As a resident in Upstate South Carolina, I must admit that it is not only incredibly beautiful, but our real estate is incredibly well priced relative to California.
I love California as well and have watched with a combination of bemusement and dismay as real estate prices have, over the past few years, reversed course. Watching that reversal, I feel a sense of relief that we still have proof that trees do not, as the saying goes, grow to the sky!
In the case of stocks, such as Apple below, this has yet to be demonstrated.
Let’s dial back the clock three years. There is a small house (about 900 square feet) just around the corner from one of my buddies. It was being put on the market for $10 million. Let me be clear, the 900 square foot house was not made of gold bullion. It was just a little cottage. But here we have it:
To be fair, the cottage is on, for this neighborhood, a lot of half an acre, which is gargantuan for here. Most lots are like 6400 square feet or so. All the same, a Chinese buyer snapped up the place for $10 million, and it has sat there, unoccupied, for three years. I know this for a fact, because he walks his dogs in front of it every morning, and although a gardener is evidently paid to keep the yard tidy, not a soul has crossed the threshold in all these years.
Having said that, present estimates for this property are a bit south of $10 million. I’m sure the rich Chinese national who plunked $10 million into this place was doing so as a “safe haven”, but I’m not so sure she can celebrate a $6 million deflationary plunge in value:
$10 million and now worth $4 million? Deflation is painful when it happens quickly to you!
2016 was definitely some kind of peak California frenzy, when multiple all-cash offers, people camping out in front of sites where a listing was going to be posted the next morning, and a scarcity of inventory ruled the day. Just north of here, in San Francisco, there was this tale:
It was typical of the time: 27 offers (most pure cash) and a sale price nearly double the offer. And all this for an “uninhabitable” place. Glancing at Street View, I’m inclined to agree.
Times have changed. There aren’t multiple offers anymore. The Chinese seeking a safe haven have fled. And the new tax code has splashed cold water on California real estate. As for scarcity of inventory – – back in 2016, I think at one point there were a total of 11 properties listed for sale right around my buddy’s home – – that has changed too:
The most poorly-situated sellers are those with ultra-luxury properties. Another deflationary effect is that nobody wants what you are selling. At 40 cents on the dollar they do, right?
It took me all of three seconds to get this example for you. Below we have a $39,998,000 property (far more appealing than if it was priced at $40,000,000, LOL). You may have noticed that little mention of a $10 million price cut as of last month (deflation).
Added to which, this sucker has been on the market for 535 days already. It was not that long ago that the “days on market” was invariably a single digit. Helpfully, Zillow lets you know the monthly mortgage payment at this reduced price would “only” be a $191,068 twelve times a year.
At this price, it’s obviously a lovely place. They’ve even decided to dedicate a portion of this expensive property to a statue:
Wait, here comes my historical memory bank. I couldn’t help but instantly think of the statue of the children in Stalingrad after the Nazi bombing of the city. It’s eerily similar and once deflation expands over the next decade, probably extraordinarily prescient.
We are currently enjoying a rising stock market and real estate prices, unfortunately deflation will rear its ugly head again shortly.
In the next few days I will be posting a full explanation of deflation, the destruction it causes and how you can help your family walk out of its ashes alive and well with your retirement portfolios buying power fully in tact.
In July I posted an article pointing to the fact that Real Estate Sales were declining rapidly in Southern California.
Sadly, that has spread across the entire country. According to Redfin, more than one out of every four homes for sale in America had a price drop within the most recent four week period
In the four weeks ended Sept. 16, more than one-quarter of the homes listed for sale had a price drop, according to Redfin, a real estate brokerage. That is the highest level since the company began tracking the metric in 2010. Redfin defines a price drop as a reduction in the list price of more than 1 percent and less than 50 percent.
That is absolutely nuts and we have not seen this in a long time.
Yes, this could be just a short-term event, but according to Bloomberg is may be more serious . . .
“Although the U.S. economy and job market are firing on nearly all cylinders, the housing market has essentially stalled,” the mortgage guarantor said. “Weaker affordability, homebuilder constraints and ongoing supply and demand imbalances over the summer resulted in fewer home sales and less home construction compared to earlier this year.”
