Home Ownership: Do You Have The Courage To Buy Into This Housing Market?
Thursday, July 2, 2009
by Marc Lichtenfeld, Senior Analyst, Smart Profits Report
Almost half of all American adults no longer believe that home ownership is a realistic way to build wealth.
That’s according to Gail Cunningham of the National Foundation for Credit Counseling, quoted in Barron’s this week.
Given that home ownership is a cornerstone in almost every wealth-building plan, this is astonishing. Even if the days of selling a house for an enormous profit are over, building equity in a home beats the pants off paying rent.
Of course, home ownership is not always better than renting, but in most cases, it still is. And even if home prices are flat, building a little bit of equity makes it worth the cost of ownership, especially when you add in the tax breaks associated with owning a home.
Home Ownership Statistics Are Disconcerting
Trouble is, some of the statistics about home ownership are frightening:
- One-third of those surveyed don’t believe they’ll ever be able to afford a home.
- 42% of those who once purchased a home, but no longer own it, don’t think they’ll ever be able to afford to buy another one.
In Tuesday’s column, Karim Rahemtulla detailed the problem that the large number of short-sales are causing in the housing market.
Today, I’m going to give a couple of tips to both house-hunters looking for bargains and investors looking to “buy on fear.”
Real Estate - Buying When There’s Blood in The Streets
There’s an old Wall Street axiom that says you should “buy when there’s blood in the streets.” And throughout the real estate market, there is clearly blood in the streets.
In some markets like in Oakland, California, where prices have dropped 32% in the past year and 75% of first quarter home sales were distressed sales, there’s not only blood in the streets, there’s a virtual river of the stuff flowing down Broadway & 17th St.
But if you’re considering buying a property - either as a primary residence, investment property, or vacation home - now is probably a good time to start looking. Desirable vacation and retirement spots such as Southern California, Miami and Naples, Florida, Phoenix, Arizona, and Las Vegas, Nevada have suffered a particularly bad beating and likely contain many desperate sellers and foreclosed properties.
And even in markets that have held up relatively well compared with the rest of the nation, you can likely find some bargains…
Home Ownership: Use Desperation To Your Advantage
Take Asheville, North Carolina, for example…
The average sales price of a home there is only off by about 15% from the peak, but homes are now sitting on the market for an average of 144 days, up from 94 days. The number of houses sold in 2009 is down by one-third from last year.
Even Austin, Texas, which has weathered the real estate storm better than most, has seen the average price of a single-family home decline by just 3% from a year ago, but volume has slipped 25%.
As Karim suggested on Tuesday, the best strategy may be to find a desperate seller who is forced to compete with short-sales and the foreclosures. Plus, you’re likely to get the deal wrapped up in a much more timely fashion than if you’re dealing with the banks’ lawyers. Sure, you may find bargains on foreclosed properties and short-sales, but the process will take much longer.
For those of you not looking to buy a house but still like the idea of buying fear, consider this option…
Go Contrarian On Commercial Real Estate
Many experts believe commercial real estate will be the next big shoe to drop. And my colleague at Investment U, Dave Fessler, recently published some alarming statistics about the upcoming commercial real estate fallout. Take a look:
- During the first quarter, businesses vacated 8.7 million square feet of retail space. Not only was that a 10-year high, it compares with 8.6 million square feet vacated for all of 2008.
- Vacancy rates at regional malls, strip malls, and neighborhood centers are increasing at the highest rate in 30 years.
But if you’re looking for an uber-contrarian way to play this commercial real estate trend, consider REITs (Real Estate Investment Trusts) that specialize in commercial property.
Take a look at Kilroy Realty Corp. (NYSE: KRC). Founded in 1947, it develops and manages office and commercial property in Southern California - one of the hardest hit markets in the country.
The firm just cut its dividend to $1.40 per year, but that still equates to a beefy 6.9% yield. It’s cash flow positive and has a healthy return-on-equity.
Currently trading around $21 per share, it’s down considerably from its high of $88 back in February 2007.
And while it’s not always easy to buy when everyone else is selling, history has proven time and again that it is precisely those who are able to buy in scary times are the ones who make that make the most money.
Hoping your longs go up and your shorts go down.
Marc Lichtenfeld
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One Response to “Home Ownership: Do You Have The Courage To Buy Into This Housing Market?”
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Your comment to the effect that owning a house beats the pants off renting has become a bit of an old wives tale. Today one must run the numbers.
I began home ownership in the 1950’s and have lived and owned on three continents. It was also the time, and very reliably so, when house prices kept up with inflation. Accordingly, inflation pretty much covered the cost of owning a home. At that time there were not many affordable alternative risk-free investment opportunities for the average family. These were the times when home ownership had great credentials.
Unfortunately, these time ended in the 1970’s with the first house price doubling that started in England and spread to North America and to a lesser degree Europe. If you look at the facts you will find this sudden inflation was caused by ill-conceived Government and Central Bank policies feeding on the greed that forms part of every persons character.
Since the 1970’s we have had short periods when house prices doubled followed by very long periods when they stagnated waiting for prices to once again correlate with wages. It was always the case that new entrants to the market drove the chain reaction of prices up the housing spectrum. Therefore, it soon became clear that home ownership is only for the house flipper or those who could be sure their job would allow them to stay put for up to ten years.
These oscillations of ‘land of plenty’ followed by ‘desert’ have increased over time until the recent mother-of-all bubbles created by so-called developed Governments and their Central Banks panic induced in 2001.
A strong tenet of life is that the higher the rise the greater the fall, so don’t look for this housing crush to end soon and don’t expect home ownership to regain popularity until the market is again stabilized to incomes and Governments put in irrevocable guarantees that the bubble will not form again. This condition relies on Governmant prudence that appears contrary to politicians power base and intelligence/experience so I wouldn’t hold your breath in anticipation.
It would be an interesting exercise to survey financially smart people and find out how many have sold their homes, or would like to if they could, in favor of renting. You may be quite suprised at the current unpopularity of home ownership absent a current economical argument. This is a shame as home ownership underlies approximately 70% of America’s economic base.