Many Americans are mired in a housing gridlock: They can't afford to sell their homes because property values have fallen, causing millions of people to owe more on their homes than they are worth. And, many can't move to take new jobs until they sell their homes.
Michael Hicks, director of Ball State University's Center for Business and Economic Research (CBER), has found the migration of people from one part of the country has nearly ground to a halt. He analyzed data from a variety of sources, including United Van Lines (UVL) migration numbers.
Fewer Americans are moving now than in any year since 1962, when the population was 120 million smaller.
"The economy is playing havoc, since property values have dropped significantly in the last few years," Hicks said. "Many people simply cannot just pick up and move. They have a home they have to sell first.
"It many cases, one spouse moves to another state to work while the other stays home in their main residence in an attempt to sell it. With the current market, homes are selling at thousands less than what people paid for them a few years ago. Some people may just be stuck for a while until the economy improves and homes begin to sell again."
Since 1977, UVL has tracked where the firm takes its customers in the 48 contiguous states. UVL says Michigan is the No. 1 outbound traffic state for 2008. Nearly 67.1 percent of all Michigan-related United Van Lines traffic was leaving the state. Despite large job losses in the manufacturing sectors, Indiana actually gained population in 2008.
One of the justly celebrated strengths of the United States economy is its labor mobility. By this account, at least, our housing market has basically destroyed that critical asset.
A recession like this is the worst time to lose your labor mobility. I am quite convinced by the argument that since the 1980s, recessions have been characterized by structural, rather than cyclical, unemployment. Rather than temporary layoffs of workers during periods of slack demand, modern recession-driven unemployment tends to result from the destruction of jobs, firms, even industries. That's why long-term unemployment creeps up, and skilled workers are having a harder time than they used to during downturns: it takes longer to match a skilled worker with an appropriate position than to slot body into a low-skilled place.
In those conditions, workers need geographic mobility to offer them a wider variety of potentially appropriate jobs. But this time around, they're tied down by overpriced real estate and underwater mortgages.
The article suggests that families may pick up the strain, with one spouse staying behind to sell the house while the other spouse moves. But that's a very temporary, and a very bad, fix--at best, that means trying to support two households rather than one on family income.
Even renting mobility is a problem if you don't have the money to move to where a job is; I'm seeing more and more listings on Craigslist saying they won't pay moving expenses.
And yet we subsidize the very thing that is restricting labor mobility. Maddening...
Given that two income households are pretty standard these days risking the job of the employed spouse to enable the unemployed ( or transferred) to look for new work may not be such a good idea unless the pay differential is considerable.
To make matters worse Fannie will no longer consider the income of what they call the 'trailing spouse' to be considered for a new home loan should a couple be transferred. They ( rightly) assume the spouse
giving up a job to move to a new location might find it hard to become
employed again.
Zic:
Of course. Why would some firm do that when more people are desperate for jobs.
In those conditions, workers need geographic mobility to offer them a wider variety of potentially appropriate jobs. But this time around, they're tied down by overpriced real estate and underwater mortgages.
Don't forget health care. How many people are stuck at their jobs for fear of losing health care?
sangellone's description of the situation seems more realistic to me. Is there any data on how many people are actually underwater on their mortgages? And aren't most of them in places (like FL, CA, NV) where everyone was moving for the last few decades as part of the great American experiment in mobility?
And I'm sure it's my own class bias talking, but how many of those underwater people have skills so specific that moving across the country is going to help them? Sure, an Akron-based computer programmer might be helped by moving to Chicago, but an unemployed Circuit City manager is probably going to have the same trouble -- or success -- anywhere.
Except no one is opening more stores. In fact, I bet you'll see store closings for even supposed health companies. And more WalMart's are going to lead this country to an economic recovery.
I am quite convinced by the argument that since the 1980s, recessions have been characterized by structural, rather than cyclical, unemployment. Rather than temporary layoffs of workers during periods of slack demand, modern recession-driven unemployment tends to result from the destruction of jobs, firms, even industries.
Bingo!! And that is why the "recovery" will be tepid at best. No one has been able to say where the new jobs are coming from. Green jobs? Not if the oil companies can help it. Ever notice how they are trying to re-brand themselves as energy companies? So laughable. Anyway, the point being, get ready to see a reduced living standard even for those with jobs(Except if you work at Goldman Sachs).
