Calm Down On The Housing Thing

The Uncommon Sense Blog ^ | 2/27/08 | Dan Taylor

[slackattack19]

If I read one more article on the depressed housing market I'm going to overdose on Zoloft in an abandoned builders model home and wait for the repo guys to find me and call 911. Enough of the housing market news already. There's lots more going on than meets the eye here. Some huge dangers but some equally huge opportunities. Here's what I mean:

1. THERE ARE TOO MANY HOUSES FOR SALE- No kidding. Really? Not so fast here. Except for some truly overbuilt markets we have about a 9-12 month supply of housing inventory versus the normal 6 months. It's the same situation that car dealers face in each new model year. About August the new models come out. The old ones are still on the lots. Too many cars and not enough space. Some get discounted. All eventually get sold...

[org.whodat]

LOL!! LOL!!! Where did this writer get his advanced degrees in real estate!!!

[ClearCase_guy]

Roughly 30% of the potential buyers in the world for US Real Estate will come from Europe and the Middle East over the next ten years.

Buying the houses that Americans can't buy?

[2banana]

Real estate has never been cheaper in the US. It has never been more available in the US. It has never been more accessible by the rest of the world than right now. Roughly 30% of the potential buyers in the world for US Real Estate will come from Europe and the Middle East over the next ten years. Think they know something we've forgotten?

I throw a huge BS flag. Real Estate is STILL massively expensive. It needs to drop a minimum of another 25% to even get back to historical ranges. Europe and the ME are in their own soon to be popping RE bubbles. They ain't coming.

PS - what are historical norms?

1. 100 x monthly rent = cost of the house
2. 2.5-3.0 x yearly gross income = cost of the house
3. 40% (MAX) monthly take home pay should equal cost of monthly carrying costs of the house (PI, taxes, utilities, upkeep)

We are SO not there yet...

[SF Republican]

Real estate has never been cheaper in the US Wow, that IS good news, does that mean I can buy my first home like my parents had, including the $28 mortgage payment?

[RightWhale]

Nobody is buying, nobody is selling. Just sit and wait. Except those whose payments have increased for some unknown reason to more than their income. They’ll dump you out into the snow at 40 below on the marge of Lake Lebarge.

[KarlInOhio]

The good people need to band together and sue the banks that loaned them the money that they didn't understand everything about. The bad people need to understand the speculation has it's risks.

Oh, if only they had been given something to read before they signed the mortgage they could have avoided this... no, wait, they could have just read the mortgage before signing it. Sorry, not feeling much sympathy right now for people who got zero down interest only ARMs.

[Adammon]

I was in Ft. Myers last Fall and three major builders were running full page 30-50% off sales.

30-50% off of 150%-200% inflated prices isn't exactly a 'deal'. Regardless of the 'deals', people still aren't buying, which means that the prices still have to come down, possibly to lower than the costs of building; which is only more damaging to an economy because it makes builders less likely to build in the present, and in the future if they can't make a decent return on their investment.

When the stock market is down, I'm all for buying because the stock market truly only continues to go up. When you're paying inflating prices for housing, it takes a long time to recoup that investment.

[steve86]

House inventory is the same situation as a car lot. I quit reading there.

[illiac]

What he really fails to mention, purposely, is that it is much harder to get a loan - even for qualified buyers. Also, with more inventory, less sales take place, and finding comparable sales for a real estate appraisal (if the property is financed) continue to dwindle. This all makes for appraising a home at a sales value more and more difficult.

[griswold3]

http://www.rbauction.com/twincities/index.jsp

Attention Twin Cities
Absolute Auction!!
26 new homes for sale!
Good luck!

[fireforeffect]

1. 100 x monthly rent = cost of the house
2. 2.5-3.0 x yearly gross income = cost of the house
3. 40% (MAX) monthly take home pay should equal cost of monthly carrying costs of the house (PI, taxes, utilities, upkeep)

Used these when I bought, weirded out my search realtor.

Never have had trouble making a payment.

[misterrob]

Your numbers are out of whack. If you suppose that a 3 BR house with 2 baths in a nicer area is going to rent for $1,400 per month with a yard and some parking that house is supposed to be worth only $140K? If you can get $17K per year in cash from the place and pay out only $8.5K in mortgage and interest, not to mention getting depreciation benefits that reduce your taxable profit to only $5K, with even a 3% appreciation rate per year it’s a killer investment with 20% down on the property.

[cinives]

My parents first home in 1954 cost $14k - it was a small 3 br 1 ba tract house, probably only about 900 sf. Formica counters, each room was small, bathroom was about as big as someone standing upright. I think their payment was about 68 a month on a 20 yr loan. Of course my father was only making about $2400 a year.

Tell me, what do we consider a typical starter homes today, and at what salary level ?

Today’s starter salaries are at least 10x or more what they were in 1954, so 10x the house cost is not necessarily unreasonable. Add in the oversized starter house at about 3x what it was in 1954 and there’s your answer.

[2banana]

Here is one I just ran:

Monthly Rental Amount $2,400.00
Percent of Year Unoccupied 5%
Annual Cash Flow (minus vacancy) of $27,360.00

Property Acquisition Cost $300,000.00
Less Down Payment - Cash In $60,000.00
Amount of the loan $240,000.00

Payment Monthly Principal/Interest $1,556.64
Annual Insurance Cost $1,200.00 (LOW BALL)
Annual Taxes $1,400.00 (LOW BALL)
Annual Repairs Budget $600.00 (LOW BALL)
Percent of Rent Mgmt Fee of 6%
These expenses total to Annual Cash Out of $23,521.28

Income of $27,360 minus cost of $23,521 = $3839 cash return over cash out

$3839 divided by cash investment of $60,000 = Rental Yield of 6.4%

This assumes some appreciation for the loss of the $60,000 down payment and that you have decent renters.

[Myrddin]

I just moved my son from San Diego to Pocatello. His real estate firm was located in the Eastlake development of Chula Vista. About half the houses there have never been sold or occupied. The contractors continue to build to comply with their contracts. Lots of unsold, unwanted housing. Property values are dropping and lots of buyers are upside down. Many are on their way to foreclosure. My son went from $8K/month to having difficulty feeding himself. Transactions were taking so long that buyers, sellers and finance companies became impatient and terminated them. Lots of work for my son's agents, but he doesn't get paid unless the transactions close. Getting away from that dysfunctional market was necessary.

[Attention Surplus Disorder]

I’m in your camp, that SFH homes do not cashflow.

But I might add, you’re also forgetting the foregone interest on the $60K down payment at whatever interest rate you’d like to use...roughly another $2K a year even at today’s poor rates.

[elpadre]

There are available homes for sale in my region, but I can’t see where their advertised price has been reduced. They are offering some help on closing costs and maybe taking offers that aren’t necessarily known, but I can’t see much difference in pricing.

[Cicero]

Rental housing is seldom profitable in itself. You can make money on it, but usually only in a rising real estate market.

I.e., let’s say you manage to break even for ten years, and then sell for double what you paid.

But that’s clearly not a good bet today.

[2ndDivisionVet]

I have to agree with some of his points. Look at how many homes there are in DFW under $150K just on Craigslist, for instance: http://dallas.craigslist.org/search/rfs?query=&minAsk=0&maxAsk=150000