home ownership, renting, double dip, good for whom?

[Rich Weese]

My day started with getting ready for a trip tomorrow to Cancun. Fun, excitement and grand kids.... Then, I made the mistake of reading news reports and picking up the USA Today.
Front Page headline article "Cities see rise in rental homes". Shouldn't have read it. Opening paragraph states that over 500 large and mid size cities have seen homeownership drop and increase in renters. Good or bad?
The 4 million foreclosed homes in last 5 years will cause long lasting changes, reduction in neighborhood stability, and eliminate the # 1 method folks have created wealth over the last 50 years-their home equity.

Irvine increased from 40-50% renters in last 10 years
25 cities now have more renters than owners
Since 206,rental households have grown 692,000 a year
Since 2006, owner-homes have dropped 201,000 a year.

Then I read some more articles that talk about a DOUBLE DIGIT drop (11.6%) in RE values currently.

Then I read some more articles that seem to say the dream of home ownership might not be so good any more. Concern about more drops in values. Continued foreclosures. Potential cuts to home owner subsidies. Possible elimination of interest deduction on taxes.

It seems to me, when I start to think deeply about this, maybe there is a move afoot to turn U.S into renters. Who does this benefit? Why would someone not want to be positive about real estate ownership. Isn't this where the majority of estates have been created? What if we can't see benefit in owning real estate? What does that do to values? Why would lenders want to loan on a bad future?

There is definitely a positive in renting currently. In many cities you can rent the same home than what you would pay in mortgage pmts. If you didn't believe in value increases, or were constantly being told that is no longer the best route, why would you do it? Even with the low interest rates, govt assistance programs, mortgage re-dos etc, the prognosis is not good. We've been told we're on the mend, yet the facts tell a different story.

Why would govt want this? Could it be beneficial to them? Take away that dream and create more dependence on Big Brother? Higher inflation wouldn't matter as much or would it? Would this help create a more "level playing field for all" if the # 1 wealth creator was taken away? Would this be helpful? Would this lead to more "socialistic" approach and need of Big Brother involvement?
I told you this messed up my day!! I don't have the answers. The increased demand for renters is good for my rentals, but if the buying public doesn't believe owning real estate is a good thing, aren't we screwed? Feel free to disagree or tell me I'm nuts. In this instance, I hope I am. Rich

[Bryan Hancock]

Unemployment is the big problem. Even those that are employed are worried about losing their job and competing with 20% of the population to find another one. I doubt we will see a significant rise in homeownership until employment improves drastically.

[Michael Zuber]

Rich as you and Bryan know real estate is not really a point in time investment. Meaning there are so many factors going on at any one time it is tough to pick a bottom or a turn in the market until it is several quarters behind us.
So all of this negative press is just part of the process and we will have more pain. Just wait until a big bank or fannie or freddie goes back to the government and says whoops we need another $5B-10B. We have lots of pain a head but when we come out of this in 5-10 years the people that bought at distressed prices will be the ones with all the money.
Time heals all wounds and memories fade with time and so much of the capitalist society is based on Property ownership it will become a good investment again.
I can;t wait until Newsweek or Time magazine has a cover story that says Home Ownership is OVER. They have proven to be great bottom pickers in the past.

[J Scott]

Originally posted by Rich Weese:

Would this help create a more "level playing field for all" if the # 1 wealth creator was taken away? Would this be helpful? Would this lead to more "socialistic" approach and need of Big Brother involvement?

Most economists would say it's just the opposite...

If anything, the tightening of lending in this country over the past several years will create a bigger disparity between rich and poor than it will level the playing field.

Think about it -- who can qualify for loans these days? Pretty much only those who don't really need loans (those who already have money).

Those with money and credit have a rare opportunity in this economy to create much greater wealth...those without money and credit have been shut out of the game, and have less opportunity now than in recent history to break free from the working class.

[Chris James]

Allot has changed in this country the last 20 years. We live in economically volatile times. In "the old" days people worked for a company their whole life. We live in a different world now. People are much more likely to work for many different companies during their lifetime and because of this to move quite frequently. They take jobs in different cities and must be willing to re-locate on short notice. This is one big factor I'd say. There are many benefits to renting over owning. James Altucher wrote an interesting article about this recently. Although I or you may not agree with him about some or maybe everything he writes he does raise some interesting points.

http://www.jamesaltucher.com/2011/03/why-i-am-never-going-to-own-a-home-again/

But what's the impact on people looking to own houses for investment purposes? Maybe it's not so hot for people looking for appreciation. But more renters mean higher rents right? I always thought that rents and the price of homes were inversely correlated. Rents are supposed to move up as the price of houses go down.

