Owning a Home Archives

Reasons to Stay Out of The Housing Market in 2012

Housing Market 2012The media has been fairly upbeat about housing market for the start of 2012, so is now a good time buy? I for one am optimistic that the housing market may stabilize a bit more in 2012, but I am not sold on a true housing recovery.

If you take a look at the S&P/Case-Shiller Home Price Index, both the Composite 10-city and Composite 20-city are both down considerably in December from the previous year. Honestly, no real indices or indicators are showing any housing recovery at all. So far it appears to be all speculation that the housing market is going to recover in 2012.

I for one am seeing some activity in my local real estate market, but it appears it is mainly people buying up cheaper homes and condos. Overall I would say things are bleak. Here are a few things to consider before buying your first home or real estate investment in the 2012 housing market.

1. Interest Rates

Interest rates are appealing because they make your payment smaller, but realize that if (and most likely when) interest rates go up, buying power goes down. If you buy a $200k home on a 30 year mortgage @ 4%, your payment will be  $954.83 a month for your mortgage. If interest increase to 6% and you go to sell your home, the buyer would have to get your home for a purchase price of around $159,200 to have the same payment that you had at 4%. That is a potential $40,800 loss on your home. This maybe mitigated by the fact that the economy is getting better (implied by rising interest rates), but there is a good chance you are taking an equity hit.

2. Brokerage Fees

You purchase your home for $200,000 and later decide you need to sell the home, be ready to pay 6-7% to get out of your home. If you got the same price that you paid, be ready to take a potential $12,000 to $14,000 cash loss.

3. Location

The “place to be” might quickly become the “place not to be”, especially in this economy riddled with foreclosures. Even nice neighborhoods can turn quickly.

4. Career

You might be locking yourself into a job or career path when you commit yourself to a home. Potential career opportunities may be missed simply because you aren’t able to relocate. If you are committing to a home for 5+years, you should also be committing to your job or the area for employment for that timeframe.

5. Neighbors

While renting you can easily pick up and leave, but with owning you are stuck unless willing to endure the potential pain of selling and moving away.

6. Hassle

Yard maintenance, redecorating, repair, and all of the hassles that come with a home are expensive and time consuming. Are you ready to give up weekends?

7. Taxes

You might be happy with your monthly payment until you realize that it will increase every single year, similar to rent. Local levies may pass and potentially cost you $100’s a year in additional taxes. You will also hear the expression “You don’t really own your home… stop paying your taxes and see if you own your home.” Even if you pay off your mortgage entirely,  sadly you will never be payment free.

8. Depreciation

Let’s not forget that many experts are estimating the housing market will continue to go down in 2012 and even beyond.

9. Inflation

If the housing market goes up 0.3% in 2012 and inflation was 3.3%, you effectively lost 3% that year. Your 200k home is now worth $200,600 but adjusted for inflation it is only $194,191. The housing market requires appreciation equal to inflation to make any sense investment wise.

10. Leverage

Owning a home is a highly leveraged position, especially for those who purchase with less than 20% down. A small % downturn can potentially put you underwater very quickly. With only 3.5% down on that 200k home, if the housing did decrease by another 8.5% you would be $10,000 underwater on your home. Leverage can destroy people, especially people very little cash reserves.

11. Equity

People tend to drastically overestimate how much they are building when it comes to equity. I personally earn about $168 a month or $2016  in equity on my $117k mortgage. The amount of each payment that goes towards principle will increase, but not as much as you might think (mine is increasing at about only $.60 a month!). In ten years I will owe $91,925.91 ($25,075 of equity built) if I make standard payments. That might sound like a lot, but realize that is over a decade of your life.

12. Opportunity Cost

If you make payments on your home for 30-years, you are locking your cash into equity into your home. If you would have taken that money instead and put it into another investment, there is a good chance you could have outperformed your mortgage. Remember that a 4% is approximately 3% effective rate if itemizing.


This isn’t to discourage you entirely from owning a home. People will argue that owning a home isn’t an investment, but it is important to  understand the real world financial consequences of getting involved with the housing market in 2012

 

Housing Market 2012The Housing Market in 2012 is recovering, or so the National Association of Realtors said today in a report that stated home resale numbers are through the roof and available inventory is at a seven year low.  But how heavily should you weigh this report in your decision making? I would argue that is is about 99% complete propaganda.

Now of course when the National Association of Realtors is advising that housing is strong, you probably realize there is a strong conflict of interest. Are there signs that the housing market are getting better, I would argue nothing is concrete.

Taking a look at the numbers in the report released, the claim is that existing home sales increased 4.3% to an annual rate of 4.57 million for last month (which would be the highest since May 2010). But if you keep reading, you will find out that there is a major revision. In December this same association reported an annual rate of 4.61 million (which would have been higher than last month’s numbers), but they are revising this number down. If that 4.61 million would have been correct for December, it would have been an increase of 5%. The revision this month put December down all the way to 4.38 million units, which is a loss of .5%.

That’s right, from +5.0% to –.5%, which is a 5.5% swing! Don’t forget this month they are saying it is up 4.3%.
Look I understand people make mistakes, but if you are going to make headlines with a 4.3% increase and then say you made a 5.5% mistake you are a joke.Housing Market 2012

The only thing this report really has done is make a headline and discounted what little believability the National Association of Realtors had left.  The headline should have gone to the revision and not to the propaganda for this month.

So what should we use as an indicator of a housing market in 2012 and onwards? That’s a tricky question, but it most likely is going to be a combination of both sales volume, sales price, and interest rate macro trends. If you think about it, interest rates might be the only un-biased indicator we truly have.

