Tuesday, May 01, 2007

What Your Realtor Doesn't Want You to Know - Part II

Since most of the real estate advice you hear comes from realtors, I thought it would be of use to point out how wrong their advice is.

Local realtors have been running an ad in the papers boldly declaring: "It is a great time to buy a home". Certainly it would benefit the realtors.

But is the advertisement true?

Actually, the ad is misleading.

Here is where the ad is wrong:

First, the ad claims that the large inventory of Key West properties won't last. The ad has been running for months, and in reality the number of properties for sale has increased. And, the official numbers actually understate the number of properties available. Not included in the MLS numbers are the large number of homes/properties still in development, properties in foreclosure, and the many for-sale-by-owner properties.

Second, the ad claims that median national housing prices will post gains in 2007. But according to the National Association of Realtors, their official forecast predicts a drop in median home prices for 2007 (a first since they have been keeping track...which only goes back 40 years). Here is a chart from the National Assn. of Realtors website showing their official forecasts (click on the chart to see a larger version):

Third, the ad claims that Former Fed chief Alan Greenspan recently said that housing prospects are looking up. Mr. Greenspan said that 6 months ago. More recently, his tone has become more ominous. He most recently said there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors. On March 15, 2007 Greenspan said: "You can't take 10 percent out of mortgage originations without some impact." "Subprime woes were "not a small issue," said the 81-year-old policy kingpin emeritus. Greenspan has put the chance of a US recession by the end of 2007 at 1 in 3.

Finally, the ad claims that "real estate is a great investment", and cited an 88% increase in national median home prices over the past 10 years. But don't mortgages last more than 10 years? Yes, they are usually 30 years. So lets look at other decades instead of cherry picking the very best period in the history of the real estate market. Going back to 1890 and removing the effect of inflation, only three out of ten decades saw an increase in median home values. Most times, real estate underperformed most other asset classes. (click on the following chart to see a larger version)

Also, I've also included a chart in response to the ad's declaration that since interest rates are near 40 year lows homebuyers have a once-in-a-lifetime opportunity. Click on the chart to see how the economy responded to rates rising off of low levels.

Maybe it is time for the realtors to stop misleading the public, update the ad, or pull it from publications.
Either way, it's NOT a great time to buy a home.
Like this post? Let us know:


Anonymous said...

It's a great time to buy for some people. It all depends on your personal financial goals. It's not a great time for flipping homes as what was being done here. If you're looking to move out of a rental and into home ownership, then, yes, it's a great time.

Another point you may have missed is that as long as the stock market is performing well, people will be less likely to buy a second home and invest elsewhere. Many homes in this area are second homes. Accordingly, I believe these are the homes for sale so investors can put the money someplace else and not take the losses from vacancy, insurance rates and threats (hurricanes).

Anonymous said...

That's it. Real estate sucks. I'm going to sell everything and rent an apartment the rest of my life.

Anonymous said...

The longer the realtors run that ad, the more truthful it will become. When would a realtor ever say it is not a good time to buy a home? Keep up the great work, love your blog.

Cayo Dave said...

In response to the anonymous posts:
anonymous #1 - i appreciate your comment, but let me respond. Who has a personal goal of owning a home that is depreciating in value for possible more than 10 years? And, a rental in Key West is far less than buying, and would probably lead to more equity over the next ten years (since renters don't have to pay carrying costs, insurance, taxes, and upkeep) Secondly, as for the stock market draining away investment money, if so it is pointing to the fact that stocks are a more attractive asset class - meaning that prospects for gains are better. In reality, people are selling because they couldn't afford the home...maybe because they were flippers, maybe subprime variable borrowers, or maybe another reason. Either way, housing will not look attractive until demand outweighs supply.

anonymous #2 - It is clear that for you renting is worse than a lifetime in hell. I respect your opinion. But if you do sell everything, I suggest spending some of your windfall on a new personality.

anonymous #3 - I believe that the longer they run the ad the more untruthful it becomes...unless of course they run it for 10+ years. Thanks for the praise!

Anonymous said...

What is with all of this doom and gloom. We are simply going through a MARKET SHIFT. It has happened in the past and will happen in the future. In the case of KW real estate this shift is going to be more drastic than in other places due to the fact that prices were inflated. As far as my prev post in which I said it was a good time to buy (for first time home buyers) I was referring to lower priced properties (esp condos). These properties have already come down in price, in some cases as much as 50%. While their may be addl cuts in price it won't be a whole lot. And yes it will take 5-10 years for an owner to make a profit. However I am talking about homeowners who are planning on living in and holding on to the property for at least 5-7 years. You are also forgetting other benefits that homeowners have ie: income tax deductions at the end of the year, and the pride of home ownership. There is also some worth in not having the hassle of dealing with landlords, many of whom do not take care of their rental properties. All in all I would NOT reccommend buying a luxury property, commercial property or multi unit property of any kind at this time as a major price correction is still due. I WOULD recc buying a condo, single family home under 500k, as long as it is not for investment purposes. These types of property will ALWAYS have good value in KW. And for those of you PRO stock market people remember the 80s when the investors were jumping out of brokerage firm windows! A lot of people lost their entire investment, retirement at that time. Many of those people were average Joes like me who were relying on the "so called experts" investment advice.

