You Say Potato… I Say The Market is OK…
July 31st, 2008
We all see different things in different objects. Data though – data is supposed to be cold hard facts. You’re not supposed to be able to twist data around for your perverted pleasure.
So. The other day, I made mention of a Forbes article which points to over-inflated property values in the Outer Sunset district.
And today, I read the news from the National Association of Realtors. The article is aimed at REALTORS – NOT at the general public.
Their take on the SAME data that Forbes provided?
That the Outer Sunset is a Neighborhood Where the Bubble Hasn’t Burst!
Pardon my French but WTF?
Two completely different viewpoints taken from the EXACT same data.
The article from REALTOR.org reads:
In a report for Forbes.com, Hotpads.com, an aggregator of rental listings, produced a price-to-earnings spread for each ZIP code in the country’s 40 largest cities by comparing rental costs with buying costs for similar properties, based on number of bedrooms, location, and price per square foot.
A price-to-earnings ratio, or P/E, expresses how much a buyer has to pay for each dollar of return. Buyers in high P/E neighborhoods pay a huge premium to live in the area relative to how much it costs to rent a similar property there.
A high P/E can simply mean a neighborhood is overpriced, but it can also indicate where buyers have gambled that the area will ultimately appreciate further, turning an overpaying buyer into a smart investor.
I added the emphasis – because this is where I get thrown for a loop.
So? Which is it?
Well – I’m not sure. Frankly, even I’m confused.
And each party has different motives.
There’s no denying that bad news sells. Is Forbes manipulating the data?
And there’s no denying that if consumer confidence falls further, real estate prices will continue to fall. So it the National Association of Realtors trying to spin Forbes article to make things look more peachy-keen?
My verdict? It’s a combination of both. And neither. The real answer is that NO ONE HAS THE ANSWER.
If you need to buy a home, and plan to stay AT LEAST 5–7 years, then chill out. You’ll be allright. Prices will appreciate enough to make up for any market slowdown that’s going on now.
But if you are looking to buy for the short term – then stop and back away from the mortgage. I can’t think of one good reason to buy unless you like throwing away your hard earned money.
Want more answers? Contact me. I’ll try to walk you through it. But as you can clearly see – no one has a crystal ball, and even data doesn’t give us enough insight for us to draw any real conclusions.
I agree that no one knows what will happen, but I question your assertion that if a current buyer holds on to their home for 5-7 years, they will be “allright”. Perhaps they will be happy and healthy, and they may even enjoy owning their home, but there is no sure bet that their house will not lose value for much longer than 5-7 years; case in point, Japan, where there was a property bubble in the 1980s to match our own; prices there declined for 14 years, from 1990 to 2004, and are still way below where they were at their peak.
Comment by marakima — July 31, 2008 @ 9:26 pm
Marakima – I agree. My assertion may be off. I don’t have a crystal ball. But, most ecomonist agree that the market will pick back up sometime in 2009. Historical appreciation in SF (prior to the “boom”) was about 5% per year. At that rate, even if values decline a bit more this year, they’d allow a homebuyer to purchase a home, enjoy the tax benefits of homeownership, to build some equity and sell at a small profit down the line.
Historically – the best time to buy has always been “yesterday.” Back in the 1980′s when the market here was doing really bad and interest rates were ridiculously high, my parents had the opportunity to purchase a home in the Inner Sunset. They hesitated because rates were so high (though they could afford the payment at the time). By the time rates went down, prices went up and they could no longer afford a home. They both rented until they met their respective new spouses (they divorced years ago) and wouldn’t have become home owners if their spouses hadn’t owned homes when they met them.
I think people need to factor in the financial implications of owning a home. But, it’s much more than just a financial investment. And in my opinion (not everyone’s opinion, I know) buying a home is still a wiser choice for someone buying for the long-term that is throwing away money on rent that provides no opportunity for appreciation, and offers no tax benefits.
There’s a risk in most every investment (at least anything that isn’t FDIC insured). The stock market, for example, is volatile, yet people don’t raise an eyebrow at having a large stock portfolio. But a home, a tangible investment that provides all sorts of benefits aside from just the financial ones, is seen as risky. I don’t get it.
In short, I really believe in homeownership as an investment – and the longer the term of homeownership, the better.
Comment by admin — July 31, 2008 @ 9:46 pm
I have nothing against ownership, and I’m no RE professional, and do appreciate your insight; I think that especially due to the inflationary monetary policies of the Federal Reserve, owning can be a great thing. I do have to call you on one thing, though — the idea that paying rent is throwing money away. Rent goes to maintenance and taxes, plus provides for (hopefully) some return on capital for the owner. Here in the Outer Sunset, those maintenance costs can be frightfully high: in the 2+ years I’ve lived here, my iron gate has rusted away, and the rest of the house is in noticeably poorer shape than the day I moved in (and not because of me!). I’ve heard that maintenance typically averages 1-2% of the home value per year; assuming the lower number because of our high SF prices, that would be $6000 yearly on a modest Sunset home. Seems high to me, but maybe you have better data. Add in taxes and insurance, and that comes to quite a bit of the rent. In my case, I’m self employed and can deduct 1/2 my rent for tax purposes (based on sq. footage use), so there’s a benefit there as well. And insurance, especially if you want quake protection. So, it’s my layman’s guess that at least 1/2 of monthly rent goes to fees that would be paid by any homeowner.
Comment by marakima — July 31, 2008 @ 10:00 pm
Marakima – I have to be honest – I didn’t realize that any portion of rent can be used as a deduction when self-employed. But that’s why I don’t EVER try to give my clients tax advice!
I think that $6000 a year for an average Sunset home is probably fairly average. Some years are of course better, some worse. Roofs are expensive. Fences are relatively cheap. Moisture damage or fungus can be expensive. Water heaters are relatively cheap (at least compared to a roof.) So while I don’t have actual data, I do think that’s fairly accurate. And the closer you are to the beach – the worse it will be. (I live on Great Highway, and even though our house is fairly new, I can already see rust bleeding through the stucco in places, the finish on my gate bubbled and peeled off and we even chose aluminum for the gate because of the rust factor, and my mail flap is rusted almost in place.)
I guess you’re saying that you’d be spending money on maintaining your home anyway, and when paying rent, you’re not paying for maintenance. But a lot of maintenance increases the value of your property, so it goes back to investing in your investment (sounds redundant, but it is true.) And while maintenance isn’t deductible, taxes are.
And while you’re investing in your investment when you’re a homeowner, you’re investing in someone else’s investment when you’re a renter. And, you lose the opportunity to earn some return on the money shelled out every month.
But – renting does have it’s advantages. In this market, any place you buy won’t be as nice as the last place you rented. If all you can spend each month is $3K, your rented home will be much nicer than anything you can get with a mortgage payment that’s just $3K. And, you don’t need to worry about maintenance. When something breaks, the landlord comes to the rescue. And of course, in SF, there’s rent control, which protects you from increases in your housing costs. (I’ll reserve my opinion on that matter till another time – short version is that I’m not a fan and it’s not used for what it was intended – which is to be sure that people don’t get priced out of their homes.) So renting isn’t bad, and in fact, for some people it’s the best option.
And P.S. – Thanks for sharing the tax benefit of renting for the self-employed. I love it when I learn something new!
Comment by admin — July 31, 2008 @ 10:40 pm