bostonbubble.com

[Guest]

Hurray! Home Sales at Lowest Level in More than a Decade! The story is here:

http://www.nytimes.com/2010/08/25/business/25econ.html?hp

Also James Kwak comments on a story from the day before about how housing has never been a good investment:

http://baselinescenario.com/2010/08/23/housing-in-ten-words/

Enjoy!

[GenXer]

I hope nobody thinks of their houses as investment. It works only if you get lucky. You have to buy very low and sell very high. Some people got lucky, some didn't. There are much better investments. A house is a luxury, a place to live, and a place which you hope gets you some money in the end, but just like any other risky investment - don't count on it. All the numbers 'worked out' only when the market is going up, almost double digits per year. A couple of good years skewed the numbers as well. It will be very interesting to see what happens in 5, 10 years. Most people believe prices are going to go up soon, and will keep going up.

[john p]

Buying a house should be integrated in an investment strategy, but shouldn't, as you say, expect it to be an investment vehicle.

I think the big debate about a house as an "investment" is between the professionals who use the term to categorize investment vehicles and create portfolios of investments that align with risk and time horizons of withdrawl, penalties, taxes on withdrawls etc. The layman sees the term "investment" in a more general way like "investment of my time" and get confused because if they're saving say $500 per month and their mortgage is $2,500 per month isn't it like ignoring the gorilla in the room when you do your financial planning?

I say that your housing is part of your investment strategy. I manage it like a liability. Many financial planners just play offense and ignore defense (mostly because playing defense doesn't give them fees). What I mean is if you have a credit card balance with 15% interest, it is prudent to pay off the credit card than to invest in something that gets you at best 6%.

Another realm of investment strategy with housing is time horizon. If you know you want to live in an area for a long time, maybe it makes sense to refinance at a shorter term to get a lower rate; perhaps by shortening the term you free yourself on the back end for heavy savings? Now, if you're in IT and you go from gig to gig, the house might prevent you from earnings if you had the flexibility to pursue them.

What is interesting is that during the Bubble two things were going on. First, people were looking at housing as a capital investment, and second, people's lives became more portable and in flux. A guy from San Francisco who got a gig in Boston bought a condo even though he intended to live here a few years because not only would he build his savings from the job, but he'd have forty or fifty thousand in price appreciation. If he didn't buy and he rented, his savings wouldn't pace the price appreciation and people were getting priced out of the Market.

I think that financial planners need to look at debt schedules and manage liabilities and create accounts to pay for the furnace that might go or the roof or house painting. Again, most financial planners make their money selling products or investment vehicles and they are all offense and very little defense because again, their compensation is based on what is put into offense. If they tell you to invest $500 a month into their Annuity, they get a commission whereas if they tell you to pay off your Credit Card and come and talk to me when that is done they get a thank you...

If a planner tells you that a house is not an "investment", they might be trying to take that gorilla off the table for discussion so they can get you to focus on what gives them a commission. Be careful of this.

[CL]

Of course buying a house is an investment. Anything that you buy and not consumed (i.e. planning on resale/transfer in the future) should be counted and considered as an investment. Just like if you buy a car that you plan to sell in 5 years, you should consider it as an investment and at least factor in future resale value in your decision.

What people should realize is investment is inherently risky (i.e. since future resale value cannot be accurately predicted), thus it should be managed conservatively to allow a comfortable margin of safety.

[GenXer]

Yes, a house is an investment, but not the one that should be treated as such. Its above all a liability, and for every liability, the most important aspect is to manage risks. Monthly income is good when you have it. When you don't have that, its called emergency cash plus unemployment, if you have it, and finally, if that's not enough, you have a foreclosure (and in some cases, preceded by 401k liquidation). I hope this should be pretty clear by now.

I'm reposting my 'rules' for buying a house from another thread:

1) Financing at most 50% (decreasing the leverage as much as possible)
2) Having your house represent a small fraction of your portfolio (the smaller the better, but not 100% or even 50%)
3) Having adequate cash reserves to cover the mortgage if needed, and and being able to have enough savings to not have to sell when you lose your job.
4) Maintaining a small price to income ratio (say, 3:1), provided the above 3 rules are satisfied.

[GenXer]

John, just to point out something. I know a thing or two about investment products, and especially commission-based investment products, mostly because the first thing I do with my clients is get them out of these monstrosities, which almost always are too costly and illiquid. But this time I think you've landed in bed with the realtors, who keep spreading 'buy a house as an investment' propaganda.

