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The Wall Street Journal Says After Five Years Of Bust It Is Time To Buy

June 12, 2011

Mortgage rates are near 50-year lows. Affordability has improved dramatically. The ratio of home prices to income is 21% lower than its 15-year average. An excess of 3 million vacant units makes this a buyer’s market. Household formation averaging 1.2 million a year in the next decade should clean out the excess.

“Whatever the excess supply of housing is, it is shrinking pretty fast,” says Thomas Lawler, a regular source at Calculated Risk, the leading arbiter of housing data. He is quoted in Why It’s Time To Buy. (Please see the chart below showing positive inventory trends. Click chart for large image.)

The obvious long-term goal of ownership is free-and-clear title with no mortgage. If your mortgage is paid off at retirement your monthly nut is significantly reduced. You don’t have to pay rent. You can sell the house and collect the equity on the way out.

The journal reporters suggest an “ultraconservative” approach. Only purchase when the cost to own is cheaper than the cost to rent. That means you should wait for the monthly cost of ownership including principal, interest, property taxes, fire insurance and upkeep to equal the rent bill you would pay for a similar home. (Please see the chart below showing price and inventory trends. Click chart for large image.)

“While we might not see rapid growth in the next couple of years, there are a tremendous number of positive signs that could lead to a rebound,” says Anthony Sanders, a real-estate finance professor at George Mason University.

PRINT WSJ says it’s time to buy

22 Comments
  1. Anonymous permalink
    September 20, 2011 4:36 pm

    That chart just shows when the robo-signing scandal hit the headlines. The banks have refused to foreclose for a year now. Yeah, some buyers are frontrunning the manipulation. They know less supply can lead to flipping profits. These buyers better hope they are quick because if the banks see prices rising you can bet they will start foreclosing again…..

  2. ron glandt permalink
    June 15, 2011 9:29 pm

    Michael,

    Even Thomas Lawler states the statistics he used to construct the graphs have some possible flaws. The problem that I see with the charts is there is no way to determine how many home owners would love to sell their homes but they can’t list them since their mortgages are larger than the values of the homes. This may be the reason why inventories seemingly appear to be currently lower. The owners can not put them on the market because they owe too much on them.

    Additionally, I also believe the government is intentionally holding foreclosed homes off the market so as to not flood the market. Lenders are doing the same. I have seen evidence that a greater percentage of homes are ‘underwater’ and more foreclosures are on their way to the market.

    This sounds like I am pessimistic but I am not as I am finding areas currently to invest in because bottoms has been reached. However, I don’t count on appreciation! Incomes in this country have dropped significantly which will affect real estate prices. As a whole, this country won’t see much appreciation for about 4 or more years. Also watch inflation because interest rates would be raised. The health of real estate markets are much too complex to be described by these two charts. The U.S. is at financial crossroads and we all have to pay attention. Thanks for your blog, Michael.

    • June 17, 2011 12:23 am

      HI Ron, I was impressed by Lawler’s estimate of shrinking inventory; mainly because there are so many negative indicators out there and which I am following. I’m a big believer like you in looking at lots of data. I don’t think you have seen the 30 charts published as part of a guide to the Spring buying / selling season. Check it out when you have a chance link below. Thanks for your pro opinion. mdw

      https://housingstory.net/10-key-charts-to-see-before-you-buy-a-home/

      • Anonymous permalink
        June 17, 2011 8:01 am

        Michael, Yes, the 10 key charts are excellent and could provide a cautionary partial backdrop in a decision to purchase real estate. Initial patience in decision making is necessary to consider all the variables in the desision. The reason patience is necessary, as Shiller has implied, is no one is a pro in a housing market of so many distressed properties. Once one can consider all the variables thoroughly, with practice, a decision can be made quickly – if necessary.

  3. June 15, 2011 7:18 pm

    Timing markets is the sphere of the lucky, truly genius, or charlatans. I’m not a fan of short-term investments, in general, but especially true when it comes to real estate. Transaction costs are too high, and, as this blog alludes to quite often, prices can certainly continue to slide.

