Housing

[pinko]

America’s Ten Sickest Housing Markets

Posted: August 3, 2011 at 4:35 am

For three years, the real estate market has been going in one direction — primarily down. Some areas, however, have begun to recover. Recent S&P/Case-Shiller data show that among the top 20 housing markets in the U.S., 18 had very modest improvements in sales prices during May. Others, like Washington and Boston, have began to at least stabilize from a year ago.

•Read America’s Ten Sickest Housing Markets

Read more: America’s Ten Sickest Housing Markets - 24/7 Wall St. http://247wallst.com/2011/08/03/americas-ten-sickest-housing-markets/#ixzz1U4xi88AN

[Bonam]

Err... any thoughts or opinions on the article? Or just posting it?

Housing market looks more than healthy where I'm at. I'm just hoping to be able to buy something in the next year or two before prices skyrocket again.

[August1991]

Err... any thoughts or opinions on the article? Or just posting it?

Good point. We have a rule that posters should make comments on articles and not simply paste a link.

Anyway.

If someone can afford a down payment, has the time to research properties and plans to stay at least five years or so, then buying a house/condo makes good investment sense. Both Canada and the US offer in effect a tax advantage since the imputed rental benefit is not taxed and any capital gain on a principal residence is not taxed either. In the US, this advantage is further increased through mortgage deduction on taxable income. No other investment offers such tax advantages.

Finally, we have a well organized real estate finance market (despite what you read in the papers) when compared to every other jurisdiction on the planet.

OTOH, much of the US has just recently gone through a housing bubble so while there are some good deals availabale, people are gun shy to buy.

[Charles Anthony]

Guys,

Please report it next time.

[ZenOps]

Report what?

I would say slight liability in some areas and massive liability in others.

http://www.fdic.gov/bank/individual/failed/banklist.html

When a house is foreclosed, and the bank also refuses (or cannot) pay taxes - it usually a sign that a house is barely worth much more than the taxable liability each year.

Yes, historically there have been many times that houses and large properties have sold for $1. Dates all the way back to potato famines and the like - where landowners would simply give away land to remove themselves from the tax burden.

Edited August 4, 2011 by ZenOps

[Oleg Bach]

Makes you wonder with all the foreclosures in America - that the states might just be a huge feudal kingdom and the master kicks out the useless surfs who do not pay full tribute.

[The_Squid]

Buying a house is the wisest investment one could make, despite the ups and downs of the housing market.

However, like any investment, you have to do it in a wise manner.

[Bonam]

Buying a house which is to be a primary residence is almost always a wise decision. Even if the value of the house depreciates substantially, you are still saving money, except in very extreme cases. What people seem to forget when discussing the value of buying a house is that, if you didn't buy the house, you would instead be living in a rented residence.

Let's say I have the option of buying a house or continuing to rent an apartment at $1000 / month. If I buy the house and live in it for 10 years, that is $120,000 in rent payments I didn't have to make, which instead went to paying off my mortgage. So even if the value of the house drops by $120,000 in the meantime, I still break even. (The example is obviously for illustration only, the numbers change somewhat if you include the effect of mortgage interest rates, etc).

[kimmy]

Buying a house which is to be a primary residence is almost always a wise decision. Even if the value of the house depreciates substantially, you are still saving money, except in very extreme cases. What people seem to forget when discussing the value of buying a house is that, if you didn't buy the house, you would instead be living in a rented residence.

Let's say I have the option of buying a house or continuing to rent an apartment at $1000 / month. If I buy the house and live in it for 10 years, that is $120,000 in rent payments I didn't have to make, which instead went to paying off my mortgage. So even if the value of the house drops by $120,000 in the meantime, I still break even. (The example is obviously for illustration only, the numbers change somewhat if you include the effect of mortgage interest rates, etc).

What people often forget is that money that is spent paying real-estate fees, taxes, and interest is just as lost as money that is spent on rent.

A $200,000 home is going to cost you about $380,000 over the course of a 25 year mortgage, so you better have more than an $80,000 home to show for it by the time it's paid off.

(for comparison sake, a $1000 rent over 25 years works out to $300,000 and costs $260 less per month, even if you disregard taxes, strata fees, maintenance costs, etc.) Now, if you invest that $260 per month, how much do you have after 25 years? If you put it into something that gets 4% interest, you've got $134,000. $134,000 cash beats an $80,000 house...

