Is real estate for suckers?

May 20, 2011

Are you a dope for buying a home in the U.S. right now?

If you need and want one, there’s no harm in that. Yet if you think it’s an investment that will actually appreciate, you’re taking a sucker’s bet.

During the bubble years, the “greater fool” theory prevailed. When you bought a home, you were confident that someone would buy it for a higher price than you paid. “Flippers” prospered from this mass psychology.

Right now, it’s a “lesser fool” market: You’re hoping that you’re not foolish for buying a depreciating asset in a troubled economic climate. Millions stay out of the market just to avoid the feeling of doing a fool’s errand.

Home prices are still dropping in many areas with no real bottom in sight. Zillow, the real estate tracking service, recently reported that first quarter prices were approaching the declines last seen in the Great Depression.

The U.S. home market is no longer in triage mode. It’s a train-wreck. Zillow said home prices “are no longer due to bottom out” this year. When will they, then? It may take years, and here’s why.

Anyone who bought during the bubble may never see any appreciation. Since most of them are “underwater” — the mortgage is more than the home’s value — they have no economic stake in the house. They may join a growing wave of “strategic defaults.” At least one quarter of the entire market is stuck in this way.

I’ve known several neighbors who’ve walked away. Why pay financing, taxes and maintenance on a property that isn’t likely to pay you back in the near future — if ever? It’s not an investment. The more you pay, the deeper you get into a sinkhole. Banks won’t re-value the home and lower your payment, so what’s the point? It’s simple emotional math.

Adding insult to injury are two more pieces of bad housing news. There are about $20 billion worth of mortgage resets coming due on adjustable-rate mortgages this coming year, my colleague Linda Stern reports.

If banks and mortgage insurers adhere to unusually high credit standards, millions won’t be able to refinance and will lose their homes.

On the high end of the market, the loss of federal mortgage guarantees for homes prices $729,750 and above, will hurt even more. Residents of expensive coastal states such as California, Connecticut, Massachusetts, New York and New Jersey may see prices plummet.

Will there be even more price declines as desperate sellers compete with highly-discounted bank-owned properties? In several markets, banks own from 40 percent to 56 percent of all properties (Detroit, Cleveland, Chicago, Minneapolis, Memphis, Tampa and Fresno), according to ClearCapital, a property information company.

With foreclosures at an all-time high, prices can only drop more unless bargain-hunting buyers come into the market en masse or the government brings back home buyer tax credits to stabilize the worst markets.

Markets with the highest negative equity ratios — those the most underwater — will have the hardest time recovering. Leading in negative equity by percentage, according to Zillow, are Phoenix (68 percent); Orlando (64 percent); Riverside, CA (48 percent); Tampa (47 percent) and Miami (43 percent). Only Boston, Dallas and Pittsburgh had underwater ratios in the single digits.

Since the federal HAMP program didn’t force banks to negotiate with homeowners to reduce principal or interest payments, they are under no obligation to keep people in their homes. That’s why I’m no fan of HAMP. Congress should either fix it with something that will protect homeowners or dump it. To do that would involve a heart-searing national conversation on the importance of homeownership and the American Dream. This talk is long overdue.

There is some hope that state attorneys general will be able to negotiate some flexibility on terms with major banks, but don’t count on anything meaningful. Outside of an outright tax by municipalities, counties or states on banks to slow foreclosures, there’s no real relief in sight.

Welcome once again to the ownership society, where your ability to negotiate with the mammoth, bailed-out money trust is critical and most likely inadequate. At this point, though, you’re more like a boxer who’s been hit too many times. You’re trying to stay on your feet and playing “rope a dope” until the referee calls the fight — even though the bout looks like it’s been fixed.

14 comments

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The fool is one who expects prices will only go down or only go up within the same week. Consider the price of gold. The price declined in a 20 yr period, only to go up during the next decade. Will gold always go up? Housing prices always go down? Does Geico sell golf ball retreival insurance?

Posted by SanPa | Report as abusive

[…] probably see that this time too. Of course, right now, nominal prices are still falling.Reuters: Is real estate for suckers?Are you a dope for buying a home in the U.S. right now?If you need and want one, there’s no harm […]

Posted by Seattle Bubble • Weekend Reads from Across the Spectrum | Report as abusive

Your article suggests that Real Estate “everywhere” has experienced the same price declines. This is just not true. There are hundreds if not thousands of cities and towns across the United States where great Real Estate buys can be realized. I’m going to conclude that the writer of this article has little to no knowledge concerning real estate and probably hasn’t ever owned any real estate, or maybe they were one of the kool-aid drinkers that used their homes as an ATM and thought real estate would never go down. You clearly don’t know a thing about Real Estate. You better stick to beanie babies.

Posted by RSDallas | Report as abusive

its the sheep that determined a house was worth more than the materials and labor in it.

Posted by truetoearth | Report as abusive

Yeah, brilliant column. Next year, when the interest rates have gone up, renting is unaffordable, many people will think of Mr. Wasik and remember that they missed the opportunity to buy a house for a cheap price in a low interest market.

Posted by FBreughel1 | Report as abusive

A house is a manufactured item, just as a car is. With enough trouble and expense, both can be kept in working order for a long time. But they are not rare, as classes. And they are not investments.

Investments are in limited supply, always. Gold is an example. If you could grow it on trees, it would be worthless and marketed.

Land can be an investment. It can appreciate. As Will Rogers said, “They ain’t making any more of it.”

This is not a good time to buy a house unless it is on a lot of very desirable land.

Posted by txgadfly | Report as abusive

well according to your logic, house prices should go up also with land…. because without land you can not build a house… no more land no more houses..

