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There is no question that buying a home
can be an emotional experience. Sometimes the desire to own is so
strong the “want” to own outweighs the actual “need”
to own. This strong desire can suddenly run into a brick wall of
economic reality, however, when a would-be buyer realizes they do not have
sufficient cash flow to pay for a 20 percent down payment and a mortgage,
high taxes, annual maintenance, and the inevitable but certain major repairs
that will be required on the property.
In 2011, there are sound reasons that
new home sales have hit the lowest level ever recorded. Foreclosures,
coupled with desperate sellers of existing homes and developers with a glut
of unsold luxury condos, have left a real estate market saturated with
product at every price point. Indeed, every time a house sells, two
more sellers come out of the woodwork because they heard homes were selling.
The sad fact is there are just too few buyers, and anyone who can afford to
buy a first or second home is holding out for further price reductions.
Crowds of people are not showing up like they did a few years ago at open
houses and lookie loos (a
realtor’s worse nightmare) are littering the landscape and can be
spotted a mile away, as realtors pray for big time job growth.
What a difference a few years has made.
From the top of the housing bubble to now, the economic reality of
ownership has flipped 360 degrees. Back when housing prices were rising
so fast and mortgage credit was so easy to obtain, no matter what you paid
for the house, the cost of actually owning and maintaining it were left out
of the buying decision. Rising prices took care of all the costs and if cash
was short, mortgage REFI’s paid for it, plus a vacation.
Homebuyers back then neither needed income or a down payment to own one, two,
or even three properties. Owning a house didn’t feel like a
burden; it helped set you free financially, or at least that’s what you
thought.
In today’s new world the family
house (and in many cases more than one) has become a crushing burden that is
simply too much to bear. Food on the table has taken precedence over property
taxes and a mortgage, leading millions of Americans to “sell by
mortgage default”. In other words, let the bank take the
underwater home. I read in The Wall Street Journal this week
that at the end of 2010, there were over 11,100,000 underwater borrowers. That
equates to 23.1 percent, or almost 1 in 4 of all mortgages.
Homeowners who bought into the American
Dream have a right to be bitter and defaulting on the mortgage is a way of
handing back the new American nightmare to Wall Street and the banks.
The average person has figured out that the last thing the bank wants to do
is take back the house because if they do, they’ll have to pay the back
taxes and maintenance, and then take a big hit when they sell it. So,
while the banks delay foreclosure, the ex-homeowner gets to live rent free
for months or even years in the house. Ah, the revenge is sweet, and at
least the kids get to eat.
Troubled markets do create opportunity,
however. So with housing prices getting cut big time, and many of our neighbors
looking to sell, my wife and I are not the only ones starting to look around
and think about whether it might be time to buy that second home. The
drop in housing prices makes buying look tempting on the surface, the only
question is, “what lies below”? Bored real estate agents
are spinning the story that there are buyers coming in with cash for the once
in a lifetime opportunity. (Many of these same real estate agents
were house flippers who flopped in the bubble, so we take their hype with a very
large grain of salt.) New buyers are also encouraged by realtors to think
about buying a property with rental income potential, but they may not be
aware of the actual costs to carry a property especially when seasonal
rentals remain vacant or are rented at steep discounts.
Indeed, buying would be much more
tempting if after you bought and paid cash, you were done paying for
it. Unfortunately, that’s not the case. When you own
property, you effectively put a target on your back that screams to everyone
from the tax assessor to the plumber “please send me bills”.
I’m aware of many homebuyers who have discovered the hard way
that paying for your house along with food, utilities, insurance, gas,
telephone, etc. each year, can easily eat you out of house and home and these
people live in places like Manhattan, Palm Beach and Aspen.
As a Baby Boomer nearing retirement age,
careful planning is crucial as we enter the land of “Life after
Income”. Without normal income, the real question for owning a house
isn’t what you paid for it but where will you get the money to
keep paying for it. Indeed, having mastered the art of living
modestly, I can appreciate the joys of ownership because I haven’t been
stretched to the limit, but I know a home can quickly become a money pit if
you’re not careful. Given general inflation and the need for
local governments to bleed taxes from property owners, my costs could easily
double in five to seven years. For every enthusiastic second homebuyer
coming into the market today, there are ten homeowners who have either lost
the house, are trying to rent and can’t, or are maxed out and looking
to sell. There are 10 million unoccupied houses in America, 11 million
homes underwater, millions of mortgages in default, and millions of homes
that will still go to foreclosure. Will any of these people be buying again
anytime soon? Should we listen to the real estate brokers and rush to
buy now? I don’t think so.
We’re optimistic that there may be
a deal out there for us, but so far renting a premier vacation property in a
beautiful location has proved to be the way to go. The same places we
rent may be priced for sale at over $500,000 in beautiful resort towns.
But when you look at the property tax, which may not be too bad, and maintenance
fees, which are rarely low, the usual story is, even if you were given the
house for free, you would have to be willing to live there for at
least six months before owning would make economic sense. For a
month’s use as a renter we might pay $5,000, but the owners are paying
anywhere from $30,000 to $50,000 to carry it, even if they owned it free and
clear! Just paying for use saves us a bundle and we haven’t tied
up half a million or more earning nothing. Moreover, renting offers a
piece of mind when you are not there. We don’t have to worry about
theft, floods, freezing pipes or the roof leaking, or squirrels and mice
moving in before a forest fire moves them out.
We have even begun to wonder why the
owners of such premier properties are renting them out at prices we can
afford. It turns out they are desperate for cash and renting because
they have to. Many are in a cash bind, want to sell, and can’t get
offers that today they are willing to live with. So, based on what
owners of quality vacation properties are asking as a sale price, and have to
pay in carrying a property, renters are getting a big time “half price
off sale”. For now, I’ll take a rental at 50 percent
off. If I buy the property at the price they are asking instead of renting
it, I can easily become the owner crushed by an overpriced house that is not
being used enough to justify the cost.
Now, don’t get me wrong. In
many areas of the country, it is a great time to buy. Affordability is
the best it’s been in years. If you really need a place to
live full time and can buy with all cash, or you have that 20 percent down
payment and a decent job, by all means look at buying that primary
residence. Moreover, if you are willing to shop hard, as a buyer you
should be able to cut a deal where in ten years of living, the house will
have given you great joy for the annual cost and turn out to be not a bad
investment given all the inflation that is coming.
However, if you are looking for that
second or third home, at current prices you better have that rich uncle, a
trust fund, or have just won the lottery with a 20-year payout. We live
in South Florida which is one of the many ground zeros for housing hell.
We have neighbors flitting between three homes and unable to pay for
major upkeep on any of them. We have friends dropping the prices on their
second homes because they can afford to carry, at most, one house. We
have new members on our condo board who somehow think that if they can
liberalize rentals for the property, they can hang on and cover some of their
maintenance and tax. We have driven around and looked at the endless
For Sale signs, and have stopped in at open houses where the owners and
brokers have literally run after us saying “please make an offer, the
price is negotiable”. Many of the properties have been listed for three
years or more and are slowly getting marked down with no buyers in sight.
Don’t forget. When the price
of a home is cut in half the taxes are cut in half, and the lower priced
homes usually have lower maintenance. Therefore, it pays to watch and
wait until the cost of owning comes down in line with the cost of renting,
and you can actually afford the carrying costs each year. Patience will
be rewarded with not just a half price off in rent, but a half price sale on
the property! We look forward to the time when owning real estate will
be cherished again. At that time we’ll be ready to write the
check.
Richard Benson
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