-k

[Remiel]

It really depends on how you want to live and run your life as well. If you might want to move around a lot, it might be worthwhile to rent. If you are like me, and feel like you would go nuts living somewhere that you can never let loose, then a house is practically the only way to go long term. Renting means not having to worry so much about whether you can move. Owning means not having to worry about others telling you what you can and cannot do (at least relatively speaking).

[Bonam]

What people often forget is that money that is spent paying real-estate fees, taxes, and interest is just as lost as money that is spent on rent.

A $200,000 home is going to cost you about $380,000 over the course of a 25 year mortgage, so you better have more than an $80,000 home to show for it by the time it's paid off.

(for comparison sake, a $1000 rent over 25 years works out to $300,000 and costs $260 less per month, even if you disregard taxes, strata fees, maintenance costs, etc.) Now, if you invest that $260 per month, how much do you have after 25 years? If you put it into something that gets 4% interest, you've got $134,000. $134,000 cash beats an $80,000 house...

Indeed, but it equals a $134,000 house, a house which has depreciated by $66,000 (according to your numbers) from its original purchase price of $200,000. As I stated, my numbers were a quick illustration, and would change if interest was included. So congrats on including the interest and providing a more accurate example The point remains that once you take into account rental costs if you don't buy a house, buying a house will save you money in the long run even if it depreciates somewhat in value.

To add further to that point, it should be noted that buying a house gives you various tax advantages (especially in the US), gives you access to low interest home equity lines of credit should you need them. And, when it comes to fees, rental isn't a free ride either, as you might be required to pay renter's insurance and other fees as well. Furthermore, while a house might depreciate in value in the short term, it is historically unprecedented for it to depreciate over the 25 year timespan of your example.

Edited August 5, 2011 by Bonam

[Bonam]

It really depends on how you want to live and run your life as well. If you might want to move around a lot, it might be worthwhile to rent. If you are like me, and feel like you would go nuts living somewhere that you can never let loose, then a house is practically the only way to go long term. Renting means not having to worry so much about whether you can move. Owning means not having to worry about others telling you what you can and cannot do (at least relatively speaking).

True. At the same time, owning a house also means you gotta do a lot more maintenance, mowing the lawn, etc. There are certainly lifestyle pros and cons. Renting an apartment can more directly be compared to owning a condo (rather than a house), in which case many of the restrictions are still there.

[kimmy]

Indeed, but it equals a $134,000 house, a house which has depreciated by $66,000 (according to your numbers) from its original purchase price of $200,000. As I stated, my numbers were a quick illustration, and would change if interest was included. So congrats on including the interest and providing a more accurate example The point remains that once you take into account rental costs if you don't buy a house, buying a house will save you money in the long run even if it depreciates somewhat in value.

To add further to that point, it should be noted that buying a house gives you various tax advantages (especially in the US), gives you access to low interest home equity lines of credit should you need them. And, when it comes to fees, rental isn't a free ride either, as you might be required to pay renter's insurance and other fees as well. Furthermore, while a house might depreciate in value in the short term, it is historically unprecedented for it to depreciate over the 25 year timespan of your example.

I always hear people say "renting is just throwing money away", but they don't seem to realize that roughly 40% of your mortgage payment isn't going into equity.

I think the example I provided illustrates that paying off a 25 year mortgage doesn't put you that far ahead of renting and putting the difference into a long-term investment. Even if the house doesn't depreciate.

And I think I really understated the case, because when you factor in property taxes, home insurance, maintenance costs, strata fees, renovations, and all the other costs home-owners have that renters don't, the difference between that $200,000 home and a $1000/month rental is a lot more than the $260/month figure I used.

Ultimately I'm still considering buying a home, but I'm holding off. First off because I'm not sure my present situation is permanent. If I move or decide to go to school, I'd wish I hadn't bought. And secondly because I'm skeptical of current housing prices in the city I live in. The market doesn't seem sustainable.

-k

[Bonam]

I always hear people say "renting is just throwing money away", but they don't seem to realize that roughly 40% of your mortgage payment isn't going into equity.

