Many thanks to the reader who forwarded us Blanche Evan’s 5 Things to Tell Buyers on the Fence. Blanche Evans is the editor of Realty Times, and her approach to real estate ranges from the practical and sensible to the ludicrous.
Evans is in one of her ludicrous phases apparently. Here’s her article with a rebuttal by yours truly:
It’s high time we told buyers (and sellers, for that matter) the truth about whether a home is a good investment.
Despite what Wall Street wants you to believe, owning a home isn’t the same kind of investment as stocks or bonds. What you get is a USE asset that depreciates over time while it grows in market value. All you have to do is keep the home in good repair to maximize your investment.
Depreciates over time while it grows in market value? I’ll come up with a comeback to that one when I figure out how to wrap my brain around it.
Here are five reasons why you get more for your money with a house than the stock market:
1. Leverage. With stocks, you put in all your money for a little piece of a company. With a house, you put in a little money to get the entire house.
Evans must have managed better terms on her mortgage than I ever did. Mine stipulated that on the sale of the house, the lender must be repaid the amount owed. That meant that my share of the proceeds amounted to my original investment + any appreciation- I didn’t get the whole thing. Now it’s true that I always had the USE of the entire house, but then renting has always afforded me the same privilege, without the current downside risks.
2. Tax benefits. Uncle Sam knows that owning a home is a pain in the neck; that’s why you get tax incentives. These are basically government bribes to get you to buy.
Think about it, with what other investment can you put in 5 percent of the cost of the asset, reap all the appreciation, and pay no capital gains? That’s right: live in your home for at least two years, and you don’t have to pay capital gains tax on up to $250,000 in appreciation if you’re single and a combined $500,000 if you’re a married couple.
And that’s not all — consider the benefits of fixed-rate mortgages, property tax write-offs, interest rate deductions, and depreciation. Is this a great country or what?
In many, many markets across the country now, rental payments are significantly less than the mortgage payment for the same property. In addition, renters do not have to bear the burden of maintenance costs. Very often, the tax benefits are insufficient to justify the added expense of homeownership.
3. Control. When you buy stocks, you’re paying some CEO 500 times the average worker’s salary for company performance that most other workers would lose their job over. With a home, you have control — what you buy, how much you pay, and where you live. You can improve the value with repairs and updates. Try comparing that to getting heard at the next shareholders’ meeting!
Of course, with glutted rental markets, a lot of renters will tell you that what you rent, what you pay for it and living where you want to live without the hassle of repairs and updates gives you more control over your life and more disposable income. It’s also easier to move without the hassle of having to sell. A mortgage in a bad market can look a lot more like a "ball and chain" than "control."
4. Lifestyle. Do you want to look at a concrete jungle or your children playing in your own back yard? With a home, you’re purchasing a vantage point for yourself and your family. The neighborhood you want to be in, and the size and style of a home that fits your needs.
I hate to break this to you Blanche, but not all rentals are in "concrete jungles." My current rental is in a gated community in the hill country west of Austin. Six bedrooms, 4 1/2 baths, 360 degree views, seven acres and has a creek at the bottom of the property. The schools are great, as are my neighbors. The landlord would happily sell us this place, but why would I more than double my monthly payment and pick up the maintenance costs in a declining market?
5. Value. Unlike some stocks, your house will seldom become worthless. Barring a catastrophe, your home will retain a major portion of its value, even in the worst of times. So don’t freak out about slight fluctuations in the value of your home in any given year. You’ll make it up. Housing has lost value only one year out of the last 35. It’s more normal to beat inflation by 1 percent to 2 percent.
Slight fluctuations? L just sent me the listing for a property that went into foreclosure in the Phoenix area, which is now listed at 33% less than was owed, and will undoubtedly sell for less than that. "Normal" has changed– the median home price is the Phoenix area was down 12% year-over-year in January, and "recovery" is nowhere on the horizon.
Evans concludes:
So let’s add a little perspective here. You lost a greater percentage on the stock market this past year than if you owned a house. You lost more on your SUV. And you sure lost more on your iPhone.
