Wednesday, August 29, 2007

Buyer's Market Arrogance

I remember Top Gun. Where Sundown, Goose's replacement, is in with Maverick and they're going against Viper. Viper sets Maverick up with an easy shot. Cake, pure cake. And Maverick says, "It doesn't look good."

Sundown, not paralyzed by the loss of Goose says, "What do you mean it doesn't look good? It doesn't get to look any better than that!"

And so is the housing market.

Buyers, much as I have been on your side and advocating this is a buyers market, you are goofing up big time. Wake the ef up and quit being so God damned arrogant.

I don't know how many times I've seen buyers come into the market and have the unrealistic expectations that housing is just going to be given to them for free. Matter of fact, not just free, but the seller is going to pay them to take their house. Furthermore, I don't know how many friends of mine I've said, "Hey, have you gotten pre-approved? Now is the time to start looking." only to have them say, "Well, I don't know, you know. I mean housing is on the way down, I think if I wait a while longer I might get a good deal."

The only problem is in "a while longer" there may not be such great deals.

Led by a media blitz that the housing market is in dire straights, buyers have been led to believe to postpone their purchasing decision indefinitely. Only problem is indefinitely means you'll pass up on what is arguably going to be the greatest time in your life to buy property. Prices are on the way down, interest rates are still at a historic low, debt servicing costs relative to potential rents are reasonable, but oh no, we're not going to buy. We're going to wait until the market tanks even more.

Now, I've always insisted that prices are going to go down (which I still opine they will). But what I've seen based on anecdotal stories and some incidental research is that not only are buyers passing up on discounted prices, but they're passing up on prices where they actually cash flow. Where if you rented out the property, your rental income would cover the mortgage, insurance, utilities and taxes. In other words, buyers have unrealistic expectations and are going to wait too long.

So here is my humble advice to all you aspiring junior, deputy, official or otherwise economists;

Don't let this opportunity pass you up.

Yes, there is a glut of housing, but based on housing starts, they're cutting back production drastically. Which means that once this excess inventory is eaten through, you'll be back to a balance market, and I surmise rather quickly. Yes, yes, I've insisted that the market has a ways to go, which it does, but buyers have become so loth to pull the trigger I fear they'll NEVER pull the trigger until it is too late.

So for me, for yourself, for the sanctity and holiness of capitalism, do yourself a favor and at least get pre-approved for a loan and be on the hunt, be on the look out. It is an opportunity, especially for those of you aspiring economists that are younger that may not present itself again.

All that being said, I could be completely wrong, you could lose everything, markets are inherently risky, you are a fool to listen to my advice, blah blah blah and all the other legal mumbo jumbo that alleviates me of any responsibility of you investment decisions.

8 comments:

Anonymous said...

You know, I've been considering buying a house for a few years out here in the bay area, California.

But, it's hard to convince myself to spend half a million dollars for a 1000sqft condo in a bad neighborhood.

Justin

Captain Capitalism said...

Yes, but you operate from the false premise that living in California is somehow desired.

;P

Just kidding, I couldn't stand California. The only thing I did like about California was driving in LA at around 3AM. Could go pretty much as fast as you want, on 8 lane highways with no traffic.

Anonymous said...

You can drive like that in Chicago too.

California isn't all that bad. It's grown on my quite a bit in the 6 years I've lived here.

It almost never rains, when it does, it's really just a sprinkle.

The coldest it gets in the bay area is high 30s, but generally it's warmer than 40 in the winters, and 70s and 80s in the summer.

It's only about an hour to the beach.

It's an easy weekend trip to some great skiing at Lake Tahoe. I spent some time snow camping on Mt. Lassen last year. In the winter the whole park is designated wilderness, all the roads are closed, and covered with 10+' of snow.

Yosemite is only about 4 hours away.

Tons of rock climbing, lots of mountaineering and peak bagging, and hiking.

Despite the crazy people/politics out here, it's actually a very nice place to live.