    What makes sense is buying when realistic cash flow estimates meet, or exceed, required rate of return (RROR). Every market is different, but I’m seeing this condition hold true in some condo markets; where ownership costs are less than rental income, even when acquisition costs are factored in.

    There’s no reason that the concept of dollar-cost-averaging shouldn’t hold true for real estate; investors should accumulate assets over time, only when cash flows make sense, and build a steady portfolio over time. Trying to time markets to max yields will drive most people insane!

    • June 15, 2011 7:25 pm

      Hi Rob, Investing in property based upon cash flow and when committed to a long-term hold together sounds like a good investment philosophy to me. Thanks for your guidance. mdw

      • berlinjames02 permalink
        June 15, 2011 8:08 pm

        Did you see Robert Shiller on Yahoo! today? He made a comment I found pretty interesting: home prices (pre-bubble) are the same as they were in 1890 when adjusting for inflation!

        Think about that for a moment. Essentially that says homes are not an investment vehicle.

        Here’s the link if you would like to watch the video:
        http://finance.yahoo.com/video#video=25605123

  4. Buck permalink
    June 14, 2011 8:14 pm

    I take umbrage with the opinion (WSJ) that waiting for rent vs. own outlays to merely “equal” is “ultraconservative”.

    First, in a bust the ratio overshoots and outlays to own become less expensive than renting, sometimes enough to have a material impact. This is the very incentive that pulls renters to market and finally cements a bottom.

    Secondly, even if the outlays are equal, when home prices are depreciating, equity is being destroyed faster than you can build it.

    Bottom line: buying (even with a discounted outlay) when the market is in a clear downtrend is in no way “ultraconservative” in my book.

    • June 14, 2011 9:45 pm

      Hi Buck, Clearly true that buying with prices falling cannot be considered an “ultraconservative” purchase — no matter what the payment-to-own versus the payment-to-rent equation says. Thank you for your insight. mdw

  5. J in Boston permalink
    June 14, 2011 10:16 am

    Michael,

    I have very much appreciated your blog as I have read it over the past year or so. This summer my wife and I are looking to buy a house. The housing bubble was in full swing when we first reached a point of being ready to buy in 2004. One day of house-hunting made us realize it must be a bubble that we were better off waiting it out. Now we have rented for our entire adult lives and as a lifestyle decision we are prepared to purchase, and potentially loose money, on a home so that we can live in a place that we can improve it to our liking.

    One note from the trenches that you may find interesting – In the past two weeks we have had four houses we were interested in looking at sell before we could see them. Good houses priced right are selling fast in Boston.

    • ron glandt permalink
      June 14, 2011 11:27 am

      J in Boston

      I expect Boston to have strong markets depending on the neighborhood and specifically the block where the house is located. I would methodically investigate the net selling price of each of the four houses you mention. Talk to the sellers or the buyers, if possible, and see if any incentives were given by the sellers to entice the buyers. Public records do not usually show the incentives, such as credits for new carpet, mortgage interest buydown, or a new roof. It is not in the best interest of the property tax collectors in disclose incentives, and simply they do not have the time to go into that much detail. Check out the sales price history of each house! Also, do not watch any TV shows regarding first time home buyers as they are entertaining but their methods are absolutely wrong when buying a house.

      Homes sales statistics are only a fraction of the information one needs to assess a trend. Real estate agents often don’t have much desire or the time to fully study the local market and they have a conflict of interest in any statements they make. Owner occupied realestate requires a 2-3%/year appreciation to be considered healthy. The intrinsic value of ownership is valuable but it must be in balance with the financial obligations. Home buying is an emotional activity so….caution. Financial stress has disasterous consequences.

    • June 14, 2011 9:53 pm

      Hi J in Boston, The critical detail in your statement is that you are prepared to experience a loss on your purchase. A person who has reached that level of maturity in their investment analysis is going to pursue their purchase the smart way and will choose the right property. Good luck in your search. Please send me a pic of your house when you find where you are going. mdw

  6. Anonymous permalink
    June 13, 2011 1:12 am

    Could you clarify what this means: “The journal reporters suggest an “ultraconservative” approach to purchasing by waiting for the monthly cost of principal, interest, property taxes, fire insurance and upkeep — the primary costs of ownership — to equal the rent bill for a similar home.”