Posted by Helloidiot | Report as abusive

Not every market has been hit hard, but according to the S&P Case-Shiller Index, most of the top 20 major markets are still seeing declines. It stands to reason that as land becomes scarcer, prices should go up. That’s the conventional wisdom. But there was so much overbuilding and speculation during the boom years, that until the excess supply is reduced, you won’t see much — if any — appreciation. Having said that, if you want a home and don’t regard it as an investment and just a desirable place to live, then you can ignore economics for a while.

Posted by johnwasik | Report as abusive

just because they ain’t making anymore of something doesn’t mean it is always underpriced no matter how high up it goes…. nor that it will always be lesser underpriced later.

Posted by threeRivers | Report as abusive

This article leaves out the most important economic issue for potential home buyers. For decades, the “It’s a Wonderful Life” folks have believed that owning a home is synonymous with the American Dream. The biggest federal subsidy program ever is the mortgage interest deduction. All homeowners and potential buyers need to ask, “Is this massive subsidy going to continue?” Of course, the biggest beneficiaries of this taxpayer largesse are the rich with their mansions and second homes since there is now no cap on this whopping deduction.

Posted by ptiffany | Report as abusive

It makes no sense to buy a home?
It makes no sense to rent?
Pick your poison.

The article makes too many generalization about housing markets, property values and home values (property value and home value physically connected but different.) Within every region, city and neighborhood there are unique valuations. I live in one of the declining markets mentioned and home sale prices (the actual sale price) in my neighborhood are not in a free fall. There are neighborhoods much worse off, and there are highly desirable neighborhoods that have seen slight increases (the actual sale price) over the past year.

Also, the following statistic referenced needs to be clarified:
“In several markets, banks own from 40 percent to 56 percent of all properties…”
Banks generally own a portion of all properties via the financing, but I do not believe that 40 percent of all homes or 40 percent of homes for sale in my city are fully banked owned going into foreclosure. I really do not believe this is correct and misleads the reader. Again, the market I am in was one specifically mentioned. Also, when you compare Zilow to other sites the data is different, Zilow is skewed toward the negative.

(There seems to be a dash of fear-mongering in lots of articles these days to get your click to generate some ad revenue. Write for the click of it.)

So let’s all rent? Your losing a minimum of $8,000.00 – $10,000.00 a year. There is no risk in renting you just lose. Pick your poison.

If you plan to, or even hope to, live in a specific city for more than six years buy a house. Six years turns into 12 in the blink of an eye, that would be over $100,000.00 in rent down the tubes. Six to 8 years from now if you do everything the old school way with down payment, financing, backup savings, and home location you should see at least a little profit. The is a risk but you could realize a profit. Thinking long term, when you are 65 – 70 years old and the roof over your head is payed off you are far better off than if you are still paying rent. Rents will continue to go up and your mortgage will go down. Your income will most likely not rise in harmony with rent, food and lawyers. Renting makes absolutely no sense in the long term.

I do agree completely that your house should not be looked at as a windfall investment. Your mortgage and home is one piece of your financial puzzle.

Pick your poison kids. (full stop)

Posted by rgs001 | Report as abusive

I just bought a second home, why ? Because I could.

Posted by Graff | Report as abusive

[…] have more than $1.8 billion in debt, according to Foreclosure Listing Servi more… Is real estate for suckers? – Reuters Blogs (blog) – blogs.reuters.com 05/20/2011 Reuters Blogs (blog)Is real estate for suckers?Reuters Blogs […]

Posted by News about REO Short Sales Foreclosures Whittier, Hacienda Heights, La Mirada issue #1 – FsReoShortSales.com | Frankie Sells Homes | Report as abusive

Wow! You can tell what type people read the reuters site. Why are so many blasting the writer.

This author is talking about buying a home for an investment, not about someone buying a home as a place to live, rear children, grow roots, become a part of the community. (does that stuff still exist) If you plan to live in a home for more than a decade, it’s still smart to buy. Try living in these rent-boxes. No privacy, noisy neighbors. You can have it.

The gaping hole in the recovery is the absence of forcing the money-changers to take a hit. The Feds make 800 billion available to them so they can stay in business and then don’t require that banks give the “homeowner” a break. You can see who the Feds are protecting. There should have been an immediate moratorium on foreclosures till new mortgage terms could be negotiated. That would have stopped the spiral on prices. The only victim is the bank, but not making money isn’t the same as losing it. Except to a usurer.

I encourage anyone to walk away from their “commitment” if they bought a “nice” home that’s now worth less than their mortgage. Let the banks eat the bricks. They charge “interest” because there’s “risk”. It’s time the tables are turned. Outlaw usury

Posted by unkjwea | Report as abusive

[…] High-end homeowners can particularly feel the pinch, since their properties will exceed the coverage provided by the federal flood insurance program and most regular homeowners’ policies. In some cases, they could find themselves holding at least four separate policies to insure their coastal homes: homeowners’, windstorm, flood and excess flood coverage. […]

Posted by Coastal living: Bad weather pushes insurance higher | Reuters Wealth | Report as abusive

[…] they are running a small side business, investing in real estate, or are established professional service or trade professionals like Edmonds, go-it-alone, […]

Posted by Self-employed? When to graduate from sole proprietorship | Reuters Wealth | Report as abusive

[…] think it's an investment that will actually appreciate, you're taking a sucker's bet.http://blogs.reuters.com/reute .. July 27th, 2011 in Real Estate | tags: estate, is, real, […]

Posted by BUSINESS VOCABULARY » Blog Archive » what is real estate » BUSINESS VOCABULARY | Report as abusive

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