My Head May Explode
Homebuyer Associates March 2011 E-Note
Homebuyer Associates www.homebuyerassociates.com
414.254.4129 homebuyeba@gmail.com
Michael D. Holloway/Seamus Holloway
My Head May Explode
My head is going to explode. According to index Y, “Housing is improving.” Economist X notes “Housing prices continue to inch down.” “Now is a great time to buy” says the National Association of Realtors. “Rent and invest the difference between owning and renting” advises some financial magazine.
Disraeli and Twain had it correct (the quote is attributed to each): “There are white lies, damn lies and statistics.” I don’t know when housing will return but, like Warren Buffett, I do believe housing will return. Buffet recently bought a brick company anticipating housing’s return and noted, “Now is the time to buy it if you’ve got the money, and we’ve got the money.” I could make the same argument for buying a home.
http://www.cnbc.com/id/15840232?video=3000008253&play=1
I suggest home buyers “read bylines not headlines” which is my way of saying all real estate values are local. A recent New York Times article said sales were down 25% from a year ago. The byline was Boston. The Case-Shiller Price Index shows prices are down 29% from their 2006 peak noting Phoenix and Las Vegas are down 51 and 57% respectively with Dallas down 4.2%.
If you plan to live in the four-county Milwaukee area then the information above is from headlines. If you plan to live in one of those areas then the story is a byline. My point is that homebuyers should understand their local market – the market where they plan to live.
What is the state of local housing and should you buy a home? According to Milwaukee’s Biz Times, quoting the Case-Shiller index, Milwaukee’s housing market in the 3rd quarter has declined 10.9 percent since 2007 and is projected to stabilize by the end of 2011. http://www.biztimes.com/realestateweekly/2011/2/2/milwaukee-housing-market-to-hit-bottom-this-year
I think research – which leads to a comfort level – is how most home buyers should approach the buying process. A few things to consider:
A home is a place to live. You can rent or you can own. The government places a value on having a place to live and refers to it as the “net imputed rent from owner-occupied housing.”
A home affords you a tax deduction for mortgage interest and taxes. Do not buy a home because you get a tax deduction. Do not buy a larger home than you need because you get a tax deduction but do understand the tax deduction lowers the true cost of home ownership. I didn’t say I was for or against the tax deduction, that’s another newsletter, but you should acknowledge the benefit of the deduction.
Historically homes have appreciated in 3.0% range (a leveraged appreciation). That has not been the case since 2007 but it is historical data. My bet is that we will eventually return to the historical average. On a $225,000 home that equals $6,750 (not compounded). Because capital gains are excluded from the sale of homesteads ($250,000 for a single person and $500,000 for a couple) it becomes a form of forced long term savings.
The interactive site below is an enlightening way to test the cost of ownership vs. renting. I used a monthly rent of $1,600; home cost of $225,000; a down payment of 5% with a mortgage rate of 5% and tax rate at 3%. The closing cost default used ($9,000) is high. I think $3,000 would be more on the mark. That should lessen the spread of years as to when it becomes better to own than rent. No matter, I think the interactive provides a good visual.
http://www.nytimes.com/interactive/business/buy-rent-calculator.html?emc=eta1
(If you own a home you may want to use the link above as a means of identifying who your target buying audience is. If this is not clear feel free to contract me to discuss how to do so.)
A recent Wall Street Journal article noted:
During the boom, lax lending and speculation pushed house-price inflation far beyond the modest rise in household income. The ratio of home prices to annual household income reached a peak of 2.3 in late 2005. By this past September, it had fallen to 1.6 the lowest level in 35 years and below the historical average of 1.9 between 1989 and 2003. “Based on incomes this is as affordable as it gets,” said Mark Zandi, chief economist at Moody’s Analytics. “If you can get a loan, these are pretty good times to buy.” I’ll discuss the mortgage loan landscape next month.
If you found this information of interest please share it with a friend and thank you for your business. If I can be of assistance to you, your family or friends I would welcome the referral. Thanks for reading.