Homeowners do better than renters

Many years ago, buying your first home used to be a rite of passage that usually coincided with starting a family. Your first home was not just a place to live; but was considered an investment that was expected to grow and provide a “nest egg” for your later years.

Several generations later, a lot has changed. We view investments differently, and have become amateur number crunchers trying to get the most of our money. But what was once considered a sound long term investment has now been deemed as poor judgment.

Of course to real estate investors, housing is a commodity; they take risks to reap rewards. Short term real estate investors (“flippers”) are often viewed as opportunists, buying homes at a discount and selling at retail value. The flipper’s goal is to have a quick turnaround between the time of acquisition and resale (flip), avoiding as much carrying cost as possible. The risk for the flipper is very high, especially in fickle markets; but the payoff can be very rewarding. It is not unusual for a flipper to lose money on a project because of delays, unexpected costs, and/or poor timing.

Long term real estate investors acquire homes to be used as rental properties, banking on the properties’ appreciation when it comes time to sell. Although the financial reward for this investor is long term, the risk is considered to be leveraged over time as well. However, unexpected costs and loss of rent can make such an investor rethink their plan and cut their losses.

For the rest of us, however; housing may not be such a great investment after all, according to many financial pundits. One such pundit, Morgan Housel (of Motley Fool fame), wrote about his meeting with Robert Shiller (of Case-Shiller fame) to give some telling insight about home values (Why your home is not a good investment; usatoday.com; May 10, 2014). Shiller told Housel that the housing market is “a provider of housing services” and “not a good provider of capital gains.”

According to Shiller, home prices from 1890 to 1990 (adjusted for real inflation) are “virtually unchanged.” Housel further added that home prices between 1890 and 2012, adjusted for real inflation, “went nowhere;” and decreased 10% from 1890 to 1980, when adjusted for real inflation. Shiller even suggested that “real” home prices could decrease over the next 30 years, due to a number of factors including obsolescence and advances in construction techniques.

With all the stats and figures, are those who touted the investment value of long term home ownership – wrong? Not necessarily. The consensus is that home ownership offers stability as well as many other benefits including: a place to live, a place to raise a family, and belonging to a community. These intangibles may be responsible for the research conclusions by Harvard University’s Joint Center for Housing Studies, that indicated there is an association between home ownership and growing wealth; where home owners fared better than renters (Herbert, McCue, and Sanchez-Moyano; Is Homeownership Still an Effective Means of Building Wealth for Low-income and Minority Households? Was it Ever? Joint Center for Housing Studies Harvard University, September 2013).

Is buying a home a bad investment? Housel pointed out that even Robert Shiller owns a home, and (at the time of the interview) indicated he would buy a home if he were in the market.

by Dan Krell
Copyright © 2015

If you like this post, do not copy; you can:
reference the article,
like it at facebook
or re-tweet.

Protected by Copyscape Web Plagiarism Detector

Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

September 4, 2013June 30, 2019

Are home prices really rising as fast as reported; how accurate are the home price indices

All major home price indices point to rising home prices, and a few are reporting some very large percentage increases for a limited number of metro areas. But as home price indices are reporting price gains, why are some home sellers getting push back from buyers on price; are home prices really rising as fast as they are reported to be?

Home price data through June used in the S&P/Case-Shiller Home Price Index (spindices.com) released August 23^rd indicated a second quarter National Index increase of 7.1%, while a 2.2% increase was reported during June in the 10-City and 20-City Composites. Areas around the country that experienced the largest decreases in home prices have also experienced the highest price gains in the last 12 months. Take for example the Phoenix metro area, where home prices increased 37.1% from the low in 2011. Locally, however, the Washington DC metro area prices increased 1% in June (compared to a 2% rise in May).

