John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... Is buying a home an investment mistake? Vote at the end of this blog
Nationwide existing-home sales plunged to a 15-year low in July, falling 27.2 percent in July from June, and 25.2 percent from July 2009, shows a report released today by the National Association of Realtors.
The drop was similar to the 26.6 percent year-over-year drop for closings in the Denver area last month, which was reported earlier. Closings were down even more in the Denver-area in July compared with a year earlier, falling 28 percent. Denver-area home closings in July from June fell 19.5 percent.
Independent broker Gary Bauer, who prepares a monthly analysis of the Denver-area housing market based on Metrolist data, said that he thinks a lack of consumer confidence is the culprit both nationally and locally.
“We’ve seen a consistent drop in consumer confidence,” Bauer said. “When consumer confidence falls like it has been falling, long-term items such as buying a home are not on the radar screen. Maybe this is an indication that activity is going to continue to decrease for the remainder of the year.”
August outlook dim
He said that from his “individual perspective,” home showing and offerings dropped in August. Part of it is the normal seasonal impact, as with the start of school, moving close to a school is no longer helping to drive the market.
“I think August is not going to be a good month, but I am not ready to say it is going to be grim,” Bauer said. “The reason is I’m not going to say it is grim, because I have had conversations with people in the title industry and they said they are quite active. And a lot of their activity is not for refinancing.”
Beyond the latest report, Bauer is concerned by a comment by Thomas Hoenig, the chief of the Kansas City Federal Reserve.
Fed remark “irresponsible”
“If the American people are looking at the housing market to be their investment opportunity, I think they are making a mistake,” Hoenig said on Monday at a field hearing by the U.S. House Financial Service s Committee’s oversight and investigations subcommittee.
“That is irresponsible,” Bauer said about the comment. “Pretty much my first feeling is that something is coming down the line and they are not sure how to handle it. But I don’t think someone in that position should be making a blanket statement that if you are looking to invest or buy a home, you should not be doing it.” Former U.S. HUD Secretary Henry Cisneros, speaking in Denver today, noted that while he repects Hoenig and that homes primarily should be purchased as a place to live, and not as an investment, noted that Hoenig is almost always the lone dissenting vote of the Federal Reserve Board, and does not represent the direction the Fed is taking to help revitalize the housing market.
Lawrence Yun, NAR chief economist, said a soft sales pace likely will continue for a few additional months.
Low rates will drive demand
“Consumers rationally jumped into the market before the deadline for the home buyer tax credit expired,” Yun said. “Since May, after the deadline, contract signings have been notably lower and a pause period for home sales is likely to last through September. However, given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs.”
Cisneros said that he thinks the tax credits were still a good idea, even though some of the sales that would have included in the summer shifted to the spring. The credits also likely spurred some home buying that would not have occurred otherwise, he added. The housing market, which was especially vulnerable late last year and this spring because of weak demand, needed the boost of the tax credits, he said. Cisneros said that recoveries in the housing market led the country out of the last eight of nine recession.
NAR President Vicki Cox Golder, owner of Vicki L. Cox & Associates in Tucson, said there are great opportunities now for buyers who weren’t able to take advantage of the tax credit. “Mortgage interest rates are at record lows, home prices have firmed and there is good selection of property in most areas, so buyers with good jobs and favorable credit ratings find themselves in a fortunate position,” she said.
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I heard the chief economist for Zillow make similar statements today. He said homes will only increse in value 2-4% over the forseeable future, therefore people should really consider renting. OK, I buy a $200,000 home, put 20% down. If I get 2%/yr appreciation thats $4,000 on a $40,000 investment, thats a real return of 10% with very low risk of principle assuming we’re at or near the bottom. Thats without considering the higher rates realized by FHA borrowers or the tax benefits which will grow significantly effective January 2011.
And he’s the chief economist at Zillow? So yes it’s a good time to buy, particularly your primary residence and I’ve confirmed why Zillow is a blight on our industry.
You conveniently left out the 3% closing cost on 200,000 ($6,000) when you buy and the 6% of the 220,000 house you selling in 5 years($13,200). It looks like you lost $9,600 with you example. That also assuming no put no money into the home for maintenance.
You have to give the man his due; he identified Zillow as a “blight”.
He also forgot the major tax benefit to owning a home. The tax benefit of owning is huge for most people. Also we will most likely never see interest rates this low again. Buying something and selling it in a year will probably net you a loss, however people on average hold a home 3-5 years. I think most people will be safe within that time as long as they don’t over pay and don’t over extend themselves. I’m always very careful about that with my clients.
Ha – woops I just realized he did mention the tax benefit…
“If the American people are looking at the housing market to be their investment opportunity, I think they are making a mistake,” Hoenig said…” Geee….. The investment opportunity he thinks is better is WHAT?? Stock in WHAT? Securities backed by WHAT? It must be gold. It would seem that if Wall Street, the Fed, and more government than we need, can’t provide an environment where people can feel safe in buying a house, then it must be time for the revolution that some think is inevitable. I’m off to get a pick, shovel and prospector’s pan.
Heavens, I’m in! Do you need a Sherpa?
In Winter Park, we call it a quiet enjoyment of your investment. Skiing, mtn biking, hiking…a lot more fun than watching CNBC
Wasn’t sure if you needed my entire name.