I can hardly find another product with the following attributes:

1) Huge sales commission to sell
2) Closing and other fees to buy
3) Taxes every year, as well as substantial upkeep costs, some of which can be quite random (and large)
4) Very time consuming
5) Very illiquid
6) Just as volatile as the stock market
7) Bought with lots of leverage...etc

If you were to ask me to describe the worst possible commission-based product, I think a house would be worse than that. So let's not discuss how a house is an investment. Its a terrible investment, and you are at the mercy of the markets, pretty much regardless of how long you hold. People buying now will hold for 20+ years, and may not make much money on their houses, if you honestly look at the expenses put into the house. There are plenty of studies that show that even during the good times the returns are meager (on average), but who cares about averages when we have a 5, 10 or 20 year recession? Just because people made money in the past means nothing for the future.

[CL]

A house is an asset, not a liability. A mortgage is a liability, and the difference is your equity (+ or -ve). Simple balance sheet. Keep saying your house is a liability is poor accounting.

People in this forum keep confusing/lumping together the investment decision (buying a housing) and the financing decision (via a mortgage). For instance, if your objective is to gauge valuation of a house (investment decision), using a price to income ratio make sense. But if your objective is to create a healthy buffer for your mortgage (financing decision), then you should use a (mortgage payment + tax)/income ratio for affordability. I find people use these ratios rather randomly.

[GenXer]

Depreciating asset such as a house is a liability. You can separate the process into stages, but you have to look at all aspects at once. As an investment a house is worse than the worst commission-based product available on the market, hence it can not even be in the same league. The idea is to prevent the buyer from ever getting hurt from owning a house. You have to look at the entire picture, including potential future risks and losses - something very few people look at before buying.

[CL]

Depreciating asset is still an asset. An asset is an asset, its market value will go up or go down depending on market condition but that does not make it a liability.

Cash is a depreciating asset in inflationary environment - is cash a liability???

[john p]

A good advantage to buying a house is paying it off.

If you buy a house at age 35 and pay it off at 55, you've got like ten years to sock away savings.

If you rent, you have to rent until you die, so rents keep going up and up and say you want to live till your 90?

You have to look at it like pay a mortgage for twenty years or rent for fifty years.

Of course you could rent and save the delta between buying and hope someday that you'd have enough to buy a house cash, but by the time houses will have appreciated a lot along with the investments...

I think this whole "Investment" discussion came about because people were looking at real estate purchases like short term deals and then paying the closing costs and then resetting the meter back to 30 years.

People are a bit freaked out and not many feel stable enough to settle down and make a big commitment.

I agree with every word you said GenXer.

I understand where CL is coming from but I think it is still a language issue. From a financial standpoint you have assets and liabilities on your balance sheet. The debt is a liability, the maintenance is a liability expense. If the market value is more than debt owed, it then becomes an asset. However, it is risky to do this. My house has gone up and down within a range of $200k throughout the past couple of years. Now as far as time horizons are concerned if you're younger, the volatility is more acceptable, but as you get closer to retirement you should count on more reliable returns i.e. bonds and such.

I explained this same thing to a few friends of mine the other day. As an architect we have fire rated walls, say around an electrical room. Now lets say that a few adjacent walls were built out of similar construction but didn't have the Underwriters Laboratory fire rating associated with their assembly? Now if we had a fire, those other walls have fire resistive properties, but for the sake of Code Analysis, they are unrated partitions and I can not rely on them to meet Code. I think what GenXer is saying is that people were determining their net worth using their house value in the same vain that someone would consider a nonrated wall partition.

I have always appreciated GenXers concern given the risky climate we're in, I think it is appropriate, however, I think his strategy works best for the very wealthy because the process is faster. Most people don't want to rent their entire lives so they hope to get the meter started at some point. I understand whole heartedly why people aren't buying because it is like jumping in a cab when you see bumper to bumper traffic and you can get further faster by walking...

One potential thing that actually might help the economy (stepping back but related to this thread) is that many financial institutions have these Subprime Assets on their balance sheets and they are worth very little using current market value. If the market value of these starts to go up because fewer people default than expected, it will improve the books of these Institutions very quickly. It's a matter not so much of how crappy things get, but how crappy in comparison to how crappy people have currently evaluated them in the Market.... The question is, could the United States Taxpayer stand to gain if these Mortgage backed securities become valuable? I'd love to see the method of how they settled on prices with the Banks. Anyone know?

