Home buyers need to buy for right reasons
By John Rebchook on August 27, 2010 · 1 Comment · ShareThis
(Editor’s Note: I normally write about keynote speakers at real estate events. But this morning, I was the keynote speaker at the Aurora Board of Realtors. Following is my speech, with a few tweaks. John Rebchook)
The stars are aligned in a way to create the best conditions for home-buying I have seen in almost 30 years of writing about real estate.
You all know the reasons.
Mortgage rates are at historic lows, hovering around 4.3 percent for a 30-year-fixed rate loan.
Sellers, whether they are individual or banks, are motivated, providing bargains for qualified buyers. Many homes, especially at the higher price ranges, are selling for not only far less than what they commanded three or four years ago, but less than the replacement cost.
The number of unsold homes on the market, while still low by historic standards, rose 14.6 percent in July from July 2009, giving buyers more choices.
No sense of urgency
Yet, I have never seen a time when there appears to be more home buyer apathy in the Denver area. The key ingredient of a robust buying market is missing: A sense of urgency.
Of course, the reluctance to sign on the dotted line goes well beyond Denver.
Everyone here saw the report by National Association of Realtors this week that dominated headlines. To recap: Nationwide, existing home sales in July fell 25 percent from a year ago and 27 percent from July 2009. In Denver, existing home sales were down 19.5 percent from June and 26.6 percent from July.
MUF-bust
Blame it on what I’m calling the MUF – Media, Unemployment and Fear
The fear factor, of course, is fed by the lack of consumer confidence, which is a nice way of saying that for the vast majority of people, there is no guarantee of that they will be able to hold on to keep your job. And while the unemployment rate is 8 percent in the Denver area, slightly better than the nation’s, earlier this year I attended a conference where the chief economist for the Colorado of Department of Labor and Employment said when you include people who are severely under-employed, or who have just given up on trying to find a job, the actual unemployment rate is probably at least twice what the official statistics show.
All of that, of course, impacts peoples’ ability to take advantage of great mortgage rates and attractive home prices. In addition, a recent RE/MAX International report said that 29 percent of the homes in the Denver area are underwater. In other words, almost a third of the homeowners don’t have any equity in their homes, making it very difficult to move-up.
Beyond all of those fundamentals conspiring against buyers, there is the media, which largely missed the housing melt-down, and doesn’t plan to make that mistake again. It’s trying to get ahead of the curve, whether that is a double-dip recession, deflation, inflation or all of the above.
There are more reports in the media, including InsideRealEstateNews, my blog, about the downside of buying homes than I have ever seen.
Shooting messenger doesn’t help
But don’t shoot the messenger.
It’s simplistic to say just because there are critical stories about homeownership in the New York Times, The Wall Street Journal, Denver Post or InsideRealEstateNews, for that matter, they are driving away buyers.
First, just because they are exposing the downside, or potential downside, of buying a home, doesn’t mean they are wrong. And frankly, with my blog at least, I’ve devoted far more space to fundamental reasons that bolster the case for now being a good time to buy a house than the reverse.
And be aware that the press tends to be much more of a mirror, reflecting what is going on, then an engine that powers a trend.
Yes, undoubtedly some people are reluctant to buy a home, because of nasty headline, and there have been plenty of them. A recent one in the New York Times shouted: “Housing Fades as a Means to Build Wealth, Analyst Says.”
And closer to home, I recently wrote about a report from the Everitt Real Estate Center at CSU, in conjunction with the Colorado Association of Realtors, which claimed that overall, homes in the six-county Denver area have only appreciated 7.1 percent from 1999 to 2009.
In other words, if you bought a home for $100,000 in 1999, 10 years later, that same home would only be worth $107,100.
Other reports, whether from Metrolist, S&P/Case-Shiller, or the U.S. Government’s Federal Housing Finance Agency, have reported long-term gains many times 7 percent during that period.
But if the CSU analysis is accurate, it is particularly chilling in a couple of respects. The most obvious reason is that homeownership has long been pitched as a good, long-term investment. As the late Texas developer giant Trammell Crow once said: “The secret to great wealth is to own real estate and live a long time.”
Are homes long-term investments?
But if you dig a little deeper, if the conclustions from CSU are correct, it is even more ominous. During that stretch of time, the inflation rate was 28.8 percent. In other words, if your home after 10 years of ownership is worth only $7,000 more than what you paid, you’ve actually lost close to $22,000 in real dollars – without even including the cost of buying and selling. That is because your $100,000 in 1999 dollars has the same buying power as $129,000 in 2009 dollars.
The CSU analysis concludes that only Douglas County and Broomfield County, with a 10-year appreciation rate of 26.3 percent and 24.5 percent, respectively, came close to matching the inflation rate. In Arapahoe County, the long-term gain amounted only to a half of one percent, and Adams County saw a 2.7 percent decline.
