Today’s guest post comes from Mark Thoma, who labors tirelessly in the pacific Northwest. Mark is a Professor of Economics at the University of Oregon, where he also pens the well regarded blog, Economist’s View.
In today’s guest commentary, Mark hits upon a subject near and dear to our hearts, the perennial Housing bottom callers. (see our earlier discussion of the anti-Cassandras).
Without further ado . . .
~~~~
In the news today, I’ve been hearing once again that we are near the bottom of the housing cycle, the inevitable bottom call. For example, though the more optimistic analysts are a little more cautious than at times in the past, they still believe the end of the housing downturn may not be to far away:
Although U.S. home prices fell faster than ever in the second quarter, the
rate of acceleration slowed in June… Experts hailed the slight deceleration as
a harbinger of an eventual recovery in the dismal real estate market.
…[O]bservers seized upon a sliver of good news: … "I consider it good news that
you’re seeing price declines decelerate," said Terrin Griffiths, economist and
industry analyst with the California and Nevada Credit Union League. "While the
markets haven’t reached bottom, we’re getting closer to there." [source]
or
Two announcements suggested that a bottom could be nearing for the
housing
market [source]
But enough quotes, you already know how this goes.
Hearing that "the end is near", that the bottom is in sight, I
couldn’t help
but think about Barry and his reaction to bottom calls. Going back almost
two
years to November, 2006, this is a post of his called, appropriately,
Near a Bottom in Housing?:
…I have been … skeptical about the staying power of the most recent
rally… The rally appears to be based on several false premises: A soft
landing, a bottom in real estate, a mid-cycle slow down that resumes almost
as
soon as it starts.Indeed, if the bulk of the housing recession is behind us, then this
would go
down in post-war history as one of the shallowest housing corrections on
record.This week, the news out of the Homebuilders belied the "Housing is
Bottoming"
meme. The simple truth is that 46 year low interest rates (~5.125%) created
a
generational boom in Housing construction, sales, investment, and
speculation.
Now that rates have increased…, and home prices have nearly doubled in 7
years, all the while inventory built to record levels — the blush is off
the
rose.
And, moving forward another month, to December, 2006:
Yeah! Housing Will Recover in Q1!: Or
so says the NAR:"The worst of the U.S. housing slump is over, according to the
National
Association of Realtors. …David Lereah, NAR’s chief economist "Most of the correction in home
prices is
behind us, but general gains in value next year will be modest by historicalstandards." Lereah did not offer any evidence for his statement.
Call it wishful thinking… The NAR has not shown itself to be a
particularly astute forecaster… Calling the bottom in Real Estate has been
a
losing gambit this year. In addition to the NAR’s chief economist, several
other
cheerleaders have erroneously called for the same, including former Fed
Chief
Alan Greenspan. They have so far been proven wrong. …Real housing bottoms require more than wishful thinking; They require
solid
evidence, and more than mere price reductions. A significant decrease in
inventory, plus motivated sellers, would go a long way to seeing a bottom
form.
So far, we have yet to see any evidence of that.
As you read through Barry’s posts, you can see his respect for NAR
economists
grow (e
.g.,
"NAR economist Lawrence Yun? Puh-leeze!
He’s been
optimistic housing would stabilize for years now."). In
fact, I
think the level of respect may be entering Greenspan territory, and we know
how
much respect Barry has for his housing calls (among other things). In case
you
missed his
post on Greenspan a couple of weeks
ago:
Recall Greenspan’s first Real Estate bottom calling attempt came in late
2006… He repeated the calls many times since then. Most recently, in April2008, when he said "the drop in U.S. home prices will probably end well
before’
early next year as the number of houses on the market diminishes, aiding an
economic rebound."Wow, that’s three strike in just one swing: Inventory remains high, home
prices continue to fall, and we are still waiting for the economic
reboundMany of today’s current woes are traceable right back to Greenie: Keeping
interest rates too low too long is just the start; his malfeasance in
refusing
to regulate the lending industry. — Wessel politely called it
"regulating too
lightly" but that’s horseshit — Greenspan made the ideological
decision to
allow the free markets to just sort it all out. That’s what’s happening now,
and
no one likes it very much (except a few hard core free market types, who
find it
all delightfully anarchic)
So far, the bottom calls have been far off. But there will a bottom, and
one
of these days we’ll get there. But when, and how will we know? What signs
should
we look for? Above, Barry
says two things to watch for are:
A significant decrease in inventory, plus motivated sellers
Sellers may be motivated, but there hasn’t been a significant decline in
inventories:
[via
Calculated Risk (larger)]
And the main point of the news today was that another thing we need for
recovery to take place, price
stabilization, may not be too far away. Is that correct?