The change between these Mortgage Backed Securities being on balance sheets as an asset switching to a liability is what caused the Economic Meltdown and it is exactly what the Toxic was in the Toxic Assets Relief Program (TARP). One last note, $550 Billion of the $800 Billion has been paid off by the Banks.

Bush's deficit started with $450 Billion and then you add in the $150 of TARP that hasn't been paid back, and then $100 Billion in Stimulus Relief for the Recession and you get $800 Billion of what Bush is responsible for. In all fairness to Obama, the reduced consumerism and the huge amount of workers not earning paychecks and paying taxes along with the unemployment liability hurt governments revenue streams so you have to discount a significant amount of his deficits. I'm really not trying to get political, I just want people to be able to make those adjustments in their heads so they can really get a better sense of the future. It is part of looking forward and just like GenXer said, just because something behaved a certain way in the past isn't a guarantee moving forward...

[CL]

This asset/liability is not just a language issue - it's a concept issue. A house, regardless of whether it appreciate or depreciate, is an asset because it can generate cash flow (rent or live-in-so-you-don't-need-to-rent). Whether it is a good asset or not is up to debate and valuation, but looking it as an liability is conceptually wrong.

All fixed, real asset will incur depreciation/amortization and maintenance expense. It's true for a house, a car, a factory, a patent, even land. It's true for personal/household balance sheet or coporate balance sheet. That fact does not make it a liability.

All I am saying is one should look at housing as asset, mortgage as liability. Analyzing these 2 aspects require different tools and one should not jam 2 into 1 and looking at it as a liability.

[john p]

I get what you're saying.

I think you're just hearing the prevailing resonse to the prevailing misconception and you're just looking at it from a different perspective.

I think someone said "A boat is a hole in the water that you pour money into". In the same vain, you wouldn't consider a boat an asset even if you could use it to take people on fishing trips etc.

Bottom line is, people, unlike yourself, still think that part of the way to acquire wealth is through appreciation in their house and are relying on that appreciation to retire on as their nest egg. What GenXer is trying to say, and correct me if I"m wrong, is that you shouldn't count on that.

There is a great scene in the movie "Planes Tranes and Automobiles" that this reminds me of


http://www.youtube.com/watch?v=NEZv0FUPtcc

[john p]

oh, rats, this clip doesn't have the part where the couple is shouting "You're going the Wrong Way!", and the guys says "How do they know which way we're going?" and then he gestures like they've been drinking....

[Boston ITer]

[john p]

I get this too. There aren't many places, however that have had flat house prices in the past 30 years. 30 freaking years is a long time and a lot can happen.

http://www.marealtor.com/content/upload/AssetMgmt/Documents/Member%20Resources/Research/ResidentialMarketOverview.pdf

It looks like the average selling price in 1980 in Massachusetts was $59,296 and in 2006 it was $339,065. That's like 5.75 times.

So lets say you bought the place for $59,296 in 1980, and put down 5% and financed at say 10% interest. That mortgage payment would be like $580 back then and like $720 last year and today, it would be just the taxes and insurance, WHICH IS A HELL OF ALOT CHEAPER than having to go out and find a place today and rent in the case that you never bought. Now consider, one person who bought for $60k in 1980 just pays real estate taxes and insurance and the person who didn't buy is paying rent (for a small house might be $2,000 per month) for the next 25 years until they die. I don't know how you can say that my argument doesn't hold up?

On top of that yes, you could have saved more money towards the beginning of the term, but not very long into it the premium you would have been paying for rent above what your mortgage would have been would be negative savings and money that could have been invested.

Yes, you can rent and make a lot of money and then move to a really cheap cost of living area like Albany and buy a house cash. Go for it. I've said before that was a cool idea. The Burlington VT idea might not work as well because the prices are going up there. I get the sinking ship concept but you have to be honest with yourself that Boston is really going to be a ghost town like you saw on the Planet of the Apes movies or a war zone like in the movie the Warriors. As long as people think that Boston is a good place to build a life and career, people will pay a bit of a premium to do business with the talent here. I get that the glory days for certain things might be done and the past 30 years may have been a bubble in of itself, but 30 years is a long time for things to happen and I just don't see Boston becoming a complete armpit.