    • June 13, 2011 5:56 pm

      Hi Anonymous, The paragraph means to say: If the cost of owning is the same as the cost of renting, then it’s a strong buy signal. Thanks for your comment. mdw

  7. ron glandt permalink
    June 12, 2011 11:04 pm

    First of all, I can’t see how the first chart represents any recent trend other than inventories are increasing, not declining. In other words, I wouldn’t make any home purchase decision based on either of the two charts above. I find many of the journalistic articles, like in the Wall Street Journal, quite shallow. Real estate markets are back to basics, maybe more than previously. Real estate is all about local, local, local, and location, location, location but also about condition and price. Therefore, broad statements such as it is a good time to buy can be poor advice because of the numerious variables one must consider in purchasing. The local market may be near its bottom but if there doesn’t appear much of a chance for any appreciation and if the purchaser cannot remain in the house for at least 10 years, he should rent. As an investor, I am, again, purchasing rental properties but the decisions, although very technical in nature and difficult, are much easier than the decision of purchasing a home to occupy because the renter is making the mortgage payments and expenses in an investment property. After nearly 40 years of real estate investing, I don’t currently own my own home.

    • June 15, 2011 7:36 pm

      HI Ron, Check out the first chart (“Existing Home Inventory: NAR vs HousingTracker.net”) and the blue line on that chart. The blue line represents units for sale in a limited number of markets followed by HousingTracker. The high inventory for that subset is 1.55 million units. The current inventory is 1.05 million units. It’s a huge decline; although demand may have fallen even further. Still, the idea of falling inventories is new especially when promulgated on Calculated Risk. Worth looking at. Thanks for your comment. Mike

      http://www.calculatedriskblog.com/2011/06/lawler-existing-home-active-listings.html

  8. Tom permalink
    June 12, 2011 8:32 pm

    It may make sense to buy in certain areas. San Diego, most of L.A., San Francisco, NYC – they are all still in a non-sustainable bubble.

    Owning a home greatly reduces efficient mobility.

    I’d like to see Tom Lawler’s track record buying and selling homes, investing, etc. My guess is he’s a very nice economist that I’d enjoy having a drink with, but would not be impressed with his investing acumen. In other words, consider the source.

    “Affordability” doesn’t equate to “makes good financial sense” to buy.

    Owning a home outright means one’s capital is tied up in their equity – and over decades and decades this has only produced returns equivalent to leveraged inflation – i.e. not very good.

    I managed money for and with a billionaire and he chose to have a mortgage.

    • June 12, 2011 8:49 pm

      Hi Tom, I think you will agree that the bill for shelter is a bill you have to pay. And if the bill for owning is less than the bill for renting, that’s the start of a compelling argument to buy. While there may be better places to invest money than real estate, we naturally have a prejudice in favor of the security of a home which is paid for and can’t be taken away because we missed the mortgage payment. I think a home is a smart irrational investment. Thanks for your comment. Michael

  9. Anonymous permalink
    June 12, 2011 7:35 pm

    I call bullcrap! One small depretionary wave coming and then it’s QE3. Strategic defaults on the rise and 10 years of inventory to go! I know now that the Wall Street Journal is a paid patsy.

    • June 12, 2011 8:26 pm

      Hello Anonymous, I would go with the Kool-Aid-Mix drinker — the drink which makes one oblivious to the pathetic economic performance which follows a financial crisis — versus the paid-patsy theory — we are a business newspaper and have to be positive. Thank you for your comment. Michael

  10. Carol permalink
    June 12, 2011 7:23 pm

    Do you agree with this article? I ask, because it sounds very rosy when compared with your past articles and charts.

    • June 12, 2011 7:55 pm

      Hi Carol, I don’t disagree with any of the facts presented to make the case for buying. I agree that it makes sense, for example, to consider buying if it is the same monthly cost as renting. I don’t think the authors came to terms with major distress signals; especially concerning the inventory of delinquent mortgages. Thanks for your comment. Michael

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