& Market Trends
For a House in a Hamlet, To Buy, or Not to Buy, That is the Question
Posted Apr 1, 2011
There is no question that buying a home can be an emotional experience. Sometimes the desire to own is so strong the “want” to own outweighs the actual “need” to own. This strong desire can suddenly run into a brick wall of economic reality, however, when a would-be buyer realizes they do not have sufficient cash flow to pay for a 20 percent down payment and a mortgage, high taxes, annual maintenance, and the inevitable but certain major repairs that will be required on the property.
In 2011, there are sound reasons that new home sales have hit the lowest level ever recorded. Foreclosures, coupled with desperate sellers of existing homes and developers with a glut of unsold luxury condos, have left a real estate market saturated with product at every price point. Indeed, every time a house sells, two more sellers come out of the woodwork because they heard homes were selling. The sad fact is there are just too few buyers, and anyone who can afford to buy a first or second home is holding out for further price reductions. Crowds of people are not showing up like they did a few years ago at open houses and lookie loos (a realtor’s worse nightmare) are littering the landscape and can be spotted a mile away, as realtors pray for big time job growth.
What a difference a few years has made. From the top of the housing bubble to now, the economic reality of ownership has flipped 360 degrees. Back when housing prices were rising so fast and mortgage credit was so easy to obtain, no matter what you paid for the house, the cost of actually owning and maintaining it were left out of the buying decision. Rising prices took care of all the costs and if cash was short, mortgage REFI’s paid for it, plus a vacation. Homebuyers back then neither needed income or a down payment to own one, two, or even three properties. Owning a house didn’t feel like a burden; it helped set you free financially, or at least that’s what you thought.
In today’s new world the family house (and in many cases more than one) has become a crushing burden that is simply too much to bear. Food on the table has taken precedence over property taxes and a mortgage, leading millions of Americans to “sell by mortgage default”. In other words, let the bank take the underwater home. I read in The Wall Street Journal this week that at the end of 2010, there were over 11,100,000 underwater borrowers. That equates to 23.1 percent, or almost 1 in 4 of all mortgages.
Homeowners who bought into the American Dream have a right to be bitter and defaulting on the mortgage is a way of handing back the new American nightmare to Wall Street and the banks. The average person has figured out that the last thing the bank wants to do is take back the house because if they do, they’ll have to pay the back taxes and maintenance, and then take a big hit when they sell it. So, while the banks delay foreclosure, the ex-homeowner gets to live rent free for months or even years in the house. Ah, the revenge is sweet, and at least the kids get to eat.
Troubled markets do create opportunity, however. So with housing prices getting cut big time, and many of our neighbors looking to sell, my wife and I are not the only ones starting to look around and think about whether it might be time to buy that second home. The drop in housing prices makes buying look tempting on the surface, the only question is, “what lies below”? Bored real estate agents are spinning the story that there are buyers coming in with cash for the once in a lifetime opportunity. (Many of these same real estate agents were house flippers who flopped in the bubble, so we take their hype with a very large grain of salt.) New buyers are also encouraged by realtors to think about buying a property with rental income potential, but they may not be aware of the actual costs to carry a property especially when seasonal rentals remain vacant or are rented at steep discounts.
Indeed, buying would be much more tempting if after you bought and paid cash, you were done paying for it. Unfortunately, that’s not the case. When you own property, you effectively put a target on your back that screams to everyone from the tax assessor to the plumber “please send me bills”. I’m aware of many homebuyers who have discovered the hard way that paying for your house along with food, utilities, insurance, gas, telephone, etc. each year, can easily eat you out of house and home and these people live in places like Manhattan, Palm Beach and Aspen.
As a Baby Boomer nearing retirement age, careful planning is crucial as we enter the land of “Life after Income”. Without normal income, the real question for owning a house isn’t what you paid for it but where will you get the money to keep paying for it. Indeed, having mastered the art of living modestly, I can appreciate the joys of ownership because I haven’t been stretched to the limit, but I know a home can quickly become a money pit if you’re not careful. Given general inflation and the need for local governments to bleed taxes from property owners, my costs could easily double in five to seven years. For every enthusiastic second homebuyer coming into the market today, there are ten homeowners who have either lost the house, are trying to rent and can’t, or are maxed out and looking to sell. There are 10 million unoccupied houses in America, 11 million homes underwater, millions of mortgages in default, and millions of homes that will still go to foreclosure. Will any of these people be buying again anytime soon? Should we listen to the real estate brokers and rush to buy now? I don’t think so.
