"That's a powerful cocktail working against the housing recovery," said Mike Larson, an analyst at Weiss Research. "There's going to be a long-lasting psychological hesitancy for ordinary buyers to believe again in the dream of building wealth through homeownership."That's what got us into this mess in the first place, you cretin! Buying a house is merely exchanging cash for a dry place to keep your stuff; it is not a magic "wealth building" slot machine. Nowhere is there written a guarantee that the value of your bungalow will increase faster than inflation and the cost of repainting and shingle replacement. If you want to actually generate real wealth, you need something more than some dirt with a box on it.
I grew up in a town full of corporate gypsies for IBM and HP, among others. If people were going to be there for only a year or three, they'd rent. Heck, if it was just a one year hitch, married men frequently wouldn't even move their families, choosing instead a 1 br. in one of the "No Kids Allowed" apartment complexes that were still legal back then. Yet at the height of the boom, people would buy a house fully expecting to realize a profit in three years or less, which should have set the Dutch Tulip Bulb Analogy warning bells ringing in minds of even the most reckless of gamblers, maybe even congressmen. And yet we have people looking back and viewing that as a normal state to which we will hopefully soon return!
(H/T to SurvivalBlog.)
41 comments:
The irony! It burns!
Someone from the Washington Post longing for the Bush II years?
Shootin' Buddy
I sure am.
Real estate has always been a risk. Obviously the amount of land is limited so demand will eventually increase UNLESS - population decreases, your neighborhood goes to crap, the local economy tanks, etc...
A useful and durable tangible, -- like a house on land you own or a 1911 -- can help protect its owner against currency debasement.
The real difficulty illustrates your point, though. Most of use don't treat our working Colts as ATM machines, borrowing against them to finance consumables.
I will never forget my father's pride the afternoon he walked in and reported, "You are now living in a house that's paid for." The idea of borrowing against it to buy a car -- or anything else -- would have been outside any remote stretch of his understanding.
Buying a house, living in it a few years, then reselling it for more than what you paid is just like that other form of Legalized Gambling, the Stock Market. If that "Buy now, sell later for profit" was true, then the Salvation Army Stores would all be closed down due to the fact that used socks would be worth $50 a pair.
Of course, there are those in the shooting game who think that just because a firearm is old means its worth a Gazzillion dollars. Case in point: purchased a plain old Army issue 1943 Remington-Rand 1911A1 for $200 back in '89, sold it a couple of years later for $200, now they want $2,000-$3,000 for the same thing? Funny, I don't recall having a 1000% inflation rate over the last 20 years, or my gasoline would be costing $27.00 a gallon.
Bubblehead Les,
US military surplus firearms have surged enormously in price in just the last five to ten years.
As with anything, there's a complex dance of supply and demand at work.
They are not making any more. They are immensely popular, what with WWII being a popular topic of movies and video games at the moment. And they are being pursued as tangibles by people using inflated currency which they are gun shy about putting in the markets or real estate.
When you are bidding on a 1911 with your paycheck, you're bidding against a guy who cashed out of his $1.5M 2br/1ba California home three years ago and retired to Oklahoma to take up gun collecting. Who's gonna win that auction?
"Nowhere is there written a guarantee that the value of your bungalow will increase faster than inflation..."
Actually, it's an eternal and inalienable human right, applicable in all times and places, just like access to an MRI machine, free child care with locally-sourced organic lunches, and an above-average wage. Can't you read bumper stickers?
"...and the cost of repainting and shingle replacement"
Those fall under the general welfare clause, or maybe it's interstate commerce.
The bubble mentality is the belief that you can get something for nothing just by following a few simple rules. The NASDAQ bubble gave way to the housing bubble and now we've moved on to the big government bubble. You'll know we've snapped out of it when people stop assuming that each successive bubble-crash can be fixed with a simple something-for-nothing plan that'll easily return us to the something-for-nothing historical norm.
A house should cost about the same as replacing it, less depreciation. 'Less Elvis slept there.
Land should show a profit - if you build improvements that generate income: an apartment, a farmstead, a factory. Build a road on it, though, and much of it kind of "freezes" in value, cause it gets tough for a new purchaser to do much with it.
