A Recovering Economy

A Recovering Economy

Are the good times back again? All year long, we've been hearing that the housing rebound is upon us. Yes, there has been some marked cooling in the market in the past couple of months, but by and large, the stars have remained aligned. The economy is recovering, unemployment is inching down and the Federal Reserve is trying to keep interest rates low, helping create the greatest buyers' market in anyone's memory. Things are looking brighter for sellers, too. The often-quoted S&P/Case-Shiller home-price index is chronicling the biggest price increases in half a decade. ·        
Secrets to Selling (Or Buying) a House Today
It no doubt makes a lot of people want to jump into the housing market again. And perhaps they should. But… We're also hearing the siren song that led so many buyers astray during the bubble: that real estate is a great way to build wealth and financial security. And we're seeing home buyers, like retail stock investors rushing after a hot IPO, moving into a housing market that has already been plowed through by institutional and corporate buyers. So, don't let the euphoria over a recovery obscure the market's flashing yellow lights. Like all economic booms, this one carries the instruments of its own destruction. With that in mind, here are five of those yellow lights to keep in mind before you decide how much to bid on that house—or whether to bid at all.

1. This recovery leaves a lot to be desired.
Yes, housing has certainly turned a corner. All in all, home-sales volume is about where it was in 1999, while inflation-adjusted prices are at 2000-2001 levels. In July, the National Association of Realtors clocked existing-home sales at an annual rate of about 5.39 million—up 17% from a year earlier. Construction is up, too. According to the Census Bureau, building permits for single-family homes were issued in July at an annual rate of 613,000, up from the post-bubble nadir of 337,000 in January 2009. But the current figures don't come anywhere close to the recent highs. Existing-home sales are up, but they're still about 27% below the figure from mid-2005. And those 613,000 building permits hardly compare to the bubble-era high of 1,798,000 in September 2005. So, the best you can say right now is housing has leveled out after a 13-year roller-coaster ride that has seen massive government and Federal Reserve efforts to spur demand. Is that a recovery?

2. The new boom is a rehash of the old one.
A look at a map quickly shows where the current action is. The West and parts of the South are hot. Most of the Middle West and Northeast are lukewarm. And if that sounds familiar, it is. Most of today's boom is happening where Bubble 1.0 swelled and burst midway through the last decade: Florida, Phoenix, Las Vegas and California's Central Valley. Indeed, of the 20 hottest markets of 2013, 17 are west of the Rockies—12 in California.   So, a lot of the impressive percentage gains in price we're seeing lately are coming from very low levels. In hard-hit Bakersfield, Calif., for example, prices fell nearly 54% from their bubble-era zenith in 2006 to their nadir in 2011, according to the Home Price Index of the Federal Housing Finance Agency. So, the 14% bump from 2012 to 2013 is an improvement and no doubt heartening to existing homeowners who have seen median prices rise to $188,000. But, like the old song goes, it's more a case of "down so long it looks like up to me" than a genuine recovery. The stories are similar in other bubble-scarred areas. But in places like Kansas City, Pittsburgh or St. Louis that barely experienced Bubble 1.0, today's market is not nearly so robust. Even when there are impressive-looking percentage gains outside of the old boomtowns, there's usually a deeper story at work. Consider this sobering stat: In the battle-scarred city of Detroit, prices in July were up 33% over a year ago. Detroit! Detroit's new median selling price? $13,556.

