US residential property – a good buy?

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The chart below, the Affordability Index of US residential property, comes courtesy of the New Observations on Real Estate, Mortgages & Life blog. The Index is computed by factoring in home prices, mortgage rates and income.

Let’s have an open thread and discuss in the comments section whether this represents a buying opportunity, or is it a question of fools rush in where wise men fear to buy? Click on “Comments” below the heading of this post and share with me your views on whether I should part with my South African rand for a residential property in some part of America.

affordability-index

Source: New Observations on Real Estate, Mortgages & Life, March 4, 2010

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9 comments to US residential property – a good buy?

  • Bill H

    RE is the USA is a very ‘regional’ animal. While you can’t give a home away in Las Vegas or Florida, prices in NY have not dropped all that much.

    For me, I would see how rental income is holding up & only invest if the rental income could cover my costs. I wouldn’t speculate on price appreciation.

  • richjoy

    Those who have a job, savings, and credit, are not likely to now be laid-off, as the economic cycle has bottomed and is now on the upswing–thus job security and qualifications are not a concern.

    Therefore, given the likely inflation rates to come, housing is NOW likely to be the greatest opportunity of a lifetime. The risk/reward ratio screams!

  • Paul Sandison

    Dear Prieur

    Why part with Rands now when the dollar is so strong? That is the first question. The rest are far more important.

    Quite apart from the home loan credit running out soon, the fundamentals of 3 loan types – Alt-A, Option ARM and of course now added to by Prime, are extremely weak, because the economy is very weak, and barely skimming above deflation.

    Furthermore, there is a widespread agreement among economists that since the US requires a 6% p.a. GDP growth to start any meaningful job-hiring, the huge social problem of 20 million out of work and the resulting load on the economy is going to take a couple of decades to eliminate even under the best conditions. At the same time, the US will be constrained by debt repayments.

    The residential housing resets will carry on until the end of Q1 2012, and will be much bigger and more devastating than sub-prime since the loans are twice the size of those in the sub-prime category.

    In addition, this time the big banks especially are in no shape for a repeat crisis – however much new capital they are holding on their books, they still have great sub-prime liabilities hidden. Please tell me how they are going to withstand the next housing downturn that will continue to expand now month after month for a full 25 months?

    I am sending you two links here which show the extent of the coming housing storm.

    1 Video
    Eric Parks gave the alarm on ALT-A, ARM, and Prime in April 2008, and even warned of Lehman, six months before the crash of October 2008. He also shows how the coming resets are going to come about now, through the whole of 2010, 2011, and Q1 2012. Don’t be put off by his political colour, just look at the facts he presents.

    http://redstateeclectic.typepad.com/redstate_commentary/2008/04/the-alt-a-shoe.html

    2 Then from November 2009 we have a concurring view from PhD John Hussman of Husman Funds, who shows very similar stats as Parks.

    http://hussmanfunds.com/wmc/wmc091109.htm

    3 If that isn’t enough, the next shoe to drop is US commercial real estate, which is in dire straits and which will bring down nearly 3000 of the US 8000 banks in the next 4 years. Unlike the housing sector, commercial real estate resets continue through 2013. See
    http://www.cnbc.com/id/15840232?video=1102262224&play=1

    4 Therefore, with housing and commercial real estate about to fall off a cliff, the banks not at all clean of their toxic assets and regulated so that the next housing and commercial real estate default shock wave won’t break the US budget, all while unemployment still very high and the economy weak, what is it that would make you think that the following deja vu scenario on the stock market is not going to take place? See:

    http://broadcast.ino.com/education/deja_vu/

    Wouldn’t the better method be to buy gold, and then when the world economy goes into freefall around the 21st June 2012 you can buy whatever you like?

    If you disagree with the picture I have sketched above for you please tell me what it is that you know that I don’t know.

    best regards

  • Big Al in Chicago

    I agree with you Paul. We have more foreclosures coming as more arms reset and the commercial real estate problem is just starting The buying opportunity of a lifetime in real estate is 2-3yrs away.

  • Kane

    More than any other industry (except banks), the debt problems will keep pressure on pricing. With 1 in 4 U.S. homes in foreclosure or late on paying by at least a month, I’d be amazed if there isn’t further downside.

    Not knowing the actual inputs to the chart, I’d estimate (just by looking at it) that the home price change is getting a huge boost due to y-o-y price changes…I think if they looked at inventory on the market, the results would be markedly different.

    I’m also a tad skeptical that NAR is the source…it’s their job to tell everyone that real estate is a great buy.

  • Superstar

    I’m visiting Palm Spring CA now from Canada.

    I have been looking around for real estate and find the values here extraordinary.

    There are places in the finest communities in Palm Springs ie homes with mountain vistas, pools, luxed out yards and interiors for $750,000, basically all reduced in price.

    In real estate, like in any other asset investment you can never catch the bottom.

    But what you have now is the excellent timing of owners of higher value properties that want/need out.

    There are so few people with cash in their hands willing to buy that you can offer them substantially below the already reduced price and have a lot of interest.

