Wednesday, May 10, 2006

David Lereah's Latest Quote

"It's going from a seller's market to a buyer's market," said David Lereah, the chief economist for the National Association of Realtors. In March, "price appreciation went down to 7.4 percent, from over 10 percent," he added. "That most probably reflects that sellers are bringing their prices down."

Lereah is right that 'seller's are bringing their prices down.' It may no longer be a seller's market in the bubble markets, but it is certainly NOT a buyer's market. In the bubble markets it is a greater fool's market.

37 comments:

  1. Gee, does that mean all of you who claim prices are going down are *shudder* wrong? 7.4% appreciation sounds like, you know, appreciation to me. PWN3D.

    ReplyDelete
  2. Here's a good article about the bubble:

    http://www.consumptionjunction.com/downloadsnew/cj_52447.jpg

    ReplyDelete
  3. It will be a buyer's market when PITI = equivalent rents. Until then, Lereah is just contributing to global warming.

    ReplyDelete
  4. This comment has been removed by a blog administrator.

    ReplyDelete
  5. Aaaah! Tubgirl! I should've known better

    ReplyDelete
  6. Lereah is in the business of selling houses. He doesn't get me worked up the way other commentators do.

    The media should do a better job of pointing out that he is NOT an unbiased source of information when they quote him, though.

    The worst is that many economic commentators who were saying "housing looks really strong" for the past three years are now starting to say "get out now." Now, how the f*&(*&% does that help? If some poor fool bought an overpriced house last year, what is he supposed to do now?

    It is just like in the stock market bubble 6-10 years ago. All the mainstream commentators were gushing about stocks until they crashed; then they all said "well, we knew that would happen sooner or later."

    You really have to think for yourself and not believe what you read, especially in the major media.

    A Redskins fan

    ReplyDelete
  7. Question for the bubbleheads--should I buy my apartment?

    My building at 16th and R NW is converting to a co-op and I can buy my ~700ft one bedroom for about $200K. Should I be worried enough about the crash to pass on this and opt for a $25K buyout instead?

    ReplyDelete
  8. We need more info.

    What is your rent?

    What will the coop fees be?

    What will taxes be?

    What are equivalent rents in the neighborhood for rents?

    How long do you plan to live there?

    etc.

    ReplyDelete
  9. Anonymous,

    You don't say what you're currently renting at. You'd want to compare mortgage versus rent.

    Also, in addition to your mortgage you'll have a co-op maintenance fee. Any major renovations or construction needed at the place?

    One thing to consider, professional property managers have decided they can make more money selling the place than to continue renting it out. I'd see if you can figure out if there's more to their motivation than that? Perhaps they just want to be out of the property.

    On the flip side, if the cost difference is modest, how much do you really like your place? Do you plan on staying there for 5-7 years?

    Also, is there a better view or apartment location within the building? Perhaps you can negotiate an inbuilding move? That would be a cool perk.

    Lots of things to consider. Good luck!

    ReplyDelete
  10. I think the answer is obvious: $25K pays for a lot of rent. At least 1 year. How much will prices go down during that time?

    ReplyDelete
  11. AnonyChastleton - while the devil is always lurking in the details of any RE deal, $200K (if it is really $200K) strikes me as a pretty good price. For instance, my LL is trying to unload my 776sf condo at the Vienna Metro for $339K.

    Post more details and we'll give you the best free online opinion from strangers you'll never meet that you can find anywhere on the internet. :)

    ReplyDelete
  12. David,

    Rent is $1500 now, at low end of comparable neighborhood rent range, estimate $15-1800. Plan to live here approximately 5-7 years or until married.

    Purchase price is $215,000, of which $135,000 is share purchase and $80,000 is allocated share of the blanket mortgage.

    Monthly maintenance costs are $1100, which consists of $600 of debt service on the blanket mortgage, $400 in operating expenses, and $100 in taxes.

    I am in the 28 percent federal income tax bracket.

    ReplyDelete
  13. Re: "One thing to consider, professional property managers have decided they can make more money selling the place than to continue renting it out."

    Actually not in this case. The building was under contract to be sold to continue to operate as a rental. Tenants oprganized and invoked DC's right to purchase law to put together the co-op conversion deal.

    The other option to considee is to buy and flip, rent for a couple years, then buy back in. Instant equity probably greater than the value of the buyout.

    ReplyDelete
  14. 25K should buy two years rent in a comparable apartment. Unless you want to make this place your home for a very long time, the answer is easy. "Buh-bye."