Martin Feldstein is pushing his housing rescue plan in the Financial
Times,
the same one he’s been pushing over the last few months (e.g.
WSJ and
Washington Post). The plan involves stabilizing housing prices to reduce
foreclosures (through "mortgage replacement loans" from the
government). He
s
ays:
The current decline of house prices is the natural result of the bubble that
by
2006 had raised house prices to 60 per cent above their long-term trend. Thesharp decline since then means that today’s prices are about 15 per cent
above
the trend level. But while a further 15 per cent decline may be inevitable,
there is nothing to stop prices declining even further.
This doesn’t sound much like a bottom call:
The large and growing number of homeowners with negative equity will
increase
the rate of defaults and foreclosures and therefore drive the downward
spiral of
prices. Defaults are likely to accelerate as the ratio of the debt to the
home
value rises. … Each such default puts downward pressure on existing
prices,
increasing the like-lihood of further defaults. It is this spiral that
threatens
the American economy and the global financial system.The policies adopted until now will not stop the downward price spiral.
Are we near the bottom? Is the end near? I wish I could answer yes, but I
think we have a ways to go yet. Paul Krugman
says:
When will it all end? The answer is, probably not until 2010 or later.
I’m hoping it won’t be that long, but so far the crisis has unfolded in
an
almost eerily slow fashion – sort of like watching a train wreck in slow
motion
and being unable to do anything about it – and there’s no reason to think
that
will change.
I’m a mechanical engineer by trade so I “see” things in the physical sense. Let me give you a physical analogy to the bottom callers and the decreasing acceleration that I’ve grown so sick and tired of hearing about. If I jump out of a plane with no parachute, I accelerate (via gravity) until I reach a point that the air friction around me equals the force of gravity pulling me toward the earth. This point is called terminal velocity. The highest point of acceleration I experience is the instant I jump out the plane and it “decreases” to zero acceleration at terminal velocity. At terminal velocity I am no longer going faster or slower than I was a second before so my acceleration is zero. BTW – terminal velocity for a human is about 125 mph (store this trivia tidbit for use in just a second.) So the housing rate of acceleration slowed, SO WHAT!!!! At terminal velocity my acceleration has slowed to zero, BUT I’m still screaming toward the earth at 125 mph! The instant right before I face plant into Firma Terra, I’m still experiencing no acceleration. My point is the acceleration, while important, has NOTHING to do with calling a bottom in housing! The only thing that matters is the direction. If I’m still heading down then there is no bottom reached regardless of whether I’m headed down faster or slower (acceleration) than last period.
I don’t know about slow, it’s like a double speed Japan. Which still doesn’t bode well for the near term. And as Keynes says, in the long run we’re all dead.
Well, all but the top couple of percent of American households saw a decline in real earnings during the housing boom, and prices are still how much higher than 2001 (particularly if you factor in the increaingly high cost of borrowing for the mortgage)?
Many don’t want to admit it, but housing prices, given the runup in inventory, rising price inflation and unemployment, and the probable slowdown in new household creation, should be LOWER than they were in 2001. Well, there’s still time.
Barry,
Aren’t we expecting a large number of resets in 1Q 2011? (I assume these are mostly post-2005 “vintage”) Shouldn’t we then expect to see a bottom after this?
Well people, this should end all this “are we, or we not?” banter.
A certain bald headed person called the bottom in the housing market yesterday. Period. End of discussion.
Any other questions?
Ha Ha! That post just made me realize I hadn’t heard the term “soft landing” in a long, long time. I think it may have been replaced with “V-shaped downturn” but I’m not sure.
I like the first comment. How fast can prices drop? That’s a good question.
Also noone seems to point out that once we hit bottom how long will it stay there?
I guess reaching terra firma at terminal velocity would be an ‘I’ shaped recession.
I agree with bk: with inventory greater, income lower, and unemployment greater, house prices should be at or lower than 2001 prices. Anyone who tries rocket science to explain otherwise is selling something.
Except for a few minutes here and there a long time ago, I’ve never watched Mad Money. I can deal with Cramer’s writing, but the sight and sound of him is too much to take. But yesterday it came on while I was up a ladder painting. And I heard Cramer predict that housing would bottom precisely “one year from now”. Another self-serving stunt for the most unaccountable scumbag in the punditry business.
