The housing speculators return

By Felix Salmon
November 30, 2009
Daniel Indiviglio is joining their ranks, now that mortgage rates are back at record lows. "If you're in the market for a home as a long-term investment, say at least 10-15 years, it's pretty hard to make an argument against buying now," he says.

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It seems the housing speculators are back, and Daniel Indiviglio is joining their ranks, now that mortgage rates are back at record lows. “If you’re in the market for a home as a long-term investment, say at least 10-15 years, it’s pretty hard to make an argument against buying now,” he says.

It’s hard to know what to make of this. Some people are looking to buy a home — that’s understandable, given that everybody needs shelter. And some people are looking to invest money with a long-term time horizon. And some people even fall into both categories at once. But that’s no reason to desperately try to conflate the two, and to describe yourself as being “in the market for a home as a long-term investment”.

It bears repeating: homes aren’t investments, they’re places to live. If you can buy a nice house for less than you’d otherwise pay in rent, then go ahead and buy — no matter what the market looks like, or where mortgage rates are. On the other hand, if you’re looking for an “investment”, stick to securities. You can sell those much more easily when you need some money, and they won’t drive you into possible bankruptcy and homelessness if they go down rather than up.

In any event, low mortgage rates are if anything a reason not to buy: after all, the best way to make a lot of money in the housing market is generally to buy when rates are high and sell when rates are low. If rates rise from here that will keep a lid on prices, and if they fall then there’s no particular reason to buy now.

Some people have a strong emotional need to buy a house, and those people will always be able to find themselves some kind of good reason why they should Buy Now. But if you’re genuinely on the fence about whether to buy or not, then looking at mortgage rates isn’t going to be nearly as useful as looking at local rental rates, and their possible future course. Right now is one of those rare times when prevailing rents might actually fall rather than rise — in which case the rent vs buy calculator is likely to tip even further into “rent” territory. If it signals a “buy”, and you have the money to purchase a house, that’s great. Just make sure you’re happy with the house qua house, and you’re not kidding yourself that you’re making an “investment”.

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Comments
12 comments so far

What about the added incentive of the government giving you $8,000 to buy a house now?I’m not quite ready to buy – and may not be for years – but I’ll sell some stock and cut corners to do it if it really makes sense. The $8,000 sure makes it tempting.

Posted by Ron in NYC | Report as abusive

There is a case for a long term investor that buys for cash flow. They shouldn’t care where interest rates or prices go. They are buying the equivalent of a perpetuity. One does want quality though, a growth area with relatively tight market signaled by relatively high land values. These are good long term investments if cash flow positive. Most others are not, even if cash flow positive, because it represents a return of capital rather than a return on capital.

Posted by Lord | Report as abusive

Not sure I agree with the following:”In any event, low mortgage rates are if anything a reason not to buy: after all, the best way to make a lot of money in the housing market is generally to buy when rates are high and sell when rates are low. If rates rise from here that will keep a lid on prices, and if they fall then there’s no particular reason to buy now.”True with regards to price of a house, but if you own for 15 years, you may have completely paid off the house. In this case what matters is what you paid in total (principal + interest) relative to inflation vs. the value of the house in 15 years. With low rates that rise, the price you get in 15 years may be “lower”, but the amount of interest paid will be smaller as well.

The way people have generally “made money” (in inflation-adjusted terms) from home ownership is through leverage. Most of the long-term housing price series suggest that nominal housing prices basically have tracked inflation. Then the question becomes whether the return to your leverage is greater or less than your alternatives…I’ve basically been a homeowner since the mid-1970s (five different residences in that time) and have purchased because the current costs of home ownership have been less than the current costs of renting comparable space. (My experience, by the way, has been that renting comparable space is really, really hard as one looks at larger and higher quality homes.)

Posted by Donald A. Coffin | Report as abusive

When I was a CFP I remember reading (ca. 2000) a fairly rigorous analysis that concluded on average it takes at least 10 years for the financial advantages of home ownership to surpass those of renting. Total-costs were looked at: taxes, tax breaks, real estate cycles, maintenance, etc. (Pride of ownership was not quantifiable.) In the short term, on average, renting offers more financial advantages; in the long term owning was better. Clearly people conflated “financial advantages” with “investment success,” and so many tried to get long-term results in the short term. That’s a flawed POV in what is fundamentally a use asset and not an investment asset. It seems silly to put your home in a category of investment that could put you out in the street if you couldn’t sustain the misconception.

Posted by theod | Report as abusive

It seems to me rather narrow to view a house as simply a p[lace to live in the narrowest sense. Ownership offers the ability to create one’s own environment — paint it any color you like, put in different carpet, finish the basement, redo the yard etc etc. You’d be mad (if the landlord would even give permission) to do that in a rental.Plus you have security of tenure and no one except the bank or tax man can ask you to leave. You also get a forced savings plan.Sure, houses are not an investment like a share of Intel (that’s a joke) but an awful lot of people VALUE the non-monetary benefits. I would take the broad view of the benefits of ownership.

