| We have hit the bottom in the US housing | | | | mortgage market and as many variable rate |
| market. There are plenty of signs of stabilization | | | | mortgages with low teaser rates reset later this |
| in the residential real estate market after the | | | | year and next year. In the second quarter of |
| horrible three year downturn. In July existing | | | | 2009 one in 8 households with mortgages was |
| home sales were up 7.2% from the June level | | | | either in foreclosure or late on their payments. |
| (the most since August 2007 and well ahead of | | | | Household debt remains at very high levels, and |
| expectations). July home sales were up 5% from | | | | this will take years to correct. The banks are |
| a year ago, the first year/year increase since | | | | much more careful about lending to home buyers |
| November 2005. Housing prices have recently | | | | and about appraisals. Down payment requirements |
| moved up for the first time since July 2006 | | | | are up and income verification is actually required |
| according to the Case-Shiller home price index. | | | | now (no more liar loans). That will not change |
| The housing affordability index has improved to | | | | anytime soon. |
| the highest level in nearly 40 years thanks to | | | | Residential real estate as an income-producing |
| lower home prices and low mortgage rates (5.3% | | | | investment opportunity? |
| 30-year fixed). The average home is now about | | | | My prior comments about housing as an |
| one-third cheaper than it was at the peak three | | | | investment relate to homes you own for your |
| years ago. For the first time since 2004 sales of | | | | own use. Income producing property can be a |
| existing homes have risen for four straight | | | | very different story if you buy right and can |
| months. | | | | manage the properties efficiently. Real estate |
| Most of the rebound in sales has been at the low | | | | investors typically evaluate properties on an |
| end of the market. Is now is good time to buy | | | | unlevered cash-on-cash return basis. That means |
| that cabin or that second home in Florida/Arizona | | | | comparing the dollars you invest in the property |
| Las Vegas? I don't expect a significant rebound in | | | | to the cashflow you get in the first year after all |
| housing prices over the next few years. Housing | | | | expenses. I know real estate investors who are |
| was extremely inflated in a credit fueled bubble | | | | buying foreclosure properties right now in the |
| which has now burst. Housing prices have just | | | | Twin Cities who are getting 15%-20%+ cash on |
| now gotten back to their long-term trend which is | | | | cash returns (without any leverage) buying homes |
| roughly in line with inflation (3%+ per year). We | | | | and renting them out. With these kind of returns |
| are not going back to the home prices of three | | | | you don't need to "hope" for significant home |
| years ago for a long time. | | | | price appreciation to get a very good return. If |
| Is residential real estate a good investment? | | | | you are going to "invest" in real estate, do it with |
| Between 1975 and 2007 residential real estate has | | | | income producing properties. Income producing |
| appreciated just 1.8% ahead of inflation according | | | | real estate investments are great diversifiers for |
| to Harvard's Joint Center for Housing Studies. By | | | | your portfolio and provide an excellent hedge |
| comparison, stocks have historically returned | | | | against future inflation. Most investors use income |
| about 7% over inflation. People should think of the | | | | producing commercial real estate (rather than |
| homes they own as consumption and a place to | | | | residential) in their portfolios. Publicly traded real |
| live, not as a likely great investment. The days of | | | | estate investment trust (REIT) funds are good |
| levering up and buying as much and as many | | | | vehicles to get low-cost, liquid, diversified |
| homes as you can are over. Don't underestimate | | | | exposure to commercial real estate. If you can |
| the costs of owning residential real estate (such | | | | find income producing real estate properties with |
| as a second home). Property taxes alone can | | | | cash-on-cash returns significantly above other |
| often be 1%-1.5% of the value of your property. | | | | investments (such as bonds or REIT funds at 5% |
| If you add insurance, maintenance, utilities, lawn | | | | yields) then you may have a good investment. |
| care, repairs and other costs the total can add up | | | | My bottom line: |
| to 2.5%+ of the value of your property per year. | | | | My advice is to only buy the home(s) you can |
| If your property is appreciating at the long-term | | | | easily afford. Don't buy a bigger house than you |
| average of 3%+ per year, your costs of | | | | need. Don't buy an extra 2nd or 3rd house or |
| ownership are eating up most of that gain. As the | | | | cabin that you aren't going to use on a very |
| huge wave of baby boomers age over the next | | | | regular basis. Don't expect your homes to be |
| 10 years they will be selling large 4-bedroom | | | | great investments. Think of them as nice places |
| homes in the suburbs and buying smaller homes | | | | to live and enjoy with your family and friends. |
| condo's in the cities, in the country, and in the | | | | Don't use too much debt when you buy and be |
| south. That's bad for large suburban home prices. | | | | careful of variable rate mortgages. I prefer fixed |
| People used to think real estate prices only went | | | | interest rate mortgages because they are less |
| up. | | | | risky. I recommend having a plan to pay off your |
| Negatives that will keep a lid on home prices for | | | | mortgage by the time you retire so you can |
| some time: | | | | enjoy a mortgage-free and worry-free |
| The unemployment rate is still very high at 9.4%. | | | | retirement. I think it is prudent to expect your |
| We are heading into the seasonally slow fall/winter | | | | residential real estate to appreciate at the general |
| time of year for home sales. The $8,000 | | | | rate of inflation (around 3%+ historically) over the |
| temporary refundable tax credit for first time | | | | long term. For the next couple years housing |
| home buyers has been helping home sales | | | | appreciation is likely to be below that, especially |
| recently but it expires November 30, 2009. | | | | for high-end homes. Remember that all real estate |
| Interest rates are likely to increase as the | | | | is local and appreciation/depreciation varies |
| economy recovers, hurting affordability. The Fed | | | | significantly by location. Do your homework on |
| has been pumping billions into the market to keep | | | | supply, demand, and value in your area. Invest |
| interest rates low. That won't last forever. A new | | | | wisely. |
| wave of foreclosures may be coming in the prime | | | | |