Did you see where there is wailing an gnashing of teeth, 'cause maybe 2 million of the 8 point something million jobs lost for President Obama's "hope and change" are real estate jobs that will likely never return, because there won't be as many properties changing hands? Or that the "house flippers" will have to find another way to generate scads of income?
Hell, Tam, people with HUD are still trying to put convenience store clerks and part-time waitstaff without money down or credit into houses! HOUSES!
Because everyone deserves to live the American Dream. . .
Helen: "Everyone's special, Dash."
Dash: [muttering] "Which is another way of saying no one is."
Couldn't agree more, Tam.
A few points.
1. You should never assume your primary residence is an "investment." (See below) You may not be able to sell when you need to.
2. In accounting there are only assets (things that make you money) and liabilities (things that cost you money) Your primary residence is a liability. As oh so many people discovered.
3. The Administration loves to blame Wall Street, but artificially low interest rates (Feb) and insanely low requirements for loans (Fannie and Freddie) and laws aimed at making everyone (whether they can afford it or not) a homeowner are really to blame.
Brad K.,
"Land should show a profit - if you build improvements that generate income: an apartment, a farmstead, a factory. Build a road on it, though, and much of it kind of "freezes" in value, cause it gets tough for a new purchaser to do much with it."
True. Real estate can be used to generate wealth. And it's certainly possible for land to increase in value due to other land around it improving (real estate speculation of that sort probably dates back to Sumer and Akkad.)
"As with anything, there's a complex dance of supply and demand at work..."
Correct.
Guns, gold, real estate, or "plastics"...that's all it is and all it was. Emphasis on the complex dance part, though.
AT
A home is a place to hang your hat at the end of the day. IMHO prices are still crazy. I believe this thing is not over. I'm still waiting for the other shoe to drop, perhaps this winter. When homes are 2-3x average incomes (which means less than 200,000 for the average home)and your required to put 20% down...we may then begin to approach something resembling normalcy in this country.
I have been lucky in buying and selling houses during transfers. I own the current one and have no debt in a nice area. It does make you feel like a free man.
My 40 year old neighbor is sweating a jumbo morgage for $600K.
His house would be lucky to sell for half of that. There are two folks in the same age group in even worse shape on the street.
Never assume tomorrow will be better than today.
Gerry
Gerry
And on the subject of Corporate Gypsies...
One of the oil refineries in the town where I grew up had so many people come through on short-term assignments (1 to 2 years) that the company owned several typical suburban houses for these folks to move their families into. Plus at least one fairly large home for the plant manager.
They just took it for granted that you wouldn't buy a house if you only expected to be there a short time. (That was a long-term investment.)
"If you want to actually generate real wealth, you need something more than some dirt with a box on it."
Be it dirt with a box on it or dirt for a box to go in it, it ain't worth anything until some schlub wants it. Demand is the driver of markets ..... which makes me wonder if the Socialists in charge feel more assured about their power when everybody is starving and their stomachs are demanding food...... sure seems they are striving for that.
Ok, this example is extreme but I'll bet this is not that unusual:
http://market-ticker.org/akcs-www?post=166165
Scary.
Man, I know this wasn't the point of the post, But my Fiancé and I would do a great deal to have a place where there were no children to deal with. Barring Kids from the complex would be worth an easy $100/month in rent (that's roughly 10% in San Diego, for perspective)
The only reason I'd buy property anywhere, would be as a place to live out my post-service days. Say, high in the Colorado Mountain, with s little spot to put a house, and a well for our water. Never understood anyone who'd buy a house to resell it, unless they were doing it professionally.
Yet at the height of the boom, people would buy a house fully expecting to realize a profit in three years or less, which should have set the Dutch Tulip Bulb Analogy warning bells ringing in even the most reckless of gamblers, maybe even congressmen.
People would have to know what the Dutch Tulip Bubble is for the alarm bells to ring.
I received a typical middle-class public school education. Got passing grades. Graduated high school in 1985.