"No one has been able to say where the new jobs are coming from."
That's true, but that's typical in cases of structural changes. 25 years ago, no one could say where the those laid off by the typewriter companies or those who worked in the typing pools were going to get new jobs. If you told someone in 1982 that they'd have a job fifteen years later teaching Microsoft Office to aspiring office workers, they would have had no idea what you were talking about.
"Green jobs? Not if the oil companies can help it."
To more accurately rephrase that, "Oil company jobs? Not if the greens can help it". So far, the greens have been winning that battle hands down. We have a state on the verge of bankruptcy that nevertheless has billions of barrels of oil off its coast, the extraction of which would directly create tens of thousands of high-paying blue collar jobs, as well as providing desperately needed royalty revenue to the state. And yet this doesn't happen because of greens.
We need single-payer relocation insurance, and we need it now.
I thing we need GRC - Government Relocation Corporation, with a subsidiary GVL - Government Van Lines.
GRC would buy your house if you could not sell it for its mortgage amount. They would then sell it for almost nothing to some deserving individual for next to nothing. Selection of these deserving individuals could be farmed out to community activist organizations like ACORN.
Then GVL would move you for free it you were a member of a certain class - say UAW member. In fact GVL could hire and train those UAW members, complete with UAW work rules, as drivers for GVL. If GVL moved you, you would be guaranteed that your furniture would arrive within 6 months and only 50% of it would be broken upon arrival.
In fact GVL could hire and train those UAW members, complete with UAW work rules, as drivers for GVL.
Yeah, the Teamsters are going to have something to say about that. And they tend to say it with brickbats, or so I hear.
Actually, the teamsters are a big zero in the moving industry. They had some success in some big union cities, like NYC, with certain large local moving companies in the past, but most of those companies are now defunct. In California, Bekins, unlike all other movers, had about 100 company owned, unionized, operations. They're ll gone now, since the Bekins Company collapsed. Like all unions, the teamsters are very good at putting their employers out of business and putting their members out of work.
For over the road drivers, the van lines always relied on owner operators.
By the way, in the late 80s all the leaders of the NYC local teamsters movers' union ended up in jail - wonderful group.
Ha! Good one.
But actually a number of states have a "relocation allowance" available as part of your unemployment insurance.
While there's certainly a lot of truth in falling house prices restricting moving, people must realizes that "workforce,mobility" has been declining since the latter 1970s.
The principal reason is the large increase in 2 income households. The loss of income for one spouse, and the uncertainty or being able to replace that income in a new locale, causes a couple to think long and hard about moving. This often results in choosing to stay. In the earlier 1970s and before, companies favored hiring married men because they were viewed as more stable. By 1980 that view had reversed and singles were favored due to their perceived mobility.
The above is exacerbated by the steep increase in public sector employment and that sector's increased income/benefits relative to the private sector. If one spouse has a decent public sector job with any longevity, it's pretty certain that they will not be able to replace that in a new locale.
Another factor that reduces moving is the vast difference in cost of living among various locales. Companies often find it very hard or impossible to lure middle income wage earners to very high cost of living areas. Employees see that, even with a raise, their real income will be reduced. This is very common with trying to lure people like middle managers and engineers to places like the New York metro area.
I spent from 1976 to 1986 working for large moving companies, in marketing. We were well aware of all the rapid changes as we spent a lots of time with corporate HR types.
I just went through this exact thing; had to pony up cash to close on the sale of my home. Where's my bailout? Imagine the a gov't policy to help those who pay their obligations on time and as agreed, one which would actaully discourage defaults. Perhaps give folks a simple tax break if they suffered a loss on real estate due to a move, so long as they paid what was owed. That could actually be implemented, as opposed to these absurdly complicated 'help for homeowners' programs.
Megan,
This does not pass the smell test.
Assume someone wants to move from A to B. It isn't that people can not sell their house, it is that they don't want to actualize the loss they have taken. They want more money out than they can get. This is true even when they are underwater. If they take the loss they can move. Houses are cheap in location B too, for the same reasons they are cheap in A.
Of course, the problem is, people don't want to move to places they can afford. They want to keep living above their means, because they have somehow convinced themselves that they are richer than they are. They have been flying too high on borrowed wings for quite a long time now. They have become convinced it is their birthright.