Your sister lives out here, as I recall, if you haven't been out you should come see the state. I've got a link somewhere that shows all the public lands/wilderness areas in California.

Justin

Disposable Info said...

I've convinced myself that the odds of actually getting a return on your investment - after inflation - are not in your favor, particularly on houses purchased over the past year.

I hate to link, but it'll help prove my point (and it will increase the odds that someone intelligent will argue with me.) So, here goes:

http://foreecon.blogspot.com/2007/08
/hungry-for-home-prices.html

You really don't have to read the whole thing (unless you completely disagree with my summary here):

1. If you bought a median sized house in 1980 and sold it around 1995, you would have lost money (after adjusting for inflation).
2. The whole buying-a-home-is-an-investment concept is relatively new, I think, popular during boom periods and invalid most other times.

You've got to check out the Robert Shiller graph I linked to, as it changes the whole argument. (Justin, check it out before you make up your mind on buying a 1000 sq ft condo in a bad neighborhood)

And Mr. Capitalism, since this is my first time posting I'd like to offer my compliments on writing an awesome blog that is third, on my list of daily reads, following Cowen's Marginal Revolution and Greg Mankiw's Blog. (Also, you remind me a lot of me... Except you're supposed to spell "F", as in "What the eff?!," with two f's.)

Holy crap, that's a long commentary. I apologize for the space suction - You're welcome to come over to my blog and reciprocate. In fact, I'm achin' for some good old fashioned debate, so I'd be more than pleased if you did return the offense (of contradicting one of your assertions...)

- Dave Foree

Anonymous said...

A Darn Good Post! Finally a voice of reason about the housing market!
The notion of buying a property and putting no improvements in and expecting a huge return is foolish. A few lucky people pulled that off during the boom, but it not how real estate investing really works..

The tried and true approach of real estate investing is Rentals.
- Rental income is a beautiful thing. Even if property does not increase in value (comparing against inflation), you are way ahead. The foolish renters are paying the debt service and principal for you. Eventually you own it free and clear. Every month renters are paying $700 off my principal plus the interst plus an extra $100 month for me. Pretty awesome savings plan huh?

Right now the next wave of millionaires are purchasing real esate in a depressed market. Seeds for future fortunes are being planted today.

General rule of thumb: Find out what everyone else is doing, then do just the opposite to be successful.

Anonymous said...

My son just paid $478,000 (actually $487,400) for a 780 sq ft. house in LA. No garage and no driveway! Owner paid $520,000 three years ago and has had it on the market for $720,000 for 16 months before bank took it back. Mortgage owed was $475,000. Paid $9,400 for closing, loan fee, back taxes on top of sales price. ($9,400 (owner's debt)+ $142,000 cash and $336,000 at 6.4%)Only in California. I would rather live in a tent.

Captain Capitalism said...

Dave - Thanks for the post, I will respond when I have a little more time as I want to do it justice.

Anon 1 - Yes, you inadvertantly hit on a point I was going to make to Dave. ie- yes, if you're just buying a house as an investment, not a consumer good, then housing is not a good investment. But if anybody is aspiring for home ownership and to not pay rent, now is the time to look. Also rental property does make it an investment and it would change it if the property cash flows.

Anon 2- Just out of curiosity, but does it occur to anybody in California to just sell their place, but some nice joint in Oregon for a fraction of the cost and retire early????? The social life in LA can't be worth half a million dollars.

Justin said...

What I find more shocking are the poor people in CA who own houses out here, and refuse to move.

Imagine if you bought a house out here 30 years ago, you make under $50k/yr, but have a house worth more than $1,000,000.

The whole housing market out here just blows me away.

But, like I said before, there's a lot of good out here in CA, and I think a lot of people just see it all as the price they pay for everything they can do here.

Plus, as a computer engineer, like me, and so many others in the bay area, this is where the jobs are, and we get paid more out here.

I can't afford a house, but I can afford a lot of expensive hobbies.

Justin