That really depends on a lot of factors, such as the interest rate, the length of the mortgage, and the down payment. I plan to buy a residence in about two years by which time I should have about $100k saved up, and properties in the neighborhood I'm looking at go for 250k-300k. I'd probably only get a 5-7 year mortgage, or maybe forgo that completely and just use my credit line (way simpler to deal with just clicking a button online even if the interest rate is like 0.5% higher than I could get on a mortgage, avoids closing fees and junk like that too). Anyway, in that case, less than 10% of the total that I spend would be going into interest (at present interest rates).

I think the example I provided illustrates that paying off a 25 year mortgage doesn't put you that far ahead of renting and putting the difference into a long-term investment. Even if the house doesn't depreciate.

And I think I really understated the case, because when you factor in property taxes, home insurance, maintenance costs, strata fees, renovations, and all the other costs home-owners have that renters don't, the difference between that $200,000 home and a $1000/month rental is a lot more than the $260/month figure I used.

To be fair, the $1000 rental vs $200k home is kind of arbitrary to begin with. To make it a realistic comparison, the two residences would have to be comparable in quality, square footage, neighborhood, etc. The price of renting vs buying a comparable residence varies significantly from neighborhood to neighborhood. In some, you could get an apartment equivalent to a $300k condo for like $700-800 a month, in others, you'd be hard pressed to rent one for $1200-1500, or even to find one at all.

Ultimately I'm still considering buying a home, but I'm holding off. First off because I'm not sure my present situation is permanent. If I move or decide to go to school, I'd wish I hadn't bought. And secondly because I'm skeptical of current housing prices in the city I live in. The market doesn't seem sustainable.

True, if housing prices seem unrealistically inflated in a given area, that is certainly a reason not to buy there. Vancouver, for example, seems a bubble ripe for bursting if the Asian investment in the housing market there ever stops.

[ZenOps]

Rent? What is that?

Maybe one might still have to pay rent in Canada, but not in the US.

http://www.usatoday.com/money/economy/housing/2011-05-12-foreclosures-taking-longer_n.htm

It takes over 900 days for the banks to foreclose in New York nowadays. Which means that many people who were forced or decided to foreclose and stop all payments are still technically living at their residences until they are forced out. No mortgage payment, no rent, no tax - for nearly three years.

No need to pay rent. Just squat an abandoned foreclosure, or pay the whole $16 and yearly tax for three years and go for full ownership.

Edited August 5, 2011 by ZenOps

[Bonam]

Rent? What is that?

Maybe one might still have to pay rent in Canada, but not in the US.

http://www.usatoday.com/money/economy/housing/2011-05-12-foreclosures-taking-longer_n.htm

It takes over 900 days for the banks to foreclose in New York nowadays. Which means that many people who were forced or decided to foreclose and stop all payments are still technically living at their residences until they are forced out. No mortgage payment, no rent, no tax - for nearly three years.

No need to pay rent. Just squat an abandoned foreclosure, or pay the whole $16 and yearly tax for three years and go for full ownership.

Some of us prefer to live in prosperous areas rather than crumbling abandoned wastelands.

[BubberMiley]

I think the example I provided illustrates that paying off a 25 year mortgage doesn't put you that far ahead of renting and putting the difference into a long-term investment. Even if the house doesn't depreciate.

But your example depended heavily on massive, unprecedented depreciation. Your given model, that a $200,000 house bought today will be worth $80,000 in 25 years is not likely to be realistic. If it does shake out that way, then I also question the value of any investments you've made in those 25 years. They'll likely not perform well in this economic collapse either.

I bought my first house in the 1990s and sold it for double what I paid eight years later. The one I bought to replace it has also since doubled. I doubt we'll see those rates of return again for a while, but I now feel badly for the poor saps I know who never bought when they could.

Edited August 5, 2011 by BubberMiley

[pinko]

Good point. We have a rule that posters should make comments on articles and not simply paste a link.

Anyway.

If someone can afford a down payment, has the time to research properties and plans to stay at least five years or so, then buying a house/condo makes good investment sense. Both Canada and the US offer in effect a tax advantage since the imputed rental benefit is not taxed and any capital gain on a principal residence is not taxed either. In the US, this advantage is further increased through mortgage deduction on taxable income. No other investment offers such tax advantages.

Finally, we have a well organized real estate finance market (despite what you read in the papers) when compared to every other jurisdiction on the planet.

OTOH, much of the US has just recently gone through a housing bubble so while there are some good deals availabale, people are gun shy to buy.