3. Big businesses are doing a lot of buying.
Two of the most troubling aspects of the housing recovery, so far, have related to the outsize presence of deep-pocketed Wall Street investors acting out a monumental episode of "Flip This House." Their presence is driving price increases and sales volume even as they frequently outbid individual home buyers. Indeed, it's a great paradox that the new real-estate boom is taking place alongside a plunging rate of homeownership. The homeownership rate—the percentage of housing units occupied by their owners—has fallen from a bubble-era high of 69.2% to today's 65%, the lowest level since 1995. (A four-percentage-point falloff is huge. The rate has been above 60% since the 1950s.) These corporate cash buyers have spent much of the past three years stoking local real-estate markets by bulk buying tens of thousands of troubled single-family homes, fixing them up and renting them, focusing on the metro areas with the greatest number of distressed properties. Frequently, the new renters are just the kinds of families who might have been buyers of those very houses 10 years ago but are now unable to meet today's more stringent mortgage-loan requirements. In 2012, institutional buyers purchased about 140,000 homes in the U.S., or about 3% of all sales, according to RealtyTrac, a real-estate data firm in Irvine, Calif., but that tiny percentage obscures the impact of corporate buyers in individual markets. In July, institutional investors accounted for 25% of home purchases in metropolitan Atlanta and 20% in Tampa. Of course, fixing up houses and renting them out is an old mom-and-pop business. But the volume of today's institutional purchases is quite unlike anything individual investors could ever pull off. And, just as Joe and Jane Home Buyers are awakening to the renewed vitality of the housing market, some of Wall Street's smart money seems to think real estate is already peaking or at least that the easy money has already been made. The companies' early investors are pocketing their double-digit gains and are now liquidating their investment positions by selling shares in their companies to the public on the stock market. American Homes 4 Rent, a real-estate investment trust formed in 2011, has bought, renovated and now rents out about 18,000 homes in 21 states, focusing on California, Arizona and Florida. The company's shares went public on Aug. 1 in a $705.9 million IPO. It was the third such company to go public since December. Wall Street's No. 1 U.S. house owner is Invitation Homes, a unit of Blackstone GroupBX -2.01% LP. In less than two years, Blackstone has amassed a collection of about 30,000 houses—most in hard-hit real-estate markets such as Tampa, Orlando, California's Inland Empire, Las Vegas and Phoenix. Blackstone, which describes its real-estate philosophy as "buy it, fix it, sell it," is already preparing IPOs for its other commercial real-estate holdings.  

4. Investing in housing is nothing like buying a home.
A market that's good for investors may not be so hot for you. No doubt, the corporate buyers have created a great business. But few individual home buyers, lured by the headlines of a new real-estate boom, understand that the house-owning math of investors is 180 degrees from the rest of us who are buying a place to live in. And don't forget: You're bidding against these buyers, and the odds are stacked against you. Vote Your home isn't an investment property. Investment properties have cash flow and pay for themselves. Homes don't; homeowners pay for them. Corporate property investors usually buy with cash. Their acquisition and maintenance expenses are paid by rental income, and they're taxed on only the difference between their revenue and expenses. There are other real-estate tax advantages, including depreciation, that enhance cash flow but are unavailable to individuals. Losses can be carried over year after year and used to offset profits elsewhere. And real-estate investors have a leg up even on stock investors because they can avoid capital-gains taxes completely if they sell and buy "in kind" properties. Finally, property investors don't live in their portfolios, so they can buy and sell without incurring the inconveniences of moving and committing their sale proceeds to another property. Homeowners, in contrast, usually borrow money, which means that, even at today's ultralow interest rates, the cost of a home over the 30-year life of a mortgage will be 70% or more above the purchase price. On top of that, homeowners must cover their maintenance costs with after-tax income. The homeowner's mortgage-interest tax deduction is of little value to owners outside the most expensive communities because the annual interest payment on a typical home loan is not significantly different from the standard deduction available to all taxpayers. The home sellers' $500,000 ($250,000 for individuals) capital-gains exclusion is irrelevant for most homeowners, since few home sales produce actual profits. (That's right. No profit. You have most likely paid far more in interest, taxes, maintenance, improvements and other home-owning expenses than the difference between your purchase and selling prices.)

5. Interest rates are on the rise.
The great house buyers' market is still on. And it's likely to keep going as long as the economy can create jobs that pay well enough to buy (or rent) at today's prices. That is especially good news for home sellers, many of whom have been locked in their homes for years, unable to sell and move up or on. But as the economic recovery has slowly gained momentum, interest rates have begun to rise. At some point, they will rise to levels that eliminate today's home-buying advantages. New-home prices have already reached their nominal bubble-era highs, and existing-home prices are not far behind. As interest rates rise to their traditional levels, generally between 5% and 7%, you can expect either prices to stabilize or sales volumes to decline. Ominously, the Mortgage Bankers Association this month noted a decline of more than 70% in refinance-loan applications since rates began rising in May and about a 15% falloff of purchase-loan applications. That said, mortgage money is still a remarkable bargain. Today's 30-year fixed rates are still far cheaper than in 40 of the past 42 years. Even today's more elevated rates (4.57% as of last week)—more than a percentage point higher than in January—are less than the average rate for all of 2010. Two years ago, like today, no one believed rates could fall further. Indeed, the warnings were that rates were bound to rise. And then, like today, it was a great time to buy a house.
(By: David Crook - http://online.wsj.com)

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Phone: 623-703-7445
Dated: January 24th 2014
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