August sales of existing homes missed analysts’ projections, while new-home sales fell in three of the four months through July. Figures due Wednesday on new-home sales are projected to show stabilization in August after the weakest pace in nine months. Housing and other economic data may be clouded in coming months by fallout from Hurricane Florence.
“Coming out of the downturn we’d expected a much stronger acceleration but we haven’t really seen that” during the recovery from the housing collapse, said Sam Bullard, senior economist at Wells Fargo Securities LLC.
So, as the chart illustrates housing starts have not fully recovered from the 2008 meltdown.
Although the stock market is still flying due to international capital flows moving into US markets, it makes sense to avoid sectors that may not be moving higher and may rolling over preparing for a decline.
I have reprinted a portion of this article because of important data that just came out. So, a closer look at the charts below the article is imperative.
Southern California home sales crash, a warning sign to the nation
Sales of both new and existing houses and condominiums dropped 11.8 percent year over year, as prices shot up to a record high, according to CoreLogic.
The median price paid for all Southern California homes sold in June was a record $536,250, according to CoreLogic, a 7.3 percent increase compared to June of 2017
In the past, California, one of the largest housing markets in the nation, has been a predictor for the rest of the country.
Southern California home sales hit the brakes in June, falling to the lowest reading for the month in four years. Sales of both new and existing houses and condominiums dropped 11.8 percent year over year, as prices shot up to a record high, according to CoreLogic. The report covers Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties.
Sales fell 1.1 percent compared with May, but the average change from May to June, going back to 1988, is a 6 percent gain.
The weakness was especially apparent in sales of newly built homes, which were 47 percent below the June average. Part of that is that builders are putting up fewer homes, so there is simply less to sell.
“A portion of last month’s year-over-year sales decline reflects one less business day for deals to be recorded compared with June 2017,” noted Andrew LePage, a CoreLogic analyst. “But affordability and inventory constraints are likely the main culprits in last month’s sales slowdown, which applied to all six of the region’s counties and across most of the major price categories.”
Fewer affordable homes
The median price paid for all Southern California homes sold in June was a record $536,250, according to CoreLogic, a 7.3 percent increase compared with June 2017. While part of that is due to a mix shift, since there are fewer lower-priced homes for sale, it is becoming increasingly clear that fewer buyers are able to play in the higher price ranges.
“Sales below $500,000 dropped 21 percent on a year-over-year basis, while deals of $500,000 or more fell about 3 percent, marking the first annual decline for that price category in nearly two years,” said LePage. “Home sales of $1 million or more last month rose just a tad – less than 1 percent – from a year earlier following annual gains of between 5 percent and 21 percent over the prior year.”
LePage points to the rise in mortgage rates over the past six months, increasing significantly a borrower’s monthly payment. Rates haven’t moved much in the past month, but are suddenly going higher again this week, pointing to even further weakness in affordability.
Time to check the trend charts:
The charts below represent the Real Estate Sector and can tell us if the information in the article above is pointing to a possible Real Estate price crash or it has it already started. Should we look to transfer from a REIT to something with more growth potential? Should we move form Real Estate Mutual funds or Exchange Traded Funds to another sector?
Let’s take a look:
The Image below is our longer-term Monthly Trend Chart for IYR, a Real Estate Index ETF:
As you can see it is bullish after a short corrective decline since January. But because of the late spring and summer building that exploded, we have reacted bullishly. Could that turn south again?
The Weekly chart below gives us even more information revealing that the overall real estate market has been extremely bullish since late February. Our algorithm was hit with a rare quick scare in late April only to capture the bull run since then. But the article is speaking of data that just came out. So, a closer look is imperative.
The Daily Chart for the Real Estate Index tells a changing story:
We can see that a downturn in the real estate index has just begun and may be illustrating the start of a downward move that can be traded successfully.
It can also be a guide telling you that the weekly Red Light is could be arriving shortly. This would confirm that both the daily and weekly are supporting a decline in prices that just started this month.
Better yet, this information could tell you to exit your ETF, or even take a short position to profit from a decline.