Many people simply don't have the cash to pay the difference between what they get in the sale and what they owe the lender.
What you do then is rent out the house until you are right side up again. In location B, you rent. You continue in this way until you can unwind the position. You may not like what you can afford to rent, but that is the cost of a bad investment decision. Many people will be paying off these loans for a while. Many people are paying off student loans too. Sure, it sucks; so what?
If they have to they can declare bankruptcy. Oh, but they don't think they should have to. Because why, exactly?
In many areas, the rental income will not come close to the monthly mortgage payment. I live on Long Island, NY. Most rentals cannot come close to covering the mortgage of a recently (15 years or less) purchased home with a conventional 20% down loan. In most cases, the rental income would only cover about 1/2 the real estate taxes.
The article was not about "bad decisions". It was about the fact that some people cannot MOVE because they can't sell the house and get enough out of it to pay off the mortgage - no matter what the reason.
Idiotic statement. A neighbor of ours (in a suburb of Houston...We have not had much of a decline becuase prices never really ran) thought he'd do exactly that. It's been sitting, empty for 4 months while he makes double mortgage payments. To recap Megan's point, many Americans have three choices:
--Bring cash (which they do not have) to the table for closing;
--Try to rent the place out, hemorrhage cash (which tehy do not have)
--Stay put.
In no case does your silly "Take it like a man" attitude add anything to the conversation.
Jay: "What you do then is rent out the house until you are right side up again. In location B, you rent."
Galt: "It's been sitting, empty for 4 months while he makes double mortgage payments."
FAIL.
Apparently there is a nesting restriction so I have to reply here. Apologies.
Ed,
The point here is that their mobility is not affected, sorry if I was unclear.
You do not have rent the house in location A out for enough to pay the mortgage - you only have to rent it out to pay for the rent in location B. You may not be able to afford a very nice house in location B. Then again, if property values are uniformly depressed, it will be about the same.
I suppose in retrospect I should have been clearer on that point.
The difference in the mortgage and rent at location A is not relevant to mobility, it is simply the amount of negative cash flow being generated from a mal-investment.
Mr Galt,
I suppose your neighbor moved to another expensive house instead of a less expensive one. Probably because he feels the recession is temporary and does not wish to sell at the bottom. That is a reasonable plan if you can afford it. It sounds like the rent is a little too high if it has been on the market that long.
Nowhere did I advocate buying a second house and making a second mortgage, but your neighbor may have sound reasons. For most people, I would not recommend this though.
If he really needs to move, he can cut the rent by 25% and I bet he will get a renter. Lets say it is only $800 a month. Then he will need to rent a place that costs less than $800 a month. What his mortgage is is not relevant. He may be paying $1200 a month in mortgage and collecting $800 in rent that he uses to pay his own rent. This is clearly not a good situation, but it has not affected his mobility. The sort of place he can rent may not be as nice a place as his old one.
These numbers are purely hypothetical and not meant to reflect on your neighbor in any way. I am just making up an example to illustrate a broader point.
I live near Clear Lake, BTW. And lets keep the "idiotic" and "silly" comments to a minimum. I don't know you but I bet you are pretty intelligent. Don't get so worked up :)
I agree completely with this. I have a cousin who is super young, but since he bought a house, he is stuck in a job that he hates and in a relatively crappy city for his job prospects.
One of the major advantages of forcing people to save up for a 20% down payment is it helps avoid this. The super young are some of the worst homeowners because they need labor mobility more than others. If you do need to unexpectedly sell in 2-3 years you can do so without bringing money to the table. Even in a normal market, if you bought at 0% down and tried to sell in 2-3 years you'd likely have to bring some cash to closing to pay for the associated fees.
This is a good point, and I completely agree.
The problem is, of course, that we didn't do this. :) The place we are in is a mistake, we never should have done it. But, we are still here, and we still have to deal with it.
But yeah, going forward, it's hard to imagine not getting back to 20% down.
I think part of the problem is that we need to de-stigmatize renting. Way too many people get a house way too early and are in way too much debt.
I agree completely with this. I have a cousin who is super young, but since he bought a house, he is stuck in a job that he hates and in a relatively crappy city for his job prospects. D'oh!
"Many people simply don't have the cash to pay the difference between what they get in the sale and what they owe the lender."