If things like the Dutch Tulip mania were mentioned in school they made zero impact in my noggin. I read about that stuff on my own time, in the library. And later, when I enlisted, I kept reading. I loved being stationed in D.C. for two things - girls outnumbered men in D.C. and the fantastic book stores that town had compared to IttyBitty, Oklahoma.
But if I'd never read another lick after high school - many people don't read anything more stimulating that 'People' - I'd have no context to know I should be alarmed by a bubble.
Dirt,
"The only reason I'd buy property anywhere, would be as a place to live out my post-service days. Say, high in the Colorado Mountain, with s little spot to put a house, and a well for our water."
You *do* understand that you'd be snowed in 3-5 months/ year?
jimbob86,
From the tone of his post, I'm not sure he'd see that as a downside. ;)
"But if I'd never read another lick after high school - many people don't read anything more stimulating that 'People' - I'd have no context to know I should be alarmed by a bubble."
Reminds me of something I was reading the other day about how Pizarro managed to capture the Incan Emperor Atahualpa - who was surrounded by 80,000 of his soldiers - with 168 Spaniards, 27 horses and and a single light cannon.
Basically, Atahualpa walked into a trap that would have been glaringly obvious to a European emperor or king. It wasn't because he was stupid (he had just won a civil war against his brother in a contest for the throne), but because the Incans had not developed a writing system to pass down knowledge. Without that knowledge, Atahualpa had to rely entirely on his own experiences, and thus couldn't have learned about similar traps staged in the past and would have had to have come up with the concept himself.
He also couldn't have learned about how the Spaniards had successfully pulled off a similar trap several years earlier when they captured the Aztec emperor or of their technological advantages, both because of the geographical isolation and because word of mouth messages are much less accurate than written accounts. Thus, everything came as a complete surprise for him and his troops, who were completely demoralized by the swift capture of their emperor and by the effectiveness of the Spaniard's guns, steel swords, armor and horses.
I think y'all may be missing something. The number one way that buying a house "builds wealth" is through the equity that builds up as the principal is paid down. This will happen even if the value doesn't appreciate at all. Now you will have to spend some along the way to maintain the value of the property, but if the "useful life" of the property is longer than the the time used to pay off the principal, this will never come close to eating up the wealth you've built up ("equity"). Again, all this can take place without any inflation or price escalation.
Take this extreme case. You've got $150,000 in hand. You can "consume" it -- i.e. spend it on clothes, dvd's, lattes, and the like. Or you can go out and buy a house. Do the latter, and you've "built wealth" -- well, more accurately you've "preserved" it.
Most people do not have the discipline to "save" a significant sum of their income over time. But buying a house more or less forces them to do this.
So, buying the house that you live in will build/preserve wealth. Buying houses that others live in, or that you think you can "flip" in a few months for profit, is a good way to lose wealth. Them's two different things.
@ jimbob86,
I thought Dirt Sailor was clear - he plans to tolerate, somewhat, the other 7-9 months of the year that the world would be likely to intrude.
Snowed in is a term of affluence. Most of the time it means you cannot get your SUV to 7-11 in a timely fashion. When your daily life doesn't start with a key in the ignition, who is to notice?
For supply runs, for medical emergencies, why I read somewhere that in Colorado someone has a snowmobile - or a sled or tobaggon, or even a neighbor, over on the next slope.
In the past, one chose one's mate with an eye to living remote and self-reliant, and raised their family that way. Some still do.
And if the credit crunch/deflation (destruction of non-physical-asset wealth, like mortgage derivatives and consumer debt), Peak Oil (end of the era of cheap energy), and/or the ongoing Obama administration "fixes" to the economy, bites as hard as expected there may be more neighbors for Dirt Sailor than he appreciates.
Anon 10:26,
You keep using "built" but I'm not sure that is the word that describes what you are saying.
"Stored" perhaps, or (like you alluded to,) "preserved".
Putting $150k in a house no more "builds wealth" than putting 150 two-by-fours in a pile "builds a house". It's a great way to store two-by-fours, though. ;)
Anon 10:26,
A couple of quibbles.
