Lane Hornung, the president of 8z Real Estate, over a lunch of teriyaki sandwiches in a Boulder restaurant, recently discussed a wide-range of residential real estate issues, including home buying strategies, where we are in the real estate cycle, and the case for buying a home as an investment.
Hornung, who also is the co-founder and co-founder of COhomefinder.com, is a numbers guy, who holds an industrial engineering degree from Stanford, as well as a MBA in finance from CU. Hornung takes such an analytical view of the market, that at on one question from InsideRealEstateNews, he said he didn’t want to respond until he had time to study the data. For reading material, Hornung brought with him a copy of a recent New York Times article authored by economist Karl E. Case, co-author of the S&P/Case-Shiller Home Price Indices. The latest Case-Shiller report, with August figures, will be released Tuesday. 8z is one of the sponsors of InsideRealEstateNews and a conversation with Hornung is a monthly feature of InsideRealEstateNews.
Following is Hornung’s take on some issues:
InsideRealEstateNews: Since buying a home is not a guaranteed road to riches, as it was perceived to be a few years ago, how does that change the game?
Hornung: Hornung alluded to the article by economist Case, who he said made a very reasoned argument that given how much homes prices have fallen from their peak, combined with historically low interest rates, now is a compelling time to buy a home.
“A lot of people would call Case a guy who is very pessimistic about the housing market,” Hornung said. “I would say he was more of a realist, and was one of the first to say that a downturn was coming in housing. I think most people would consider him a bear on the housing market,” in contrast to many who were bullish for so many years.
Yet, Hornung, notes in the New York Times article, Case argues, “the idea of home ownership is not dead. He believes that a little perspective is needed. His point of view is very consistent with my observations. If you combine low interest rates that maximize your purchasing power, and combine that with home prices that are very affordable, it is very good time to be buying and taking advantage of these conditions.”
That’s not to say that the home bubble was not real.
Hornung said that point was driven home to him, while attending a conference in Las Vegas in 2006, when a waiter at lunch told him how he had bought about a half dozen homes that cost hundreds of thousands of dollars each, and he was planning to buy more. For Hornung, that was reminiscent of the apocryphal story that Joseph Kennedy reportedly sold of his stocks right before the stock market crash of 1929, when the man who shined his shoes regaled him with tales of his stock-trading prowess,
IREN: Buying a home as an investment:
Hornung: Owning a home, unlike other investments, has a utilitarian value – that is, it provides shelter.
“A home has what economists all an “imputed rent value,” Hornung said. “If nothing else, it keeps the rain off your head and keeps you warm in the winter. No matter how many shares of stock you own, it won’t keep you dry and warm.”
Over time, when you adjust for the ups and downs of a home value changes, the imputed rent plus the appreciation of a home, returns about 6 percent a year, he notes.
“If you own a stock, it can go down to zero,” Hornung said. “That basically never happens with a house. It might lose 50 percent in value from its peak, but will almost never lose all of its value.” Over time, he said, home values tend to rise about 4 percent a year, with the other 2 point gain coming from the rental aspect. Indeed, if you were unlucky enough to buy a home during the peak years of 2005 and 2006, you would still have the imputed rent advantage of owning your home, he notes. Yes, it is true that you likely will not be able to sell the home for what you paid this close to the peak of the bubble, but that only becomes an issue when you try to sell your home, he said.
“Homes rise in value, over time, about half the rate of stocks,” Hornung said. “Homes should appreciate at a lower rate, because they are less risky than equities.”
IREN: Is this the bottom?
Hornung: It doesn’t matter. Again, using the stock market comparison, it is very easy to look back and point to the day when prices hit bottom and is when everyone should have been backing up the truck.
By contrast, Hornung, noted, homes are bumping along the bottom. They may show a 2 percent drop increase, or a 2 percent increase, but from a long-term perspective, that is just noise, he argues.
“If you buy at 2 percentage points to the upside, or 2 percentage points to the downside, over time, as the ups and downs smooth out, it will make very little difference,” Hornung explains. “Right now, we are kind of bouncing around on the bottom. The bottom is real estate is U-shaped. It might be at the bottom of the U for another 12 months, 24 months or 48 months.”
IREN: So are you saying the recovery is four years away?
Hornung: Not necessarily.
Indeed, it’s quite possible that your individual home purchase already is far off the U-shaped bottom and is following the long line of appreciation that historically lasts longer then the bottom of the cycle, Hornung notes.
Again, consider the comparison of investing in an equity, as opposed to buying a home. You know exactly, in real time, exactly how much your share of IBM or Google has risen or dropped since you bought it, because every share of common stock is the same.