Rob P:
I like the terminal velocity and face plant analogy. Great stuff.
Usually I think of the economy as being like a massive ocean liner. You can stand on the bridge and know intuitively that the ship is beginning to slow down (that would be Barry in 2006), but you also know that the thing has a lot of momentum and is going to keep on going until it hits that little tiny iceberg out there… (credit crunch, subprime, call it what you will).
After the ship finally stops of course it would then take a lot of effort to get the ship moving again (Japan), and then there are those troublesome leaks down below the waterline (insolvency, bankruptcy, unemployment). So not everyone is going to make it into the lifeboats (sorry, Lehman, Wachovia, WaMu), we have to save the women and children (Fannie and Freddie) first.
Acceleration matters here because we are talking jobs for builders, product suppliers, the gamit.
This “Post” has me wondering what’s this economy “Engine” called? Legal theft? What is the “System” really up to?
Define system = mechanism to step through a life with prosperity for me. No, familiy. No, my job. No, my local community. No, the USA. No, the globe.
Housing bottom callers at this point are wind-up dolls.
It’s amazing to me that these people are paid so much money for the crap they say.
From MarketWatch’s Greg Robb yesterday:
“Economists who are calling the housing bottom are like a baseball team that’s close to clinching a playoff berth but keeps losing, and its clubhouse staff has to keep loading and unloading Champagne across the country.
Every month, these economists say the bottom is close, but really some poor souls are putting the Champagne back on the truck for the next month.”
“sort of like watching a train wreck in slow motion and being unable to do anything about it”
Exactly.
Except for short this market, because its still got a serious case of delusion.
Sign of the times: The Treasury has to open its own “Discount Window” for the FDIC… and we DONT hear an uproar…?
Greenspan made the ideological decision to allow the free markets to just sort it all out
Minor quibble: those markets consisted of individuals, some of which were inordinately greedy and lacking in ethics.
So it ain’t “the market,” per se. It’s the bad guys.
Housing bottom callers at this point are wind-up dolls.
It’s amazing to me that these people are paid so much money for the crap they say.
Posted by: Steve Dallas | Aug 27, 2008 10:54:12 AM
Steve,
they get paid so much, precisely, for their willingness to say such things. Much like the CEOs, paid for what they’re willing to do. Shills and Hitmen are the highest cost inputs in any racket..
Um, terminal velocity is a terrible analogy. In physics, when you hit terminal velocity, there is no velocity to be gained no matter how much distance you travel because gravity is constant.
In economics the “gravity” constantly changes due to supply and demand (due, at a minimum, to population growth and money supply growth) so there is always distance to be gained.
Sorry, I mean there is always velocity to be gained.
Stupid teleconferences are messing me up! ;p
Just saw Fiorina on Bloomberg and she said that McCain has a home plan to keep people in their homes with a 30 year mortgage. Crisis over, we’ve hit bottom.
1/ The parachute analogy fails since (believe it or not) all house prices are not going to 0 (the equivalent of hitting the ground). Indeed in a few places house prices are rising-an impossibility for a parachutist.
2/ Homebuilder stocks will start moving up before nationwide house prices hit their low because of an increase in the number of places where house proces rise.
@Larster: You mean the same self-serving, self-promoting, snake-oil ME-FIRST-LAST-ALWAYS (unless the shite hits the fan and then it’s not MY fault) Carly Fiorina? Why does this woman even get air time? She stunk the joint out at HP and is still trying to take credit for their recent turnaround. What a joke. She must get air time simply for having a shred of charisma because it certainly isn’t because of her competence. I’m sure she’ll be governer of Cali someday. Her new nickname should be the “The Music Woman”.
“In economics the “gravity” constantly changes due to supply and demand (due, at a minimum, to population growth and money supply growth) so there is always distance to be gained.”
Always…as in “it’s always been like that”?
It’s “always” like it’s been before, until it isn’t.
Case in point: Money supply growth. The money supply is right now contracting. “M3 “broad money” aggregates fell by almost $50bn (£26.8bn) in July, the biggest one-month fall since modern records began in 1959“, and the trend since Feb 2008 is strongly negative, to say the least.
As for the population growth, (I’m assuming US growth) it may benefit business interests (more development) but it is unsustainable from a resource management standpoint.
Where’s the fear in saying something completely wrong when you know otherwise. These guys are smart enough to know the truth. We’ve got to change that the fear of losing a couple a bucks is less than the fear of getting something else. Anyone up for corporal punishment?