If money is cheaper to borrow and people are not taking advantage of it, most likely it’s a fairly weak market. If people start borrowing and purchasing homes, the interest rates are likely to increase.

Anyone else feeling confident in a true housing recovery in 2012? Because I certainly am not.

Reference: Housing Market 2012

The Housing Market With Increasing Interest Rates

Housing Market 2012The housing market was slightly down, but relatively stagnate in 2011. The housing market has become increasing segmented, (meaning some areas are showing very small gains while others are still showing giant losses) and many people are wondering if now is the time to buy. My opinion? If you are looking at a house as an investment or way to “save”, you should stay out of the housing market.

Let me first say that I am a home owner. I own a home that was recently appraised for $160k and I owe about $117k on the mortgage. I have not paid down the mortgage what so ever, but I have basically completed a very costly rehab of the house. I have skin in the game, which is why what I might say next is relatively shocking.

The housing market might be doomed. I believe the housing prices will not increase and could even decrease in most areas of the nation for anywhere as long as 5+ years. The bottom line here is that we haven’t bitten the bullet of how bad the housing market really is right now.

One of the biggest threat we have to housing is interest rates. A 30 year fixed mortgage loan is at roughly 3.9% today. Many people might find current interest rates as exciting, but to me it’s terrifying.  Interests rates are bound to increase and just for the record – I’m aware increasing interest rates are usually a good sign of economic growth.

Let’s assume you purchase a $200,000 home today @ 3.9%. You payment would be: $943.34 a month for the mortgage alone.  Now let’s say the economy picks up and interest rates go up to 6% – Now suddenly your payment is $1199.10 ($255.76 more / 27.1% more). To keep that $943.34 payment at the new rate of 6%, your house would have to have a selling price of $157,342 ($42,658 / –21.3% of your home’s value) .

Now you could be quick to assume that because of the interesting interest rates, that means a better economy and more jobs, but do you really think things are going to go back to they way they were? If anything we have a glutton of homes, a young population that doesn’t want to own (or can’t), a ton of foreclosures in the pipes, and an aging baby boomer population that will soon be selling their homes for an easier lifestyle (condos / assisted living), adding to the already excess inventory. There are a lot of things holding the market down that could actually making housing prices worse regardless of increasing of interest rates.

Housing has to return to what it simply is, a place to live.

I read articles and blogs talking about how it is “now cheaper to own than rent.” Are you kidding me? It is only logical that it is cheaper to own than rent. Just think about what you are doing, you are locking a large sum of your liquid cash in a down payment, you are committing yourself into a home and a community, and you are subjecting yourself to potential losses if your community or the housing market in general continues to fall, and did I mention that you just lost 6% of your home’s value the minute you sign the paperwork and your closing costs?

The housing market has a heck of an uphill battle. I know the Fed has promised to keep interest rates where they are for at least 2 more years, but if they increase the rate before a real recovery – You are going to see massive losses across the board in the housing market.  Did I also mention that you need the housing market to go up with inflation just to break even, so every year it’s stagnate is effectively another loss?

I’ve said it before and I’ll say it again – without the $8,000 incentive I received for buying my home – I wouldn’t have seen it as a viable option. It appears the the days of free money for buying a home are over, at least for now.

Mortgage and down paymentThe idea of buying an owner occupied duplex is simple, live in one unit and rent the other. Here in the Cincinnati, Ohio area it is very viable that you can cover your entire duplex mortgage payment in full (including taxes and insurance) from the income from your tenant.

I myself am completely fascinated with the idea of living mortgage free, but how likely is it that I will truly live mortgage free at a young age … not very likely without extreme measures. I am currently 25 years old and if I continue normal payments on my mortgage, at age 45 —  I will still owe $56,562 out of the $117,000 balance on my loan. My payments will be exactly the same (except discount for time value of money).  If I paid $500 extra towards my principle every single month, it would still take me about 11 years 6 months to pay off my loan. Going 11.5 years without $500 a month is not viable or financially responsible.

So what are the options for living mortgage and rent free at a young age without piles of money? Buy a very small house (Less than 50k) or buy a duplex or multi-unit building and let the tenants pay your mortgage.

Let’s assess both options:


1295533_1(1) Buy a very small house (less than 50k):

Pros:

  • Small Mortgage
  • The end is in sight, especially after a larger down payment.
  • If real estate drops 10%, you might only be talking 5k.
  • No Sharing Walls  / No Noise / Privacy

Cons:

  • Often in questionable locations – and safety is an absolute must for me.
  • Often these houses need lots of costly work and effort.
  • Without cash inflow from the property– you will never be free of payments entirely, taxes and insurance are still due yearly.

1278958_1(2) Buy a Multi-Unit Home or Building (Such as a Duplex)

Pros:

  • If you land a good tenant, your entire mortgage (including taxes/insurance)  is usually covered (in some regions of the US)
  • You qualify for deductions
  • Certain expenses are half-deductible for duplexes (for example painting the exterior or landscaping).

Cons:

  • You are a landlord, which comes with all kinds of trouble. For example, you are now subject to state landlording laws and possible legal action from your tenant.
  • Even though you have an expense Duplex (or multi-unit), you may not be able to itemize since you have half of it rented out and half of it is depreciated over 27.5 years.
  • Sharing Walls / Noise / Less Privacy
  • Don’t forget you get taxed on any profits


So which makes more sense? Around where I live, I could easily find a house for $72.5k or less which would keep my estimate payment under $500 a month all in (taxes / insurance / everything) or I could find a duplex and most likely pay $0 a month and possibly break just about dead even after taxes (effectively living completely free in a duplex). I suppose it all boils down to this: $500 a month with a small house or $0 a year with a duplex where you have a tenant and have landlord duties. Tough call.

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