Many of those could do a short sale - but that would mean having to rent for a few years in the new area. For many people having to rent would be totally unacceptable. I mean rent is "throwing your money away..." Not that you didn't buy your house for 400k 3 years ago and now it's 300k so it's been dropping in value by $2800 a month not to mention your mortgage and property taxes. But, rent? Never, it's socially unacceptable and as every knows - it's just throwing your money away.
From what I understand, trying to BUY a short sale house is a nightmare. The banks don't seem to be able to get their act together. It can take months to get the stupid thing to go through, if at all.
Here's the history of one in my neighborhood. I know the house because I made an offer on it 5 years ago, and neighbors looked at it recently on my recommendation. It's huge with 5 bedrooms, 3 baths. It sold for 495K (100 K too much because it needed a lot of work) 4 years ago. The buyers fixed it up. Then, a couple of years ago it was advertised at 419K, short sale. It was easily worth that and still is. Much smaller houses ACTUALLY sell here for that amount. For whatever reason, it didn't move. Eventually it got foreclosed and went on the market at 399K, then 379K. Then it disappeared from the MLS listings but is still on the real estate agents site. If it sold at 379K the bank lost another 40 grand plus the cost of foreclosure. That's an indication of how screwed up short sales are.
Calvin Jones and the 13th Apostle:
get ready to see a reduced living standard even for those with jobs
Right. At a European Trade Conference 1-2 years ago:
Reporter: But, how much trade can China expect to do with Europe ?
China Rep: Oh, we expect to do quite a bit of trade with Europe...
after their populations get used to a considerably
lower standard of living.
Many of those could do a short sale
I suppose as long as they don't need to actually sell the house for the 6 months or so it takes to get the damn signatures on the paper they could.
Perhaps give folks a simple tax break if they suffered a loss on real estate due to a move
Can't you take a capital loss now? I'm not up to speed on the details of tax law.
Rob: It's been a while since I looked at it, but last time I checked, capital losses are netted against capital gains, and any excess can be applied to ordinary income for $3,000.00/year.
This is subject to a rant for another day, but it's outrageous that if I make $100,000 in capital gains from extraordinarily good investing, the government wants to be paid today, but if I lose $100,000 through bad luck or stupidity, the government wants to string it out over 30+ years.
Truth!
I think that you can't take a capital loss on a primary residence. You also have a large exception from capital gains as well on a primary residence, so it somewhat evens out in this case. Currently, you are forgiven for the taxes you'd owe for loan forgiveness but that isn't necessary indefinite.
I guess my point is that if you bought a house interest only with low to no down payment the financial hit to foreclosure or short sale isn't that bad. Some people may not want to move because realizing the loss is psychologically painful. Mobility may also be down because people are having troubles finding a job for themselves and their spouse in a new town.
I suppose as long as they don't need to actually sell the house for the 6 months or so it takes to get the damn signatures on the paper they could.
They don't need to pay their mortgage or taxes during this period, so it doesn't matter that much. They will just have to rent in their new location instead of buying.
Perhaps give folks a simple tax break if they suffered a loss on real estate due to a move
Many people are getting a tax break. They don't have to pay taxes on the amount of loan forgiveness they received. Typically this would be counted as income and taxed, but the current law temporarily prevents that.
"In most cases, the rental income would only cover about 1/2 the real estate taxes."
The Geithners paid $1.6 million for their home in Westchester and are now forced to rent it out for $7500 a month. Property taxes are $27,000 a year.
The mortgage would run about $9600 a month plus about $2250 in property tax for a total of $11,850 a month. That doesn't include maintenance.
Why buy something for $11,850 when you can rent something for $7500 if you know you may have to move in a few years. You can't tell me Tim didn't think he might have to move to Washington at some point in his career.
I don't know, he was too dumb to know that he was supposed to pay payroll taxes even when his employer told him he had to.
Believe it or not Greitner actually got LUCKY with that 7500 rent. Mamaroneck and Larchmont are very popular with diplomats and foreign bankers working in NYC because of the short commute to Manhattan's east side where most of the banks, consulates and UN missions are located . The foreign governments and banks pick up the rent. Since the supply of rental houses in those areas are limited, the deep pocketed governments and banks drive up the rents.
In the NYC burbs, there is not that much demand for upscale rental houses.