Those of us who were renting didn’t lose a thing on our house last year. Oh and Blanche, I don’t have an iPhone- but I do have a nice Treo- a gift from my son. He knows it will depreciate, but he was feeling a little flush after being short on homebuilders and lenders this past year, so he was a little frivolous. Not everyone lost money in the stock market.
There are still good reasons for some people to buy a house– but Evans didn’t hit any of them. I’ve read her home selling advice, which is consistently good. Like most real estate agents though, she should stick to selling houses and avoid investment advice. Too many agents who went beyond their area of expertise in that area have former clients who are now in foreclosure.
Leverage. With a house, you put in a little money to get the entire house.
Leverage is a double-edged sword. Great in an upmarket, but potentially devastating in a down market. In a down market like now, leverage is *not* your friend.
RE: Depreciates over time while it grows in market value?
I think this refers to being able to depreciate a house for tax purposes.
“So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do.” – Benjamin Franklin
In this case; HAS to do for survival. It would really depress me if Blanche Evans or others selling the same line really did not understand how conveniently reasonable they are. I think it’s a ploy to attract the few people left that have been sleeping in a bubble for the past several years in an effort for survival. I understand that negative thinking is not conducive to sales. I also understand that these people are reliant on sales to live, but they need to keep their ethics in check. I would like to see the same line of crap sold to her parents or family in the interest of making a sale…… doubtful (I hope).
…….And i would like her definition of catastophe referenced in reason 5. I think she may have an alternate and less reasonable definition than the family that transferred to Phoenix in ‘05 and is being transferred again next month. Who is responsible for the 40% – 50% difference in what they paid vs. what the market will currenly bear? I would define this scenario as a financial catastrophe. I am no expert though.
I agree emphatically with Twist. These people should keep their mouth shut regarding potential investment return on real estate. It seems that even the experts may have overlooked an item or two. Perhaps Blanche has an idea of where the above referenced family (and others) can come up with the defficiency without additional burdon on the taxpayer. I doubt it though.
NVMike-
I thought about that- but “depreciates over time” is a wierd way to say “take depreciation.”
It would be refreshing if one of the cheerleaders would simply tie together two concepts:
1. Some people want to, can, and probably should buy houses & land… now.
2. They should probably pay what the property is (going to be) worth when this is all finished… if that can be determined.
They keep beating the “buy now” drum, in spite of current asking prices.
Why not just suggest that people who want to buy make offers at a price that would make sense to them to pay… rather than trying to badger them into the market by paying a price that everyone knows won’t hold up over the next few years.
In many markets, you can just take the true monthly rental value (based on the median income and what people can really afford to pay to rent a house) and multiply by 100 – 150, (depending on market history), which would give you a nice place to start establishing a wholesale value to an investor.
It’s not perfect, but it’s better than screaming “we’ve bottomed” month after month.
If they want to move houses, lower the price.
(oversimplification, I know… but we gotta’ start somewhere, and “it’s a great time to buy” is getting old)
Formertitleguy-
Potential buyers have their reasons for buying, for example– no suitable rentals in an area, they are in an area where buying makes more financial sense, issues like handicapped accessability, or perhaps they run a landscaping business or welding shop from home. Those issues might make renting problematic. Maybe it’s just that a buyer can afford a home, is in a position to take the risk and doesn’t care. All of those are valid reasons for buying in this market.
A lot of folks overextended themselves because they listened to dumb investment advice. Evans and her like should listen to their clients needs and work toward the best possible outcome. When asked about how good an investment a real estate purchase might be, they should encouraged clients to seek the advice of a professional.
Twist,
Sounds like a nice home you have there in Austin. The other nice thing about renting are.
1) If you lose your job you can downsize easier.
2) If the neighborhood goes to hell you only have a few months to worry about it.
3) Its cheaper to rent a nice house than own it.
4)You don’t worry about price flucuations.
5) You never pay anyone 6% to move again PRICELESS.
It’s not the property, Blanche…
it’s not the ignorant, scared potential buyers, Blanche…
it’s not what “Wall Street wants me to believe,” Blanche…
it’s the prices… Prices… PRICES!!!!!