Rock said...

I tipped my cap to you, Cayo Dave, for this latest piece.

Keep up the great work.


Rock said...

To the person who recommended buying a house in KW for under $500k. Why buy now? Inventory is still growing. Reductions in prices outhumber price increases 10 or 20 to 1 every week.

And there's this to consider: all those folks who bought Key West Real Estate in 2004 and 2005 are just about to see those low teaser rate hybrid loans change to ARMs. When their loans go up 50% to 100% overnight, many will be kicked into Foreclosure.

Meaning inventory will continue to grow. This will put further pressure on home prices to go down.

My maintenance man is about to lose his home to an ARM kick in. No one wants to refi his house. He's begging his lenders to help him out. I hope someone will work with him.

Anyone buying real estate in Key West today is taking their financial future and holding it above a fire by a string IMHO.

What blue collar worker in Key West can really afford a "home" priced at a ridiculous $450,000 in a tourist based economy which is seeing fewer tourists every year since 2005 (funny how that co-incided with the beginning of the Housing Crash), more affordable hotel rooms being taken off the market, and more people up North not being able to sell their homes for a profit so they can afford to buy in Key West?

Are you only getting your Real Estate news from the classified ads in the Key West Citizen, or are you seeking out the hard core data which paints a real picture of what is really happening in Real Estate?

This is a state, National and Global wipeout of Real Estate wealth happening at this time. It's going to take years before people wade into a home again which requires more than 25% of their take home pay.

You got to pay attention to our overall economy to understand why workers are no longer lining up to buy homes.

Many workers who were on Ed Swift's list for affordable housing on Stock Island have dropped off the lists.

Hundreds of these lower income people couldn't even afford a $5,000 downpayment as required by tightening standards from lenders willing to work with the lower income homeseekers.

If so called "affordable housing" is no longer "affordable", then how can you pump housing which is twice the price of Ed Swift's Lincoln Garden's project?

The market has turned on a dime.

This is not a simple downturn.

This is a beginning of a major downturn in housing.

Stay tuned. It's going to get more interesting later in this year. When more rich people start losing their shirts, that's when the squealing will finally sink in that hey, it wasn't different this time. It's the same as it ever was: buying manias always turn into severe busts.

It's not doom and gloom. It's history and reality returning to the "mean".

p.s. No one jumped out of stock brokerage windows in the 80s.

Cayo Dave said...

Rock - I couldn't have said it better myself. I like the recent article I read that said that Key West real estate had bottomed. The article cited a realtor who said that more properties were selling. What the article missed is that the prices are dropping precipitously: 25%-50% thoughout the Keys.
Volume is not the measurement of a bull market. Price is.
By that realtors logic, the stock market crash of 1987 was a great day to own stocks since volume hit a record.

Sally O'Boyle said...

If you buy a home for $500K and need a mortgage, these days you need 10% ($50K) to 20% ($100K) down. Then a mortgage for $400K to $450K which requires insurance ($4,000 year minimum = $333/month). Property taxes are $417/month. Payments on $450K at 6.25% are $2,770. That's a $3,520 nut every month. Keeping to the old rule of thumb "keep you housing costs to 1/4 of your income"... you need to be pulling in $3,250 A WEEK. $170K a year.

Yes, you can do it making less, taking that ratio higher. You'll be house rich and cash poor. That's fun. I've been there... YUCK.

This does not include maintenance so figure at least 1/2% (.005) of the housing costs yearly: . You won't have an expense every year but one year you will have a huge outlay and will be glad you set it aside.

Buying is not a good idea unless you can afford it. It sounds like anonymous is recommending buying just to own. Makes no sense at all. Might as well fling your money out the car window.

I've been renting for several years and have had GREAT landlords. They are out there - be a good tenant, and be picky about your landlord. Renting has given us tremendous freedom. And cash in our pockets.

Anonymous said...