Look,most of my clients over the years ran their businesses, re-invested their profits back into same, created a retirement plan whether a 401K or Keogh, and usually once the previous steps were met and maintained, bought their commercial building as an LLC or personally and rented the property back to themselves and/or other tenants, thus diversifying for future retirement and creating rent stability and a long term future for their business and themselves. Most people that I know have created true wealth through income property ownership and retaining same for the depreciation, tax and interest expense benefit and long, long, long term investment. It is called tangible wealth and tax management through proper capital investment to loan leveraging. The concept is ownership of a true hard asset and using the logic of EBITDA cash flow awareness as an investing guide. Flippers are just that, simply quick money (aka: I on’t want to work) and many got burned, just like Dubai and the “investment bankers” that forgot (or should I say never learned/internalized) the basics of the three C’s of lending. Duh. Anyone who thinks that investing through equities when in a minority position is a safe bet better invest with Mr. Buffet and even he can’t perfectly monitor ethics and financial reporting of his holdings. There may have been a time when Buy and Hold worked, but now is not the time. It is a flippers (whoops!) traders world and we can thank the derivatives trades that have transformed what was once a stable market. Ultimately, land and its economic improvements are the prize, make no mistake. Let’s see: would you rather own Enron shares, a Dubai “see through” hotel, a bucket of gold (hint: it does not generate income, it is just a store house) or own the building with a long term lease with Google (okay, and maybe a few of their shares in your 401K)?Have a great day!

Posted by Doc | Report as abusive

I suppose rents might be falling somewhere, but mine (Kalamazoo, Michigan of all places) just went up again (1150 to 1200) with my lease renewal last month. I kept thinking that with job losses and foreclosures here I would catch a break this year. Nope. I guess I need to move to capture the lower rent, but moving is an awful and costly experience.

Posted by Neil D | Report as abusive

These speculators assume that home prices will increase. What happens if mortgage rates go up to 8, 10, 12% or higher? What will that do to home prices? The govt will not be able to keep rates this low as their reckless deficit spending will lead to inflation and higher rates. I am old enough to remember mortgage rates at 16% back in the early 1980s. The deficit back then was much lower on a per capita basis.

Posted by William | Report as abusive

I live in Phoenix. For the past two years, speculators have been snapping up cheap homes for rentals. Home and rental values keep dropping. Of course most of these homes were purchased with lots of leverage. When will these come back to the market as foreclosures? I am a broker and keep track of many homes through MLS. I am now seeing the same homes in their 3rd foreclosure.

Posted by Steve C | Report as abusive

I agree that historically, owning has been better over the long term – particularly if you want a house rather than an apartment – but the rules have changed too much in this decade. Prices are still very distorted because of rampant and unprecedented speculation. They haven’t fallen enough with regard to incomes and comparable rents – entirely because the government is taking so active a role in propping prices up.As someone who doesn’t own, I am reluctant to enter the real estate market while such heavy-handed and unsustainable tactics are in place. Prices don’t have room to grow in my area over the next decade, because property taxes and homeowner’s insurance premiums add too much to the carrying costs of home ownership. It literally costs more for property taxes on a modest house in my area than I currently spend for rent. No exaggeration. And that says nothing about the costs of maintenance or your mortgage. Plus, with the job market so bleak, I can’t imagine how there won’t be a continuing wave of foreclosures and distress sales.No thanks – I will wait until the nonsense has subsided before I buy, barring some unusually good deal that comes my way.

Posted by Mike | Report as abusive

Mike, I totally agree with you. Property taxes are a huge threat to the young due to extremely unfunded public pensions and the real possibility that the elderly will succeed passing the tab to the young (as they did in California and Florida).So without a really long tax abatement or a house that’s so cheap it compensates me for this risk… sorry guys, i’ll continue to be a happy renter!I also like the fact that we remain totally mobile (we would love to live some years abroad if a good opportunity comes knocking) and keep our housing costs to the minimum. As almost everybody else, if we ever buy, we would go for a much bigger home than what we are renting. Which is a want, not a need. The savings coming from consuming little in housing go towards college for the kids and for our retirement. The house is small but the locating is optimal so we walk to work and come back home for lunch. what else can i ask! i hate wasting time commuting.It’s a much more conservative strategy we set up since 2004 that has worked wonders for us. Also helped the fact that we’ve bought puts on homebuilders as the bubble was finally coming to it’s climax. That was so much fun to see happening!!! Imagine that for years friends and family were shocked at living arrangements. Now… they ask for financial advice :-) So it’s not true that this crash made everybody miserable. It made us so happy being young!

Posted by julia | Report as abusive
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