Heck, I’d likely be glad to buy Twist’s house from her landlord next week… for 100 X whatever she’s paying in monthly rent… and continue the lease for as long as she could possibly want to stay there.
I have no idea where it is, or what it’s like, but at 100X rent… I’d probably love to own it!
Sounds like a wonderful place!
Back in the “old days” that is how investment property was bought.
I have no knowledge at all of the situation…
but I’ll bet Twist’s landlord paid more than 100X rent.
Asset Hunter-
I think that your basic concept of paying a more realistic price is sound. However, a large portion of sellers can’t take lees than what they owe, which defies the logic of your calculations (although I agree that it should work that way).
We have hit “the perfect storm” in some cities and will have to hit true bottom with a lot of casualties before the prices you describe can be obtained.
Unfortunately, the cheerleaders and bandaids are making things worse and not better. We have to hit actual bottom before we can appreciate or even value anything again.
I also agree with the simplification of lower prices will move some homes, but also think that the whole comparable market for the subject property will have to be playing by the same rules for it all to work. There are too many people that stand to lose too much for this to happen nicely and will not accept “market value” like you describe. Most will hang on to the point of rediculous and not accept that their home is only worth what someone will pay. The Italian marble flooring in their kitchen tells them so.
We need to crash completely and I would rather see it sooner than later. This affects me directly as I am an owner of several properties. That’s really tough luck for me if I wanted to sell right now, but it does not change the fact that certain things must and will correct before we can “move on”. Just because some of the circumstances occurring now are a bit unfair to many does not make them any less real. I would love to “will” things different than they are like Blanche, but it’s simply futile.
Just because things are simple does not make them easy. Again, just my two cents.
Twist-
I agree 100% with your reply. I purchased for some of those reasons. Also, Realtors should sell homes, not investments and should persuade a potential investment purchaser to seek advise from an investment professional to advise them.
In the rare case that the Realtor is qualified to perform both functions, I think the Realtor should be obliged to refer the buyer to someone else to avoid any potential conflict of interest.
In these cases, Blanche and others should be illustrating the points you gave (the benefits of purchasing a home), not investment advice,
formertitleguy – unfortunately, I think you’re right.
If I had a solution any more brilliant or insightful than “lower prices,” I’d certainly offer it.
Likely as with any investor, I get bombarded with workshops, classes, programs, etc about “short sales” and “REOs” and “foreclosures.”
I’m guessing that there are a LOT of people out there throwing money (or trying to) at properties 20-30% below their top selling price, thinking they are going to be filthy rich “when this dip recovers.”
More band-aids & short term painkillers for the sick patient, I’m afraid.
One thing about the old stock market that Blanche didn’t mention… when stocks do plummet, they often do it quickly.
It might be nice if whatever was going to happen with RE would just happen quickly?!?!?
Asset Hunter -
In a perfect world, it would have happened early last year all within a week.
I also have no answers to this mess other than “Let’s get on with it.” I was willing to accept the risks before playing though….
She is great anecdotal evidence as to why realtors will be spending their next few years in court defending lawsuits. They have a legally-defined fiduciary duty to clients that they compromise by expanding into areas in which they have no business dwelling.
For instance, her investment advice pumping real estate on the basis of leverage is just blatantly and obviously wrong. In equities, you can easily obtain leverage through a margin account up to 50% or using options at a 100-1 ratio. However, these increase risk levels……ironically just like in real estate…….hmmmmm.
Twist does a great job refuting her propaganda, so I’ll leave it at that.
I will point out that the degree of vested interests of these college dropouts-turned-real estate agents became much clearer when I was a picture on HousingPANIC showing one neighborhood with 3 houses in foreclosure owned by real estate agents. These losers just can’t win. I’ll call it Karma.
One question regarding price bottoming. I’m sitting on cash – and saving more every day – for the day when real pain comes in real estatbr and I pick up a few steals. However, in my modeling I see a huge risk of quickly rising interest rates (countering impending reflationary rates) that could further
plummet house prices after a “false” bottom (ie, drastically higher borrowing costs further reduce prices that buyers can/will pay).
