As promised, we are returning with our North American Housing Price Index. We do not claim that this is completely representative of North America as a whole, only that it is honest and not massaged to put a spin on things.
Our first result was a bit of a shocker, even to us: A drop of 9.65% in one month! So, whatever you might be hearing about 'green shoots' - it's not happening in residential real estate.
We noticed the pull downwards was from a lot of distressed properties (i.e. foreclosures) being brought to market. Since there seems to be no end in sight for the foreclosure flood, this trend will likely continue.
Tune in next month for our update.
Showing posts with label real estate. Show all posts
Showing posts with label real estate. Show all posts
Monday, June 15, 2009
Friday, May 8, 2009
Las Vegas, NV: Bellweather of Doom
Our co-writer made a post a while back, laying out a brief case for the collapse of present valuations of American housing stock. He forecasted (and still forecasts) an estimated 87% drop in value for desirable, non-redundant living space, along with almost every mortgaged houseowner ending up 'under water.'
According to the basic number we've seen bandied about, approximately two-thirds of all houseowners have mortgages. We can surmise, without too much imagination required, that if house prices do indeed plummet 87% or so, almost all of these mortgaged houseowners will be 'under water,' and will likely default on their debt. This will of course create an enormous glut on the real estate market, and devastate the debt-addicted banking system of the United States, and indeed the world.
Our co-writer is now partly vindicated, by the original Icon of Sin: Las Vegas, Nevada. In a recent Wall Street Journal article, a study shows that 67.2% of all homes in Las Vegas have "negative equity;" or, in the common tongue, the owners owe more on their mortgage than the house is presently valued. We point out that 67.2% is right around two-thirds of all houses (and thus virtually every owner with a mortgage is 'under water'); Las Vegas is now the bellweather of the United States housing collapse.
It is difficult - if not impossible - to put a time-frame on this collapse, but we are confident that said collapse is both in progress, and cannot be halted in real terms. However, the Federal Reserve's attempts to rekindle inflation will likely succeed, and when that day comes some of these 'under water' houseowners will at least have the succor of having their nominal property values resume an upwards march. That will be a phyrric victory, but we suspect that realisation will take some time to dawn on the average American citizen.
According to the basic number we've seen bandied about, approximately two-thirds of all houseowners have mortgages. We can surmise, without too much imagination required, that if house prices do indeed plummet 87% or so, almost all of these mortgaged houseowners will be 'under water,' and will likely default on their debt. This will of course create an enormous glut on the real estate market, and devastate the debt-addicted banking system of the United States, and indeed the world.
Our co-writer is now partly vindicated, by the original Icon of Sin: Las Vegas, Nevada. In a recent Wall Street Journal article, a study shows that 67.2% of all homes in Las Vegas have "negative equity;" or, in the common tongue, the owners owe more on their mortgage than the house is presently valued. We point out that 67.2% is right around two-thirds of all houses (and thus virtually every owner with a mortgage is 'under water'); Las Vegas is now the bellweather of the United States housing collapse.
It is difficult - if not impossible - to put a time-frame on this collapse, but we are confident that said collapse is both in progress, and cannot be halted in real terms. However, the Federal Reserve's attempts to rekindle inflation will likely succeed, and when that day comes some of these 'under water' houseowners will at least have the succor of having their nominal property values resume an upwards march. That will be a phyrric victory, but we suspect that realisation will take some time to dawn on the average American citizen.
Saturday, March 28, 2009
An Investing Quandry
The Depression is making investing decisions more difficult for everyone it seems. A friend of substantial means just yesterday said he wants to keep more money "in the mattress." We don't doubt the literalness of his words.
Even we, who have made a career of making decisions, find assessing risks very difficult. In particular, an interesting situation has come up that has us stumped. We have become aware of opportunities to purchase real estate at what seem to be very attractive valuations. But yet we are somewhat paralysed.
We ask ourselves: Is this a value trap? Are the neighbourhoods - though adequate now - doomed to decay? Are cities which are not very prosperous (or with large non-prospering segments of their population) at risk of social disorder?
In happier times, we would have assumed that having done our homework to select the best investment candidates, we could expect fruitful results. We have always done well 'buying the dips'. Under the present circumstances, it seems wiser to err on the side of caution. It grates against our indwelling optimism to resist any bargain, but with 'the world turned upside-down' that conflict is a state we will simply have to adjust to.
Even we, who have made a career of making decisions, find assessing risks very difficult. In particular, an interesting situation has come up that has us stumped. We have become aware of opportunities to purchase real estate at what seem to be very attractive valuations. But yet we are somewhat paralysed.