Selling a house, regardless of how much the loan has been paid down, adds the full sale price to your gross income for IRS purposes, the year of the sale. Push your gross income over certain limits, and the tax bite gets really uncomfortable - challenging any loan principal you might have paid.
Today loan rates are low. When the market sets the value at an equitable number, though - 6-7 percent? - the amount of interest vastly exceeds the amount of loan principal - the purchase price of the house.
You are correct, that if people take some percentage of their weekly or monthly income, put 30% of that in savings (loan principal), and hand 70% of their "savings" to some random banker, they will accumulate a sizable chunk of money some years down the road. If the mortgage payment were the same amount as you might be paying in rent, then buying the house makes sense.
But a $1500 mortgage doesn't actually benefit that much over $800 rent. With the rent you are more flexible with regard to changing situations, and you have a landlord to come fix the roof. Maybe. Besides that, most homeowner have a very expensive hobby of "fixing up" the place - with tools, ladders, and massive manhour investments in various projects over the years. This can be very satisfying - as well as keeping Home Depot happy - and often contributes to "improvements" at sale time. But if that time is actually needed to produce additional income, say in a second job, then where is the benefit?
A skilled handy person can often get paid for making repairs for the landlord.
Then there is the issue that many municipalities consider home owners major money sources, and levy taxes to match the "current market" values. I notice my local county assessor is still using bubble-era property valuations.
Note that realtors work for the seller, not the buyer. Their living is marketing - motivating the buyer, not assuring the most helpful and factual recommendation for a buyer's circumstances.
Powerful cocktail indeed.
I wonder which one it is that he is drinking to believe such nonsense?
The other fun thing is when people finally realize those underwater palaces sort of look like houses, but are made of cardboard, staples, frozen snot, and wishful thinking.
A couple quibbles.
First, a house *is* actually "wealth". What your private residence is not likely to be, is "income". Even if you don't expect the income for several years, or average it over that time frame.
A person who does not have to lay out income on a recurring basis to live somewhere is wealthy.
Just because the "housing market" has turned, don't get all twisted up in the reverse side of that bubble fallacy. A home is still a good way to spend your money, all other lifestyle choices being equal. In fact, now is probably a really good time to buy one, if you're not too squeezed for cash.
Wealth does not equal income, people. Wealthy people often have relatively little income. One big difference between middle class and "upper middle class" could well be defined as owning your home.
That's why "tax the rich" schemes don't work. You're only taxing the people generating income (i.e. hard-working risk-takers), not the people sitting on wealth.
We are all wealthy, compared to most of the world: we have assets that many would literally kill for, which give us great leisure and choices- again, compared to the rest of the world, if not Bill Gates.
Now, a lot of houses here in the US are simply status symbols. I have many friends with status symbol houses that they are cursing right now. They bought them for "resale value" rather than utility as I did. At the time, it seemed reasonable, I just didn't have the cash flow they did at the time, and was differently focussed: I would rather have bought a second house for a rental(income-bearing property) than put more money into the primary residence to try and flip at some indetermeinate future point.
Brad K- You don't pay income tax on a home sale as long as you have resided in the home for at least 2 years out of the last 5. It is subject to capital gains on any gain over $250k (per sale), with a one-time lifetime exception available that is primarily aimed at seniors retiring and selling their home to live on the proceeds until they kick it.
But a $1500 mortgage doesn't actually benefit that much over $800 rent. With the rent you are more flexible with regard to changing situations, and you have a landlord to come fix the roof.
Which prompted me to think about something I ran into a decade ago: the pool of houses to rent is fairly narrow, now.
Need a two-bedroom for you and your squeeze? Got less than two kids? No problem.
If you have five kids, dogs, and so on, finding a rental house you can afford is really tough.
@ Larry,
About "You don't pay income tax on a home sale". That wasn't what I said.
The full sale price gets added in to income to determine the income bracket, artificially inflating which tax bracket you fall into. Then, later, the payoff of expenses and mortgage are taken off, so theoretically you pay taxes only on the after-cost proceeds - at the inflated tax bracket rate. That inflated rate is also applied for all your income. It was the difference between 33% and 54% tax rate for me, and through my withholdings badly into arrears. The house sold Dec 21, a few years back - and played havoc with my taxes.