[Bryan Hancock]

Ahh...those "evil" corporations cooked it up to give people fewer job choices. The truth is out now ;-)

[Cheryl C.]

I agree with Michael. This too shall pass. Memories are short and the American Dream will be back. Meanwhile LL's will make alot of $$$.

[Rich Weese]

Cheryl- How about embellishing on the "dream coming back" feeling you have. What will cause this? Higher income? Easier qualifying? Better tax treatment? I'm trying to figure out how this dream returns.
Times are really different. So much wealth has disappeared with market crash and reduction in real estate values that no longer exists. Less assets for borrower to be able to qualify with. Lower income. Fewer foreign investors buying real estate here. I just have a hard time seeing it return.
I also have serious questions as to what the administration is doing in this mess. Telling us we're on the mend, when no facts support it. I'm sceptical. Rich

[Bryan Hancock]

Where have you seen that fewer foreigners are investing in real estate here Rich? I have noticed just the opposite anecdotally over the last few years. Australians and Canadians are really looking to put money to work here.

[Cheryl C.]

Rich,

I'm up here in the Northern Virginia/DC area and follow the regional housing blogs. I believe people truly want to buy but are afraid that prices might fall or they will lose their job. I think we have a group of 25-35yr olds that will buy when unemployment eases up and the horrific stories of their friends buying at peak fade. We are well off peak pricing and affordability levels are at decades lows. Our vacancy rate is 3.5% (half the National average) and rents are up 8%YOY. I'm happy to have them rent for ten years, but they will buy eventually. Remember, marriage and kids are delayed from earlier generations. Once those kids come, they will be buying. Just my opinion.

[Rich Weese]

I agree on the Canadians, due to the recently strengthened canadian dollar. There was a time when a development in FL was 60% European ownership. No longer. We've also lost the Japanese due to their "lost decade". I've been lucky enough to travel extensively and chat with many guides in other countries as well as with residents and investors in those countries. There is serious concern in our stability and many are expecting China to take the lead. No real knowledge on the Aussies attitudes.
I just don't see the wealth and wealthy to play the real estate game as it once was. Rich

[J Scott]

Originally posted by Rich Weese:

So much wealth has disappeared with market crash and reduction in real estate values that no longer exists. Less assets for borrower to be able to qualify with.

Artificial wealth...not actual wealth...

This "paper wealth" was the result of bubbles...artificial inflation of the stock and housing markets...

Things have merely returned to about where you would expect them to be given long-term trends; unfortunately, Americans over-leveraged themselves based on the paper wealth, and are now feeling the sting of bad decisions.

People just need to take responsibility for not saving and investing intelligently when times were good...

[Bryan Hancock]

Artificial or real....It is still a negative wealth effect and that is why people aren't spending money. We're having a long, muddle-through recovery....but it is still a recovery.

[J Scott]

Originally posted by Bryan Hancock:

Artificial or real....It is still a negative wealth effect and that is why people aren't spending money. We're having a long, muddle-through recovery....but it is still a recovery.

Agree on both counts. The real estate market is lagging the rest of the economic improvements, but that shouldn't be a surprise given the extent of the market crash and how tight lending standards are...

[Bryan Hancock]

Forgive my engineering spelling in my last response. I corrected it above.

The last chart on this site:

Calculated Risk Unemployment Chart

shows the percent job losses relative to peak employment month. The red line at the bottom shows how anemic job growth has been this cycle. To say that the recovery is slow by historical standards is a ridiculous understatement. Until consumer confidence in their job returns there will be little boost to the housing market.

[Ophelia Nicholson]

I'm going to agree with Cheryl and Michael and others in this thread and say this too shall pass. I'm sure in the 1930's it was probably unimagineable to have a time where people would have jobs and weren't starving but we saw that time.
I'm originally from Jamaica, Jamaican and US housing are so diffrent at least when I left jamaica. I've been in mortgage business for 10yrs worked at lot of mortgage companies and lenders and one thing I can say for sure. The mortgage industry will never die- they make way too much money.
In 2001 when I first started buying houses, houses would sit on the market 365+ days with noone buying, people seem to forget that when you think about days when saw a house listed and it already had 20 contracts.