But Hornung points out that no matter what data from sources such as Case-Shiller or Metrolist show, your home purchase has many variables that determine its value, such as the neighborhood, competition from new homes, and how much demand there is for that style of home, amenities of your home, in addition to the price you paid.
“If you are waiting to capture the absolute bottom of the housing market, No. 1, you can’t time the market,” Hornung said. “In general, the notion of trying to time any market is laughable. For some buyers, the bottom may have been in 2009, and others it might be in 2010. If you get a a great deal on your particular home, it doesn’t matter what the overall market is doing.”
IREN: Thoughts on so-called “zombie homeowners,” with no equity, walking away from their homes, even though they can still afford their mortgages?
Hornung: When you get a loan to buy a home, there is a contract with the lender to pay it back, he notes. As with any contract, it can be modified, honored, or breached, he adds. “I am very sympathetic with people who can no longer afford their mortgages because of health reasons, or they lost their job,” Hornung said. “In many of those cases, they do not have the luxury of holding on their home. If they can’t get a loan modification, their only choice may be a short-sale or a foreclosures. But for most people, who can afford their home payment, but it is under water (that is, the mortgage is worth more than the home), they are sitting pat. And that is the right decision, both ethically and from a business perspective, for most people. After all, they still have the imputed rent value of their home. If they walk away, they are going to have to rent somewhere anyway.”
And people seldom walk away from paying their car loans, even though they depreciate the second they drive off the lot, Hornung noted.
“Why? Because the car does what they bought it for,” Hornung said. “It gets them where they want to go. There are advantages to having your own car, instead of only taking public transportation. And there are advantages to owning your home, as opposed to renting.”
IREN: Speaking of renting, are you seeing in increase in people buying homes as an investment?
Hornung: He said he he telling all of his brokers to contact anyone who has shown interest in buying an investment property, and they’ll run the numbers to see what kind of return they can expect.
Hornung said that investors even in high-priced markets in Boulder, are enjoying immediate cash-on-cash returns. In the past, landlords in Boulder often counted on overall appreciation, and weren’t expecting their homes to cash flow from Day One.
But with mortgage rates being so low, hovering close to 4 percent for a 30-year, fixed-rate loan, and even lower for an ARM, that directly boosts their bottom line, he said.
“I’m seeing people cash-flowing, even when you account for the opportunity cost of the capital – that is, their down payment,” Hornung said. “Mortgage rates are not only low for owner-occupants, but for investors. I know one guy who recently refinanced his loan into less than 5 percent. That is amazing. It goes directly to his bottom line.”
Hornung also said that he is seeing investors successfully snap up homes at various price levels. “It’s not just the $55,000 condo in Aurora,” Hornung said. “You can buy a home in Highlands Ranch and rent it to a nice family.”
Is the smart money buying investment properties?
Hornung: Increasingly, he said he is seeing groups buying homes as investments. Part of it, is a that some people who can qualify for a loan, are hesitating, because of all of the bad press, seeing friends unable to move because they can’t sell their homes and take a job some place else, or just plain fear, he said.
“I think that is absurd,” Hornung said. “Other areas have had slumps in housing prices before. People who bought in southern California when that market slumped in the early ’90s, are now millionaires.”
That said, renting compared to buying, is clearly gaining momentum, he notes.
“A lot of the so-called smart money, is saying that they would love to be your landlord, and have you make their mortgage payment on a property,” Hornung said. “And with rents rising, it is a good time to own investment property. But except in very rare circumstances, it makes more sense to buy with the idea of buying and holding, and renting, rather than buying with the idea of flipping it for a quick profit.”
Is the end of the housing buying frenzy such a bad thing?
Hornung: “We are returning to the fundamental reason of why people want to buy their homes,” Hornung said. “They buy a home because they are in a point in their lives that makes sense. They buy because it is convenient to work, or they like the school district for their kids, like the neighborhood. First and foremost, they want to live there, and any appreciation is just icing on the cake. What I think is nice about that is it will create more a sense of community. When you are buying a home with a flipper mentality – you say I will live here two or three years and then I will sell it, buy a bigger home, and live there for three years or less – I’m not sure that does much for creating a stable community. I think one of the great advantages of people buying a home is that it does foster a sense of community. Homeowners who are putting down roots care about what happens and become involved in their community. That is one of the major benefits of homeownership, and I think a little of that was lost during the buying frenzy, when people purchased homes mainly as an investment vehicle. I think we are returning to the idea of primarily buying a home as a place to live, and I think that is very important as a benefit to society.”
To read the New York Times article that Lane Hornung alluded to, please go to A Dream Home After All.