We’re optimistic that there may be a deal out there for us, but so far renting a premier vacation property in a beautiful location has proved to be the way to go. The same places we rent may be priced for sale at over $500,000 in beautiful resort towns. But when you look at the property tax, which may not be too bad, and maintenance fees, which are rarely low, the usual story is, even if you were given the house for free, you would have to be willing to live there for at least six months before owning would make economic sense. For a month’s use as a renter we might pay $5,000, but the owners are paying anywhere from $30,000 to $50,000 to carry it, even if they owned it free and clear! Just paying for use saves us a bundle and we haven’t tied up half a million or more earning nothing. Moreover, renting offers a piece of mind when you are not there. We don’t have to worry about theft, floods, freezing pipes or the roof leaking, or squirrels and mice moving in before a forest fire moves them out.
We have even begun to wonder why the owners of such premier properties are renting them out at prices we can afford. It turns out they are desperate for cash and renting because they have to. Many are in a cash bind, want to sell, and can’t get offers that today they are willing to live with. So, based on what owners of quality vacation properties are asking as a sale price, and have to pay in carrying a property, renters are getting a big time “half price off sale”. For now, I’ll take a rental at 50 percent off. If I buy the property at the price they are asking instead of renting it, I can easily become the owner crushed by an overpriced house that is not being used enough to justify the cost.
Now, don’t get me wrong. In many areas of the country, it is a great time to buy. Affordability is the best it’s been in years. If you really need a place to live full time and can buy with all cash, or you have that 20 percent down payment and a decent job, by all means look at buying that primary residence. Moreover, if you are willing to shop hard, as a buyer you should be able to cut a deal where in ten years of living, the house will have given you great joy for the annual cost and turn out to be not a bad investment given all the inflation that is coming.
However, if you are looking for that second or third home, at current prices you better have that rich uncle, a trust fund, or have just won the lottery with a 20-year payout. We live in South Florida which is one of the many ground zeros for housing hell. We have neighbors flitting between three homes and unable to pay for major upkeep on any of them. We have friends dropping the prices on their second homes because they can afford to carry, at most, one house. We have new members on our condo board who somehow think that if they can liberalize rentals for the property, they can hang on and cover some of their maintenance and tax. We have driven around and looked at the endless For Sale signs, and have stopped in at open houses where the owners and brokers have literally run after us saying “please make an offer, the price is negotiable”. Many of the properties have been listed for three years or more and are slowly getting marked down with no buyers in sight.
Don’t forget. When the price of a home is cut in half the taxes are cut in half, and the lower priced homes usually have lower maintenance. Therefore, it pays to watch and wait until the cost of owning comes down in line with the cost of renting, and you can actually afford the carrying costs each year. Patience will be rewarded with not just a half price off in rent, but a half price sale on the property! We look forward to the time when owning real estate will be cherished again. At that time we’ll be ready to write the check.
Mar 28, 2011
Finance Group, LLC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
Richard Benson, SFGroup, is a widely-published
author on securitization and specialty finance, and a sought after
speaker at financing conferences on raising equity for mid-market
Prior to founding
the Specialty Finance Group in 1989, Mr. Benson acted as a trading
desk economist for Chase Manhattan Bank in the early 1980's and
started in the securitization business in 1983 at Bear Stearns,
and helped build the early securitization businesses at Citibank
and E.F. Hutton.
Mr. Benson graduated
from the University of Wisconsin in 1970 in the Honors Program
in Math, and did his doctoral work in Economics at Harvard University.
Mr. Benson is a member of the Harvard Club of New York and Palm
Finance Group, LLC is a Florida Limited Liability Company and
is registered with FINRA/SIPC as a Broker/Dealer.