The Mistake Of Regarding Homes As An Asset Class
The Marin Independent Journal reports from California. “Marin single-family home prices jumped 3.4 percent in March as the county continues to deal with a supply and demand problem that’s causing bidding wars among buyers. The median price of a Marin home in March was $987,000, compared with $955,000 in March 2014, and 218 homes sold in the county compared with 219 in the same month the year before, according to CoreLogic. People interested in buying homes are being advised by Bob Ravasio, a Coldwell Banker real estate agent, to make sure they know how much they’re comfortable spending on a home. ‘I always tell my clients to chose how much money to spend based on if you get it you’re not going to wake up the next day and say ‘Oh god, what have I done.’ On the other hand, you don’t want to say ‘Oh man, I should have put in more money,’ Ravasio said.”
The World Herald in Nebraska. “Within three weeks of deciding to stop renting, Dayna Miyashiro and fiance Jeff Allgood signed a contract to buy a midtown house. In fact, they pitched their higher-than-asking-price bid right after laying eyes on 4307 Marcy St. The offer on the 89-year-old home was accepted before sundown the next day. ‘We had to be very aggressive,’ said Allgood, a securities specialist. ‘We didn’t want to miss out.’”
“The couple — he’s 25 and she’s 28 — is part of a wave that many real estate experts believe is resurging locally: the first-time homebuyer. With his family nearby, and UNMC growing, the couple consider the gable-roofed, wood-floored home a wise investment even if the budding internal medicine doc is stationed elsewhere after her residency. ‘We’ll always have a connection to Omaha,’ she said. ‘Buying a home, I know, will be a great investment.’”
The Coeur d’Alene Press in Idaho. “The National Association of Realtors and the Department of Housing and Urban development agree, the way credit scores are calculated needs updating. Credit scoring companies have already taken steps to broaden the criteria to include payments for utilities and rents. By looking at other measurements like on-time payments to a property manager, phone company or utilities under the proposed changes these folks could build a good score through the agencies adopting the proposed new standards. Recent research by Experian finds that the inclusion of utility payments in a credit-scoring model could reduce the number of borrowers considered to be subprime by half.”
“While these things could help the housing market, we are seeing another challenge locally. With 54 percent of our residential sales selling for less than $200,000, a search of the Coeur d’Alene market revealed only 126 homes available below that price. Of that number, nearly half showed accepted offers already in place, waiting for financing or inspections before moving to closing and completing the transfer. This makes it pretty slim pickings for buyers trying to find affordable houses.”
Chicago Now in Illinois. “I did a double take yesterday when RealtyTrac released their March Foreclosure Market Report, including data for Chicago. Since peaking again in August 2012 Chicago foreclosure activity has generally been on a downward trend and actually hit a new low in February. Then the March data comes along and it’s roughly triple what it was in February. In fact, it hasn’t been this high since January 2013. Their on-the-ground intelligence indicates that the spike might have been the result of some kind of backlog that just cleared and released a flurry of activity.”
“Note that the surge is in the two latter stages of foreclosure - bank repossessions and scheduled auctions. Defaults did not increase so the pipeline is not getting fatter and will probably end up clearing faster now. So if this data is correct then we can look forward to a surge in distressed properties hitting the market and a further reduction in the shadow inventory.”
“One of the more interesting points RealtyTrac VP Daren Blomquist made was that back in early 2013 Illinois passed SB 16, otherwise known as the Fast Track Foreclosure Legislation. The legislation did anything but provide a fast track foreclosure process. In fact, with all the additional requirements, not only did it slow down the process but it totally discourages foreclosures of low end homes where the cost of a foreclosure now exceeds the benefit for the bank. So we are ending up with all these low end homes where the owner is in default on their mortgage, the bank is entitled to all the proceeds of any sale, but the bank doesn’t foreclose on the home. These homes become zombie foreclosures and it’s a growing problem for cities like Chicago.”
The Houston Chronicle in Texas. “A new reality is settling in on the local real estate market as Houston confronts its first serious economic hit in years. After years of white-hot growth, some houses are sitting on the market a little longer and builders have started offering perks to lure prospective buyers. One Tuesday morning last fall, Sheldon Bloch checked his computer for new home listings and saw a four-bedroom that looked promising. He and his wife, Pat Deeves, knew from experience they had to act fast.”