It’s “without further ado”
>there is no velocity to be gained no matter how much distance you travel because gravity is constant.
Errr… no. Back to the teleconference with you!
It sounds backwards, I know, but General Relativity teaches that when you jump out of the airplane, you are in freefall and not accelerating at all. The acceleration starts only when you land on terra firma. Then you are accelerating upwards. What this means for housing I haven’t a clue.
There is one constant that everyone forgot when prices were going up: affordability. As a mortgage broker and a real estate investor my main concern with the “boom” was that homes were becoming unaffordable. Lenders pushed real hard the “neg am” loans in order to keep the market going. They made those loans very attractive to us in the mortgage industry with great YSP, but the end result is what we have now. However the same affordabilty issue applies in reverse now. As prices are adjusting down and homes are affordable again we can do real, old fashion, mortgages -please read: full doc!- and even with slightly high ratios get them approve by exception -if you have been in the business long enough this all sounds familiar- The result will be an increase in sales and a decrease in inventory. One more factor that should help stop the bleeding is the loan modification process that lenders have have to adopt in view of the default rates. Would this mean the bottom is near? Yes! If you doubt it look at the most recent data from troubled counties like Miami-Dade and Broward in Florida. You would have to micromanage this data and go on week to week and not months info but it is there for you to make your conclusion. Finally, with the election day closer and a new administration in place in 2009 the media will probably stop their doom and gloom and will probably start publishing more balanced articles regarding our industry.
Remeber this date. I call a “top” to the number of “bottom calls”.
@Raul Lopez Jr: So I guess all of this “doom & gloom” is all mental and causing this slump, correct? Keep dreaming. Your denial will continue to make a lot of money – – for OTHER people. Please check back at this time next year to see where we are……
Errr… no. Back to the teleconference with you!
What’s your point? That you don’t understand gravity? 9.8.
As for the population growth, (I’m assuming US growth) it may benefit business interests (more development) but it is unsustainable from a resource management standpoint.
I’m talking world population growth which is exponential. Yes, it is unsustainable, but at what point? 10 years? 50? 300?
It really does not matter when housing prices bottom. What does matter is when the majority of homeowners that will default (intentional or not) do default. Then banks will be left with underwater homeowners that continuing to make payments. You see defaults will naturally ease way before home prices stabilize. Defaults are behavioral based and home prices are economically based.
@Click Broker: You probably right, but I don’t think we’re close to that point, especially with so many Option ARM’s still about to reset, do you?
Their bottom calls don’t even begin to mention that the usual form of past housing busts includes a few more years of real price declines. So even if Mr. Krugman is right about 2010, it might take until 2012-2014 before housing prices really start to increase again.
There is no bottom until the average person/s can pay the monthly note. And that will not happen until the average person has a higher paying job. About 57% of the nation, on average over the years have been able to stay in a home but during the last 3 to 5 years that percentage got up to 69%, until the equation: 69% – 57% = 12%, reduction is accomplished we will still not reach bottom. Add to that the fact that all those houses are going to have to “deflate” back into the system.
Here, some back of the envelope calculations:
2006 U.C. Census Bureau:
Total Housing Units: 126,316,181
Calculation: 126,316,181 * 12% (percent decline needed to get back to U.S. average) = 15,157,941 [Extra homes on the market]
So could that mean that 15,157,941 – 5,000,00 approx.(on market now) = 10,157,941 (homes on market left to go!)
Wow! what a ways to go…
Concerned Citizen has it in a nutshell!
Wages for the bottom 75% of the country will have to be substantially improved before any recovery will take place. It’s not only house mortgages that are affected but the credit system, which includes all credit cards, Hire Purchase agreements, etc.. etc.. Surely inflation is going to add to the problem, where gas, food, trinkets and baubles produced largely overseas will be affected by a devalued currency. Only when the bottom 75% can be offered a sustainable future will there be any signs of a recovery. I’d suggest that the only way this might happen is either in accepting a significantly lower standard of living for the majority or probably the simplest solution, that has historical credibility, is to manufacture a case for war – as long as the majority of Americans don’t mind making bombs or war machinery and are programmed to think heroically about the fighting boys leading the fight for freedom and democracy in some foreign land, then the enormous war-machine will let a few crumbs fall down from its overfed table to the patient hungry masses.