Yancey,
My money is on the wife. Of all the people I know who got into trouble by buying at the peak - the wife was the one who was adamant that they need to buy a house.
Why buy something for $11,850 when you can rent something for $7500 if you know you may have to move in a few years.
Because rentals of that kind are very hard to find. People with that kind of money usually prefer to buy, and nice neighborhoods rarely have a large rental stock. Renting usually doesn't mean the same place for less money, it means an inferior place in an inferior neighborhood for less money.
Besides, renting has its own risks. Your landlord could get foreclosed on, or simply decide to sell, in which case out you go even if you've never been late and can't afford movers. That would have happened to me, except that I had arranged to buy a house in anticipation of the end of my lease, so no big deal.
renting has its own risks.
Yes... but renting is rarely going to result is massive financial losses.
To your other point - I'm not sure that " nice neighborhoods rarely have a large rental stock." Is an accurate statement. If you do a quick search of the nicer towns in any major city you will find luxury rental units available in good school districts/nice towns.
A quick google search shows that Tim could have rented a very nice place here http://www.greenwichshore.com/ with rents topping out at $3,800 a month 1/3 of the cost of the westchester house.
The greenwichshore is apartments, not houses. You can also rent an apartment in Mamaroneck. There are lots - right near the train station.
That's no relationship to houses. Greitner, like 10s of millions of other Americans wanted to own a home. Like many, he cannot afford to sell it without a loss. That just reinforces the whole premise of the story - about people being stuck with houses they can't afford to sell. Most of them are not being offered Cabinet positions in DC.
Greitner, like 10s of millions of other Americans wanted to own a home. Like many, he cannot afford to sell it without a loss.
He does not have to sell at a loss and make up the difference from out of pocket unless he wants to buy another house.
If he rents out his old house for $7500/month, then he can rent a new house for $7500 or less. He is still paying his old mortgage, that hasn't changed, and he still living in a house, that hasn't changed. It's just a different house.
The only difference is that he might not like the house as much as he liked his old one. But he isn't trapped either.
Rob,
And as for my use of Greenwich - I would have used Westchester but I know their are good and bad parts of Westchester so my comps might have been innacurate. I know for a fact that there are no bad parts of Greenwich.
jmo3,
and an even quicker clicking on your link shows that Tim could have rented an apartment, not a single-family house.
Look, I can only speak for the two markets I've been closely involved in recently, Charlottesville, VA and Portland, OR. In neither one could you easily rent a nice place in a nice neighborhood (and indeed the C'ville market is so warped by the university that my mortgage/insurance on a 3BR/3BA on 1/3 acre with community pool access was cheaper than a 1BR apt. with 1-car garage). Sure, you might get lucky (especially for short-term stuff, for somebody hoping to sell next year), and sure, you can always have a roof over your head. But if you're like me--you value SFH living, you value good schools, and you value neighbors who care about the community--then renting is right next door to impossible.
Yes, I'm paying more, but I'm getting more, too.
Oh, and a 30-year fixed is an inflation play, too, which at the moment is looking like a good one.
"That's no relationship to houses."
Both offer shelter against the elements. This absurd fascination with single family homes is ridiculous. If the cost was the same for a 3 bedroom colonial in Greenwich or a 3 bedroom apartment - by all means go with the house. But, when the three bedroom colonial is going to cost you hundereds of thousands of dollars more and expose you to huge risks - it doesn't make any sense.
This absurd fascination with single family homes is ridiculous.
Dude, are you not the same person who has defended the desire of the buyers of designer goods to enjoy the best craftsmanship that money can buy? Personally, I think high heels are ridiculous, and doubly so at $500/pr, but hey.
A SFH costs more because it separates you from your irritating neighbors and usually comes with a nice private park for the dogs/kids attached. Plus, you get to do whatever you want with the interior.
It's a consumer good. Some people like to consume expensive shoes and Hermes handbags, others like to consume a little bit of land and a shelter that is theirs alone. Nothing wrong with that.
Incidentally, John Hussman proposed a solution to the problem of underwater mortgages with his PAR concept. I think I've already linked to it a half dozen times before on this blog over the last six months or so, so if anyone cares, feel free to look around for it.
Rob,
Ahhh - how does it feel to be on the other side of your usual line of reasoning :-)?