Anybody been thinking through the same scenario? Conclusions?
Alan M,
I am hoping like hell interest rates go to the moon. Then I can buy at 75% off and get a 10% CD with my remaining money earmarked for a house.
The situation is as simply as this:
The majority of the people who are not buying now cannot afford to buy now with the exception of a very small percentage of the population.
People who bought before the bubble (as long as they did not heloc) can afford to significantly lower their price if they want
or need to sell.
People who have to sell and bought at bubble prices will either foreclose or possibly be allowed to short sale.
Rising inventory, tighter credit, loss of jobs and loss of higher paying jobs will significanly reduce prices.
It is as simply as that.
The author of the article is wrong about why the government gives tax breaks. You will notice that since houses are not being built and bought, we in a recession. The government doesn’t like recessions and so yes they bribe you to become hopelessly in debt in order that they can be endlessly reelected.
Asset Hunter-
The asking price on this place [which is unrealistic, but a couple of price drops from where the owner started started] is 350X the rent- so we’re real happy just renting.
The owner built it himself 10 years ago, and he now owns it free and clear, so he’s in a position to sell it for a realistic price. His “Make me a millionaire and buy my house” attitude though left this place empty for a year and a half. Whether he eventually is willing to sell at a realistic number or not remains to be seen.
Well, I find some of the commments on this site nonsensical, to say the least.
I’m a Realtor. I’m also graduate educated. My family happens to own one of the most successful and profitable real estate corporations in South Texas.
The last thing anyone in our company would do is try to sell someone a house he or she didn’t want to buy. Nor would anyone in our company try to encourage someone to pay more for a house than he or she is willing to pay. That would be bad business.
You buy a house to live in it. The mistake that most people make is in thinking of their house as an asset. It’s not. An asset generates income. Your house is a capital savings (equity) account with liabilities (taxes, insurance, maintenance). Thinking of your house as anything else is the easiest way to go broke.
What we are experiencing these days is the bursting of a financing bubble, not of a real estate bubble. It is true that questionable lending practices and outright mortgage fraud, on the part of both lenders and borrows, drove up the price of housing to unrealistic levels. But that only affected the fools who bought into the speculative fever.
The people who bought houses to live in may have missed out on the opportunity to sell their houses at an inflated price, but those people didn’t buy a house to flip it and make a quick buck–they bought a house to live in it.
You put 20% down on a 15-year note. That’s the only way to buy a house, and it’s been known for decades. Those who bought houses in that way are not going to lose money, unless they are forced to sell.
Real estate is and remains a sound investment. Prices go up and prices go down, just as in any other market. But over the long run, real estate beats the stock market.
The advantage of ownership, as opposed to renting, is that you build equity. Renters only pay someone else’s principal, interest and taxes. And when you’re ready to move, what do you have to show for it? Nothing.
That said, ownership is not for everyone. It requires discipline and financial responsibility. But then that’s why owners always make money, even in a down market, whereas speculators always go broke.
I was channel flipping and landed on a Mad TV rerun today (Saturday). There was a skit about a house for sale.
“A million dollars? Is there a gold mine in the basement or something?!”
I wish I could find a version of it on You Tube. It was hilarious.
ASensibleRealtor -
You must admit that your point of view somewhat contrasts the commentary that started this thread. There are very good people in any profession, but the “boom” created a lot of quick opportunistic Realtors and Lenders who were less than credible or sensible. If everyone performed using the policies from your company, we probably would not be in this mess.
Also, South Texas did not (due to the ‘80s crash) see what California, Nevada, Florida, or parts of Arizona (and others) did these past few years. I am in South Texas and purchased last year. My family moved from the West Coast where things from even a business standpoint were considerably different than you describe. That may be somewhat regional, but I think it more to do with opportunity and unrealistic market prices.