    ReplyDelete
  15. Don't listen to these people. Your place is worth 325k easy. You're a fool not to buy at 200k.

    ReplyDelete
  16. If you can at 24 $1500 monthly payments out of $25K I would like to hire your financial advisor--that would take over 35% annual returns.

    ReplyDelete
  17. So the monthly cost would be $1100 + the mortgage on $135K, or about $2000 per month total?

    Running the numbers the other way, $1500-1800 rents suggest a price of approximately $150K-$195K with the tax and insurance numbers you provided.

    Could you afford to lose $200-$500 if you were forced to rent it?

    ReplyDelete
  18. Anon 9:52 - Who said anything about $1500 a month? Due diligence will no doubt turn up a comparable place for less.

    Anon 9:51 - "...worth 325k easy?" I'll agree with that. Given that it is understood that condo/co-op prices in DC are falling, what do you think the place will be "worth," by the time the conversion is complete? Are you recommending a "flip," at this stage of the game? Good heavens.

    On purely financial grounds, this fellow is at least asking the right questions. What we don't know are his long-term intentions, the appeal of the apartment in question or any of the specifics. Come to think of it, cooperative apartment buildings often have very different rules about owner occupancy than do condos. The cooperative can prohibit an owner from renting out his place, and, should they allow it, they generaly reserve the right to "screen" renters, as in, "I don't like his haircut, he can't live here."

    Apologies if my reply was hasty, I for one would bail and leave my options open, given what is known about this story. I would also exercise extreme caution with co-op buildings, for reasons such as that stated. The legal structure of a co-op is one that should be well understood before buying - "eyes wide open," as they say.

    ReplyDelete
  19. "Anon 9:51 - "...worth 325k easy?" I'll agree with that. Given that it is understood that condo/co-op prices in DC are falling, what do you think the place will be "worth," by the time the conversion is complete? Are you recommending a "flip," at this stage of the game? Good heavens. "

    You mean that certain internet trolls hope they're falling. In reality, they are continuing to rise.

    ReplyDelete
  20. I'd be extremely hesitant to buy into a co-op, personally. I rented in one for awhile, and my LL had lots of issues with the co-op board. It's a lot more restrictive than a condo. Plus, did you actually say that your monthly fees would be $1100???? :O Holy cow, that's crazy. Unless the building, unit, and location are extra special, I can't imagine wanting to take on that headache. If you like condo living, you will have *plenty* to choose from in the near future, given the rate that they are getting built around here.

    ReplyDelete
  21. Anon 12:07, Coops are not designed to be rentals, the special tax status of coops require this. Your LL may have been renting unit to you in violation of coop bylaws. Therefore I'd expect that the coop board had issues with the LL.

    Also, after reading so many posters here argue that homes are not Investments but places for the owners to Live (therefore flippers should rightfully burn in hell), I'm surprised that renting restrictions would now be a consideration since renting is more of an Investor's perspecitive.

    ReplyDelete
  22. There's no question you should buy the coop unit. Buying this unit will cost you less than renting.

    Don't make the mistake of taking contrary advice from people on this site, their math (and logic) is not reliable. For example, you can buy an asset with a current market value $300k plus for only $200k, only an idiot would not do this (and your investment is quite safe since even a 40% property value decrease would still leave you with a lot of equity).

    Re taxes. I've owned three different coop units in DC. Taxes are always very low, this is the main advantage to coops. My DC property taxes last year was about $250 for the entire year for a 2 bd 2 ba appraised by bank at 400k plus (I don't know what the city tax appraisal is). I'm surprised that you state that your taxes will be $100 a month. In addition, operating expenses usually include the taxes, so the $400 monthly operating expense you cite may already include the taxes. You should verify this.

    The $600 underlying mortgage payment is tax deductable. If you make 20% down on the purchase mortgage of 135k, the monthly payment will be about $665. Total monthly mortgage payments and tax (with the high $100 per month your provided) equals $1365 per month. Since during the next five years most of these payments will be towards interest, your tax deductions will be substanital, about $15,000 per year as an itemized deduction, or at your 28% tax bracket, after backing out tax deductions, your monthly mortgage costs about $1000 a month.

    The bottom line you're total monthly ownership expense, tax adjusted, will be about $1400 a month. This is several hundred dollars less per month than rents for a comperable unit.

