From the Philly Inquirer:
Short-timer may not want to buy
toured Northern Liberties on Wednesday with a friend who is house-hunting. Boy, there’s a lot going on there: big condo buildings under construction, old rowhouses being gutted and rehabbed, funky restaurants and bars popping up . . .
It made me want to get out of the bland suburbs and move to town. But is this a good time to buy – for me, my friend or anybody?
Like any small market, this neighborhood has its own issues. There still are a lot of dilapidated properties there. This is worrisome for a house-hunter – especially a first-timer such as my friend, who expects to be transferred out of town in four years or so.
On top of that, there’s been a lot of bad news about the housing market nationally. Last week, the National Association of Realtors said it expected the median existing-home price to fall 0.7 percent this year compared with a 1 percent gain last year. It said new-home prices should gain a minuscule 0.4 percent this year, compared with last year’s 1.8 percent gain.
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Given all that we’ve heard about the softening real estate market, the subprime-mortgage meltdown, the risk of recession, and rising interest rates, does it make sense to buy a home this spring?Maybe – but only if you adjust to the new conditions. Generally, it takes healthy home-price gains – on the order of 5 percent or more a year – for buying to be more economical than renting if you don’t expect to stay put at least five or six years. When appreciation is lower than that, it takes even longer to break even.
A home is a great long-term investment, but a terrible short-term one. To counter the kind of rising risks we see today, buy only if you plan to stick around seven, eight, even 10 years.
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irst, a house is a concentrated holding, meaning you have a lot of money tied up in one thing. If a biker gang or slob moves next door, home prices could fall and you could lose a lot of money. With stocks and other securities, it’s easy to spread your money around to dilute the risk.Second, with a house, you generally lose money the moment you get it. That’s because of the Realtor’s commission you’re likely to have to pay to sell. With mutual funds, there need be no commission at all.
Consider an existing home purchased today for $250,000. To sell it, you’d pay $15,000 in commissions, assuming a typical charge of 6 percent. So the home’s value has to go up $15,000, or 6 percent, just for you to break even.
But if the NAR projections are right, the price would rise only about 1 percent over the next two years, leaving you 5 percent down. Add moving costs, fix-up costs and other expenses related to selling and you’d be even deeper in the hole.
Your down payment would have lost money. Had you rented, that cash could have gone into a worry-free money-market account paying 5 percent a year.
what happens to your buy vs rent, when you factor in tax deductions of Mtg intrest and property tax?…
This calculator from Bloomberg factors in all those parameters, including tax advantages of buying and return on investment of your down payment if you rent.
Since those can differ dramatically, you’ll need to examine those cases individually.
For some they can make a big difference, for others they have surprisingly little impact.
One size does not fit all.
Ask someone hit by AMT what they think.
Ask a cash buyer what they think.
Ask someone whose itemized deductions don’t exceed the standard deduction what they think.
Also, keep in mind that the mortgage interest deduction isn’t as sacrosanct as you might think. What happens if tax reform eliminates MID?
jb
JB-
If they got rid of MID would they not be run out of town by homeowners and the realtor/housing complex lobby would back their opposition with mega money?
read: http://housingpanic.blogspot.com/
FLASH: Morningstar analyst does the math, figures IndyMac is sitting on an unannounced $1.0 to 1.5 billion loss – on just 2006 Liar’s Loans (Alt-A)
OK, I’ve seen enough. I’m getting even shorter on Monday on NDE with put options – probably some May as well, as they have to come clean soon on what they know. Or go to jail. Yes, the market is fixed, and yes, they may choose the “go to jail” route, and short term there could be a short squeeze on NDE since so much of the float is short, but sometimes you gotta bet on what you know. And if I know one thing, it’s that Alt-A (Liar’s Loans) and IndyMac are F’d.
IndyMac’s market cap is $2.1 billion, net tangible assets of $1.8 billion, and their cash on hand is $541 million. Taking a $1.0 to $1.5 billion loss is a killer. I don’t see how they survive. Plus their business model is ruined – the days of funny money are over.
Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&sid=aQUrHEhPwpZU&refer=home
Heebner Says Home Prices May Fall 20% Amid Bad Loans (Update1)
By Sree Vidya Bhaktavatsalam and Brian Sullivan
April 12 (Bloomberg) — Kenneth Heebner, manager of the top-performing real-estate fund over the past decade, said U.S. home prices may plunge as much as 20 percent because of rising defaults on riskier mortgages.
Subprime loans, made to borrowers with a history of missed payments or untested credit, and “Alt-A” loans, which require little or no documentation, account for about $2.5 trillion of the $10 trillion in outstanding mortgages, according to Moody’s Economy.com. As much as 40 percent of these loans may default, flooding the real estate market, Heebner said.
“It will be the biggest housing-price decline since the Great Depression,” Heebner, 66, said today in an interview in Boston. Prices may fall by a fifth in some markets, he said.
That would leave home prices at levels last seen in 2003 and 2004, the middle of boom that lifted prices to a record in 2005. The damage from high-risk mortgages will slow the U.S. economy, though not enough to send it into a recession, Heebner said. Fourth-quarter growth was revised to 2.5 percent from 3.5 percent because of housing, the government said March 29.
Heebner, who co-founded Capital Growth Management in 1990, manages the $1.6 billion CGM Realty Fund. The fund has gained an average of 20 percent a year in the past 10 years, the most of any real estate fund over that period, Bloomberg data show.
Falling Home Sales
Sales of new homes will tumble 16 percent in 2007, according to the National Association of Realtors. Existing-home sales will fall 2 percent, the first drop on record, the Chicago-based trade group has forecasted. Subprime mortgage delinquencies climbed to a four-year high of 13.3 percent in the fourth quarter, according to the Mortgage Bankers Association.
Fallout from subprime-loan defaults will also hit hedge funds, and to a lesser extent, mutual funds, that bought collateralized debt obligations and other securities backed by such mortgages, Heebner said. The investment banks and brokerage firms that package and sell these products won’t get hurt because they have passed on the biggest risks to the investors, Heebner said.
“They know the product is toxic; they’re not going to get caught,” Heebner said.
The CGM Realty fund does not invest in such securities, he said. Heebner said he has sold his shares of real estate investment trusts that invest in apartments because they will face competition from single-family homes that have been converted into rentals. His fund had 35 percent of assets in apartment REITs such as AvalonBay Communities Inc. at the end of last year.
Mining Companies
He’s buying shares of mining companies that benefit from growing infrastructure needs in India, China and Russia. CGM Realty Funds also holds shares of Las Vegas Sands Corp., the casino operator that is developing real estate in Macau, China, and Mexican homebuilder Desarrolladora Homex SAB.
Heebner is known for making concentrated investments in a few industries. He sold homebuilders after owning them from 2001 to 2005, record years for home sales. He bet against technology and telephone stocks in 2000, correctly timing their collapse.
Heebner, whose Capital Growth Management has more than $6 billion in assets, also manages the $2.3 billion CGM Focus Fund. The fund has advanced 13.5 percent this year, making it the top- ranked diversified U.S. stock fund, according to Chicago research firm Morningstar Inc.
“Second, with a house, you generally lose money the moment you get it. That’s because of the Realtor’s commission you’re likely to have to pay to sell.”
Will this industry eventually offer gap insurance?
James makes good points about the AMT and standard deduction, both factors to consider when mulling the tax advantages of home ownership. The AMT in particular is something that even tax professionals have a hard time getting a handle on.
The mortgage interest deduction, however, is about as sacred a cow as you can have in Washington DC. Killing the MID would absolutely crater the housing market and set off a wave of foreclosures that will make the coming sub-prime fallout look like a splash in a kiddie pool.
I shall start a campaign to rid us of MID,nothing would please me better to see housing prices fall to the 1950’s level,watching property tax plummet as well. How could they possibly tax a $30,000 home at 15K to 20k as they do now .