If you are making the comparison of renting vs. buying a home, you need to consider all the factors. If you do a quick search online, most of the resources available will only look at mortgage payments, taxes, insurance, and maybe HOA fees. However, many of them will not discuss and outline the “other costs.” These are costs such as landscaping, snow removal, home furnishings, repairs, maintenance, replacements, and renovations. These “other costs” can add up to a lot over time.
When you calculated the costs of purchasing your home, did you calculate out the costs of putting on a new roof, a new HVAC system, new water heater, new siding for your home, expenses for landscaping your property, new appliances, etc?
If you did, then congratulations, you did it right. Most people don’t include these things. Granted some of these maintenance and replacement items are not predictable, but most of them have predictable life spans.
An Example of the True Costs of Owning a Home
Let’s say you are looking to buy a single-family house. You are driving down the street and see the perfect one, and it has just been listed on the market. The listing price is $625,000. Both you and your spouse agree that it is complete and you decide to put in an offer for $625,000. What will it cost you to own this home?
Let’s start with the underlying assumptions:
You are planning on living in this home for 30 years
The purchase price is $625,000
Your down payment is $125,000 (assuming you are putting down 20%)
Your mortgage will be for $500,000
The interest rate of a 30 year fixed mortgage is 4%
Your mortgage payment will be $28,644.96 annually
The rate of inflation is 2%
Your annual maintenance costs are 1% (starting at $6,375)
Your real estate taxes are 1.5% (starting at $9,562.50) (this will vary on your location)
Here is a chart of what your costs would be over 30 years.
Summary of the True Cost of Owning a Home:
I will point out some interesting data from this example in case you missed it:
You purchased a home for $625,000 and put down $125,000 as a down payment. In 30 years your house would have appreciated at the rate of inflation to a value of $1,132,101. This is a gain of $507,101. – This looks good so far.
The total amount of taxes that you paid amounts to $387,932. – Wow! That is a lot of taxes.
The total amount of maintenance costs it would take in upkeep of your home would amount to $258,622. – All those trips to home depot really add up.
The total interest paid on the mortgage amounts to $359,117. We don’t include the total mortgage payment because it includes principal payments which are effectively paying yourself.
We don’t include factors like insurance, utilities, etc. because they would be roughly the same for both renters and owners.
The total costs to own a home for 30 years add up to $1,005,671. – Ouch… that much?
If you subtract the total value of the home from the costs of owning it, you get $126,430. – Huh?!? Isn’t that the amount you used as a down payment?
Over a period of 30 years, assuming you do no renovations and don’t have an HOA fee, living in a home you bought would net you $1,430. Yes, you read that correctly… $1,430 in gains over 30 years on your $125,000. Wow.
Actually, if you discount the value of your $1,430 due to inflation, your $1,430 in 30 years from now would only be worth $789.50 in today’s dollars.
Now let me answer the question:
Is your home a good investment??? NO
Let’s take this example one step further.
It’s All Relative.
It is clear that over the past 30 years, your $125,000 down payment didn’t grow much more than the cost of a new iPad. It is clearly a bad investment. The next question to ask yourself is if you didn’t put down 20% to buy a house, what could you do with the money?
There were a lot of options 30 years ago. CDs, treasuries, stocks, etc. were all better opportunities in hindsight, but since none of us live in the past, let’s look at today.
Treasury Bonds – If you put your $125,000 into a 30 year Treasury bond, you would get 2.9% in annual interest. Holding it for 30 years would net you $178,240 in interest payments.
Stocks – If you invested it in stocks, and the past performance is indicative of future results* (which it isn’t), the past 30 years performance of the S&P 500 was approximately 8.4%. This would turn your $125,000 into $1,405,363. A sizable difference in your net worth.
Almost any investment over 30 years would produce a better return than owning a home that you lived in. My local bank is giving 0.10% interest on savings accounts. Even that provides a higher return on my money after 30 years.
I know this information contrary to what you may have thought, but …
live in and enjoy your home, whether you rent or own. Just do not think of your home as a profitable long-term investment, it is not even close to that.
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