Housing - What is Value?
Randy Buss
DII
Der Invest
Informant
16 March, 2004
That is something I currently
ask myself in a world, which on many levels, seems overvalued
to me. Of course the word "value" has many connotations
attached to it. Associated with value are ideas such as comfort,
survival, even luxury, a good deal, or something increasing or
at least maintaining its cost price.
- A man in the desert would value
water over most things and would be willing to pay for it a person
with enough money might value a Mercedes over a Toyota - it provides
more driving comfort, better craftsmanship, better protection,
and maybe even a better re-sale price. Hence, better overall
value.
- A person who has worked extremely hard and takes a SPA weekend
at a 5-star resort might be considered as extravagent by most,
but for him/her, the relaxation and regeneration gained is of
utmost value.
I ask myself this VALUE question
in an overall investment context. One of the largest single investments
people make is buying a home. Now, for donkeys generations we
have heard that owning is better than renting. And this for a
plethora of fairly logical reasons, which I won't get into here.
I am sure you already know them. These reasons seem understandable.
But logic and value are often at odds. Would you pay 100$ for
a liter of water ? Heck no. But the guy in the desert would.
It could save his life. Would you pay 2000$ for a 3-day weekend
at a spa ? Likely no. But the stressed-out businessman/woman
who's been working 18 hour days to make a deal, just might. Even
more likely yes, if the deal goes through. So again, value, as
is beauty, is in the eye of the beholder.
In today's overall market environment, and after giving it some
further thought, I'll be honest - I'd rather rent. "Buss,
what are you talkin' about, rent. Sheesh. Who the hell rents
these days?". My answer: some very smart people. And the
smart people are, most usually, far ahead of the sheeple in their
thinking and their actions.
What do people see in their homes? Security, chance of personalisation,
tax write-off (depends on country tax laws), pride, etc. All
are legitimate I suppose. But I would venture that the #1 thing
people see is an increasing price, hence they think a better
value. Home prices have been on a torrid pace these last years
and have been basically rising for a decade. That decade was
punctuated, and still is, by easy-money and the market bubble.
Prices have risen in the US, UK, Australia, etc. Canada? I don't
know, but probably. But my response is : so what. What does that
give you? More money?. Depends. That equation only works if you
plan on selling and buying in an entirely new location where
prices are decidely lower. If not another location, and that
is by far the majority, then you will buy another house in the
same general area which has also risen in price. So, why do people
sell? Some, to step-up their size requirements (kids), others
because they want a bigger somethingyard, pool, garage, whatever.
All are legitimate. But as you know, the rising tide of prices
raises all the boats. You will likely have to give out more of
your money via a mortgage for the next grade up in perceived
value. The net result : more comfort, or luxury or whatever and
likely a bigger mortgage. But not necessarily a better value
from an investment perspective.
In my book, better value means investments which offer better
purchasing power at the correct time. Why do I mention this?
Because I believe that in a deflationary scenario, housing prices
will drastically fall, and hence your home price's market value.
But your mortgage will not fall - you still owe the full amount.
The analogy is very easy : you bought high, now you have to sell
low. Why sell ? Because in a deflationary environment, DEBT is
what buries you, and CASH or liquidity is king. But, if you wait
too long, then it becomes even worse because all the home owners
are rushing to the exits to sell and not enough buyers can be
found. Hence spiralling prices downward even further - supply
outstrips demand.
Also, in the current job environment, many couples require two
(2) incomes to make the whole calculation tick over. If any partner
loses a job, then often this means losing the whole kit &
caboodle. That is why personal bankruptcy figures keep going
up to all-time highs.
In conclusion, that is why some professionals and insiders I
am aware of have already sold their homes. They rent now and
they will re-buy later a beautiful villa at 20 cents on the dollar.
To these people renting is more valuable because they locked
in a high price for the sale price and now keep their savings
and liquidity "dry" for the time when prices are low.
And if they were doubly smart, they sold their houses around
Jan 2002, invested in the EURO or CAD or AUD or whatever and
made an additional 15-30 % on top. This strategy I suggested
nearly 18 months ago. It is still not too late - but the deadline
moves much closer in my opinion.
So, in a sense, value is all relative.
Best Regards,
15 March, 2004
R. Buss
Please respond to :
rabuss@attglobal.net
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