I have to say, from someone who has been bearish on housing for years, that I’m finding whole “OMG ITS GONNA BE 2 MORE YEARS” meme a bit odd and a bit contrarian. I’m not about to go long on housing NOW but… everyone and their mother is bearish on housing…
I think this horse is dead. Maybe not now. Maybe not for 2 years. But it’s definitely been milked (unless, of course, if you’re in the market for a house).
Also, I suspect it’ll bottom in 6 months to 1 year. Yes, it will probably go sideways for several years but… the ability to make money out of the situation is almost tapped. Don’t forget that this is America, people, our land is priceless provided our military keeps up :)
“Doom and Gloom” is what sells papers! And, no it is not “mental” but I’m in this business and I’m tired of explaining to clients that properties are not going down to 1990’s prices. And they are not! If you are a real estate investor you know you are buying at a good price when two conditions are met: First, your rent income will suffice to cover your expenses. Second, your purchase price is as close as possible to the last realistic price. What’s that price? The answer is case by case and it is determined by analyzing data from the neighborhood, county and state. I’ll make a bet with you about this time next year, we’ll be better! At least in real estate.
With the job market weakening, what exactly is going to provide the impetus for companies to increase worker incomes while they’re revenues/profits are getting hit? [the sound of crickets chirping….]
@Raul Lopez Jr: Correct me if I’m wrong, but in most markets, getting rent to cover one’s expenses (mortgage, taxes, condo fees, etc.) is still not feasible at the current market prices. I’ve done some research here in the Twin Cities and that’s what caused me to back away from getting into the market as a long term investor – for now. The rental equivalency numbers are still way out of whack. Until that changes, we ain’t even close to THE bottom.
Jeff M. The reality of every market is different. However there is one thing we have to have clear, a real estate investor is someone who actually puts money down on a property or one who has enough market insight to be able to buy foreclosed properties. And even then you would need money for repairs or cosmetics. In my market, South Florida, the rent covers if you get a good deal. For instance, a property in Pembroke Pines, SFR, 3/2 1/2, 2000 Sqft, can be rented at $2,500.00. You can buy it at $300,000.00 and with a 25% down your PITI would be around $2,150.00. And remember, we have high RE taxes (no state income tax) and very high insurance premiums. (USA Hurricane Capital)The problem is if you want, or need, to do it without any money. What the TV gurus offer at midnight is not very real. It has never been. they made people think it was because of the bubble and that’s also part of what happened.
Jeff M.
You might be wrong about your last comment if you look a little harder. I have a client (I’m not in the Real Estate business) who has bought three new homes, as in built 8-9 months ago (at a steep discount to original asking price) in Las Vegas, she took 30 year fixed mortgages on all three and I had her place 20% down on all three properties (prices ranged from 300-375k) all three have been purchased since Jan 1 of this year and all three have renters currently. The rental income she generates not only covers all the basic costs (mortgage, insurance, and taxes) but she is pulling about a $300/month profit from them.
In my area (Delaware) I also know several people who have been able to do the same and a good pal in Florida who bought 2 condo’s in lauderdale that are now rented out and covering expenses.
Just an observation, I’m not sure what the market is in Minn. but these are three real life stories that all happened in 2008.
Stop the presses:
Moody’s looking at Prime Jumbo. OMG, you don’t suppose some of THOSE people were involved in fraudulent activity do you?
Quelle surprise, these things are turning bad faster than a bunch of bananas on a NYC street vendor’s cart.
There was MASSIVE fraud in the higher end. These losses are going to be BIG and it’s going to be FORECLOSURE city on McMansion Avenue.
http://www.bloomberg.com/apps/news?
pid=20601087&sid=aMXaioKYKnus&refer=home
Jeff M. – I have been looking around fori investment property in SW FL . I too have come to the conclusion that prices are still too high for the reasons you mention . Also who will (can) buy it when it is time to sell ?
Ben. I’m glad to see your comment. That’s my experience as well. Again, every market is different. I wish more people will come out and relate the success they are having in the current market. I know there is a lot of BS going around and a lot of snake oil salesmen trying to scam people but if you are willing to do your leg work and have some resources this is a good market to make money. And, I’m putting my money in it.
The last big real estate bust was in the early 80s and there was not a bottom until the approved and partically completed projects were foreclosed upon. In South Florida we still have many of these projects operating, so it would appear that a bottom will not occur until these developers are foreclosed upon, which will also resolve the problem of some overhanging supply. In spite of all of the vacant properties, developers are still getting zoning variances for approvals for future developments which creats additional overhanging supply–thanks to local governments that are dependant upon more development for their tax revenue. This could be a long, long time for a recovery unless these municipalities can find another revenue source to stop the endless development approvals….in Florida.
