Saturday, October 18, 2008

But Bush said...

I am once again getting really confused. I hear our esteemed leader on the radio saying all is well in the economy. And I see commercials on the tee-vee from the NAR (National Association of (Lyings) Realtors) saying now is the best time to buy a house. So I think, OK I guess I should rush out and buy me one of them $500K 1 bedroom condos that are sure to double in value in 2 years.

But then I also see reports like this:

The American housing market, where the global economic crisis began, is far from hitting bottom. Home prices across much of the country are likely to fall through late 2009, economists say, and in some markets the trend could last even longer depending on the severity of the anticipated recession.

So far this makes sense. Could the MSM actually be coming around and accepting the fact that the housing crash is just starting and we have a long, long, long way to go before even thinking about a bottom? This article reads like a post I would have written about a year and a half ago. Something about price to rent ratios. Something about affordability. The kind of talk that was dismissed by so-called experts whose only reply was "NOW IS A GREAT TIME TO BUY". Well, it was a bad time to buy last year and the year before and the year before that. And it still is a bad time to buy today. And it will most likely be a bad time to buy next year as well.

I have heard numerous idiots, I mean experts say that Miami is at the bottom. Prices are down 35% they say, so it must be a good time to buy. Bullshit. If a Honda Civic were once $50K and it were now "on sale for $30K, would it be a good time to buy a Civic? Not when the MSRP is $18K it isn't. And that's the case with Miami. Sure prices are down form ridiculous levels. But prices are still ridiculous.

And it comes down to the fundamentals. Just like a stock's price can be deemed cheap or expensive based on P/E rations (price divided by earnings). The higher the P/E ratio, the more expensive the stock is since it will take more years of earnings to make up for the initial incestment. Real estate works the exact same way. A property's P/E ratio equivalent is the price-to-rent ratio. That is how many years worth of rent does the property cost? In Miami that figure is 22. The average for the past 20 years was 15. You do the math on whether now is a good time to bu or not. Miami didn't become 46% more expensive over night and so that 22 figure must come down to somewhere around 15 in order to make real estate profitable.

When you strip away all the bullshit like 'owning is the greatest investment anyone can make' or 'when you buy a house, you really buy a home' or 'why throw your money away on rent', the price-to-rent ratio is what matters. The rest is nothing but marketing nonsense put in place by the housing industry. How is owning a house on which I will be upside down for 10 years a great investment? How am I throwing my money away on rent when my rent is lower than my after-tax cost of ownership? And last I checked, a home is a home based on who lives there and how people live, not based on the contract that allows one to live there.

And then there's this from the article:

As of June, 2.8 percent of homes previously occupied by an owner were vacant. Nearly 1 in 10 rentals was without a tenant. Both numbers are near their highest levels since 1956, the earliest year for which the Census Bureau has such data.
Translation: rents are falling off a cliff which suggests that the price-to-rent ratios will have to shoot below historical mean this time around. Buying now would be about the worst financial move anyone could make. But don't take my word for it, I didn't take a weekend seminar on how to sell real estate, so I may have no idea what I'm talking about, compared to your local real estate agent.

2 comments:

JohnnyL said...

The NAR has never missed a year saying "now is the to buy a house". Back in 2006, here in Fairfield County CT, their spokesasses were saying that same thing and housing was already poised to fall off a cliff. A year later they were saying that the downturn would be short and now is the best time to buy with prices down. Back in 1987 I bought a condo in Putnam County, NY (just nort of Westchester County, for 150,000. Two years later I had to transfer and sold it for $135,000 in the midst of the last housing bust. Those same townhouses did not sell for $150,000 again until 1997 or later. 7 years to recover. If we are lucky this one will last as long and maybe go deeper.Then there will be some excellent buying opportunities.

Anonymous said...

Spokesasses...perfect definition.