“The dogged house-hunters drove past and phoned their real estate agent. That afternoon, Bloch called their mortgage broker and Deeves penned a letter to the sellers. They offered thousands more than the asking price. After almost two years of wrestling Houston’s real estate market at its most challenging, Bloch and Deeves had finally won - and now it was their turn to call the shots. The couple listed their old house in January, then waited. Six weeks later, they dropped their price by $15,000 - and waited another week before making a sale.”
“‘It was the flip side of the fall experience,’ Deeves said.”
From Barron’s. “Rising sales in Dallas and Denver, for example, mean houses now cost more than they did back in 2006; and other markets, such as Boston, Charlotte, Portland, and San Francisco, are very close to their peaks, according to Standard & Poor’s/Case-Shiller. Just as several measures of U.S. economic growth appear poised to accelerate, the three-year residential real estate market recovery is showing signs of slowing.”
“Housing starts, as reported by the Commerce Department, have been in a deep funk ever since the U.S. housing bust and Great Recession hit with such ferocity in 2007. They can’t seem to get much over the hump of one million a year, even though population growth and immigration alone would seemingly dictate construction of at least 1.4 million homes annually. ‘There’s no question the housing recovery is beginning to falter some,’ observes David Blitzer, chairman of the keeper of the S&P/Case-Shiller Home Price family of indexes. ‘Anytime in the past, when housing starts came in at the current annual pace of one million new homes, the economy was in recession. One wonders whether these days something has changed in Americans’ attitude towards homeownership.’”
“Robert Shiller, co-creator of the Case Shiller home price indexes, said, many buyers during the boom years, aided and abetted by real estate industry cheerleaders, made the mistake of regarding homes as an asset class, like stocks or bonds. This is clearly not the case. Homes, in fact, are a consumption item that depreciates, requiring much upkeep spending to hold value. In fact, about the best one can expect in home appreciation over the long term is to match inflation. That’s what a study of U.S. home prices from 1890 to 1990 showed. Actually, Shiller found that prices outpaced inflation by a trivial 10 basis points (a tenth of a percentage point) annually.”
“Shiller detects reluctance on the part of many to shoulder the long-term commitment that a home requires. ‘People are clearly beset by insecurity over their careers, both as a result of globalization and job displacement by computers,’ he observes. ‘We live in a world of first-mover advantage and a winner-take-all economy that makes people fearful.’”
Has Marin surpassed the peak price before the last crash by now?
I would think so Pbear….Pretty much everywhere else has around here including south county…
Maybe not Richmond..
Yeah, your probably correct there…
It’s getting to the point where the banks can make back all the money they lost on the last crash. Once that happens, the Fed won’t give a rat’s behind about the cost of housing, and all the people who think housing can only go up will be asking for mortage relief. Good luck with that.
Home prices continue to rise irrationally here in Fremont Ca. Spill over from frustrated peninsula buyers?
rise irrationally here in Fremont Ca. Spill over from frustrated peninsula buyers ??
Well sure…Always has been that way except for one significant differential this time around…Foreign buyers…And what I mean by foreign is that they are new to the area or have been here for a short period of time, say 5 years…
Fremont for them is every bit as good as lets say Santa Clara or Sunnyvale…They do not have prejudicial opinions on one area over another like long time residents do…
I know someone who paid $1 million for a 50 year old tract home in Fremont.
Yes, its pretty crazy around here right now Colorado…The demand side has not let up largely because of low inventory…Another factor, long time owners exposed to a huge tax bill if they sell and where the hell do they go if they don’t want to leave family etc…They just stay put…
Another factor, long time owners exposed to a huge tax bill if they sell
I know you’re talking about the capital gains tax, but my friend told me that his property tax bill alone is over 10K a year. They are both Silly Valley professionals, so I’m sure they’re grossing around 300K per year (they’re both “principal engineers”). So I guess they can swing it. Still, the idea of paying 1 mil for a crapshack is mind blowing. Denver has become way overpriced but you can still get something far nicer out here for a million.