When I posted this article I did so with the intention of encouraging discussion. Regardless of the form presented it has done just that. Requiring commentary with a link does not seem unreasonable to me.

[kimmy]

But your example depended heavily on massive, unprecedented depreciation. Your given model, that a $200,000 house bought today will be worth $80,000 in 25 years is not likely to be realistic. If it does shake out that way, then I also question the value of any investments you've made in those 25 years. They'll likely not perform well in this economic collapse either.

Well, Bonam was the guy who suggested that even if the house depreciated by $120,000 you still come out ahead of renting. But clearly that isn't the case.

I went to a mortgage calculator website and took a $200,000 house on a 25 year mortgage at 5% -- and got payments of $1260 per month.

Then I took the same $1260 per month, spent $1000 of it on rent, and saved $260 of it at 4%.

At the end of 25 years, the home owner's $1260 per month has given him a home, and the renter's $1260 per month has given him $134,000 in savings. Who came out ahead depends on the value of the property at the end of that time.

But to make it a more realistic comparison, we should also include the other costs of owning a home. The home owner pays property taxes, strata fees, insurance, maintenance and renovations and repairs. The renter doesn't have any of those costs.

So let's say the home owner pays $1260 a month for his mortage and pays $260 a month in various home owner expenses. And the renter pays $1000 a month rent and saves $520 at 4%.

After 25 years, the home owner has a home, and the renter has $268,000 in savings.

There's a lot of factors at work, but it's not as one-sidedly in favor of home ownership as everybody seems to think.

Maybe in the future that home will be worth a fortune... but it might not appreciate in value much or at all.

I bought my first house in the 1990s and sold it for double what I paid eight years later. The one I bought to replace it has also since doubled. I doubt we'll see those rates of return again for a while, but I now feel badly for the poor saps I know who never bought when they could.

If I could travel back in time 10 years with the money I have now, I'd definitely buy a home. It would have been a great investment. But I'm having a very hard time convincing myself that buying a home right now is a great investment. Prices skyrocketted in the past decade but income didn't keep up and home prices relative to income are at an all time high... so it seems unlikely that home values will continue to go up. Mortgage rules have been toughened, all the construction that was started in the housing boom from 5 years ago entered the market and vacancy rates have increased. It seems unlikely to me that real-estate prices will rise much in the foreseeable future. It kind of looks like it has the makings of a bubble, to me.

-k

[pinko]

Well, Bonam was the guy who suggested that even if the house depreciated by $120,000 you still come out ahead of renting. But clearly that isn't the case.

I went to a mortgage calculator website and took a $200,000 house on a 25 year mortgage at 5% -- and got payments of $1260 per month.

Then I took the same $1260 per month, spent $1000 of it on rent, and saved $260 of it at 4%.

At the end of 25 years, the home owner's $1260 per month has given him a home, and the renter's $1260 per month has given him $134,000 in savings. Who came out ahead depends on the value of the property at the end of that time.

But to make it a more realistic comparison, we should also include the other costs of owning a home. The home owner pays property taxes, strata fees, insurance, maintenance and renovations and repairs. The renter doesn't have any of those costs.

So let's say the home owner pays $1260 a month for his mortage and pays $260 a month in various home owner expenses. And the renter pays $1000 a month rent and saves $520 at 4%.

After 25 years, the home owner has a home, and the renter has $268,000 in savings.

There's a lot of factors at work, but it's not as one-sidedly in favor of home ownership as everybody seems to think.

Maybe in the future that home will be worth a fortune... but it might not appreciate in value much or at all.

If I could travel back in time 10 years with the money I have now, I'd definitely buy a home. It would have been a great investment. But I'm having a very hard time convincing myself that buying a home right now is a great investment. Prices skyrocketted in the past decade but income didn't keep up and home prices relative to income are at an all time high... so it seems unlikely that home values will continue to go up. Mortgage rules have been toughened, all the construction that was started in the housing boom from 5 years ago entered the market and vacancy rates have increased. It seems unlikely to me that real-estate prices will rise much in the foreseeable future. It kind of looks like it has the makings of a bubble, to me.