But to be fair to homeownership, and put it in perspective, there were not a lot of investment opportunities that performed well during that period. The S&P 500, for example, lost almost 10 percent from 1999 to 2009.
That said, buying a home is not like owning a broad-based index like the S&P 500. No one owns an “average” home, just like no one has an average kid. Buying a home is much more akin to buying an individual stock. In other words, make the right purchase, and your individual investment can soar, no matter how the overall market performs. And unlike a stock, something made of bricks and sticks, very seldom falls to zero.
Still, for generations raised on the notion that home prices can only move one way – up – the recent downturn is jaw-dropping.
$6 trillion in home values lost
Nationwide, it’s been estimated that $6 trillion dollars of housing wealth has evaporated since 2005. SIX TRILLION DOLLARS. To put that in perspective, that is about a trillion dollars more than the economies of either China or Japan. In my book, it’s pretty staggering to have lost more in home values than the GDPs of the world’s second and third largest economies!
And if you use a conservative, back-of-the envelope calculation, Colorado’s share of that $6 trillion loss equates to about $120 billion. (Colorado accounts for about 1.7 percent of the owner-occupied homes in the U.S., but the median price of a home in the Denvr area is about 31 percent higher than the national medium) In other words, the loss in home values is more than six times the size of the State of Colorado’s budget of $19.2 billion.
Dean Baker, co-director of the Center for Economic and Policy Research, a think-tank in Washington, D.C., estimates it will take two decades to recoup that $6 trillion, and when adjusted for inflation, we will never again see the peaks we experienced in 2005 and 2006.
That’s a lot of doom and gloom. And when you include the so-called “shadow market,” of unsold homes being held by banks, which haven’t hit the market yet, there is concern that home prices will tumble yet again, as sellers are forced to compete with another wave of distressed properties. In other words, another reason not to buy today.
Yet, you would think that given all of the negatives in the market that no one is buying a home. And that is simply not true.
Sales volume rising
In the first seven months of the year, buyers paid $6.2 billion for homes in the Denver-area, almost 7 percent more than the $5.8 billion during the same period in January. Granted, 2009 was a terrible year, and much of the activity was fueled by the federal home buying credits, even though the subsequent drop in interest rates will far surpass the $8,000 tax credit for first-time home buyers. Still, this marks the first time since 2006 that Denver has experienced a year-over-year improvement in sales volume.
Earlier, I talked about the CSU analysis that traced home appreciation in the Denver area starting in 1999.
Now, let’s visit another metric: Home ownership rates.
According to the 2000 U.S. Census, the homeownership rate in Denver stood at 52.5 percent, a decade ago. By contrast, the homeownership rate in Archuletta County 70.6 percent in rural Baca County, 67.1 percent. Now, part of that, might be due to family owned ranches.
Making money not only reason to buy
But consider other parts of the country. In New York City, a decade ago, the homeowership rate was a meager 30.2 percent. In Buffalo, where home prices basically never rise, the homeownership rate was 43.5 percent.
In Chicago, the homeowership rate was 43.8 percent, while in Freeport, Ill., a rural town of about 25,000, the homeownership rate stood at 68.2 percent. The overall home ownership rate in California was 56.9 percent, but only 35 percent in San Francisco.
When the 2010 Census data comes out, the percentages are sure to be different, but I’m betting the delta between homeownership rates in rural areas, where real estate appreciation is typically not the reality, wtill remain far higher than in bigger, wealthier metropolitan areas.
Certainly, many people are priced out the housing markets in places such as New York or San Francisco. Even if you have a good income in those places, you may not be able to buy a home, unless the market goes your way and you can use the increased value in your existing home to trade up. But to do that, you have to get in the game – take the plunge and all the risk accompanying buying a first-home.
But the flip side of that, and I apologize for taking so long to get to my point, is that people buy homes in places where they don’t look at theme as a growth stock, destined to go through the roof. If you talk to people who live in small towns across the country, they will tell you the same story. Unless something happens that makes the town a trendy tourist attraction, or a big company move in and goes on a hiring spree, their only appreciation comes from paying down their mortgage. Yet, that does not deter them from buying, instead or renting
Although I in no way have a crystal ball, I suspect once people weather this current part of the housing cycle, they will continue to buy homes in the Denver area. But they won’t buy homes with dollar signs blurring their vision.
Instead, they will buy a home because the it meets the needs of their family, it is in the price range, they like the street, they like the school district, it is convenient to work. While they won’t ignore the potential for appreciation, it won’t be the driving force, either. When people start buying for the right reasons, they may buy more homes than ever