I’m not talking about eliminating MID, I’m talking about capping it near the national median home price. It’ll keep the bulk of the U.S. voters happy (think midwest), since it won’t affect them anyway.
It’s just that the rich folk here in North Jersey are going to have to start paying their fair share of the taxes.
jb
I live on Barnegat Bay and because of the neverending rise of New Jersey’s taxes – especially those involving real estate – I started to look around the country at other spots on the water. I was amazed to see that in fact our prices are already lower than those in most other states and the reason is so obvious. Our real estate taxes are in a world of their own and people simply can’t afford them – and a mortgage.
The saddest part of it all is we seem to get very little in return for all the money we send to various government institutions and they just as a whole refuse to consider the fact that some of their many “services” can no longer be afforded. At the rate we are going this will be a state for a handful of the wealthy and masses of government employees and illegal aliens and receipients of government largesse. There simply is no way that middle class people can survive in this state much longer.
We have legislators that worry about smoking a cigarette in one’s own car or what the kids eat for lunch but they never, ever have time to sit down with red pencils and start knocking down the overhead. In good part this would mean they would have to fire their personal friends and relatives. But it has to be done and we have to stop funding pensions for people to retire at 55 with extraordinary benefits that the mainstream doesn’t receive. The cutest trick is you can have several government jobs here and double dip and if in the line of duty you are found to be a felon, well we will mail your check to jail.
This is not the way other states are run. It is going to be interesting to see if the apathy can be broken by the Orwellian cameras that are going up on the GSP and ultimately county roads. If you speed – which often isn’t easy because of the wasted time in traffic jams – a photo of your car and passengers will be taken and a double fine will be sent in the mail to the offenders’ residences. This is big, big money and maybe finally people will say enough. Certainly hope so.
But in the meantime real estate boom or not, there is no long line of people who want to move here and we all know the reasons why.
Helen (11)-
The madness may never stop. I think the majority of people in NJ either swill at the public trough or are so rich (and guilt-ridden over it), that self-destruct-style liberalism is the clear popular choice.
Middle-class values and behaviors, such as paying one’s own way- or living within a budget- are not deemed important here. Instead, we find it redeeming to reward parasitic behaviors and pursue expensive regulatory boondoggles.
Will the last person leaving who’s capable of flipping a lightswitch please turn out the lights?
RE:
helen holmes Says:
April 15th, 2007 at 7:32 pm:::::”….we seem to get very little in return for all the money we send to various government institutions and they just as a whole refuse to consider the fact that some of their many “services” can no longer be afforded. At the rate we are going this will be a state for a handful of the wealthy and masses of government employees and illegal aliens and receipients of government largesse. There simply is no way that middle class people can survive in this state much longer….”
COMMANDERBOBNJ Sez: Very well ‘put’ Helen. “…MANY SERVICES CAN NO LONGER BE AFFORDED..”
..A good example is the ‘education industry’ TRYING to make the public school system into a private school “atmosphere”.:..Small classrooms like 12 to 15 students, A teacher AND an AIDE in most classrooms, specialized subject classrooms with as little as 5 kids, glitzie and spacious buildings etc….ALL UNAFFORDABLE especially within a rapidly declining (formally) wealthy state….The above is the GOAL of the teacher’s union and THE PUBLIC BE DAMMED !…..Has everyone noticed the constant ADVERTISEMENTS on TV lately (the past Month !) about how ‘GREAT’ our New Jersey Public Schools are—-ADS (PROPAGANDA) all put out by the new jersey educational association (Union)…”They” must be ‘gearing-up’ for some sizable increases in their DEMANDS for their upcoming contracts !!!—This is something anybody here should keep in mind if they are considering buying into a New Jersey HOME QUAGMIRE——Can you say: “BIG PROPERTY TAX INCREASES !!!!(To pay for this ‘FOLLY”…”) — HAH ?!———————- I Bet you can..?!