I am coming to the rescue of Anonymous who appears to be getting the short end of the stick. Since when is it a poor choice to own a home simply for home ownership sake! That was, and is still the American Dream for a lot of people. It is the INVESTORS who got us into this mess and are responsible for the overpriced real estate. Certain segments of the KW real estate market have come down considerably in price 20-50% and it does make sense to buy at this time. You are NEVER going to see prices go back down where they were in the 70s-80s and early 90s. That is a pipe dream. By most experts accounts (and I am not talking about realtors) the market will most likely bottom out in a year and will take 5-7 years to completly recover. For those of you paying rent as I did for many years you are simply paying your landlords mortgage and making the rich richer. I would also challenge the previous person who stated that they can use the differnce in rent money vs mortgage for other investments. How many people really do this? The people that I know that rent, spend their extra money on trips, cars, and other luxuries and will have no sound investments once they retire, other than a 401 k or SS. We are going through a downward trend as the market corrects itself and in the case of KW this is a much larger correction. Obviously only those people who can afford to buy should. I have a deep repulsion for the mortgage bankers and realtors who are pushing these negative equity loans and adjustable rate loans with (initial teaser rates.) The more of them that go bankrupt the better, as they are scam artists taking advantage of hard working men and women.

Anonymous said...

To the previous post by Ms. O'Boyle. I know of very few working class people that only spend 25% or less of their income on housing. Most people that I know spend 40-50%. I think that is reality. I would also disagree with you that renting is advantageous to buying. That has never been the case before so why should that be the case now. Home ownership has always been a good LONG term investment and I highlight LONG term. If you are simply interested in flipping properties than now is not the right time to buy. If you have been priced out of the KW real estate market for the past 7-10 years than it does make sense to consider buyig a lower priced property at this time. The buyer needs to be able to afford the property and make wise choices on the financing. I know an individual who just purchased a two bedroom two bath condo for 395 k. It is a corner-penthouse unit in a newer all concrete bldg. It was not a foreclosure.He got a 6% 30 yr fixed loan with zero down. This same property sold 5 years ago for 600k. He might have gotten this property cheaper if he had waited however there are not a whole lot of QUALITY condos on the market so I think that he made a good purchase. It is very possible that in 7-10 years from now this property could be re-sold in the 500-600 k range and he will have made a nice little profit. I dont know of any renters who could say the same.!

Anonymous said...

It is way cheaper then renting then buying in Key West.

Even if I bought one the new "reduced " condos that are closets for like 250k, straight out without a mortgage, it would still cost at least a grand a month in insurance taxes and condo fees.

Add that to the minimum of 5% I would be losing in interest the money could be earning, we are talking about close to 2k a month, in money not going into any equity. And that is without a mortgage interest to calculate. The numbers get even worse when you throw the interest in a 200k loan .

For 2k a month I rent a luxury places with a boat slip, and let the landlord worry about hurricanes etc.

Maybe I will buy a place in few years when its cheaper to buy then rent.

Anonymous said...

He might have gotten this property cheaper if he had waited however there are not a whole lot of QUALITY condos on the market so I think that he made a good purchase. It is very possible that in 7-10 years from now this property could be re-sold in the 500-600 k range and he will have made a nice little profit. I dont know of any renters who could say the same.!

What exectly does that mean? QUALITY condo, why would quality condos be less availible when there is even greater supply?

Well is 7-10 years he will have sunk $80-100k in taxes and insurance/condo fees into the condo as well. Factor in the percentage the real estate vultures take and then on top of that the 10 years of intrest on the big loan.

I'll say it better be selling for 500-600k or he will be losing a lot of money? Won't he?

Anonymous said...

I am starting to think that this post is being sponsored by a bunch of landlords trying to promote rentals over buying. Makes good sense due to the enormous amount of rentals currently on the market. It is also funny how everyone is conveniently forgetting to include the cost of the actual rent in their various theories, formlas. In the case of the person who is paying $1700.00 per month, this is a staggering figure of $20,400.00 per year. This money is "thrown out the window" with no assoc tax breaks or other benefits.

Cayo Dave said...

I am starting to think that this post is being sponsored by a bunch of landlords trying to promote rentals over buying. Makes good sense due to the enormous amount of rentals currently on the market. It is also funny how everyone is conveniently forgetting to include the cost of the actual rent in their various theories, formlas. In the case of the person who is paying $1700.00 per month, this is a staggering figure of $20,400.00 per year. This money is "thrown out the window" with no assoc tax breaks or other benefits.
In response to this anonymous comment: NO, this post was not created by landlords. Are you so paranoid that you cannot believe there is a logical arguement here so you instead stoke the conspiracy theory?
Secondly, no one is forgetting the rent in the equation. If you check out the NY Times rent calculator that the post links to, you can see how the rent versus own forumula is computed.
Anonymous, you consider renters throwing away $20,400 as insane. (I'll put aside the obvious fact that the renter is getting a residence - probably a very enjoyable one at that.) But doesn't both the renter and the owner have to "throw away money"? The owner must pay finance costs, taxes, windstorm insurance, flood and insurance - all of which do not build equity and, in your words, are thrown away too.
Today, with the price of an average home in Key West, and based where rents are, you will be much more likely to build equity if you rent and put the savings into a mutual fund rather than purchase.

Anonymous said...

Also in 10 years on 30 year 300k loan you pay about 190k worth of intrest

something realters seem to gloss over