Additionally, the House Price Index (HPI) published by Federal Housing Finance Agency (FHFA) indicated that home prices rose 2.1% nationally during the second quarter (fhfa.gov). And although the HPI is up 7.2% compared to the second quarter of last year, the seasonally adjusted monthly index was up 0.7% in June. Seasonally adjusted home prices for the Silver Spring-Frederick-Rockville, MD metro area indicate a decrease of 0.92% in the last quarter in light of the 4.63% one year increase; and a decrease of 1.1% in the last five years, compared to a 132.65% increase since 1991!

Something’s happening in the housing market, and experts are trying to explain what appears to be moderating home sale prices in an improving (and sometimes described as a “hot”) market. David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices stated that “Overall, the [recent] report shows that housing prices are rising but the pace may be slowing. Thirteen out of twenty cities saw their returns weaken from May to June. As we are in the middle of a seasonal buying period, we should expect to see the most gains. With interest rates rising to almost 4.6%, home buyers may be discouraged and sharp increases may be dampened.”…“Other housing news is positive, but not as robust as last spring. Starts and sales of new homes continue to lag the stronger pace set by existing homes…”

Some explain the recent modest home sale price growth as an effect of distressed home sales. Some experts hypothesize that the deep discounts paid for distressed homes since the financial crises and housing market crash have skewed home price indices lower than they would have been if the indices only accounted for non-distressed home sales; while home price gains in the last year might be more modest using only non-distressed home sales. This has been an intuitive and viable explanation such that the FHFA published in August a Working Paper (Doerner & Leventis; Distressed Sales and the FHFA House Price Index) on the effects of distressed home sales on the HPI. Although the data in this study was limited to two cities, the results are nonetheless remarkable and revealing.

The moderation of recent home sale prices, along with the findings of the FHFA Working Paper, underscore the importance in consulting with a real estate professional to compile and review neighborhood comps before deciding on the sale price of your home.

By Dan Krell
Copyright © 2013

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

February 13, 2013December 2, 2020

Predicting 2013 home sales through housing statistics

by Dan Krell
DanKrell.com
© 2013

Much like a soap opera cliff hanger, 2012 home sales ended on an upward swing leaving people wanting more good news. There’s a lot expected from this year’s real estate market, so what are some of the experts saying about 2013?

The latest S&P/Case-Shiller Home Price Indices (www.standardandpoors.com/indices) press release dated January 29th reported home prices rose during 2012 through November rose in 19 of 20 cities. The 10-city composite revealed an annual home price increase of 4.5% and the 20-city composite revealed a home price increase of 5.5%. And although the release described that the seasonally adjusted home prices may be an indication of a week winter housing market, there was a clear pronouncement that “…housing is clearly recovering…” and pointed out that nationwide existing home sale volume outpaced recent years’ volumes. The cities that made the most gains were the cities that experienced the most declines in home values and the highest foreclosure rates. The home price indices of the 10-city and 20-city composites are reportedly back to 2003 levels.

The National Association of Realtors® (realtor.org) reported in a February 11th press release that the national median existing single family home price increased 10% in the fourth quarter 2012 over the same period in 2011. And the Housing Affordability Index indicates that the homebuyer’s buying power is at a point where they could “comfortably” afford to purchase a home.

Fourth quarter 2012 home sales volume was reported by NAR to be the highest since the fourth quarter 2009; 23% of home sales during the quarter were from distressed home sales (short sales and foreclosures). Additionally, home sale inventory was down about 21.6% for the quarter, which is the lowest since 2001.

NAR chief economist Lawrence Yun was reported as saying that home sales are being energized by “pent up demand” and low inventories. He stated, “…all the conditions for strong price growth are at play.”… “Home sales are on a sustained uptrend, mortgage interest rates are hovering near record lows and unsold inventory is at the lowest level in 12 years…” Yun believes that “…supply and demand dynamics are very much at play.”

Given recent reports from various sources, it looks as if there is momentum in the real estate market. And NAR’s Dr. Yun lays out an argument for home sales that hasn’t been since 2006. But chances are that 2013 home sales will be about many factors, not just “pent up demand” or “supply and demand.” For example, it is doubtful that hedge funds will continue the bulk foreclosure buying that pushed home sales figures to almost record levels.

