Tuesday, March 22, 2011

Buying a House Continues to be a Great Deal

Buying a House Continues to be a Great Deal or,
We Think We’re Going to Believe Grandpa

Reprinted with permission from KeepingCurrentMatters.com

There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment.

One of these people is Jack C. Francis, a former Federal Reserve economist and professor at Baruch College. He said in a recent CNBC article:
“For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment.”

The article goes on to explain the rest of Mr. Francis’ comment:
That was good advice until 2006 when home prices collapsed, he says, and it “may become good advice 10 years from now, but right now it’s not.”
Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this information, Mr. Francis gives the following advice:

To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one word of advice: wait. “I keep telling them this is not the time to buy,” he says.

Let’s take a closer look at this conclusion.

1. We have our own study.

Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same categories since January 2000 (covering one of the worst decades in American real estate history), we find that home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.

2. The proper comparison is rent vs. buy.

All of these comparisons claim that putting your money into a different investment vehicle other than real estate might make sense. What they are not taking into consideration is that the investor will still have a housing expense. They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A person can’t live in their 401k or their IRA. This leads us to…

3. In most markets today, owning is LESS expensive than renting.
Trulia recently came out with their Rent vs. Buy Index. The report shows:
that it is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities.

4. Current mortgage opportunities may never be available again
The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do you think a landlord will readjust it?

5. Most Americans see more to homeownership than financial value.
Last week, Fannie Mae released the National Housing Survey. The survey reported:

• 96% of all homeowners said homeownership has been a positive experience.

• 84% of Americans still believe that owning a home makes more sense than renting. Even 68% of renters believe owning makes more sense.

• 2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).

Bottom Line

There are more and more studies being done on the value of homeownership. We think we will trust in what our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent payment goes into the garbage.

Monday, March 21, 2011

What is Really Happening to Home Prices in Aston Township?

The main purpose of this blog is to analyze and publish local real estate statistics that shed some light on what is really going on in the local real estate market.

Recently I took a look at what has happened and is happening to the price of a single family house in Aston Township, Delaware County. Some of what I found may surprise you.

First of all, it is a common belief that home prices hit a peak in 2006 or 2007 and have declined since then. That is generally true, but the magnitude of the change is kind of surprising.

For example, just ten years ago in 2000, the average price of a single family house in Aston Township was $143,602. By 2007, that climbed to and peaked at $268,635. That is an average annual increase of 9.3%, which is high and unsustainable in the long term. The average longer term annual increase in house prices in the United States is about 3%.

The common belief is that that real estate prices have collapsed since then, but is that really true?

Please check out the below (Courtesy of Trend, MLS).
• The re-sale price of an average single family house in Aston increased every year from 2000 through 2007.
• Total increase was 87% from 2000 through 2007.
• In general, house prices doubled in most of Delaware County from 1996 through 2006.
• Since prices peaked at $268,635 in 2007, they came in at $247,725 in 2008, $240,269 in 2009 and $222,497 in 2010.
• That is a decline of 17.2% since the peak. Not fun for a seller, but a long way from the 50% declines that are real in places like Florida and California.
• By way of comparison, a "normal" real estate price correction is in the area of 10-20%.
• Bottom line, Aston Township has seen pretty much of a normal price correction.

Does this mean that we have gone through the decline and that prices are now ready to rebound? Well, probably not, and for these reasons.

It is well established that prices of any item are driven by supply and demand. The result of supply and demand is how much inventory we have.

The more inventory, the weaker the market and the more downward pressure on prices. (Just think of the after Christmas sales or inventory liquidation sales).

If we have less inventory of anything, demand tends to be up (other things being equal) and there will be upward pressure on prices.

In Real Estate, we have the following definitions:

• Seller Market, 1-4 months of inventory, More buyers than sellers and there is upward pressure on prices.
• Balanced Market, 5-6 months of inventory, about an equal number of buyers and sellers and prices are stable.
• Buyers Market, 7 months or more of inventory, more sellers than buyers and there is downward pressure on prices.

Back in the good old days (if you were a seller) of about 2003 through 2007, there were an estimated 2-5 months of inventory in Aston Township. There was upward pressure on prices and they peaked in 2007.

Starting in 2008, inventory levels increased to about 6.8 months. In 2010, there was an estimated 9.9 months of inventory at the end of the year. That exerts a downward pressure on prices.

Stated differently, there is a unsold inventory that has to be worked off before we can expect to see rising prices again. As per the real estate forecasting service at KeepingCurrentMatters.com, we can probably expect to see about one more year of declining prices, followed by a recovery starting sometime in 2012.

Locally, in places like Aston Township, when inventory levels get back to under 4 months, we should be able to see rising prices once again. Until then, it is a great time to buy.

If you would like more specific information about what has happened to house prices in the immediate area around your house, just let me know and I will be glad to develop it for you.

What is Really Happening to Home Prices in Delaware County?

WHAT IS REALLY HAPPENING TO HOUSE PRICES IN DELAWARE COUNTY?
Periodically, I try to publish local real estate statistics that shed some light on what is really going on in the local real estate market.
I recently took a look at what has happened and is happening to the price of a single family house in Delaware County. Some of what I found may surprise you.
First of all, it is a common belief that home prices hit a peak in 2006 or 2007 and have declined since then.
That is generally true, but the magnitude of the change is kind of surprising. For example, just ten years ago in 2000, the average price of a single family house in the country was $160,000. By 2007, that climbed to and peaked at $273,000. That is an average annual increase of right at 8%, which is high and unsustainable in the long term. The average annual increase in house prices in the United States is about 3%.
The common belief is that that real estate prices have collapsed since then, but is that really true?
Please check out the below (Courtesy of Trend, MLS).
  • Since prices peaked at $273,000 in 2007, they came in at $267,000 in 2008, $250,000 in 2009 and actually rebounded to $261,000 in 2010.
  • That is a cumulative decline of only 4.5% since the peak. Not fun for a seller, but a long way from the 50% declines that are real in places like Florida and California.
  • By way of comparison, a "normal" real estate price correction is in the area of 10-20%.
Does this mean that we have gone through the decline and that prices are now ready to rebound? Well probably not, and for these reasons.
  • Inventory of houses for sale in the county was at or below 1,800 units until May of 2005.
  • Sales in 2005 were 7,129 houses
  • In 2010, the average inventory was 3,542 units or more than double that of May, 2005.
  • Sales in 2010 were 4,171 units.
  • Stated differently, supply (inventory) is up by more than 100%.
  • Demand (sales) is down by 41%.
  • Prices are driven by supply and demand. When supply is up and demand is down, prices go down. Overall, that is what we have seen and probably will continue to see for the next year.
If you would like more specific information  about what has happened to house prices in the immediate area around your house, just let me know and I will be glad to develop it for you.
Thanks and please let me know if there is anything else that I can do for you.