    My suggestion is that if you think RE prices will fall another 25% as Robert Schiller gives as his worst case scenario offer 25% below the market and anticipate the potential decline, but get it while the buyers are desperate.

    When you see the values down here you’ll flip.

    No one can predict the future. If the guys above knew as much as they think they did would they be on this thread now?

    Good luck.

  • Paul Sandison

    It is a pity Superstar did not view the videos I gave the links to. If he had he would instead realise what is in store if he were to move from Canada. It is also obvious from his language that Superstar is Superrich. He reminds me of the cartoon figure Oliver B Bumble to whom money never meant anything because he was a gentleman.

    Of course people like Superrich can always buy anything expensive and rationalise away the motive when the purchase turns out to be a waste of money.

    He writes: “In real estate, like in any other asset investment you can never catch the bottom.” The aphorism ‘you can never catch the bottom’ is taken out of context. Some people do catch the bottom. Jeffrey Saut caught the bottom of March 2009 to the day, and who told everyone to get into the market. And some time the top and get out in time as many did. These are people who develop a skill for sensing an approaching change of direction.

    A lot of people, including Hyman Minsky, have written about the signals that prevail when a top or a bottom is here. The aphorism is used very effectively by traders and is meant to dissuade their collagues from trying to be too precise about the top or bottom, for then one can wait too long, and once the market has turned 90 degrees, it moves fast, and if it is downwards, then it is difficult to achieve a sale, and the saying as difficult ‘as catching falling knives’ applies.

    Property is also a very illiquid investment. When the market turns, it turns fast, and it is more difficult to get a sale without incurring a loss than with perhaps any other type of investment. Of course, superriches can always write off an investment and move elsewhere. But the question was whether the author should part with Rands in exchange for a US property. Superrich evidently has no idea of the Rand purchasing power – Rands are not the same as CAD!

    Furthermore, I do not normally hear of rational people buying into a falling market. Warren Buffet does that all the time because he can afford to take a very very long term view of his investments. Even so, he has regretted an investment made in the falling market of November 2008.

    But since we know the approaching time period of the first proper bottom of the housing market (2012-2013) then as Big Al in Chicago writes it would be better to wait 2-3 years. When that time comes , if you really want to buy then you could try and bid under the advertised price if you feel the bottom could be close. Letting the property in the meantime is not an option because it would mean a loss.

    Also, think a bit more about it. Not only would one have to wait that long before a housing price bottom, that bottom level will also bring about further negative changes in the economy to make living there a negative proposition, and perhaps even more price declines. With a possible future 50 million unemployed, you may not want to live where you have bought a property, if it has become an area of foreclosure. There are already some US suburbs with so many empty houses the local town has decided to raze all of them to dissuade squatters and desperate people from living there.

    Superrich refers to Professor Robert Shiller. Shiller could be right when he gives a possible 25% further decline. But he could be wrong and it could be better, or even worse. Shiller is only good on present statistics. He appears incapable of predicting how not only how the economy is going to affect house prices in the next few years but also how sinking house prices are going to affect the economy in the next few years.

    The problem with mathematicians like Shiller is that the world could be falling down around their ears and they can think everything is fine just because it looks good on paper. If Superrich weren’t so rich he might start using his own brain to make his own decisions about things instead of relying on someone like Shiller who always hedges what he says when he is asked how things will turn out in reality.

    Finally Superrich writes: ‘No one can predict the future.’ Wrong. Everyone can predict the future. The question is with how much probability and accuracy, and with respect to what. If humans could not predict anything they would not have developed to become what they are.

    Then there is this strange ending to Superrich’s entry. He writes: ‘If the guys above knew as much as they think they did would they be on this thread now?’ This reveals a static view of knowledge. Knowledge is always changing in the minds of human beings. The interesting task for the individual is to make that change one for the better not keep it the same or worse. Since I can never know everything and am always keen to know more I for one will always be interested in the perceptions of other thinkers.

    Besides, life is interesting and productive when one improves one’s knowledge and perception of the world despite the simulatenous atrophy that starts from the 24th week of life as a foetus.

    A lot of people who write on this site and its threads know a lot. The reason why this site and its threads are so successful is that it allows the exchange of ideas of a lot of thinkers. The alternative is the triumph of atrophy and death.

  • Leland Wilkins

    The low-end houses in the Metro-Detroit, Michigan area look good to me. Good return in the short-term (on rents) and growth in the long-term.

    I wouldn’t touch high-end property anywhere in the U.S. for 2-3 years. Owners have over-borrowed are will need to unload 2nd homes, etc., eventually.

    I do believe the cheap (20-50k brick houses) properties around Detroit have bottomed.

    I’m currently moving from California to Michigan, it appears growth will continue to implode in California for the foreseeable future.

    I wouldn’t view cities that have retained their values (NY, SF) as attractive. Prices will come down as the job markets continue to shrink relative to population.

  • Paul Sandison

    More details on the difficult scene in real estate – both commercial and residential – and more information on the mutual links between the economy and real estate. See

    http://www.cnbc.com/id/15840232?video=1438808880&play=1

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