> Raul Lopez Jr. writes
> In my market, South Florida, the rent
> covers if you get a good deal. For
>instance, a property in Pembroke Pines,
> SFR, 3/2 1/2, 2000 Sqft, can be rented at
> $2,500.00. You can buy it at $300,000.00 > and with a 25% down your PITI would be
> around $2,150.00.
Those numbers ($2500, $300,000, 25%) look optomistic to me as a fellow South Floridian. $2500: I sold a similar house in Weston that’s renting now for $2000, and know of many similar cases. $300,000: There are houses at that price; most comps I’ve seen are renting for less than $2500. Most neighborhoods I’ve seen with $2500 rents are asking more than 300K to buy.
25% down: seems high/unlikely.
bonus 4th: I was paying ~$2150 PITI on a $225K 30yr loan @6.125% (prop taxes, insurance taking the big bites)… so that number looks optomistic to me as well.
The recent slowing in the pace of fall of home prices (Case Shiller composite) is an illusion.
The data is not seasonally adjusted. On average, monthly price gains in the Q2 are 0.64% higher than Q1. This number is calculated pre bust. Since the bust started, the Q2 monthly changes are still 0.54% higher than Q1. So prices falls should be less severe in Q2 than in Q1 and that is what is showing up in the numbers. IMPROVEMENT IN THE HOUSING MARKET IT IS NOT.
If you would like the monthly seasonal factors that I have calculated, it makes for a pretty chart:
Month 1987-2005 Last 2 yrs
Jan-Dec monthly seasonals
-0.34%,-0.26%,0.01%,0.28%,0.47%,0.58%,0.33%,0.14% ,-0.13%,-0.25%,-0.41%,-0.42%
Jan-Dec monthly changes since bust started:
-0.84%,-0.93%,-0.85%,-0.42%,-0.29%,-0.31%,0.26% ,0.04%,0.05%,-0.16%,-0.57%,-0.80%
> 300 – (300*.25)=225
Nevermind this part: bonus 4th: I was paying ~$2150 PITI on a $225K 30yr loan @6.125% (prop taxes, insurance taking the big bites)… so that number looks optomistic to me as well.
That number looks spot-on, actually… but it’s also a number that helped me decide to sell.
@Ben: Perhaps it is a case of “not looking hard enough” but I still think, for the most part, most properties, other than potentiall messy bank-ownded foreclosures, are still over-priced. For this reason, I’d rather keep my money in more liquid investments at this point. I think we’ll still have plenty of opportunities to grab an investment or two down the road. There’s no rush. I think many people are early here. Just my opinion.
On a somewhat related note – not to worry about Fannie! They’ve announced the panacea of “management changes”. Phew, I was beginning to worry there for as second about them. All is well now. Nothing to see here. If only all failing companies had to do to fix multi-billion dollar mess was move some names around on an org chart…….
I’m convinced that a monkey couldn’t have done a worse job than some of these execs.
Fellow South Floridian,
It’s true that many properties are being rented at those prices but if your property is in good conditions and if you are willing to take a chance on a renter who may not have the best credit (may be a recent foreclosure?) and even more, don’t ask for three months in advance. I ask for first and security. In some instances I allow the security to be paid in two or three installments. The numbers:
Price: $300,000.00. Loan: $225,000.00. Interest: 7.25% (investement) Monthly: $1573.00, Taxes: $350.00. HO Ins. $125.00. Flood: $25.00. HOA: $110.00 Total: $2,183.00. I rented it for $2,550.00
Jeff M.
I’m sure in some markets, it is too early. I’m not really all that into real estate as investment for myself and like you I’d prefer more liquidity right now for me it is too much work required and easier to own stocks/bonds, etc.
I also just want to clarify that I do not think we are anywhere near a bottom in housing. I do however know you can still make money on RE right now, in this type of market. I sometimes laugh at people that post on here regarding the market and they boast about how they are in cash as if everything has gone down the last 12 months, you can always make money on something in any market, holding cash, and only cash, IMO is not a strategy.
The thing I worried about most that I discussed with my client was the quality of the renters. I’m not exactly convinced that just b/c you don’t have a mortgage you aren’t completely levered up with auto loans/credit cards, etc, that they might lose a job as I believe more job cuts are almost a certainty or that if inflation continues on the current path and costs of things like food or gas continue or go up from here that they can continue to afford the rent.
