“We are having to start from scratch and rebuild for a down payment. We figured that a home is the place to build your wealth, and now it’s going on three years and we are back to square one.”
– Kenneth Schauf, a Chicago homeowner, quoted in a New York Times story about a projected drop in U.S. median home prices. Schauf has been trying to sell the condo he and his wife bought in 2004 since last summer, and he expects to lose money on the sale, according to the story.
Any investment carries a certain risk attached to it, no matter what that investment entails. Housing is just another investment vehicle that was victim to speculation and unrealistic valuations – when valuations return to historical levels, then the inventory supply problems will abate.
“[Mr. Schauf and his wife] bought the two-bedroom unit in September 2004 for $255,000, with a 5 percent down payment. They redid the floors, installed new window treatments and repainted the walls. They said they expected the condo to sell quickly. Instead, they have cut the price several times and have yet to receive an offer. The current list price is $279,000, though they expect to settle for less.”
“In the Old Town neighborhood of Chicago, the town house that Ian R. Perschke, a technology consultant, and Jennifer Worstell, a lawyer, bought in late 2004 has appreciated more than 30 percent, they estimated. The gain was big enough to allow them to take out a larger mortgage and renovate two rental units in the house.”
What are these homeowners smoking? You expect that you can get a higher price now for the houses you bought in 2004?
Pretty much anything bought in Chicago after 2003 is now under water.
This housing downturn is going to take a few years to run its course because people are so anchored to prices paid a few years ago. People actually have the gumption to believe they can make a profit on those bubbly prices. It will take years for them to accept the pain of a loss.
As with investments, historical performance does not guarantee future results. It’s possible that we’re moving into an era where housing is less affordable for people. Or not. You can’t predict the future.
You could call the current market primarily a “buyer’s remorse” market. Once reality finally kicks in, prices will eventually stabilize and the recovery will begin. Notice I said “eventually.”
Many condo buyers assumed that they could own for only two years and make money. They are finding out that that is not the case.
Owning a condo (or even a house) for a short period of time has historically been a money losing proposition. The inflated market of the last few years has changed that perception- to the detriment of all of those 20 and 30 somethings who bought their 2 bedroom units all over the city.
These owners seemingly knew what they were getting into but bought anyway. Also from the article:
Ms. Suarez, who grew up in the Dallas-Fort Worth area, says she is not as surprised because she remembers home prices falling after the oil bust in the late 1980s. “Growing up in Texas, real estate has never been a windfall,” she said. “For me, I always just wanted to break even.”
I wonder how they’re paying for both the mortgage and their apartment rent?
Impossible! Kenneth Schauf is a liar or a fool. Real estate always goes up in value. Everyone knows that. It is impossible to even conceive that he will lose money when he sells. All he needs to do it wait this one out. The buyers will come off the fence now that he’s lowered his price to $279,000. Even then, he’s still making money if he bought for $255,000. He should sell FSBO. Buying is always better than throwing your money away on rent.
Ian R. Perschke says what I like to hear. He claims his home has appreciated 30% in less than 3 years. Now that’s the housing market I’ve come to know, trust and cherish. If he holds on to his home for 7 more years he’ll have doubled his money. That’s an investment that can’t be matched in its simplicity, reliability and consisitency.
Odujoko,
Your math is as weak as your sarcasm is lame (and repetitive).
Thirty percent appreciation translates into a 100% return on a 20% down payment (after expenses), and a higher return on a lower down payment.
Any investment carries a certain risk attached to it, no matter what that investment entails. Housing is just another investment vehicle that was victim to speculation and unrealistic valuations…
It used to be that a house was little more than a place to live, not an investment.
It used to be that the value of a home just barely outpaced inflation and that when you added in the cost of maintenance, it was a rule of thumb that you had to live there 7 years before you could sell without bringing money to the table at closing.
I suspect that people will get this ridiculous notion of their home as an investment out of their minds within another year or so. And then we can get back to normal, where a real estate investment is a rental home where the cash after carrying costs gives you an actual return on your money high enough to make it worth the effort of being a landlord. And where a home can either be owned or rented, and your friends didn’t look at you differently based upon that fact.
That’s right! So when you buy your next place O you shouldn’t put any money down and if it goes up even a dolloar your return is infinite.
30% in 3 year = 100% in 10 years. I don’t know his particular financing situation, I was merely referring to the value of his residence. Whether he actually makes money after carrying costs, taxes and maintenance is something that remains to be seen.
“It used to be that the value of a home just barely outpaced inflation …
I suspect that people will get this ridiculous notion of their home as an investment out of their minds within another year or so.”
Agree with you Urban but I think it will be 3-4 years (esp. Chi condo where a lot is coming onto the market). It is the return of home pricing to the inflation trend that will make the next few years painful for those who purchased in the last two years (or borrowed a lot of equity from their homes)…worse in FLA, AZ and other overheated markets. Can’t speculate how far prices will fall…they definitely won’t gain value (despite what NAR says).
The return Joe Z is referring to is a leveraged return. If you put down 10% on a $300,000 condo (pretty common these days), and that condo appreciated 30% to $390,000, you would have a 900% return on that original down payment, minus whatever you paid out for your mortgage and maintenence over the time period (which isn’t much if you would have paid rent anyway and got the mortgage interest deduction).
Uptown R:
10% down is pretty common? Gosh, since when? Everyone I know was doing 100% financing. If they were lucky they were putting down 5%. How many people have $30,000 to put down on a condo?
Houses will return to their “normal” appreciation rate in the Chicago area of around 3% a year. Owning a condo with high HOA fees that is only appreciating at 3% (if that) will be painful for many.
“…put down 10% on a $300,000 condo…”
$30,000, OK
“…and that condo appreciated 30% to $390,000…”
$90,000 return, OK
“…you would have a 900% return…”
WAH?!?!?! No not 900%.
UptownR, the fabled mortgage interest deduction is not all that fantastic. Once you start getting into the higher tax brackets where you can deduct 30+% of what you paid in interest you start running into the AMT which can wipe out so much of your deduction it’s hardly worth bragging about.
UrbanChicago
Yuor phrasing is imprecise. 100% of interest on a home mortgage is generally deductible. The impact of that varies with tax bracket.
The AMT has wildly varying effects on different taxpayers, since it takes account of deductions and forms of income (, e.g., long-term capital gains) that are not applicable to all taxpayers. Interest on home mortgages is not one of the preferences that triggers the AMT.
Odujoko,
30% in 3 years = who knows what in 10 years, unless you assume the appreciation is linear, which is a foolish thingi to do.
Computing a rate of return on “the value of the residence” is total nonsense – return can only be calculated on investment and the value of the residence only equals the investment when all cash is paid for it.
I know how to fix the declining home price problem. Sellers should refuse to sell at lower prices. That way, buyers will be forced to buy at higher prices, which will support home prices for everyone. Maybe the state legislature could pass a law on this….where’s E-mill when you need him???