-k

It seems as if you have given this a lot of thought. When my wife and I bought our first house in 1973 we paid $15,000 for it. During that period of time we were able to gain equity in this first older home and move through a series of new homes and eventually to a custom built home on acreage. Of course during this same period of time interest rates reached double digit proportions. We sold our acreage at a time when the market was some what depressed and perhaps didn't gain as much as we could have otherwise. Since then we have downsized twice and now live in a small bungalow witn no mortgage. We have no regrets in choosing ownership over rental even with the extra expenses described in your post associated with ownership. Of course we had the necessary cash flow to meet the cost of a mortgage and the other expenses related to ownership.

If you have the necessary cash flow and can establish your credit with a bank or credit union it may well be worth your while to find a home that meets your needs. Depending on the rental vacancy rate in your community you may find home ownerhsip more appealing especially if there is high demand and limited supply of rental properties.

Edited August 7, 2011 by pinko

[pinko]

If you are seriously considering a home ownership option here is a link related to rental vacancy rates.

http://www4.hrsdc.gc.ca/[email protected]?iid=43

Edited August 8, 2011 by pinko

[ZenOps]

Hey - what happened to my "Higher education" asset or liability?

http://www.cnn.com/2011/US/08/11/education.apprenticeship/index.html

CNN is now tackling this issue. It is definitely becoming a liability as the US took away the ability to get rid of student debt by declaring bankruptcy in 2005. Student debt is for life - bankruptcy will not wipe away the debt.

Student loan debt surpassed credit card debt last year.

http://www.nytimes.com/2011/04/12/education/12college.html?_r=2&ref=todayspaper

IMO, it has the potential to be a much greater burden than mortgage debt. The college debt bubble is enormous.

Edited August 12, 2011 by ZenOps

[Bonam]

Student debt is for life - bankruptcy will not wipe away the debt.

No... student debt is until you pay it back. I paid mine back within a year of finishing undergrad.. and that was on a grad student's salary.

[ZenOps]

It might not be that simple anymore.

If you can't find a job in your field, its not like you can simply work for the military or the post office anymore.

USPS is chopping 120,000 jobs to start this year. Admittedly things are a little bit better in Canada, but contagion from the US is bound to affect us.

[August1991]

I went to a mortgage calculator website and took a $200,000 house on a 25 year mortgage at 5% -- and got payments of $1260 per month.

Then I took the same $1260 per month, spent $1000 of it on rent, and saved $260 of it at 4%.

At the end of 25 years, the home owner's $1260 per month has given him a home, and the renter's $1260 per month has given him $134,000 in savings. Who came out ahead depends on the value of the property at the end of that time.

Kimmy, you forget taxes in this comparison. The $260/month that you save will generate taxable income. That is, the accumulated annual interest income is taxed. A TFSA/RRSP would mitigate this but then your renter/saving scheme would mean no other tax-free saving.

If you were to invest in riskier schemes with potential capital gain, then you would be hit with a capital gains tax.

But to make it a more realistic comparison, we should also include the other costs of owning a home. The home owner pays property taxes, strata fees, insurance, maintenance and renovations and repairs. The renter doesn't have any of those costs.

Property taxes and maintenance are presumably included in the rent. IOW, most landlords are not operating a charity. They expect a reasonable return on their investment.

But you make a good point. There are costs associated with home ownership that many people ignore.

If I could travel back in time 10 years with the money I have now, I'd definitely buy a home. It would have been a great investment. But I'm having a very hard time convincing myself that buying a home right now is a great investment.

My argument in favour of buying a home in Canada hinged on two tax advantages. 1. You pay no capital gains tax on a principal residence. 2. The benefit you receive from your home investment is not taxed. Unless they are sheltered in an RRSP or TFSA, you pay tax on any investment income.

To see this, compare Kimmy and August whose rich uncle Barack dies and leaves each of them $300,000. August uses his inheritance to buy a $300,000 house and lives in it. Kimmy invests her $300,000 at 4% and uses the interest income ($12,000 annually) to pay rent - but Kimmy first has to pay income tax on that $12,000. If Kimmy is in a 30% tax bracket, she'll only have about $8,000 for rent.

-----

Your arguments about rising/falling house prices are valid but apply to all investments. In Canada, in general, real estate has been a good investment. In addition, the local real estate market is easy for most people to research and understand. A key factor in a house price is location and most people know well the features/characteristics of their city.

When people ask me where to invest their savings, I invariably quote Warren Buffet and advise them to save in something that they understand. With time and a bit of research, you can understand your local real estate market.

Edited August 12, 2011 by August1991