On another topic:
BR I’m waiting for a post and some charts from Jake on the durable goods #’s today???
> Taxes: $350.00. HO Ins. $125.00.
I congratulate you on these low numbers; had I been able to get my costs down to this, I might have elected to stay put rather than sell. Mine were more like $475 taxes and $300 insurance. I also congratulate you on obtaining $2550/rent. We are happily ensconced in a clean, desirable 3/2 townhouse @1600/month, after electing not to spring for the $2000-2200 needed to rent a 3/2 SFH in Plantation. I’m with the other folks here who think that it’s incomes that support rents/mortgages, and that the current gap between the two must narrow further before owning makes sense.
Terminal velocity puts a lower bound of 0 on the acceleration of a falling human being.
There is no such lower bound on the acceleration of a falling house price.
btw – that’s a good thing.
@Raul –
So you’re clearing $367/mo on a $75K investment, for a yield of 5.872% on an illiquid asset.
I note that you neglected to mention maintenance costs, which ought to run about $250/month on average, assuming a mere 1% of property value/year, so the return is maybe more like $117/month for 1.9%/year.
And then there’s the hidden expense: the value of your time being spent hassling with paperwork and renters.
Risks:
Market value of the property could continue to fall, or simply not rise for a really long time.
Rental rates could easily fall due to the sustained glut of housing inventory and recessionary downward pressure on wages.
Property taxes could easily rise as cash-strapped communities seek fiscal stability. This has just bitten someone else I know who owns a rental.
The renters might trash the place.
That’s a fair amount of risk to be taking for relatively modest rewards.
Typically, the real estate cycle takes about 10 years from the peak to the point where the peak is regained.
Typically, the absolute bottom is about halfway through, or about five years after the peak.
Also typically, there are 3-4 years in the middle during which prices really don’t move much, hovering within a few percent of the absolute bottom.
More than in any other market, bottoms in real estate are drawn-out processes.
My own feeling is that the bottom will occur “about” 2010-11. But for most buyers, there’ll be good opportunities for a year or two on both sides of the absolute bottom.
-btc
The biggest problem with discussing “picking the bottom” is that people assume the recovery will be V-shaped. Who here would care where the bottom is if the recovery were L-shaped? Not nearly as many. Why? Because most people still are holding real estate and are waiting to flip, or get out, or get back in at the bottom.
My view is that we will find a bottom and then trade sideways for several years. The economy will be in such pain that there will be little incentive for asset appreciation.
Speaking of L-shaped recessions —
What if the flat part of the “L” lasted for about 1,000 years? Like the dark ages after the fall of Rome.
I think it’s a real possibility.
Wisdom Seeker,
Your calculations are wrong. The maintenance is included, HOA. Everything else is on the renter. The return is not based on $75K. The increase of value of the property, whenever it occurs, will be on the $300K the house is worth. Also, $75K wasn’t my investment. I got a 4% RE Commission and all closing costs paid by seller. Oh, I forgot to mention it was a short sale and the BPO came at $345K?
Fellow South Floridian, the numbers are real. The insurance is by Homewise and the taxes are roughly 2.1% of the assesed value, which you can fight with the state to adjust to a realistic level not the 2006/07 level. One can consider the bottom may be six months away or two years away. But, the RE cycle is 10 years and we peaked at 2005/2006 depending on the market. South Florida started the run in 2002 and peaked in 2007. Worst case scenario, based on past performance, says we are in for a long haul, but the drop has been so fast that we are moving into the sideways level already. RE should not be for the short term anyway. Best case scenarion, again past performance, this property will be making a solid positive amount of cash flow for the next 5-7 years and then it could be sold with a good profit. Say, 4% yearly on average? On the whole $300K? Not bad!
Worst case scenario, based on the fall of the Roman empire, values continue to fall for the next 15 years, inflation goes to Argentinian levels, we create no more jobs, we lose the war on terror…America cease to exist as we know it… If that were to happen, God forbids (and not likely at all), what do I care what happens to this, or for that matter any other property? People, this is America! Land of the Free, Home of the Brave! We Know How! We’ve been in crisis before and will be again, for sure, but we get out of trouble because we work hard, we don’t give up and we believe in God.
Raul,
what happens if your rental unit blows out a Water Heater, or some such?
are you saying that’s covered by your HOA?
that’d be novel, would love to hear more ’bout that..