A single person can walk away w/ $250K tax free on a sale, a couple $500K provided you lived in the house for 2 of the last 5 years, any profit over that is subject to capital gains tax. Another powerful incentive to stay put in Calif. is Prop. 13, it severely limits property tax increases so if you have lived in a house for many years your bill can be a small fraction of what your more recent neighbors pay on a similar house. The typical property tax rate in many Calif. counties is about 1.1%, that would not be bad if the houses were not crazy expensive, was about $100/mo. when I sold my place in 2007 (thanks to the HBB
“A single person can walk away w/ $250K tax free on a sale, a couple $500K”
After throwing $800k at it.
Heck of an investment there….
Well…. not really.
Fremont, CA Sale Prices Dive 7%; Housing Demand Plummets Statewide
http://www.zillow.com/fremont-ca-94538/home-values/
It’s as if half America was somnolent during 2008.
The World Herald in Nebraska. “Within three weeks of deciding to stop renting, Dayna Miyashiro and fiance Jeff Allgood signed a contract to buy a midtown house. In fact, they pitched their higher-than-asking-price bid right after laying eyes on 4307 Marcy St. The offer on the 89-year-old home was accepted before sundown the next day. ‘We had to be very aggressive,’ said Allgood, a securities specialist. ‘We didn’t want to miss out.’”
“The couple — he’s 25 and she’s 28 — is part of a wave that many real estate experts believe is resurging locally: the first-time homebuyer. With his family nearby, and UNMC growing, the couple consider the gable-roofed, wood-floored home a wise investment even if the budding internal medicine doc is stationed elsewhere after her residency. ‘We’ll always have a connection to Omaha,’ she said. ‘Buying a home, I know, will be a great investment.’”
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The house looks nice enough, and she can walk to the hospital. Maybe they think they can be landlords and rent it out to future medical residents, although those aren’t people with a whole lot of disposable income, and by that time they are likely to be underwater. The two of them are spouting real-estate propaganda like they just attended a Trump seminar.
And this is in freaking Omaha, a place that is as flyover as it gets.
#1 % from agriculture of all started
I though ag was in the tank
It was listed at a whopping $148k.
http://www.cbshome.com/homes-for-sale/4307-Marcy-Street-Omaha-NE-68105-146968826
Seems like they made a pretty decent purchase decision.
Paying $150k for a 90 year old fully depreciated shack is a good decision?
You think there might be some shady things going on with that transaction?
Speak to it.
And it sold for $86,000 in ‘98.
http://www.zillow.com/homedetails/4307-Marcy-St-Omaha-NE-68105/75782962_zpid/
Is the economy that much better in Omaha in 2015 than in 1998 to pay 75% more for a house that is 17 years older? I doubt it.
Is that price high for the area? According to local records, the house last sold in April 2007 for $130,000, so it’s possible that the owner finally found a greater fool.
Seems like they made a pretty decent purchase decision.
For a 100 year old house. I’ve seen some of those in my little burg. Contrary to what some say here, they don’t seem all that well built. If really creaky floors are your thing, and you like poor insulation, drafts everywhere, sticky windows, prehistoric heating, and no central A/C (because there is no ductwork), no closets, and having only one bathroom then you’ll love owning one of those relics.
And you wonder why the cost of homes has risen when it seem obvious that the buyers no longer want model T’s but want Rolls Royce autos
Houses used to be 800-1,000 square feet, 2 br , 1 bath, concrete slabs with no built in, but now even the low income buyer wants large houses multiple baths , built ins, and Forced Air or A/C with carpets, Wi-Fi, and cable tv.
there appears to be serious buyer resistance to the small homes of the 50’s and 60’s.
think I am wrong?
You are.
Current resale prices per square foot are 300% higher than long term trend.
This seems about right
We had to be very aggressive,” said Allgood, a securities specialist at TD Ameritrade. “We didn’t want to miss out.
Yep. The old realtor ‘hurry up. Act with a sense of urgency’ ploy.
People are suckers.
LOL.
Shiller: ” Homes, in fact, are a consumption item that depreciates, requiring much upkeep spending to hold value. In fact, about the best one can expect in home appreciation over the long term is to match inflation.”
My experience exactly. On paper my home market value looks profitable but when I look at all the money I’ve sunk over the years into mortgage interest, remodeling projects, closing costs from multiple refinances, roof, windows, etc., etc. I’m about breakeven.
My experience exactly ??