By themselves, housing indices are broad based measures that typically measure one aspect of the housing market; describing the variables responsible for the measures and indices is more difficult and usually a guess at what’s happening in the marketplace. In an effort to provide a more meaningful measure of the housing market, I devised a measure called the “Krell List-to-Sold Ratio;” which is the ratio of total number of listings to the total number of homes sold in any given area during any time period. The January 2013 Krell List-to-Sold Ratio for Montgomery County reveals that activity continues to be elevated; which is interpreted to mean that the year has started stronger than recent years, but not as strong as 2012.

More news and articles on “the Blog”

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

May 31, 2012

Skepticism increases 1.3% on conflicting housing data

by Dan Krell © 2012
DanKrell.com

When the National Association of Realtors® announced last week that April’s existing home sales increased 3.4% to an annually adjusted rate of 4.62 million compared to a downwardly revised 4.47 million in March (http://www.realtor.org/news-releases/2012/05/april-existing-home-sales-up-prices-rise-again), I have to admit I was a bit skeptical. The local market is not exactly humming along, so as I read in the above referenced NAR release that April’s existing home sales rose 10% over the figure from April 2011, I thought some perspective is needed.

Let me quote you some housing statistics. The number of Montgomery County single family homes that sold increased 5.1% in February, 14.7% in March, 33.9% in April and 27.9% in May (MRIS data reported by the Greater Capital Area Association of Realtors®; gcaar.com). These numbers are not from 2012; but rather, these are the local stats from 2010 compared to closings from 2009. Yes, as you remember – 2010 was a spectacular year for local real estate!

Sarcasm aside, the number of Montgomery County single family home closings increased 5.8% during April 2012 (compared to 2011); and the number of Montgomery County condo closings also increased 8.1% during the same time. But, Montgomery County year-to-date settlements are still below the number of settlements that occurred during the same time in 2011 (-1.4% for single family homes; and -2.8% for condos). Although the 690 single family home settlements that occurred in April 2012 is higher than 652 that occurred in April 2011, the 2,034 single family home settlements that occurred year-to-date through April 2012 is lower than the 2,062 settlements that occurred the same period in 2011. Regardless, the number of settlements is far lower than what we have seen in past “normal” markets (for example, GCAAR reported that there were 849 settlements of Montgomery County single family homes in April 2001).

It must be noted that although the first half of 2010 seemed to be on a role, the number of 2010 Montgomery County single family home closings actually ended the year slightly lower than 2009. So, even though we have a month of some positive news, let’s be cautious about making assumptions.

Ok, I know you’re going to ask about NAR’s statements about rising home sales. Sure, NAR chief economist, Lawrence Yun, was reported to say that “the housing recovery was underway.” He was also quoted to say, “A return of normal home buying for occupancy is helping home sales across all price points, and now the recovery appears to be extending to home prices…”

However, the latest release of the S&P/Case-Shiller Home Price Indices (May 29th; standardandpoors.com) states “that all three headline composites ended the first quarter of 2012 at new post-crisis lows.” Although there was a 1.6% decrease in home prices in the Washington DC metropolitan area in February compared to January, there was a 1% increase in March compared to February; however, prices have decreased 0.6% for the year.

Although media headlines shout that housing has turned a corner, it’s a little premature to assume that the housing market has normalized with only one month’s data. The housing market has turned so many corners in recent years that I think we’ve made several circles! Just as in 2010, let’s see the final tally. There’s still some data to collect; let’s see how the housing market fares through the remainder of the summer.

More news and articles on “the Blog”
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of May 28, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

by Dan Krell DanKrell.com © 2013

Much like a soap opera cliff hanger, 2012 home sales ended on an upward swing leaving people wanting more good news. There’s a lot expected from this year’s real estate market, so what are some of the experts saying about 2013?

by Dan Krell
DanKrell.com
© 2013