You can watch the evolution of the housing markets in the news on housing starts and building permits. Single-family building permits are actually rising, while multi-family tanked. This seems to indicate that residential housing has bottomed, and families who feel relatively stable are prepared to build. But investors--or their backers--aren't willing to bet on demand for either rentals or condos in the near term.
That backs up what we're seeing in the housing market here in DC as my mother goes looking for a house. There's a huge glut of condos in the U Street corridor, where I live, because developers all thought they had found a sure get-rich-quick scheme. They're competing each other's prices down to levels where the developers can't be making much money; the condo across the street from me seems as if it's about to be seized by the investors, having sold less than 20% of the units. But multifamily is more idiosyncratic, and as the summer wore on, most of the houses on the market made some kind of deal.
But DC is, comparatively, a boom market. In most places, inventories have shrunk somewhat, but there's still months and months of housing supply on the market.
The real question is: what happens next year? People still have something of a bubble mentality. They want to get in now, when things are cheap, because they expect that we'll return to the housing price inflation of the 1990s, if not the last decade. But it's far from clear that this is so. Rising house prices accompanied a number of secular trends, like falling interest rates and the growth of the subprime market, which have basically run their course. Further growth in most areas is going to have to bear some relationship to the growth in incomes.
So I think that this year's buyers priced in some future gains. But what happens when next year's buyers refuse to price in even higher future gains, and demand to buy at this year's price? If the market gets the idea that no, the days of housing as an investment opportunity really are over . . . well, prices will stagnate, or even fall further.
Not that I think that would be a bad thing. The mania to buy the biggest house you can, now, lest you be priced out of the market forever, isn't very sensible. There are good reasons to want to own a home. But they have to do with the ability to customize your home environment in a way that renters usually can't. Investment dollars are better put into something that might actually enhance our national productivity.
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Yeah, but neither are laws constraining building either. The mania actually is relatively sensible in a few places in the country that have had successive bubbles, where each downturn, while sharp, has not halted the long term trend.
You should note from the article that multifamily was up 56% in May, then down 26% in June, then down 13% in July. Multifamily units get driven by investor confidence and a small number of large (politically-connected, usually) projects.
the 90 day delinquency rate has been steadily rising with no plateau in site. When the foreclosures resume (as they must), prices will slide. there are simply too many houses on the market, a full year's worth of inventory at current sales rates is much higher than historical levels. Adding on to that is the number of under-occupied houses with vacant bedrooms and you have a simple supply and demand situation. We haven't seen the housing bottom yet. Not by a longshot.
Your headline is inaccurate and misleading. Housing starts did not rise again.
See MSNBC
Headline: Housing Construction Slipped In July
Housing Starts
It's easier to just read Calculated Risk. I would say it's most accurate to say that it was flat MoM, down YoY, but up since January which may end up being the bottom for housing starts. This isn't so much a recovery, as the January numbers were the worst ever since they started keeping track in 1959.
Agreed.
Down month-over-month.
Down year-over-year.
How does that equate to a headline that says: "Housing Starts Up"
Only in Obama World does down mean up.
assume a new sort of house becomes available
in the future; A durable good, rather than a
crackerbox consumer product designed to last,
barely, for one generation.
Would that be a good investment ?
Meghan,
There is a show on HGTV - I think it's called Real Estate Intervention. The show works with people who bought a home for (let's say) 850k in 2006, put it on the market at 999k and no offers. The new realtor has to tell them it's now worth 808k.
The shocking thing is - you get updates from the couples after they sell and even after they had to bring 40k to closing - what do they do.... they buy another house!
I mean you paid 2x as much per month than if you rented for 3 years and you had to bring 40k to the closing and you still think buying a home is a good idea?
I'm dumbfounded.
There are places where mortgage payments have been higher than rents for 15 years now. Whilst it might seem insane, its pretty clear that these areas have a very strong preponderance of people who prefer to own rather than rent, at least relative to the available housing stock and prevalent zoning rules. 2x rent is extreme, but there are certainly whole neighbourhoods in the SF Bay area, and I suspect in DC, where you'd have to go back to the early 90s to find parity.
I wonder if banks could somehow use their foreclosure stock to create a market where people could sell housing short. It seems to me that the lack of an easily available way to transmit (and profit from) skepticism about an upward trend in housing prices contributes to its bubbly nature.
I just bought a house across the river from you in Alexandria. Well, I am buying a house. We close in a few days.
We watched the market very closely for a long time and looked at a lot of houses before purchasing. Overall, I think we have not bottomed out nationwide but it's a different story in the DC area. The price drops in the DC metro area, though quite real, were not nearly as dramatic as they were in most of the rest of the nation. This is just a very different market for a few reasons. For starters, incomes are much more stable here than in other places. Also, this is one area actually experiencing job growth during the middle of a recession. We will continue to experience job growth? You think government is getting smaller anytime soon? You think any of the government hangers on (lobbyists, contractors, advocacy groups, etc.) are going away as long as this is still the seat of American government? Nope and nope.