How much would you have sunk into rent over that same period of time ?? How many times would you have had to move or get the apartment dweller from hell that lives next door to you…
Have a place that you know you never need to move has value…To each his own how much value…For me, it has tremendous value…
You don’t want to do maintenance on a house, consider a condo or a townhome or buy a brick house with a tile roof…
Nah. Despite “owning” numerous homes during my working career, I moved many times because of job changes. Was this just my generation’s condition? I suspect not.
Owning/renting does not prevent/cause demon neighbors.
Very true, when I owned initially I had good neighbors on both sides but one sold to some white trash types and suddenly I had a bad situation which was much MORE stressful as an owner than a renter since moving would have been far more difficult.
(thankfully they eventually divorced and the problem resolved itself)
“How much would you have sunk into rent over that same period of time ??”
Probably less. I am reasonably certain our landlords are underwater on their 2004 investment after factoring in all the costs of real estate ownership.
Over the long haul renting would have cost me more. Lately my mortgage payment is below rental parity — and that’s before my mortgage deduction.
“rental parity”
This is debt donkey logic. It will likely cost you a minimum of half a million dollars to approach living quarters this way rather than renting something well below what you can afford.
How many years of your life is that?
Ignoring $2-3/sqft./yr of losses to depreciation doesn’t get you very far.
I’ve owned 3 homes in the last 30 yrs. Each time I sold them my bank account was considerably larger then when I bought them. If that is “depreciation” as the village idio on here keeps repeating. I love it! Currently I rent, no $50k bumps in the savings. But it is only money.
LiarsMath is no substitute. Stick with actual math.
“no $50k bumps…”
There you go. Pay ten times that and take the consolation prize. Why are you not leveraged up now to take advantage of future gains?
timing is everything. I have played it safe since 2007. (too safe)
but ” not losing” was my objective. Anyone who bought in 2003 and sold in 2005 killed it. My house was 5 yrs old, no repairs needed. Kept it for 2 yrs, no cap gains.
Ah, a specuvestor. I get it why you are feeling you are the village idiot if you sat this last round out. You might get another chance here in a couple of years and can double down for wave three. Good luck.
Leverage can just as soon deliver massive losses as gains. Just ask one of the millions of underwater homeowners whose negative equity positions never recovered from the ravages of the Great Recession.
“Anyone who bought in 2003 and sold in 2005 killed it.”
Nothing like cherry picking the most insane mania years in US real estate history to drive home your point!
scdave — I was only agreeing with Shiller that homes are usually not a good capital investment if your primary goal is to earn returns. I wasn’t endorsing renting. Heck no. I hate renting. I would much rather have a bank as my “landlord.” Banks don’t care if you put in orange carpet or paint the walls purple.
Pay a bank double? No thanks.
Rent money from a bank at a loss?
No thanks.
“or buy a brick house”
These can turn no maintenance into “uh oh house fell down” in earthquake country.
Houses never “break even”. Houses are a loss no matter what angle you look at it. Houses depreciate rapidly.
“By looking at other measurements like on-time payments to a property manager, phone company or utilities under the proposed changes these folks could build a good score through the agencies adopting the proposed new standards. Recent research by Experian finds that the inclusion of utility payments in a credit-scoring model could reduce the number of borrowers considered to be subprime by half.”
This is what we do today over and over we change how we calculate a number instead of doing something substantive. All Obama’s claims about tighter enforcement of immigration are supported by changing the definition of a deportation. Just turning someone back at the border was not a deportation until Obama changed it. Similarly, changing how we calculate credit scores does not make subprime borrowers anymore credit worthy. The old way of calculation provided decades of data on the default rates of certain scores, by changing the calculations we will only increase the granting of credit to people that will then default.
Re: California It’s crazy to see the rising house prices in the drought stricken region.
The latest sales in suburban Western Connecticut show sales at the bottom of the slope since 2006.
I hear people complain that their kids are grown and out of the good school system, but that they “can’t” sell. Consequently, the school system is shrinking fast and the cost per pupil is not.
Lower the price.
RE: lower the price
They say their home is worth more and don’t want to sell it for less than they “know” what it’s worth.
I guess they’re stuck with the depreciating asset then.
Re: California It’s crazy to see the rising house prices in the drought stricken region.
