffocus,

+1 excellent blog. I am tempted to with what you are saying, however I must agree with what Russ says as well.

since I believe the blog was mine, I just wanted to make sure that you saw my re. I am not expecting my method to be perfect, just work in the majority of cases.

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#14) On August 23, 2010 at 8:25 PM, topsecret09 (36.64) wrote:

  Just posted my opinion on this In my first post In a month. Real estate may not necessarily be overpriced In many situations,but the banks are making It virtually Impossible to get a decent transaction done. Cash Is king here In California......   TS     :)   

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#15) On August 23, 2010 at 8:54 PM, Griffinnoetfs (97.06) wrote:

Option1307, If you believe me and I understand if you don't, FB is pretty smart too. I disagree quite strongly about buying home builder stocks now (aside from an oversold bounce or 2). Home builder stocks are late cycle stocks, meaning they go up the most when the economy is booming. Industrials and banks are supposed to do the best at the economic bottom.

Don't believe me...look at WFC, CAT, MMM in the early '90's during the last RE crisis. Then look at TOL and BRT. The difference is quite clear. We are here to make money right?

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#16) On August 23, 2010 at 8:56 PM, Griffinnoetfs (97.06) wrote:

Oops, posted with the wrong user name. I meant to continue posting under Griffin416. I started Griffinnoets about 1 month ago to show people and myself that I could be an allstar without the use of any etf's. Easy as pie for me.

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#17) On August 23, 2010 at 10:56 PM, Option1307 (29.65) wrote:

Griffinnoetfs

I disagree quite strongly about buying home builder stocks now...

I do understand where you are coming from here. I have to admit, just about every factor out there points to more pain in store for home builder stocks. Tax credit expired, foreclosures on the rise, unemployment flat (or heading up), people fearful for a "double-dip", etc. etc. The news out there in regards to home builders is quite frankly terrible.

However, as we all should remember from spring of 2009, it's best to buy sectors that are the most hated. Builders certainly are reaching those levels again. I'm not advocating an all in approach, merely a dipping of the toes in the water with a long term horizon in mind.

While RE may have bottomed, I don't really foresee a quick upturn in RE or housing in the near future. However, the opposite can also be argued. There really isn't much more room for builders to fall unless there is an all out implosion in our economy/stock market (which is not entirely out of the qyestion). Take MDC for example, it has ample cash and has essentially no chance at going bankrup, oh and it pays you almost 4% to sit and wait 5+ yrs. for things in the RE sector to turn around.

I guess my point is, timing stock bottoms is rather difficult to do precisely. I feel MDC (and others) have come down far enough to push the risk/reward in my favor and I think now is a decent (not perfect) time to start nibbling on a few shares here and there within the builders. Things will take years to get better, but eventually they will and when they do, it may very well be to late to purchase shares of homebuilders.

Again, small small gambles here Fools, don't be getting too crazy!

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#18) On August 24, 2010 at 9:23 AM, miteycasey (30.31) wrote:

home ownership is always better than renting

Tell that to people who bought in 2007.

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#19) On August 24, 2010 at 10:15 AM, russiangambit (29.12) wrote:

I don't think housing has bottomoed. When there was a housing bust in Texas in 80s, it lasted about 10 years and back then the excesses wheren't as big as this time.

Plus, there seem to be still a lot of foreclosures in the pipeline. It is going to be probably another 2 years until the bottom.

Actually, here in Texas home prices are unchanged to slightly up and almost no foreclosures on the market. So, either we bottomed here a year ago already or we are not there yet and we are in the holding pattern.

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#20) On August 24, 2010 at 1:26 PM, floridabuilder2 (99.23) wrote:

Housing has bottomed and I had blogged about this during the Spring... that going into this Summer we would see housing stocks take a big plunge and that the home sales were a pure illusion. 

July is the REAL demand for housing today AND let us not forget that the previous 6 months prior to July were pull forward sales due to tax credits.

I wouldn't buy most housing stocks today, just a couple if you were a long term investor and want to lock in long term cap gains.  However, homebuilder valuations cannot go lower.  From a pro-forma basis I can't even beat down values of land any more.  Additionally, a number of private equity companies are pulling out of buying land today even though most of the time your the only bidder and you can name your price (bank/FDIC willing).

I only have one red thumb builder left, HOV....  I can't green thumb that stock until housing is on a confirmed uptick which it is not.  My guess is that housing will bounce on this bottom through the end of the year. 

This is a great blog post because I have been reading a number of articles about never buying a home and I just LMFAO.  There are good submarkets in places like Phoenix where homes are being sold at cost to build.  Plus you are getting record low mortgage rates.  I find it amazing in life that after a 5 year plunge in housing prices the experts say don't buy when you probably never get deals like this in your lifetime. 

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#21) On August 24, 2010 at 1:29 PM, Jbay76 (< 20) wrote:

I have been a big fan of renting for some time as it has allowed me to focus solely on paying off my student loans (read: shackles) withotu worrying about unexpected expenditures.  But, I just got hit with a 10% rent increase when the county I lvie in suggest ~ 3% increase.  To add insult to injury, we were also told that renewal of our lease requires us to pay an HOA fee as well.  So, now I think owning a home that you can do whatever you want to it without repurcussions from the landlord is not so bad afterall.  Plus, assuming you got a house you could afford, you don't have to move anymore.  Needless to say, we're moving out again, an average of once a year.  If we were in a state and area we wanted to live in for some years down the road, we'd buckle down becuase the rental issues being left on our laps is increasing each year.  Renting is a numbers game, and there appears to be more renters every year. There will be no shortage of people who will take the lease that I refuse to renew.

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#22) On August 24, 2010 at 1:39 PM, floridabuilder2 (99.23) wrote:

Jbay76,

Run the total cost of homeownership plus the mortgage deduction.  Take into account that home ownership hurts your ability to move (relocate). 

I personally didn't own a home until I was 35!  Renting made more sense.  Renting also makes more sense if you are single.  I think a young married couple should buy an entry level starter home, build up cash for 5 years then have kids.  Easier said than done, but it makes little sense for a couple with no kids and decent incomes not to buy a starter home if they like the metro area where they live

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#23) On August 24, 2010 at 3:20 PM, awallejr (85.54) wrote:

I find it amazing in life that after a 5 year plunge in housing prices the experts say don't buy when you probably never get deals like this in your lifetime. 

They said the same about stocks in March of 2009 too.  These are the times to buy, if, however, you have a job. 

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