In the past few months the market here has stabilized substantially. We are seeing fewer homes stay on the market for long periods of time and few houses drop substantially in price. Last fall it was not uncommon to see price drops of $50-100 thousand within a couple weeks. Sometimes all in one big chunk and sometimes incrementally. You're not seeing that so much here anymore. Prices are dropping less often and in much smaller increments and houses are staying on the market for a shorter period of time.
Still, I expect that the house I bought will decline in value in the immediate short term - the next year to two years. I expect to have to hang on to it for at least 5-7 years to break even That said, it was still the right thing for us. Once you figure in tax breaks, we're only going to be spending about $500 more each month on our house than we were on rent. That's a lot, but it's not anywhere near twice our rent. The fact is, the rental market is insane here too. When you also factor in the better quality of life we will have living in our own place with elbow room and space for family to stay, as opposed to our less than 800 square foot one bedroom apartment, we are way better off even if our house does depreciate in the short term.
It helps that we know the market, understand the commitment we are making, are purchasing beneath our means, and are committed to staying in our house for at least 5-7 years. But for us, the timing and the market conditions (hello historically low interest rates!) intersected perfectly for us to get the heck out of apartment living and into something that has potential to kick some money back out at us when we sell it down the road.
I mean you paid 2x as much per month than if you rented for 3 years and you had to bring 40k to the closing and you still think buying a home is a good idea?
The fact is, it's nearly impossible to rent a nice place in a nice neighborhood. I've been looking in 3 different markets. You can find dumps next to the highway, and you can find nice apartments, but the rental lifestyle is almost always quite different from what is available if you are buy.
I suspect that your definition of "Nice" and mine are rather far aart as I have rented SFHs for the entire decade and have never had a problem finding one that met my standards and was affordable. None of them were in posh McMansion-villes or Upper Snobovias, but I haven't ever lived in a slum either (though my current abode in Baltimore is rather close to the slums). My neighborhoods have generally consisted of middle and working class people, with a mix of ages (young couples to retirees), homes and yards that are kept looking decent, few wild parties or public feuds, and no major crime worries. Granted, I don't have kids so schools are irrelevant (though in Florida parents are not tied down to neighborhood schools).
Rob,
I totally understand - and the owner lifestyle has value. It might be worth the mortgage being 2x the rent. But, having to bring 40k to closing might be the final straw.
The other issue - this guy had to move because he lost his job in DC and his new job was in Norfolk, VA. I can't imagine: losing a job, having to sell and take a huge loss, taking the new job, then buying a house, when you have no idea where you will be in 6 months.
Norfolk? That's one of the few places on Earth where decent rental housing should be available, either from people catering to military families or military families who decided to rent out instead of selling when they moved away.
I've never brought 40k to closing, so I can't tell you what effect it might have had on my psychology. In my neighborhood, the number of rentals runs in the low single digits, and nobody wants to put you there and use you as an income source for years, they want to have you there for 6 months to help with the mortgage while they wait for the market to improve (which isn't happening that I can tell).
FWIW, the rental prices are somewhat lower than my mortgage.
Rob,
Is it wanting to be in a good school district your primary motivator?
As for T.Ferg zwe are way better off even if our house does depreciate in the short term.
But what if you have to move because you lose your job?
And for both Rob and T.Ferg - what if you buy a new place and the market continues to decline and/or you need to relocate again?
Yes, I care about the schools, and about lack of traffic (both foot and automotive). With the recent hot weather, I'm leaving doors and windows open at night, and I'd rate any neighborhood where I couldn't do that as insufficiently "nice." I lived in a couple of those before settling here, including one where I couldn't afford to buy and where my rent was considerably higher than my current mortgage payment.
As for job loss, I have a profession which is both static, in that it's tied to a particular state (two of them, technically) and mobile, in that it isn't really tied to a particular employer. My wife has a government job (just back after 18 months at home with the second kid). We have something like a year's net salary saved, which could of course be considerably stretched if necessary.
Also, I bought a foreclosure and priced in another year of decline when I did so.
Let me leap on a rare chance to agree with McArdle. The ideological prejudice towards "owning" versus "renting" is historically artificial.
As Galbraith once noted, the failure of American capitalism to distribute housing is one of its most striking problems. We forget now the abysmal tenements and shacks a majority of the working class lived in before the government handed out homesteads and insured private issuance of mortgage debt.
After FDR Americans could "own" a house as a speculative investment if they accepted the the concept of indebtedness to banks as the norm. Banks, needless to say, did not object. Yet debt and speculation remained the basis of home "ownership."