My Silly Valley colleagues seem unfazed. I guess they figure they’re all gonna be millionaires someday, and that a mud snake in an unflushed toilet is a small price to pay.
Massive amounts of debt from which you’ll never recover has a tendency to do that.
Bothell, WA Sale Prices Crater 8% YoY As West Coast Inventory Balloons
http://www.zillow.com/bothell-wa/home-values/
“Foreclosures Rose Sharply In March As Repossessions Mounted”
http://finance.yahoo.com/news/u-foreclosures-rose-sharply-march-040100747.html
This is what happens when millions of suckers pay grossly inflated prices for depreciating assets for 15 years.
The World Herald in Nebraska. “Within three weeks of deciding to stop renting, Dayna Miyashiro and fiance Jeff Allgood signed a contract to buy a midtown house. In fact, they pitched their higher-than-asking-price bid right after laying eyes on 4307 Marcy St. The offer on the 89-year-old home was accepted before sundown the next day. ‘We had to be very aggressive,’ said Allgood, a securities specialist. ‘We didn’t want to miss out.’”
Once you see bubbles inflating like this in the midwest region you KNOW the end is nigh. It’s simuliar to the canary of getting stock tips from the shoe shine boy and hairdresser.
California Housing Demand Craters 13% YoY; Down Every Year Since 2009
http://files.zillowstatic.com/research/public/State/State_Turnover_AllHomes.csv
Went to 7 open houses over the weekend in 3 of Chicago’s nicest western suburbs…Hinsdale, Glen Ellyn, and Wheaton. All of the homes were priced in the $700k - $1MM range. The theme was the same everywhere we went. Without exception, we were the only ones there. Without exception, the listing agent could not cover up his or her despondency. And without exception, every house had its own glaring flaws.
A very clear phenomenon is in play among the upscale suburban housing supply. There is plenty of demand for the $500k homes. And as should be expected, the supply of the more expensive abodes is endless, whereas the supply of the reasonably affordable is somewhere in the 3-6 month range. The higher end price reset is inevitable, it shall finally arrive when the folks wanting to sell turn into folks having to sell.
What I’ve noticed is that there seems to be a hole in the demand — in my neighborhood, smaller houses in the $250,000 price range sit for an extended period and eventually are bought by builders, who promptly bulldoze them and build McMansions priced at $600,000. Those houses have been selling.
And I suspect the same in St. Charles, Campton Hills, South Elgin, Geneva and the like - CRATER!!!
A little more color on high end Chicago suburbs…
Lake Forest…the idyllic locale made famous in such works as The Great Gatsby, Ordinary People, and A Staggering Work of Heartbreaking Genius, to name a few…is primed to be the poster child for the inevitable high end Chicago home price decline.
Redfin currently lists a staggering 176 homes for sale for over $950k in Lake Forest alone. On the year, a total of 18 homes have sold there for over that price. Granted, January to April isn’t exactly prime Chicago buying weather. That said, 31 such homes sold during this same time period in 2014 (compared to 93 sales in the last 12 months, so January to mid April 2014 was actually above the monthly average over the last year).
A little simple math…176 current listings DIVIDED BY 18 closed 2015 sales MULTIPLIED BY 3.5 months (January thru mid-April) EQUALS 34.2 months supply! We could go nearly 3 years without seeing one more Lake Forest listing…who knows, perhaps 2 Cubs World Series crowns…and there would still be houses to be had in Lake Forest.
Perhaps the supply will let up, you say? Well, 9 new $950k+ listings…TODAY!
Few opening lines are better than The Great Gatsby:
“In my younger and more vulnerable years, my father gave me some advice that I’ve been turning over in my mind ever since. “Whenever you feel like criticizing any one,” he told me, “just remember that all the people in the world haven’t had the advantages that you’ve had.”
Perhaps old F Scott Fitzgerald was referring to the folks with jumbo mortgages.
Signing a mortgage contract…from elation to despondency in multiple strokes of the pen.
