You might notice that we always ask developers in our video interviews some variation of the following question: “What do you say to the buyer who looks at the current market and decides to sit on the fence?”
Naturally, most of their answers include the recommendation to “buy now.” (These people are selling a product, after all.) But it’s always good to hear their rationale behind these answers.
Yesterday, Joe Zekas sat down with Motor Row Lofts developer Paul Zucker for an interview about his career and his approach to home building. We haven’t uploaded Joe’s video’s to YouTube yet, but here’s a small excerpt from the interview, in which Zucker explains why today is a good day to buy.
I don’t think there’s anybody who’s saying that a recovery is any more than 18 months away. Most people are projecting that it’ll be at the end of this year and into the beginning of 2009. So if you’re talking about really being in a house that you buy today three to five years from now, chances are it’ll be worth more then than it is today, for a variety of reasons.’
One, the economy will be better.
Two, the real-estate market will have stabilized.
Three, a lot of the projects that would normally be coming into the pipeline at a time like now are not, because the credit crunch has limited access to capital. Fewer projects will get off the ground, so supply will tighten as we move through this current inventory reduction phase, and prices will go up significantly in three or four or five years.
So it is a good rationale, as much as it may be emotionally driven, to jump in now, do your best to negotiate as good of a value as you can today. Remember that prices aren’t down dramatically in Chicago, so you have some leverage, but not the same as you might if you were looking for a condo in Miami right now, where there are 200 units for every buyer in the marketplace. Once you do that, pick a home that’s going to give you some advantage at resale, which usually is a product that is somehow unique to the marketplace.
Stay tuned for Joe’s videos with Paul Zucker. In the meantime, you can watch my visit to Motor Row Lofts.
This guy may very well be right, but based on the aftermath of previous downturns the prices won’t be going up rapidly anytime soon. As I recall, prices kind of stagnated at the bottom for a few years after the 80s and 90s downturns. I’d be curious to see why he thinks that won’t happen this time. It looks like it will take a long time to work through the current inventory.
I agree with Kurt. While the credit crunch causing fewer projects to get off the ground is a good thing for real estate prices, I don’t know if “tighten” is the best word to describe supply for the next few years. Granted, inventory will probably be reduced a little bit, over the next few years, but after all the high-rise condo buildings currently under construction are completed, we are going to see a HUGE inventory in unsold condos (the inventory already is quite large). A small reduction of this inventory will help stabilize prices, but supply is not going to be “tight” anytime soon, and prices certainly will not go up “significantly” over the next few years.
I think the overall point was that prices aren’t really going anywhere but up, due to inflation if nothing else.
so putting off a purchase that you know will be making in the next few years simply means you’re paying somebody else’s mortgage for that amount of time, and not building any equity.
IMHO, the line “paying someone else’s mortgage” line is a bunch of crap, kind of like the “prices always go up” line.
The cost of ownership is almost always more expensive than a (relatively) comparable rental, even after the income tax deductions.
So, if you are approaching this from a purely financial angle, the math should be: Over the course of my time horizon, is the expected appreciation of my RE investment a superior investment, relative to other available investment s, on the ADDITIONAL cash flow I will have to outlay on a per month basis to own versus rent?
If the answer is “no”, don’t buy; rent and put your additional money into the better investment option. Even conservatively, treasuries may prove to be a superior investment for the next few years.
Of course, this is a purely financial exercise, and we all know that home purchases are not done for entirely financial reasons. No one falls in love with their T-Bonds.
factually, renting is paying somebody else’s mortgage (or at the very least, paying their property taxes).
the problem with your analysis is that assuming you have a fixed rate mortgage, your payment stays flat, while rent goes up. unless you have the ability to predict the future, you have no idea what rents will be in 30 years.
but owning isn’t for everyone, no doubt about that.
Rent doesnt always go up. My rent has stayed stable for several years in Wicker Park.
I bought in the Spring of 2005, and with my mortage I’m only paying about $200 a month more per month than it would cost me to rent a comparable place (after tax breaks, equity build-up, property taxes, condo fees, insurance, etc.) This does not include maintenance of my actual unit, but that has been pretty low so far–and I have actually enjoyed being able to control my environment through painting, etc. So, I could be investing that down payment and the $200 a month, but rent could easily jump by that much in the next few years.
I know several people who have faced rent jumps of over $100 in the past year…
Generally in the last few years rents have gone up citywide and occupancy levels have also gone up.
That seems to possibly have stabilized in the last quarter.
More people renting instead of buying. Although as investor condos come on to the market you may see many of those rented out instead of “flipped”.
I am among the group for whom buying makes no sense at this point. My landlord’s monthly holding costs are almost double my monthly rent. I invest my extra money in fairly conservative stuff, but it still beats the pants off of “building equity” at this point. I am aware that this is not the case in many areas. I certainly wish I had bought in Chicago around 2002 or earlier, but I didn’t move here until 2005. Prices at that time seemed overheated, and I was eventually proven right. So I’ll buy when it makes sense, which will be at least a couple of years away.
Geoff, I think it is safe to say that over the lifetime of a traditional 30-year mortgage your rent will go up, as if it doesn’t the owner would be forced to sell the property and then the question will be moot.
Unless an owner is independently wealthy, property tax increases & depreciation costs need to be passed on to renters, it’s very sad in some respects, my mom felt forced to sell her 2 flat and it meant that a nurse lost an affordable apartment in a nice area.
To clarify my pov, certainly owning is not for everyone – but if you know you will be an area long-term, say, 10 – 15 years+, it doesn’t make much sense to rent IMO.
That doesn’t mean anyone should rush into buying property, of course, buying a house should be as far from an “impulse” purchase as is humanly possible.
I was not referring to renting over a 30 year period. I was referring to rent over a few years. As west town wanderer was as well, or at least to his time horizon. Over a few years when home prices are at historical highs, renting can be more financially sound, if you use the difference in a greater appreciating investment. And if you are fortunate enough to not have escalating rent over those years as I did, the benefits can be even greater.
There are no absolutes, which many commenters here tend to speak in, or at least attempt to. To say rent always goes up is not true. To say renting is less financially sound (usually is) is not always true. Thats my point.
In the interview with Joe, Paul Zucker of Motor Row Lofts stated a time-frame of 3-5 years. That was the time frame I was speaking too. Will you be better off if you buy now and hold for 3-5 years? My personal opinion is no; 5-7 years would be a safer bet.
If you are considering buying or leasing on a 15 to 30 year horizon, it’s a whole different analysis, and buying becomes a much more attractive option.
The “money quote” that I took away from this part of the interview is this:
“pick a home that’s going to give you some advantage at resale, which usually is a product that is somehow unique to the marketplace.”
Some parts of some sub-markets will rebound more quickly, and with greater potential for appreciation, than others. Those are likely to be the non-commodity products in stronger neighborhoods.
“I was not referring to renting over a 30 year period.”
right, but I was, which is what you responded to.
I’d love to hear of an apartment where the rent is going to stay fixed for 30 years, I’ll sell my home immediately!
a fixed mortgage is, although there are other expenses that do go up related to owning a home.
that said, I agree 100% with:
“There are no absolutes, which many commenters here tend to speak in, or at least attempt to.”
people all have very different needs and lifestyles, some people know they won’t be in the City for that long, while others plan on never leaving.
I think the more important take-away message is that people should view buying a house as buying a place to live, not an “investment” in the sense of a 401K.
Joe’s point is dead-on as well. We chose our home in no small part as it came bundled with an extra city lot – they aren’t making any empty city lots without an expensive tear down process, and there will always be a demand for green space.