As McArdle points out this all depends on people with incomes sufficient to buy out the earlier generation of homeowners at higher values. But she probably would not agree with my own solution to this disparity. Raise the minimum wage to $20/hr. No more "subprime" people, hence no more subprime crisis. But of course, that is unrealistic. The "realistic" solution is to give a few trillion of tax dollars to the banks and hope they will... well, do something that will... well, house Americans, somehow.
Somehow, I doubt that is their urgent priority.
Nelson - how exactly will 20% unemployment help the housing situation?
I wouldn't say "unrealistic". A better word would be "clueless". The subprime crisis wasn't caused by poor people desperately trying to buy the only house they could afford through the only mortgages they could get. It was caused by people of all income levels buying houses they couldn't afford, based on the belief that the houses were guaranteed to rise in value.
Handing a high-school drop out ditch digger $20 an hour isn't going to teach him to stay away from half-baked get rich quick schemes. Had the typical "victim" of the subprime crisis been making three times the salary, he'd simply have taken out a subprime loan for a home three times as expensive.
ROFL...
Raise the minimum wage to $20 an hour where I live and within a month a loaf of bread will run you $8. A gallon of gas? $9. A gallon of milk? $10. A Double Quarter Pounder With Cheese? $12.
For me, the extra expenditures would mean that your $20 raise to the moron who cooks the fries is the equivalent of a fifty percent cut in my pay.
And that fry cook still wouldn't be able to afford a house.
I am seriously considering purchasing a home now with the prices and interest rates being so low.
I currently own a co-op in NYC and am considering purchasing a 2 bedroom condo in Florida (Boca Raton or Ft. Lauderdale)as an investment/rental propery.
I am not looking to make a quick buck. I am willing to hold onto the property for 10 plus years.
I am nervous, however. I am uncertain as to if now is a good time to make this home purchase. And, I am extremely concerned about Florida's troubled economy and wide-spread home fourclosures.
Any advice would be welcome.
Storm - In some ways that's an easier calculation than working out whether to buy for yourself. Figure out your true costs - including mortgage, utilities, tax deductions, property taxes, maintainance etc, and compare against what you can get in rent. If you'd be cash-flow positve, do it. If not, don't. Easy peasy.
At this time, I would not figure in any appreciation unless you have specific knowledge the particular real estate market that implies it will increase in value. Its unlikely there will be another general boom for some time.
Also, actually the tax-deductibility of mortgage interest is a big deal. Its this that explains why there are wealthy parts of the country where you have to pay 750k for a 3/2 bungalow where prices have barely fallen - the people buying can write off 30-odd percent of the mortgage interest from their income.
As a personal anecdote: I'm re-financing my mortgage right now, which means I have to do an appraisal. (done on monday, don't have the report yet).
An interesting thing happened:
1. My lender asked me how much I thought the house was worth to get the mortgage approved (pre-appraisal). I told him I didn't want to guess because of market conditions and the renovations I had done. He asked me for my best guess, and I said $260k (I bought for 248k in May of 2006).
2. He wrote up the mortgage application for 80% of 260k.
3. I was approved, and then found out that if my appraisal comes in significantly below 260k I may be out the processing and appraisal fees (~$600-1200) if the bank has to renew their offer with new terms and I don't accept.
I thought that was interesting, since the terms are freaking phenomenal. 5/1 ARM, 0 points, no prepayment penalty, 4.25% (I may be able to float it down to 4% even). Very low closing costs (~$2300, including title verification and insurance and appraisal) by most standards.
....
As a side note: I should've rented back in May 2006. I bought a townhome that costs $1500/month in loans, $200/month in taxes, $140/month in HOA fees, etc.
I could've rented the same, or better, style townhome for a few hundred dollars less, while maintaining a much higher state of liquidity.
That being said, I've loved the ownership experience (most of it) and that's worth something too.
Joe
TJ,
1) Why an ARM and not a fixed loan? Are you planning on selling?
2) I'd watch the deal. IMHO, most lenders want to close the deal, not pocket the fees, but with the structure you're getting, the lended can always walk away from the deal and leave you out the cash.
Hey JMann,
1) 5/1 ARM because I plan on selling in 3 years (and I can definitely afford it should something come up and prevent me from moving in 5 years)
2) Agree, though the lender has a fantastic reputation and I think they are in it for the deal. I won't find out the appraisal value till Monday now.
What I see is separation. The bad parts of the country (Ca., Fl., Nv., Az. and a few others) have oceans of pain in their future. Other places (Tx., DC, Va.) are looking up. Talking about any specific area won't tell you much about the country as a whole for several more years.
Now that the national freakout has passed, the non-bad places can go back to something like normal, although normal isn't going to look like the subprime/alt-a/option ARM/no doc/nothing down insanity of the immediate pre-crash years - unless Fan/Fred go hog wild.