"So, buying the house that you live in will build/preserve wealth."
Except that there are only two ways to access that "wealth." You can get take out a loan on what you've paid off, but like all loans that actually loses you money in the long run - you pay more back than you got on the loan. The other way is to sell it - which leaves you without a place to live unless you buy another home, or rent (which leaves you paying out money again).
"But a $1500 mortgage doesn't actually benefit that much over $800 rent."
On the other hand, in the opposite situation you can benefit. My $590/month mortgage payment is much better than my $720/month rent payment - and I don't have to worry about the 3am parties, or the marijuana smoke seeping into my residence from the neighbors, whether this year's ultra-macho frat boys will decide that gay-bashing is fun, or whether I'll be able to park within 5 blocks of my home on football game days. I also don't have to worry about the rent going up every year until I'm forced to move out, then having the landlord screw me over on the cleaning and carpets. (FYI, renting in a college town really sucks.)
Of course, I also don't plan on moving before that mortgage is paid off, either. If I wasn't sure I'll be staying put, I'd still be renting.
Hmm, not bad for me since my wife and I are shopping for a house. It will be our first and last house. The house is less important than the waterfront and dock we want attached to it for our sailboat. The whole purpose of the house is to give us peace, privacy and a launch point for our retirement. It is and never will be, an ATM machine. Something to borrow money to buy and pay off as quickly as possible.
We're patient. We can wait out the shaking out still going on. When upside-down Doug the Idiot is trying to unload his house that he overpaid 3x for, we'll be there to capitalize on his misfortune.
reminds me of the years upon years we could not sell property in the suburbs of New York
City at a quarter of its tax assessed value and after 15 plus years of holding thinking things would turn around we sold it at a third of its tax assessed value to avoid paying what amounted to 15 percent of its sale price received in taxes every year and there, property grievence requires property sale in order to reevalue assessments......thus am a big fan of real estate.never did figure the borrow and "own" concept of using other peoples money to make money.....
Zendo Deb said:
"3. The Administration loves to blame Wall Street, but artificially low interest rates (Feb) and insanely low requirements for loans (Fannie and Freddie) and laws aimed at making everyone (whether they can afford it or not) a homeowner are really to blame."
FWIW, I work for Freddie Mac. We are not blameless, but we are not as culpable as you may think. For instance, HUD, our former regulator, kept raising the percentage of loans that we had to make having an "affordable" or "low-to-moderate-income" designation:
http://www.villagevoice.com/content/printVersion/541234/
Some others in Government (I'm talking about *you*, Chairman Frank) pushed legislation to loosen lending standards as well.
When you are a creature of Congress, as we are, you unfortunately need to listen to politicians as much as or more so than economists. Even now our new regulator is focused on our performance WRT HAMP and other such programs touted by POTUS, at times in direct opposition to our being able to earn a profit and get out from under the current government ownership model (part of the reason that we and Fannie still require infusions of taxpayer cash).
Looking at that whole "infusion of taxpayer cash" thing, think of this - the loss we reported, 4.7 billion, included a 1.3 billion dollar "dividend payment" to the fedgov (since they own our preferred stock), so part of the money they give us goes right back to the Treasury Department. You don't hear about that part though - only that we poured another crapton of your hard-earned bucks down an ever-deepening rathole. See this link for some details:
http://www.freddiemac.com/news/archives/investors/2010/2010er-2q10.html
BTW - at an recent internal presentation it was revealed that of all the outstanding crashing and burning "sub-prime" loans out there, we owned a paltry 9%, and that only after massive government cajoling, bordering on coercion.
A far different story that you will get from the MSM, no?
You house only holds wealth if you can sell it to get your money back. That is the problem now... It is not a wealth building or a wealth holder. It can be a wealth generator if you use it to grow, raise, rent or someway generate income.
Also - you will never own your home while you are paying property taxes. You are just renting... And from the Government no less.
Housing prices will increase when property taxes cease.
Fab post/comments.