    ReplyDelete
  23. These calculations assume a final payment that is "several hundred dollars per month" less than comparable rents. This is doubtful. The calculations also fail to account for closing costs or the opportunity costs of both the 20% downpaymnet (27K) and the 25K "walk away" windfall. Only the downpayment is recoverable at resale. Any gains on investing that money elswhere would be lost forever - "opportunity cost." Considering these factors, the proposal will not reduce the buyer's monthly housing expense.

    The calculation also does not address the $600 monthly payment towards the underlying mortgage on the building, insofar as any equity would accrue to the cooperative itself and a future buyer of the unit. One can assume this growing equity will add to the future "value" of the unit's shares, but one must also consider the market environment for small apartments that has typically followed great real estate booms. That environment and the fear and pessimism that typically rule may not bode well for resale value.

    This proposal is worth considering, but it is not something that "only an idiot" would decline. I would remind my anonymous colleague that "only idiots rush in."

    ReplyDelete
  24. Remember - Subtract 35% of the 25k (Kicked into higher bracket), Net $16250. Is it still a good deal???

    ReplyDelete
  25. "One can assume this growing equity will add to the future "value" of the unit's shares, but one must also consider the market environment for small apartments that has typically followed great real estate booms."

    Yeah, people who live and work in Washington, DC have very little need for 1-br apartments ...

    I find it amazing the stupid things people on this site are willing to say.

    ReplyDelete
  26. dc too,

    The reasons you give for not purchasing a coop unit for 40% discount to current market price are simply not persuasive. Yes, your approach is far from rushing in as a fool, instead you appear to be paralyzed with fear.

    Seriously, the unit is available at 40% discount, with total mortgage and carrying costs less than rent by several hundred dollars per month. And you'd only "consider" this. You'd be a fool not to jump at the opportunity.

    The "opportunity cost" argument is weak. It’s based on assumptions that the downpayment money would be invested elsewhere, and that this investment would yield a higher return than the property investment. But there's no guarantee that this other investment would yield a positive return (not even invested in something safe like a CD, which may result in negative return after inflation), much less a return better than the return on the coop purchase.

    Like I said, because this unit is priced below current market by 40% (something nobody disputes) than this 27k downpayment secures a coop unit with more than 100k equity. DC too, for your "opportunity loss" argument to be persuasive, you'll have to suggest an investment with a better return than I've just described. I can't wait for you to tell me how I can turn 27k investment into more than 100k so quickly.

    "Closing costs" as another reason not to buy is also not persuasive. A buyer's closing cost on a 135k mortgage for a coop would only be about $2000-$3000. (No agent fees charged to buyer, no filing fees or other DC sales taxes are assessed on coop sales, coop takes care of costs on underlying mortgage). Surely you don’t recommend that the prospective buyer make a big decision like this based upon a few thousand dollars? Anyway, since the prospective buyer plans to live in the coop unit for several years, the transaction costs amount to very little amortized over time. Again, not making this purchase at 40% less than current market because of a few thousand of closing costs makes no sense whatsoever.

    DC too, I also think your analysis of the underlying mortgage is wrong. I think its safe to assume that payment on the balance of the underlying mortgage will be perceived as accruing to the unit's shares. This is why the unit share purchase price will be a function of the amount of the underlying coop mortgage. In other words, the unit purchase price will be an amount less the underlying mortgage.

    Sure, the value of the coop may decline some in next year or two. But the decline would have to exceed 40% (or more than 50% if you adjust for tax savings) before the purchase would not be asset positive. Of course neither of us knows how far the market will go down, or for how long the decline will last. But with a minimum of a 40% cushion, I think this buyer would be in good shape short term and in the long run.

    ReplyDelete
  27. "But the decline would have to exceed 40% (or more than 50% if you adjust for tax savings) before the purchase would not be asset positive."

    Why would the unit sell for so cheap if more money ould be made.

    ReplyDelete
  28. "Why would the unit sell for so cheap if more money ould be made"

    For the same reason the current renters are being paid $25k to leave (if they decide not to buy). This isn't a typical sale on the open market. It's rental tenants exercising their right of first refusal under DC law. The apartment price is the amount assigned to each specific apartment required to match the buyer's offer, and which would allow the current tenants to organize as a nonprofit cooperative association.

    ReplyDelete
  29. "For the same reason the current renters are being paid $25k to leave (if they decide not to buy). This isn't a typical sale on the open market. It's rental tenants exercising their right of first refusal under DC law. The apartment price is the amount assigned to each specific apartment required to match the buyer's offer, and which would allow the current tenants to organize as a nonprofit cooperative association."