We ask ourselves: Is this a value trap? Are the neighbourhoods - though adequate now - doomed to decay? Are cities which are not very prosperous (or with large non-prospering segments of their population) at risk of social disorder?
In happier times, we would have assumed that having done our homework to select the best investment candidates, we could expect fruitful results. We have always done well 'buying the dips'. Under the present circumstances, it seems wiser to err on the side of caution. It grates against our indwelling optimism to resist any bargain, but with 'the world turned upside-down' that conflict is a state we will simply have to adjust to.
Saturday, March 21, 2009
Your Single Best Investment
The notion that housing is an investment certainly has a lot of egg on its face these days. But behind every bubble, is a grain of truth. The truth behind the housing bubble is that affordable, paid-for, owner-occupied housing in reasonable repair is an excellent investment for many reasons.
What was lost sight of in the recent bubble was the affordable part, and the paid-for part. The system's idea of making housing affordable was to wildly dole out loans no matter how large, and uncovered by income.
The simplest rule-of-thumb for defining what is affordable is the house value should be no more than twice the household income. This is a figure that doesn't get much air time. More typical multipliers are higher. They are propogated by bankers (who want people to borrow money) and real estate agents (who want higher commissions).
People often buy houses to live in at an affordable multiple, but then hang on when market-based appreciation takes the multiple higher. This seems innocent enough, but is actually a mistake. The primary reason is the cost of property taxes which, in most places, is proportional to market value. The cost of both insurance and repairs typically rise to some extent with market value as well.
If you live in an area where you can't find a decent house in a decent neighbourhood for twice your income (or less), move to an area where such houses abound or accept that you will be a renter. It is as simple as that. Don't compromise the quality of the house or the neighbourhood to find a house to buy in an expensive area.
The paid-for part is very important. It is not an easy thing for renters to save up two years of income to buy a house. Mortgages are indeed a great convenience when used wisely; but absolute poison if abused. Once taken out, the mortgage should be paid as quickly as possible. The indebted owner should consider a severe austerity until the mortgage is extinguished - perhaps applying as much as half the household income towards it. This will pay off a mortgage on an affordable house in just a few years.
And now to the reasonable-repair part. There are two ways of turning your house into a money-pit. One is buying a house with excessive deferred maintenance, such as the "fixer-upper" that should have been torn down or the house that "just needs a new roof." A professional inspection before purchase may save a world of hurt after the purchase. Never buy serious problems, unless you are a skilled construction worker, or the price is low enough that you can perform the repairs within the overall purchase budget.
The second way to turn your house into a money pit is to over-maintain it. Your house is not a piece of precision military machinery, so it does not need to always be in tip-top shape. A little shabby is not a bad condition for a house to be in. Let the municipality tell you when you need to re-side.
The chief advantage of owning the house you live in is that you have avoided paying for two significant costs: the bank and landlord's profit on renting to you; and the taxes on the money you would need to earn to cover said profit. As an investment, the owner-occupied house has the benefit of a guaranteed customer and a return more certain than every other investment.
The affordable, paid-for, owner-occupied house in reasonable repair is a great benefit to households, and ultimately to society as a whole. This latter benefit is perhaps at the core of the good intention behind the out-of-control promotion of 'home ownership' at all costs - the paver that led the world to a bit of economic Hell.
What was lost sight of in the recent bubble was the affordable part, and the paid-for part. The system's idea of making housing affordable was to wildly dole out loans no matter how large, and uncovered by income.
The simplest rule-of-thumb for defining what is affordable is the house value should be no more than twice the household income. This is a figure that doesn't get much air time. More typical multipliers are higher. They are propogated by bankers (who want people to borrow money) and real estate agents (who want higher commissions).
People often buy houses to live in at an affordable multiple, but then hang on when market-based appreciation takes the multiple higher. This seems innocent enough, but is actually a mistake. The primary reason is the cost of property taxes which, in most places, is proportional to market value. The cost of both insurance and repairs typically rise to some extent with market value as well.
If you live in an area where you can't find a decent house in a decent neighbourhood for twice your income (or less), move to an area where such houses abound or accept that you will be a renter. It is as simple as that. Don't compromise the quality of the house or the neighbourhood to find a house to buy in an expensive area.
The paid-for part is very important. It is not an easy thing for renters to save up two years of income to buy a house. Mortgages are indeed a great convenience when used wisely; but absolute poison if abused. Once taken out, the mortgage should be paid as quickly as possible. The indebted owner should consider a severe austerity until the mortgage is extinguished - perhaps applying as much as half the household income towards it. This will pay off a mortgage on an affordable house in just a few years.