"Nothing wrong with that."
There is something wrong with that when it destroys the economy.
Now, obviously at some point the price to rent ration would have gotten so high that even you would have rented. I just fear that due to any number of cultural factors the price/rent ratio was allowed to get out of hand.
If more people had looked at the cost to rent we might not have gotten so deep into this crisis.
Rob,
So you would admit the extra money you spend every month on a SFH vs renting an apartment is just as frivolous as spending money on Jimmy Choos or a Range Rover?
Fewer Americans are moving now than in any year since 1962, when the population was 120 million smaller.
And what demographic change has occured since 1962 that might have an influence on how mobile people are?
Don't you think the boomers who were in the 20's in 1962 might have moved just a little more frequently back then (and in the intervening years) than they want to now?
Ahhh - how does it feel to be on the other side of your usual line of reasoning :-)?
Well, if you can find me an example of someone paying 10 times as much for a house which is vastly inferior in all ways except status symbolism, as is the case when a woman replaces a decent pair of shoes with Jimmy Choos, then I'll know what it's like. Until then you're stuck asking why Geithner paid 3 times as much to get a vastly superior product. The answer is simple: he paid more because he wanted to get more. And he did get more.
Now, obviously at some point the price to rent ration would have gotten so high that even you would have rented.
Um, it did. As I said above, I had a lease--that is to say, I was renting. Even now I think prices are not at the bottom and I'd still be renting if I hadn't come across a good foreclosure deal that hit all the right buttons.
But in renting, I was forced to accept much less house than I wanted. I could not find a nice house in a nice neighborhood, because those houses are all either owner-occupied or available for the short term only while the owner waits for May to list the place. My wife's propensity to call me in the middle of the day in a rage because the baby was driving her nuts went from several times a week to none, for the simple reason that we now have enough space for him to play safely and require no tantrum-causing parental interference. Plus we have a yard for him to go out in where he can point accusingly and shout at the flowers. And it's only $300/mo more expensive.
So you would admit the extra money you spend every month on a SFH vs renting an apartment is just as frivolous as spending money on Jimmy Choos or a Range Rover?
In the case of the shoes, no. They're worthless for anything except status. You can get a comparable product, and indeed a better In the case of a Range Rover, not sure. I personally have found 4WD useful, and I understand the need for a large vehicle, so I suppose the relative frivolousness depends on how it compares to similar SUV's.
I do consider status spending in general frivolous.
My apologies for the lousy editing.
Rob,
"Until then you're stuck asking why Geithner paid 3 times as much to get a vastly superior product."
A Lexus LX 570 is 2.5x more expensive than a Ford Flex. Is it 2.5x as nice? Some would argue that it is a "vastly superior product" in terms of size, durability, sophistication, off road prowess, reliabilty, etc. I'm willing to bet you would agree that a LX 570 is "nicer" than a Flex but I'm sure you wouldn't say it's a "vastly superior product".
Your idea that a larger more isolated home is "vastly superior" is just your personal preference, no different from thinking that shoes from Jimmy Choo are "vastly superior" to those from Payless.
It is also the preference of the vast majority of Americans, and has been for many, many years. It it weren't, there would be no such thing as "suburbia". Every single survey taken always comes to the same conclusion. A private home is preferred.
I actually grew up in the first planned "suburban" development, Forest Hills Gardens, in the Queens borough of New York City. It was begun about 1917. When my parents first moved there, there was a small farm at the end of their street.
If you go to that "urban" area known as Brooklyn, NY you'll find thousands of 1800s brownstones.
Hershey, PA was built as a "company town", but Milton Hershey did something different. He SOLD the houses, at fair prices, to the employees rather than the typical renting. That attracted workers from all over and contributed to the company's success.
The desire to OWN one's own home is VERY old.
ALL high heels are ridiculous.
But as for housing, a single-family home does have advantages. An apartment in a posh complex has other ones -- pools and tennis courts may be available, for example, and you can't beat apartment living when something breaks and it's the landlord's responsibility.
I do consider it a problem that it's so hard to rent a single-family home in many parts of the country. It's not terribly hard around Washington, though, because there are a lot of transient professionals. If you want attached housing (apartments or condos), there's more of a free choice about whether to rent or buy.