Pearls
Anon 8:38,
I read a description of credit - loans - divided into "self liquidating" and "non self liquidating". Self liquidating loans are made to finance money making operations - farmers planting the spring crop, or building a factory expansion for a reliable product line.
Non self liquidating debt is consumer buying, or buying things that won't directly generate then revenue that pays off the loan.
Because real estate appreciated for so long, in so many (but never all) markets, home mortgages were mistaken for self liquidating credit. Apparently. Although I doubt anyone ever really expected the price appreciation to cover the loan, so that is kind of a chicanery to keep real estate agents in Cadillacs and fancy duds.
@ Tam & Brad:
Precisely. And as to getting "snowed-in": did it for the first 20 years of my life, and have done it a few more times since. Getting out is part of life up high.
Yeah, I know very well the interest in U.S. WW2 firearms, and the "Saving Private Ryan/Band of Brothers" craze that swept through. But for $600-$700, I can go to Camp Perry tomorrow (well within my driving distance) and get a nice functional Garand. It won't be pretty, it won't have "Provenance" that Patton used it during the Bulge, it'll be what it is : A nice weapon system that can stop something Dangerous from hurting you and yours. Same with the old .45s. And that attitude is what happened with the Housing Market: People are taking something useful and functional and putting it on to a Pedestal, trying to make it into something it's not; i.e. a Cash Generator.
By the way, have you noticed how much the AR's are dropping in price over the last few months? And the 5.56 is coming down also. Funny thing is, while looking through my copy of the 95 Gun Digest, I noticed that many of the same guns that were for sale back then and are still available today has shown no real change in MSRP. Add some inflation, and modern firearms are actually cheaper (in terms of buying power) than they were 15 years ago. So if I wanted to buy a new Remington 700, for example, now would be an excellent time in terms of value for dollar, and the guy from Cali who moved to Okie can keep the old .45.
Brad K:
Real estate agents (as well as other commission sales people) work neither for the seller nor the buyer, they work for themselves,period!!!
Forgetting this is a great way to screw yourself.
Brad,
The gross sales price of a home is reported on a form that is used to compute the capital gain. Only the capital gain is reported on your Form 1040 and added to your adjusted gross income. Capital gain is basically: Sales price - (selling expenses + purchase price + capital improvements) - ($250,000 exemption for individual, $500,000 exemption for married filing jointly).
So if you bought your house for $200,000 and put an addition on it for $30,000, your "basis" is $230,000. If you sell it for $600,000 and pay $50,000 in commissions, transfer taxes, title insurance, etc. your taxable capital gain would be:
$600,000 - (your selling costs) - (your basis) - (your exemption).
In this case, if you're single, your capital gain would be $70,000 ($600,000 - $50,000 - $230,000 - $250,000). If you're married - no gain.
Anonymous -
Buying houses that others live in (becoming a landlord) is a perfectly reasonable way to acquire wealth. It's just become very difficult in recent years because of the house price bubble. But that's not true everywhere. I currently own rental property in an area that saw no major run-up in prices. With monthly rents at about 1% of house value or more, it gives a modest profit on my investment (the downpayment), carries itself on a cash-flow basis and as the rents pay down the mortgage, "builds" wealth (equity) looking to the eventual sale of the house. Can't do that in most parts of the country yet, which may be a sign that prices still have a ways to go down. My first house I paid $3,000 down, rented out rooms for enough to cover the mortgage, utilities, repairs, etc., lived free there myself and walked away 12 years later with $80,000.
The obvious sign that prices were due for a correction was that in many areas, you could rent a house for less (sometimes a lot less) than HALF of what it would cost on a monthly basis to buy it, even with the low interest rates. I seriously thought about selling my house and renting a much nicer one for the rest of my life on the proceeds, but I'm too lazy to move.
Anonymous said...
Brad K:
Real estate agents (as well as other commission sales people) work neither for the seller nor the buyer, they work for themselves,period!!!
Forgetting this is a great way to screw yourself.
That's why you should not hire an agent but work without one. The money you can save is huge. Plus, if you do buy something, pay cash and don't borrow the money. You don't come out ahead when you don't pay cash. If you can't afford to pay for it, even a house, then you shouldn't buy it.
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