Mark, I have a home warranty, $225.00 yearly, which is paid by the renter as per contract. It covers those “unexpected” events. I wish I could talk to you people, these deals are real, I have eleven deals for my clients going on right now, all these deals are going to be positive cash flow deals.
Wisdom-seeker,
Right on. I was wondering when someone would point out the paltry return Raul’s $367 per month represented.
Your assesement of potental risks are right on, as is your point that he failed to account for maintenance/upkeep expense, and has reduced security and renter’s he was willing “to take a chance on.” Add to that the free financing of the security deposit, not a risk I’m prepared to take at this time. But hey, he sounds pleased with the results so rock on Raul.
I’ve been reading this website for what seems like many months now. Maybe a year, I guess. Like the writing and opinions. This is first time I’ve ever been moved to comment, because:
I’m reading this series of comments, and keep seeing “our friend” (in John McCain speak)Raul urging everyone to consider the wonderful bargains available in buying real estate for rental property. And I can’t help but be reminded by a bit of wisdom shared by my own parents, to the effect of, anytime someone is trying very hard to convince you to buy in to an investment, you can bet that it is not all that great a deal, due to human nature, as the investment-seller would just go on ahead and keep making all the money himself without inviting you along for no reason if it was really all that good a deal.
It just seems very simple in the long run — we built way too many houses, and we are losing way to many careers that offer wages to pay high prices for housing. Supply way up. Demand way down. Price collapses. Until we remove the supply (through selling inventory at bargain prices) and/or add demand (through job/wage growth/population increases).
My gut feeling tells me we are hurting worse next year at this time. And worse still five years from now. Seems like a mighty big mess. One that might just crash the whole ball of wax.
Huh?
Not sure what the laws are like in Florida, but I’ve never lived anywhere where “routine wear and tear” can be put on the tenant.
Which means, in my experience, that you need to reserve for:
1. Carpet replacement every 7 years
2. Repainting every 3 years
3. Appliance replacement every 7-10 years. In Florida I would imagine that includes A/C units which are not necessarily cheap.
Obviously, you might be lucky and get a tenant who sticks around for 10 years, doesn’t break anything and demands none of the normal “wear and tear” upgrades. But more than likely you’ll have tenants who stick around for a couple of year, generate “normal” amounts of wear and tear, and force you to deal with these items every few years.
Or maybe Florida law allows you to hit somebody with charges for normal wear. I suppose it’s possible, but somehow I doubt it.
That said, most successful real estate investors I know will tell you that the point to the investment is to pay for itself for 10-15 years, at the end of which you make your money on the appreciation when you sell. You don’t get into it thinking it’s a big source of cash flow unless you’re very fortunate.
-btc
BostonJoe, this is the first time I participate in any kind of forum or blog. No, I do not want to sale anyone here on my idea. I wish I could have a shot at that becuase I’d sale some of you on it. It is a good idea and I am a great salesman.
BelowTheCrowd, the properties I buy are all tiles, no carpet. For the same reason you’re pointing at. Painting the outside of the properties is not mandatory. High pressure cleaning of both walls and roof is, and it costs me $160.00 every three years. Appliances are not my concern because these are properties I bought to hold for a max of 5 years. The ones I have for the longer term, for my retirement, all have new appliances when I bought them, either as part of the deal or I paid for them, and yes, they should last in average 10 to 12 years. A home warranty policy already replaced one of my AC units and another replaced a water heater -Yes we do heat the water in Florida!-
MainePotsAndPans, Thanks. That’s the point. I like what I’m doing and so far is working for me.
The bottom in prices will be something like 100x monthly rent, nationwide.
Some places, like the SF Bay area, will probably end up at around 120x or so. (They’re at 200x now.)
Some of the square states will probably hit 70x (at 90x now)
We’ve got a long way down to go, still. Especially if rents start to head down, as they do every recession before this one.
Again, WHEN doesn’t matter nearly as much as HOW MUCH. Where I live, HOW MUCH means 40% more down, after already falling 20%… WHEN pales in comparison to that, and is really only trivia.
Who the f**k has $2,500 for monthly rent? How many jobs in south Florida pay in this range?
i do know of a few people who are paying 2500 $ month rent in s Fla . They live in Boca with a pool , have 4 bdrm/3bath . No way , some one would pay that for 300k house
before my one buddy rented he sold similar house in the neighborhood for over 600 000 !!
Pablo, the house was bought recently for $300K. A couple of years ago was sold for $575K. It’s a nice, large, single family home in a very good school district (already a premium for families) and it is on a lake.
Kidbuck, many!