Your idea that a larger more isolated home is "vastly superior" is just your personal preference, no different from thinking that shoes from Jimmy Choo are "vastly superior" to those from Payless.
It's not worth arguing the point. Granting that we're talking about nothing more substantial than personal preferences here, my primary point stands unchallenged: it's difficult to impossible to rent a nice house in a nice neighborhood. Therefore, people who frivolously wish for nice houses in nice neighborhoods have to buy, and your suggestion that they rent is as useless to them as me suggesting that young women running up their credit card bills to buy Jimmy Choos should instead buy a nice pair of Rockport walkers.
"Therefore, people who frivolously wish for nice houses in nice neighborhoods have to buy, and your suggestion that they rent is as useless to them as me suggesting that young women running up their credit card bills to buy Jimmy Choos should instead buy a nice pair of Rockport walkers."
If you point out to the woman the true cost of all that credit card debt she may chose to make different choices. In the same way that if you point out the true cost of SFH living people may make different choices.
M.C. Pointed out that "An apartment in a posh complex has other ones -- pools and tennis courts may be available, for example, and you can't beat apartment living when something breaks and it's the landlord's responsibility."
The other huge benifit is that if you need to move for a great new job you won't find yourself 100s of thousands of dollars underwater. People need to be aware of that so they can make more informed choices.
it's difficult to impossible to rent a nice house in a nice neighborhood.
It's pretty easy in Southern California, which is close to ground zero for the housing crisis. That still didn't stop people from buying houses. People were paying 2X-3X rent here for their mortgage for the exact same house across the street. That doesn't include maintenance or insurance either. They were doing the same for condos, which are not much different than apartments. The most common reasons people gave me for buying in 2005-2006 were "stability" "tax breaks" "rent is throwing money away" and of course "we're going to make a ton of money"
jmo,
How often have people ended up way underwater, historically? And how many of us really have to move for our jobs on anything but a very occasional basis? People are in trouble now, but it's not a real common kind of trouble, historically. You can't plan your life around the risk of a pretty unlikely occurrence.
My HOA owns tennis courts and a pool, BTW, not that I'll be using either much.
You can't plan your life around the risk of a pretty unlikely occurrence.
I know you don't believe that :)
Otherwise people would never buy life insurance, or disability insurance, or flood insurance, and so on.
You would be crazy not to consider risk in any investment, especially one the size of a typical house. The fact that it is such a huge fraction of a normal person's net worth is an argument for it to be more conservative, with a more pessimistic risk outlook - not less.
"How often have people ended up way underwater, historically?"
1837, 1857, 1873, 1893, 1929, 1973, 1980, and 1990... and now.
And you are wrong. The Depression saw many new houses built. About 75% of the houses in my neighborhood were built, and sold in the 30s. The house I owned, in another area, previous to this was built in 36. The previous owner had bought it in 38. Virtually all of that town was built in the 30s. Those who were not out of work in the Depression, the majority, still bought houses. At that time the longest mortgage term was 5 years.
In 73, the first oil shortage, there was no great problem with home sales anywhere. At that time the longest mortgage term was 15 years. Some gov't. assisted loans, like VA went 20.
Even with astronomical interest rates under Carter, houses sold mostly with a gain. That was in 80 and just before. The 90 - 91 recession was short lived and effected housing not at all.
Recessions DO NOT result in many people being under water. Remember that with 10% unemployment, 90% have jobs. Yes, some lose their houses to foreclosure when they lose a job but that does not lead to rapidly declining house prices.
The present problem grew during a good economy, when people, and lenders went crazy with house buying and mortgages.
The present situation is the result of a stupid housing bubble. The Dutch Tulip fiasco, when the Dutch were paying silly prices for Tulip bulbs was another bubble. The 1920s stock market was another bubble. In the late 70s and early 80s there was a bubble in sailboat sales and conglomerates were buying sailboat makers in order to cash in on that bubble and those brands are now all out of business. The Dot-Com stock silliness was another bubble. The huge sales of very expensive SUVs, fueled - like houses - with easy credit, often with HELOCS and second mortgages, was another bubble.
You can't count every single drop in prices as putting people underwater. My mother sold in 1990 for 5 times what she paid 12 years before, housing slump be damned. To end up underwater you need to buy at the wrong time, have a small down payment, and sell at the wrong time. That is, you need pretty bad luck, or maybe a bit of bad luck and a bit of poor decisionmaking.
