Time to sign off but here’s a cheerful parting observation

I showed a house to a couple today – they might buy it, they might not, but here’s the deal: I know what the builder will accept (and what he says he’ll accept is probably still higher than what he’ll get). Even assuming that he gets his price, there’s an identical house on the same street, built by the same builder, that went for 25% more 18 months ago. The second this new house sells and therefore sets the new value for this street, that earlier buyer is going to see every penny of his equity disappear. Even if he keeps his job and can stay current on his mortgage, it’s bound to get discouraging to be paying off a loan on an asset that’s worth less than the debt. Of course, car buyers got used to that proposition; I suppose home buyers will have to, too. Or perhaps they’ll rent, instead of buy.


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3 responses to “Time to sign off but here’s a cheerful parting observation

  1. Anonymous

    Not to put you on the spot, but if you were a buyer what would you do:
    a) get the best deal possible and buy a home.
    you do get tax benefits which people sometimes forget to factor in.
    b) rent so you can await further declines and thus get a better bargain down the road

    I am sure you get this question quite a bit, I am curious to your opinion

  2. Paco

    Land is real estate. It tends to appreciate on average at at least the rate of inflation which, if there’s a residence on top of the land, provides the illusion that houses appreciate in value.

    Houses are just high priced, expensive to maintain, depreciating consumer durables. How else to explain tear downs? Truly historic or, even more rarely, unusually aesthetic houses are a tiny exception.

    Sold my house four years ago when I noticed I could rent a nice (admittedly smaller) place for the same amount of money I was paying in property taxes.

  3. christopherfountain

    Anonymous, before this meltdown I would have referred you to the “rent or buy” calculator on the right hand side of this page and suggested you plug in appropriate numbers like how long you thought you’d own or rent, mortgage payments and property tax, etc. It produces a nice curve that gradually shifted in favor of buying the longer you stayed and the lower your monthly expenses. But the kicker was always the appreciation. Even zero appreciation eventually produced a buy result, but it took a long time. Negative appreciation is something else.
    Paco, above, figured out that he could rent for the same amount as his property tax and forget about a mortgage payment. That’s a great deal. here are intangibles, of course, that homeownership can bring that may outweigh the freedom of just handing a landlord the keys and taking off, but in a declining market, those grow fewer, I think.
    I really don’t think real estate will continue to fall, though, so my advice is to either rent until it’s clear that we’ve hit a final (for this time) bottom, which will cause you to lose some benefit of the bargain because we’ll only know that the bottom’s been hit when prices rise again and stay up, or buy now at a great price, by which I mean much lower (how’s that for specificity) than houses sold for in 2005. I showed some houses yesterday that were, respectively, $975,000 and $575,000 less than they asked 18 months ago. That’s 1/3 to 25% off, and that’s a pretty good cushion against further decline.
    I also agree with Paco that houses are a deteriorating “asset”. I tell my clients that the splash new houses will grow old and dated, the land, like “the Dude”, will abide. If they can stand it, I advise they buy an older house on great land rather than a beautiful new house on lesser land. But, understandably, some people like having modern wiring, great new kitchens and comfortable baths. Those don’t matter much to me – I’ve done without them for 50+ years, why go looking for them now? – but I do understand the desire. I just don’t think they make the best investments unless, as is beginning to happen, you can find a house that combines both great land, new, quality construction and a savagely reduced price. Then you have a winner, and should pounce.