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February 10, 2006

To Pull the Trigger or Not to Pull the Trigger

Q: Is the air really coming out of the housing market? Should I wait or go ahead and buy?

A: So should you wait to buy? Maybe. If nothing more is fueling the bidding wars in your neighborhood than fear and habit, then it makes sense to wait. Unless a big local employer leaves town, real-estate markets rarely change overnight. It usually takes several months for sellers to realize a market has shifted and to lower their prices, and for buyers to understand that they finally have choices and negotiating room. But if you know you are going to stay in the area for years, and will be able to ride out a cooling real-estate cycle, then keep shopping. Overall, house prices aren't likely to plunge precipitously, even in overheated markets, most economists say. Mortgage interest rates could creep higher in the year ahead, though, eroding your buying power. Just remember to think of that home primarily as shelter, and not as an "investment." That will help you keep your purchase in perspective, even when frantic buyers all around you are losing theirs.
Is the Party Really Over for Housing Boom? [WSJ]

Comments

Way too many people thinking of their homes as investments...they have always been investments of sorts, but if you ask real homeowners, they're kind of break even investments, not real money makers (at least, a primary residence isn't).

The problem is that fear and habit have certainly fueled the recent boom, and this is right - that will take a little time to break. Rates rising, however, plus the "broken habit" will likely end the bidding wars, insane appreciation and may even cause a price decline - maybe not 50% or anything that wild, but could be 10-20%. In that case, your "buying power" would be about the same - overpriced house + low rates or "balanced" price house + slightly higher rates. So if you're in it for the long haul, I don't think it hurts you much either way, if you are able to buy now without bidding over asking and the price is decent, or if you wait a little.

Posted by: Anon at February 10, 2006 9:28 AM

A home is as much investment as a car purchase is; unfortunately since zoning restrictions artificially limit the supply of living space, it creates a shortage thereby driving up costs of said housing. Like a vehicle, a house and the sf it occupies should over time continue to drop in price, as more supply is created. Zoning turns this on its head.

In reality, a purchase of any house is really a purchase for use of a good for x amount of years. Like anything else, houses wear down and require upkeep, which also serves to obscure the fact that money is continually "invested" into the house as you replace broken and worn materials and appliances over the years.

Posted by: iceberg at February 10, 2006 9:47 AM

I always wondered why those tuscan villas that haven't been renovated in 400 years are now $4 million euros. I think location might have something to do with price appreciation. Also, historically, a car is a depreciating asset whereas a house is an appreciating asset. There is something called land underneath and where that land is has a lot more to do with the price over time than the maintenance of the house. And sorry, the zoning argument is a bunch of bs, do you know how many new developments there are? Look at williamsburg for example. I don't think restrictive zoning is holding back supply.

Posted by: Anonymous at February 10, 2006 9:56 AM

One thing that I think that is being overlooked is that naysayers love to say nay, (thanks 1st gen. SimCity) writers get payed to write and gloom-and-doom sells. Is someone in 2011 going to say "Wow this is an insightful article on real estate by June Fletcher, but she totally blew it on the bubble in 2006"?
Whatever they right will likely be forgotten as things shift, unless they pull a blodgett or something similar.

Of course its all based on numbers and trends, but both sides are using them for their points. Negativity sells.

Posted by: TBDLX at February 10, 2006 10:40 AM

Shorter this Q&A:

Q: Is the air really coming out of the housing market? Should I wait or go ahead and buy?

A: How the ____ do I know?

Posted by: linusvanpelt at February 10, 2006 10:51 AM

Anonymous,

If you want to talk "investment" in the tax accountant sense, than you're right. If you want to regard it in the economic sense, its not becasue a home is not a capital good, but rather a consumer good.

Now while it's true that "location" is something that there can't be two of, it's also true of everything else in this universe. My purchase of a certain Rolls Royce precludes your usage of the same vehicle.

You can however buy a homogenous unit from Rolls Royce and be just as happy, just like the 400 people who buy into the same building.

I'm not exactly sure how you disproved the laws of supply and demand in regard to land scarcity through zoning; the fact that developers are active only proves that they think there is sufficient demand for their product, not that there actually is or isn't an abundant supply.

Posted by: iceberg at February 10, 2006 11:24 AM

I must say that the Brownstoner reply is spot on.

I would add only this: reconsider how you are thinking of a home purchase. It seems from your question your reasons to buy are too closely following the media-hype and get-rich-quick-new-investor model.

That's not what homeownership is all about.

Instead, look at your purchase from the perspective of the intangible benefits you receive from homeownership. For one, no Landlord who won't give heat/effect repairs/take out the trash. There are so many others to list. There is much more to owning and this "investment" psychology is a fairly recent phenomenon.

In my 17 years in the business, homebuyers I've worked with have always had the attitude of, "Homeownership is good for me/us on so many levels." Not, "A home is an investment."