Your approach would seem to recommend never investing in anything other than cash in the mattress, because after all, the stock market can drop!
"You can't plan your life around the risk of a pretty unlikely occurrence."
I'm only 33 and this is the third time it has happened in my lifetime. I don't think it's unreasonable for me to plan on it happening again.
"Your approach would seem to recommend never investing in anything other than cash in the mattress, because after all, the stock market can drop!"
My advice would be don't put all your eggs in one basket.
If the choice is live in an apartment and put a couple thousand dollars a month into a diversified portfolio of stocks, bonds and commodities or put every spare nickel into some over sized Mcmansion - you might want to consider the apartment.
Certainly a rational person might decide it makes sense to go with the comfort, quite and space of a SFH. But, much like it may make sense to go with the size, comfort and space of a Lexus LS 460 vs. Toyota Corolla one should at least be aware of the substantial extra cost of going with the larger, more comfortable option.
Otherwise people would never buy life insurance, or disability insurance, or flood insurance, and so on.
The very low cost of that kind of insurance mean you don't have to "plan your life" around it, you just make a trivial amount of room in your budget for it. But jmo is proposing choosing an apartment over a single family home--a pretty substantial difference, especially if you have kids--based on the speculative risk that you might accidentally buy at the the top of a bubble and find yourself needing to sell at the bottom. That's like refusing to have a kid based on the risk that you might die and leave an orphan behind. At some point, you've got to accept that life is risky and start living it instead of trying to hedge every little thing.
Clearly, one should have a good idea of what the risks are, but that's not the same as assuming that any risk at all is terrible.
I'm only 33 and this is the third time it has happened in my lifetime.
You've personally been underwater 3 times, or it has been theoretically possible, given very bad luck, to get underwater 3 times? And how many times in your lifetime has it been possible to lose money in the stock market? Yet people who thought long-term instead of day trading have done fine in both housing and the stock market in your lifetime.
I agree with the general sentiment that houses should be regarded as unusually expensive consumer durables, rather than investments. But I don't see how the risks here are so wildly out of line with the risk of driving on the freeway or the risk of buying a mutual fund including AIG.
If the choice is live in an apartment and put a couple thousand dollars a month into a diversified portfolio of stocks, bonds and commodities or put every spare nickel into some over sized Mcmansion - you might want to consider the apartment.
I'd agree with that. You shouldn't be buying more than you can afford, whether its a car or a house or a Hermes handbag.
based on the speculative risk that you might accidentally buy at the the top of a bubble and find yourself needing to sell at the bottom.
It's more that people don't calculate the costs. For example:
Person gets a job in Seatle but plans to move make to Boston to be near his and his wife's families when the kids come along in five years. So, the couple buys a home for 400k rather than rent in a luxury complex for say 1200 a month.
http://www.rent.com/rentals/washington/seattle-tacoma-and-vicinity/seattle/lake-city/solara/438749/1/?sp=1&searchrank=1&fl=
5 years pass and in a normal market the house sells for 450k. Couple says - yay! we made 50k.
Well... no. If you had rented your total outlay would have been 1200 x 60 = $72,000.
Cost to own =
Mortgage 2661 x 60 = 159,660 (please note that after paying 159,660 in paymetns you've only paid down $23,939 in principal over 5 years, you still owe 376061.55 due to your amortizing mortgage)
Propert Tax 3000 x 5 = 15,000
Sales Commision = 16,000
Maintaince = 15,000
Total cost to own after five years $181,667.
So, over the 5 year period it cost 2.5 times as much to live in a SFH vs. an apartment. And that's great - for some people living in a SFH is worth an extra $109,667. But just be aware of the costs.
JMO, you are overstating the benefits of renting.
First, you assume that rent remains stable for five years.
Second, you neglect the reduction in income tax that the mortgage interest and property tax will provide.
Third, you do not include the reduction in principal in the return from the sale of the house: gross proceeds would be $74K, not $50K.
Fourth, you are comparing apples and oranges--an apartment in a "luxury complex" is not a house, it is an inferior good to a SFH.
If people who have lost their jobs cannot move to get new jobs then its going to increase the number of households who go into bankruptcy, which is going to increase the number of defaults/foreclosures, which is going to increase the downward pressure on house prices.