Bottom line of what I'm saying is that mortgage will never die, homeownership will never die because its too engrained. Its the way people know they have achieved something. Like wow look at me I bought my first house, wow I can raise my kids here, Wow this is my own and noone can tell me to get out- Unless I stop making the mortgage payment..lol
Right now what we are seeing is a rearrangement of wealth. Over the past few years we have what I would call a feast and you could walk into 711 and have a clerk hand you their real estate agent card cause they did it on the side. Or they heard about how their friend bought a house with only $500 down and 1 day out of bankruptcy. They sold the houses, they walked away with cash, everyone and their mother was the greatest investor alive!
The powers that be sat back and saw these things (geez I'm kinda sounding like the bible now) and the powers that be said Wow we have made lots of money with mortgage and now these poor little ants are starting to gain wealth too- Lets let them enjoy for a quick second and take it away. Okay I'm done acting like a fool- seriously too many average people were gaining wealth in the form of real estate whether it was actual wealth or paper wealth so the market crash, the people came back to reality and we start over again like any great cycle.
The market will come back because now the big dogs are buying and holding and now they are more powerful cause they have more money and house prices are cheaper.

Editing post- I'm editing my post to say I read where this guy said when he walked into his building one day his doorman was giving him stock tips- I think this was in the 1930's or so not sure-if anyone knows who it is please enlighten me, and he said okay its time to sell my stocks, When the average person starts giving you tips you know its time to get out of it- Shortly after the stock market collapsed.
Thats what happened to real estate- the average person was a real estate guru or so they thought. But the stock market is still alive even after a crash so too shall real estate and home ownership continue

[Account Closed]

ophelia, i likd most of your post,but i wanted to interject a thought here real quick...you briefly mentioned the contrarian view at the end..well, right now, just about everyone and their mother is saying that "it's a great time to buy", and "it will come back"..what do you think of that?? not bashing your thoughts-again, i liked your post...but when i go out to eat, and the server or bartender asks what i do, and i tell them, and they suddenly start spitballing out what they've all heard on the news...it does worry me a bit...i guess wha i'm saying, is that if everyone believes this country will recover, and they also believe it's a great time to buy, then what would the contrarian take on that be?? and for the record, i'm one of the majority that says/hopes it'll come back as well--just think it'll take a long, long time :)

[Ophelia Nicholson]

Hope I'm not rambling on and on

Bryan you got to look past what they are saying and focus on what they are doing. Yes they think its a great time to buy but ARE THEY BUYING?
Nope they are followers and they are waiting for the news to say fire sale buy now - everyone is buying you are missing out. Then they will run in droves and swallow up because they feel they are missing out. Obviously you don't care if it comes back or not because you are still rehabbing and you are still buying cheap real estate and fixing it up for cash flow so obviously you are in a better position. It would be great if it came back to 2005 or 2006 levels but that isnt stopping you from making money with how it is now. The longer it takes to come back the richer you will probably be and for me I kinda hope it stays down for a long time so I can buy up neighborhoods.
You have to understand how markets work- not that I have the greatest understand myself- its all just my thoughts. I traded forex and news doesn't predict where the market is going. It merely pushes the market further in that direction. For example housing data is lagging or telling you stuff that is already happened not what is happening now but maybe a month or a quarter ago. So sometimes unemployment reports would come out and the news would be big but the market barely had any movement because the market had already taken that data into consideration. The point is as long as banks are lending there will be people buying- it may not be in the droves or herds like we have seen in the past few years but you've got to remember that when rates where double digits people still bought houses, when you needed to save up 20% for down payment people would still buy houses. So tomorrow if they change it 30% down guess what people will still buy houses.

[Peter Seely]

I personally think many investors are sitting on the sidelines and waiting for unemployment numbers to improve,US soveriegn debt crisis to be resolved, EU debt issues to be solved, US dollar to increase and overall global economic confidence to resume. I also think foreign investors are worried about the US dollar's future. How many Europeans are buying US real estate right now?

We talk so much about real estate values and indicators but lets not forget about the falling US dollar. Will it continue? Will it remain as the reserve currency? What effect will this have on imports/exports? What are the implications to investors should the US dollar continue to fall?

The whole economy is scaring the hell out of me right now. I want to jump in the RE market but than you get another crappy result from an indicator and it scares me away. Everything is in cycles, and we are just riding through one of these cycles. I have to keep reminding myself of this. Martin Armstrong's economic confidence model is an interesting theory, check it out.

Your nervous nelly
Peter

[J Scott]

Peter,

Real estate is local, and it's unlikely that global economic forces are going to have a major impact on a single (or small set of) real estate investments.

All of the serious investors I know, very few are sitting on the sidelines, and most believe this is one of the best opportunities to generate real estate wealth in our lifetime...

Personally, I think a lot of people are going to look back at these times and realize they missed a HUGE opportunity...

[Tim G.]

As with most things, you get in when others are getting out. That's when the real money is made.

Look at the stock market in the spring of 2009.