Sit down, sketch out the reasons you want to own---ignore the investment attitude completely---and then see if this is an endeavor you wish to undertake.

You might also check with your tax professional. She will certainly add important information to your decision-making process.

Hope that helps!

Posted by: Trevor at February 10, 2006 11:45 AM

Why does housing continue to appreciate even in places where there are no zoning laws?

Posted by: anon at February 10, 2006 11:54 AM

Iceberg, most brownstones are multi-family. These properties are very much an investment in the economic sense.

The portion of the home used by the owner is a consumer good. However, the portion rented out is a captital good. It is purchased for continued and long-term use in earning profit in a business.

If someone buys a owner-occupied property and treats it like a home instead of an investment, they're making a big mistake. For many buyers, rental income is the only way of "affording" the purchase.

I personally question the financial sense of buying owner occupied rental properties right now. For the life of me i cant understand why someone would want to saddle themselves with a negative cash flow investment just so they can get their slice of the pie.

Posted by: ItsAWrap at February 10, 2006 12:03 PM

I suggest you poll your brownstoning friends on the size of their homeowners' insurance policies. This indicates the replacement value of the structure. In most cases this will reflect very little historical appreciation over and above depreciation/maintenance. (Blue chip antique furniture has historically appreciated at less than 10%/year, and requires little physial maintenance or repair.)

What has really appreciated is the land. Few of us consider ourselves as leveraged speculators in unimproved land, yet that is a big part the investment potential of our homes.

I think it is easy, especially when it comes to older structures, to overestimate the intrinsic value of the home when it is the land that has much of the value and appreciation potential.

If you are thinking of a home's potential as an investment think about what makes land more valuable. Rental value, stricter zoning rules, enhanced infrastructure and amenities, population growth, etc. I personally don't see huge potential in most of the Blue chip areas of NYC.

Posted by: bkborn at February 10, 2006 2:18 PM

To anon,

You asked why prices are rising even in non-zoned areas, and I have answers to that.

First, you must figure in the decline of price in federal denominated dollars, and say how much is appreciation and how much is just price inflation. Asset appreciation in this case, like price inflation will consist of illusory gain.

Second, there is no location not subject to regulations and other government distortions of the price signal, zoning just happens to be one of the more prominent ones.

Thirdly, price determines costs, and not the other way around. As consumer saving drops and spending raises prices (which essentially are bids for scarce resources) which even absent an artificial scarcity like zoning will still raise the input costs. Zoning regulations will again only make this more drastic.

Posted by: iceberg at February 10, 2006 3:04 PM

iceberg, get off it!

Posted by: Anonymous at February 10, 2006 4:19 PM

I think you're all half right. Certainly, a home is not an investment in the purest sense of the word. However, I think the case can be made that brownstones are often properties with quasi-investment characteristics due to the potential for conversion to income producing property. I own a legal 2-family in prime PS. The rental income from one floor pays half the mortgage and I get to live in the other three floors. If I had converted it into 2 duplexes, then probably 3/4's of my mortgage would be covered by rental income. A substantial portion of my payments (half of which comes from rental income) amortizes my mortgage. In addition, I am fortunate enough to have chosen to buy in a nabe that has increased in popularity for any number of reasons (I like to think that it was my good judgement not luck).

At some point in 15-20 years I will relocate and either (1) sell the house and cash out the substantial equity I've accrued, (2) move, rent 100% of the space and live off the considerable income, or (3) develop/convert it to condos which I could sell and/or keep one or two for rental or personal use. Either way, these buildings provide enough flexibility for income and/or conversion that I view it as a partial invstmt.

That said, I still save aggressively for retirement. I'm not counting on the brownstone, but so far it has been a wise decision, generating gains that far outstrip any other "invmt" I've made.

BTW, to iceberg: Regulation plans an important role in ALL forms of invmt. Nothing unusual about that. And there are costs all to all invments: some more hidden than others. Money does not grow on roof shingles, but brownstone ownership has made some folks very wealthy indeed.

Posted by: Happy Bstone Owner at February 10, 2006 4:58 PM

I don't know what are this popele talking about, all i know is that i missed the first wave in 1993 and friends of mine that used to be panhandlers a\bougth a condo in park slope sold it for 700k bought a brownstone gor 800k in 2000 and now it is worh 2M so you do the math.
luck for me i didn't missed the 2000 wave bought a house for 465K around park slope
and the house worth now 1.3M on the lower side and now i bought another one in a good deal Center Slope and will gut renovate this one and believe me it will be sold in 2010 for double the amount not including the reantal i'm going to get there. Do the math and do not listen to all the wise guys in this blog.
where else you'll get this kind of money?

Posted by: developerxx at February 11, 2006 6:08 PM

« Friday Links REBNY: Median Sales Prices for Townhouses »

February 10, 2006

To Pull the Trigger or Not to Pull the Trigger

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