A nation of hoarders…….
http://curbed.com/archives/2015/04/20/in-nation-of-hoarders-self-storage-spots-outnumber-mcdonalds.php
thats sad you get so much junk you cant fit a car in the 2 car garage, i do know a few older vinyl dj’s that rent a climate controlled space for a few hundred a month…but i guess to them its a business expense to store 20,000 records….but if i get that bad it would be to a shink first …not u-store-it
I’m a longtime lurker. Just wanted to say thanks again to Ben & all the posters here. My husband just sold his house–bought & cash-out refinanced before we met. We barely managed to get out of a neighborhood we didn’t want to raise our family in without having to put cash on the table.
We are now enjoying renting a house within walking distance of my son’s school. Hooray!
Freedom from debt, good for you Lizzy!
Smart move!
A generation or two of working families are being tossed under the bus at the behest of investment bankers. Avoid their Kool Aid.
Flipping article from housing wire.
What this does for me at least is affirm what I have been seeing as I peruse the core logic site in Denver area. Seems that many of the 60’s vintage ranch homes are flips - one only need look at the photos and you can see the tell tale signs of flippers doing a really bad remodel to what are sensible / livable homes….The give away is the kitchen and the bath. Just disgusting what these flippers are doing.
http://www.housingwire.com/articles/33612-auctioncom-flipping-momentum-grows-in-first-quarter
RIght before the music stopped last time, the credit standards loosened. Those who were concerned they’d be priced out, loaded up on easy debt and bought those cheapo flips. Second verse, same as the first.
“Accounting: The gradual conversion of the cost of a tangible capital asset or fixed asset into an operational expense (called depreciation expense) over the asset’s estimated useful life.
The objectives of computing depreciation are to (1) reflect reduction in the book value of the asset due to obsolescence or wear and tear, (2) spread a large expenditure (purchase price of the asset) proportionately over a fixed period to match revenue received from it, and (3) reduce the taxable income by charging the amount of depreciation against the company’s total income. In effect, charging of depreciation means the recovery of invested capital, by gradual sale of the asset over the years during which output or services are received from it. Depreciation is computed at the end of an accounting period (usually a year), using a method best suited to the particular asset. When applied to intangible assets, the preferred term is amortization.
2.Commerce: The decline in the market value of an asset.
Read more: http://www.businessdictionary.com/definition/depreciation.html#ixzz3Xsj6wqtL”
Now it appears that depreciation applies to the acquistion price of an asset, and does not apply to the result of past owner ship.
So a 95 year old house has had depreciation in the past, but when the new owner of the property purchases it, the past depreciation is not accounted for in the purchase price or value of the asset. Or rather is accounted for in the purchase price, but a new depreciation may be applied to the asset.
Houses depreciate. Just like all manufactured items.
Got baseball cards from the 1950’s?
its all supply and demand.
A few cards out of hundreds of millions printed?
Houses depreciate. All of them.
every 1950 BB card has increased in value. google it before popping off. Same with thousands of other “manufactured goods.” I think I found the troll on the site. excuse me while I look into this JT extension.
Houses depreciate. Just like all manmade items.
when I sold a 55 MB 300SL for $3,850 it must have depreciated enough so I could get another one today for less money
when I sold my 32 Ford Phaeton for $40, I would pay more for one today than I paid for my house years later.
Perhaps you are using the wrong phrase or you are depreciating , or not appreciating ,the effect of inflation on scarce items.
The 55 year old home that I have now, has appreciated in Market Price, not Market Value, by 2,000% in the last 50 years.
And I find that hard to understand!
Or perhaps you don’t understand what depreciation means Dan… or is it jack?
“On the other hand, you don’t want to say ‘Oh man, I should have put in more money,’ Ravasio said.”
wtf?
Oh never mind, its Ravasio, another sociopath Realtor parasite trying to squeeze as much blood from from his hosts, er I mean clients as possible.
+1
never been a better time to sell, or buy if that is what you need
There is a either a time to buy or a time to sell.
You came here to be schooled. We will oblige.
“Homes, in fact, are a consumption item that depreciates,”
Indeed they do Mr. Shiller…. indeed they do.
“Robert Shiller, co-creator of the Case Shiller home price indexes, said, many buyers during the boom years, aided and abetted by real estate industry cheerleaders, made the mistake of regarding homes as an asset class, like stocks or bonds. This is clearly not the case. Homes, in fact, are a consumption item that depreciates, requiring much upkeep spending to hold value.”
HA’s steadfast lesson seems to have struck a chord…