[Account Closed]

I'm sure the housing sector will come back. It may take 5 or more years yet. In the mean time there will be many great buying opportunities.

[Rich Weese]

Charles- How will we know the "great buying opportunity"? There are many that bought 2 years ago or a year ago, thinking it was one of those opportunities, only to find further retraction of prices. Is today the day? Then we read about another 11.6% retraction in prices and more to follow.
For increases in prices (or even just a stoppage in further price decrease) there has to be more demand and less supply. That isn't happening anytime soon.
The other concern not really mentioned is ugly inflation. That home that was 100K 3 years ago and is now 70K looks like a good deal. However, when you consider the actual value of the dollar 3 years ago compared to the $.80 it is actually worth today, it isn't such a great deal. (this is a guess on dollar power, someone can find the actual value) I see as inflation increasing as the printing presses work overtime to keep up.
My first hand experience with travelling to MANY countries the last few years points this problem out quite easily. When the Canadian dollar is higher or equal to ours, that is a HUGE change over less than a decade. When the peso (going to Cancun in a few hours) is relatively equal to our dollar over the past 5 -10 years, that is a giant change. My trips to Cancun decades ago were always showing more pesos per dollar. No longer the situation. Then I go to Estonia, Latvia, Lithuania, Poland, Hungary, Bulgaria and other Danube River countries and feel sticker shock at the cost "in dollars" of a Big Mac and I see the hidden inflation and devaluation of our dollars' power. It is everywhere.
I hope 5 years is enough but not sure. A pretty good guess, imo. I just see dollar losing power, real estate prices still dropping in face value, and a 3rd problem-unemployment. Here are the 3 strikes against us currently.
1. Real estate not finding the bottom yet.
2. Dollar buying less every month/year
THREE!!! Unemployment which also leads to lower paying jobs needed to qualify/buy that real estate. We are flooding the job force with grads that aren't finding jobs, burdened with big college loan/debts and forced to move back home rather than entering the real estate buying arena.

It still looks like a triple whammy. There are areas or pockets that have shown some progress, but is it long term? Even if you buy a property that stays the same in price for a few years, with inflation, you should've waited the few years for same price/better deal. That is why there are so many sitting on the sidelines, rather than investing at present. Lots of concerns .
A silver lining---I listed my residence for sale here in the terrible Florida marketplace. The day it hit the MLS I had an offer, countered the offer at 2K less than listed price and had a deal. Selling price was 6% higher than I paid a little over a year ago. (it was nor foreclosure/short sale at acquistion time or now-traditional sale) Have since made friends with the buyer and we're progressing to a closing late June. I also had the same response to the flip I did here and shared in a thread recently. Three quick offers and a decent close.
What does all this mean? I guess different people will see different meanings. I admit confusion on my part. I've never seen this triple whammy going on at the same time in 40 years of investing in real estate. Rich

[Account Closed]

Every deal I purchase has to pencil and make sense. I look for cash flow that is positive and for value add opportunities in any purchase that I make. I find a good number of properties that meet my buying criteria.

In my market we haven't seen to many large drops in market value. There have been modest drops in prices. Lower end homes are selling quite well. Homes over 400K are taking much longer to sell.

I take a long term view on my purchases and so price drops are not that great a concern. I'm seeing rental rates increase and the vacancy factor dropping.

Part of the inflation factor is rental rates so as a landlord I will be enjoying some of the benefits of inflation while paying more for other things.

[J Scott]

Originally posted by Rich Weese:

Charles- How will we know the "great buying opportunity"? There are many that bought 2 years ago or a year ago, thinking it was one of those opportunities, only to find further retraction of prices.

Anyone who bought two years ago and is getting positive cash flow, has their tenants paying down their mortgage, was able to resell for a profit, etc, executed on a great buying opportunity.

Every day is a great day to buy if you find a great deal!!!

[Cheryl C.]

I agree that real estate is local. Some areas will recover faster than others. Although my region was whacked pretty good, the outlying (exurbs) took it on the chin. Certain close-in areas were hardly hit. I agree that it will be years before we see some decent appreciation but, again, this will vary.

As to the foreign buyer's, they represented 7% of sale in 2010 but according to "Splash" the numbers are swelling. I've recently seen 2 purchases in a small development in SW FL. One Aussie and one from Argentina. Granted this is a tiny sample but overall 18% of all agents (nationwide) reported a sale to a foreign person.

Our current Market reminds me of the 90's, although this is much worse. I follow inventory and the Virginia suburbs are maintaining at about one-third of peak. Our unemployment in Northern Virginia is in the mid 4's. Lending will loosen in a few years.