And now to the reasonable-repair part. There are two ways of turning your house into a money-pit. One is buying a house with excessive deferred maintenance, such as the "fixer-upper" that should have been torn down or the house that "just needs a new roof." A professional inspection before purchase may save a world of hurt after the purchase. Never buy serious problems, unless you are a skilled construction worker, or the price is low enough that you can perform the repairs within the overall purchase budget.
The second way to turn your house into a money pit is to over-maintain it. Your house is not a piece of precision military machinery, so it does not need to always be in tip-top shape. A little shabby is not a bad condition for a house to be in. Let the municipality tell you when you need to re-side.
The chief advantage of owning the house you live in is that you have avoided paying for two significant costs: the bank and landlord's profit on renting to you; and the taxes on the money you would need to earn to cover said profit. As an investment, the owner-occupied house has the benefit of a guaranteed customer and a return more certain than every other investment.
The affordable, paid-for, owner-occupied house in reasonable repair is a great benefit to households, and ultimately to society as a whole. This latter benefit is perhaps at the core of the good intention behind the out-of-control promotion of 'home ownership' at all costs - the paver that led the world to a bit of economic Hell.
Thursday, December 4, 2008
Perceptual Wealth
Much of financial news of recent note has typically been about how much money has been sucked into a black hole. People bemoan the falling value of their 'nest egg' real estate; stocks hopped onboard a time machine and revisited the Nineties; California real estate is already in the Nineties, and seems to have a hankering to see some disco. There's a distinct possibility that some financial sharkskin suits might be spotted in the near future, and we wouldn't rule out a resurgence of the Zoot suit.
But what, really, has been lost? In our examples, and indeed in general, money hasn't actually gone down a black hole: all that has changed is the hypothetical price tag on a given investment. Nothing changed physically about the houses in California (usually); the same can be said for stocks. One day they were value X, and the next they were value Y... the bad news: Y was less than X.
Such fluctuations are normal in a market's valuation of a given 'thing,' and are to be expected. Just because 'the market' says a certain Californian condo appraised at $450,000 doesn't necessarily mean someone will actually buy the place. The condo is worth what someone will pay, and not a cent more. Trouble sets in when people confuse a market valuation with 'money in the bank,' and spend $400,000 as if they had already sold the condo.
We suppose it's all well and good to do this when the market is forever going up... but surprise! No market is immune to the inevitable downturn, and now the average Californian real estate speculator is 'under water' (i.e. owe more than their properties are worth). They're saying they've lost money, but have they really? They didn't sell their property, but yet they spent like they had a big pile of cold, hard cash. They thought they were wealthy, but clearly weren't... so what did they have?
Perceptual wealth, dear Reader; the perception of wealth, without actually being wealthy. These real estate speculators (a.k.a 'homeowners') truly believed they were wealthy, and so they spent and lived as if they were wealthy, but in the end what made their 'wealth' wasn't real. It was an opinion, a valuation; it was what someone said the investment was worth. Writ large, the real estate bubble more resembles a confidence scheme, but it all began with someone feeling wealthy because they bought a condo in California.
But what, really, has been lost? In our examples, and indeed in general, money hasn't actually gone down a black hole: all that has changed is the hypothetical price tag on a given investment. Nothing changed physically about the houses in California (usually); the same can be said for stocks. One day they were value X, and the next they were value Y... the bad news: Y was less than X.
Such fluctuations are normal in a market's valuation of a given 'thing,' and are to be expected. Just because 'the market' says a certain Californian condo appraised at $450,000 doesn't necessarily mean someone will actually buy the place. The condo is worth what someone will pay, and not a cent more. Trouble sets in when people confuse a market valuation with 'money in the bank,' and spend $400,000 as if they had already sold the condo.
We suppose it's all well and good to do this when the market is forever going up... but surprise! No market is immune to the inevitable downturn, and now the average Californian real estate speculator is 'under water' (i.e. owe more than their properties are worth). They're saying they've lost money, but have they really? They didn't sell their property, but yet they spent like they had a big pile of cold, hard cash. They thought they were wealthy, but clearly weren't... so what did they have?
Perceptual wealth, dear Reader; the perception of wealth, without actually being wealthy. These real estate speculators (a.k.a 'homeowners') truly believed they were wealthy, and so they spent and lived as if they were wealthy, but in the end what made their 'wealth' wasn't real. It was an opinion, a valuation; it was what someone said the investment was worth. Writ large, the real estate bubble more resembles a confidence scheme, but it all began with someone feeling wealthy because they bought a condo in California.
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