    Fair enough. Thanks for the clarification.

    ReplyDelete
  30. Anon 4:57 - It is clear that we have a difference of opinion. To say I am "paralyzed with fear" is inaccurate. The original question gave us a limited amount of data with which to make a recommendation. I made mine and stand by it. Purchasing that unit will not reduce the buyer's monthly housing expense, given what is known, i.e., current, comparable rents, and a 25K "walk away" windfall. It's really very simple arithmetic.

    You insist that this is a wise investment and that is another question altogether. The buyer has stated his numbers and his intention to stay put for 5-7 years, or "until marriage." After the last DC real estate boom, it took, imagine, just about 5-7 years to bottom out. If you do not believe a repeat of that scenario is possible, fine, that is your opinion. However, DC history demonstrates that, given what the prospective buyer has told us, his timing is such that he may be looking to move on PRECISELY as the real estate market bottoms out. That is the absolute worst time to sell.

    He has a "cushion," yes, but he will have built no material equity with a conventional, 30-year mortgage in that timeframe. We have no information about the condition of the building and any additional expenses to which he may be exposed, i.e., deferred maintanence. For what purpose has an underlying mortgage been underwritten on this building? We don't know.

    We have also discussed his rental options under co-op rules. He may not have any. Therefore, any planned or unplanned life change, i.e., marriage, the birth of a child, or a job transfer, within the buyer's proposed timeframe will force him to sell or pay the carrying costs of an empty apartment in a weak market.

    My final offering on this subject is that, under normal circumstances, purchasing a home with a 5-7 year horizon is generally wise. That is because expected, average price appreciation will cover transaction costs (plus). These are not normal or conventional times, however, and the "conventional wisdom" may not apply. Ask any "long term investor" in the S&P 500 who was told six years ago he should expect to hold for at least five years. He is still down 15% in nominal terms.

    I would advise this prospective buyer to carefully weigh all that has been said and perform additional due diligence before stampeding to the settlement table.

    ReplyDelete
  31. Is this the same "simple arithmetic" that led you to assume 35% annual rate of return?

    ReplyDelete
  32. Where did I say 35% annual return? On what? What are you talking about?

    ReplyDelete
  33. You claimed to be able to get 24 $1500 monthly payments out of $25K. Even assuming tax evasion to keep the whole 25, that would require 35% annual investment returns.

    ReplyDelete
  34. No, I claimed that 25K might provide 24 months rent in a comparable apartment. Look and ye shall find a rental deal.

    ReplyDelete
  35. As an investor, an equation I often use for buying distressed properties is that the maximum price I can offer is 70% of the after-repair value (ARV) minus repairs. Judging from the numbers presented, it seems like this person would be getting the property at a price that would meet this criteria. He also has the added benefit of living in the property which qualifies him for the mortgage interest deduction.

    Some may argue that this formula is too simple. There is a reason for this, however. It keeps a person from performing "analysis paralysis" on a deal, trying to add up every little cost to figure out if it works. The formula is time-tested and it works as long as you are realistic about the amount of repairs and have a good idea of the comps in the area.

    Go ahead and run searches for listings and sold properties in the 20005 and 20009 zip codes. There are very few properties that have sold as low as $200K, and they are almost all efficiency apartments. A 1-bedroom should fetch significantly more.

    The opportunity cost issue, while worth considering, can be taken both ways. There is also an opportunity cost of losing the back-end profit from the sale of the property if this person walks away and rents elsewhere. That is likely to be significantly more than the $25K buyout.

    If you can live in the property for at least 2 years to get the tax-free capital gains on the back end, and you can handle holding costs in the interim, I think it will work out well.

    ReplyDelete
  36. In New York City many buyers are swooping in to purchase recently discounted properties. For the time being this is buttressing the local market and slowing down the decline. There is reportedly a lot of interest (and money) sitting on the sidelines, waiting for the market to settle. No one wants to catch a falling knife right? Apparently some people keep trying. At the first sign of a good deal, though, (usually measured in terms of below average $/sq foot) some of this money comes off the sidelines. I'm starting to see the possibility of a soft landing in markets with a great deal of pent-up demand, such as NYC. Time will tell.

    MSG
    http://www.realestatebust.com
    href="http://www.realestatebust.com">

    ReplyDelete