I understand your point of view on the lender and borrower being primarily responsible. However, there were quite a few Realtors in on the game too. I have had a difficult time explaining how backwards things could be in some of the West Coast markets to local (South Texas) professionals and it sounds like you would be appalled….. I works from the title and escrow side of things (vaporware) and “kicked” a lot of deals for reasons that would make you cringe. It was a racket and it’s time to pay the piper.
Good Luck with your business. You are fortunate enough to be in one of the strongest markets nationally. It sounds like you have solid policies in place within your company which is incredibly important. Remember, one of the largest RE company in Las Vegas is now in BK http://www.lvrj.com/business/11882571.html
I would venture to say it was due to loose policies, greed, and poor training of agents….. I am no expert though. Again, good luck. I think we need MORE ethical Realtors out there.
i have a couple points, one for and one against what twist said.
on the “for” side, twist didn’t mention but i’m sure twist would agree with me that Blanche’s logic regarding leverage is rather one-sided. Blanche writes, You lost a greater percentage on the stock market this past year than if you owned a house. You lost more on your SUV. And you sure lost more on your iPhone.
this is beyond ludicrous. assume, a year ago, somebody bought a below-median-priced house in CA, putting down 10% of 500K, i.e., 10K down payment. the person has now lost 100% of their investment, the entire 50K. this loss only requires a 10% drop–actually just a bit more than 3% drop once you add in selling costs.
on the “against side”: twist writes, Six bedrooms, 4 1/2 baths, 360 degree views, seven acres and has a creek at the bottom of the property.
this type of property will never be a good rental property. the price:rent ratio will always be too high, relative to the price:rent ratios of actual rental properties in the same area. if the current price:rent ratio is 350x, suitable rental properties might be 180x. let’s say the market falls 50% while rents stay the same. twists property will now be 175x while suitable rental properties are 90x.
so the mere fact that twist’s rental house has a high price:rent ratio doesn’t mean the house is overpriced. if indeed it is overpriced, it is overpriced for other reasons.
oops, that’s 50K down payment. i wish this thing had a review feature.
You put 20% down on a 15-year note. That’s the only way to buy a house, and it’s been known for decades. Those who bought houses in that way are not going to lose money, unless they are forced to sell.
what do you mean “the only way to buy a house”? probably less than 20% of buyers fit in that category since 2004.
if you are in a market where everybody buys that way, putting 20% down and keeping debt to income under 33% or whatever, then that is a good way to buy a house. but if you are in a market that allows people to buy with zero down, or 5% down, and to buy at high debt-to-income ratios, then people with the same income and savings as you will be able to pay more than you for a house. you will be forced to go outside your ratios for the same house, or to maintain your ratios in order to buy a lower-quality (cheaper) house.
basically, the easy credit made available during the housing bubble has increased the competition at each price point. so prudent buyers are forced to the sidelines, i.e., forced to become renters.
To All (FYI),
Most of you probably know this, but it hasn’t been pointed out yet. In her second point she completely contradicts herself: “That’s right: live in your home for at least two years, and you don’t have to pay capital gains tax on up to $250,000 in appreciation if you’re single and a combined $500,000 if you’re a married couple.
And that’s not all — consider the benefits of fixed-rate mortgages, property tax write-offs, interest rate deductions, and depreciation.”
I absolutely love it when agents start giving “tax advice” as a marketing tool. Here’s the deal….you get out of cap gains tax if you live there for at least two years. You get to take depreciation ONLY on rental properties. YOU DO NOT get to have have your cake and eat it too!!! She makes it sound as though all homeowners get some sort of depreciation benefit, and that isn’t true. Also, if you own a rental and take the depreciation expense, please don’t think that that is some great benefit. All that does is decrease your basis in the property (increasing your capital gain when you sell). Now it is still a good deal (if your in a higher tax bracket than 15%) because you save taxes on the depreciation expense at your tax bracket rate and when you sell for a gain (which will be increased by all of that depreciation) you only pay 15%. But I see it every day. Many people end up with no benefit at all (for tax purposes) because many are limited as to what they can take as a rental loss or if they are entitled to “full losses” they may end up down in the 15% bracket so they are saving 15% now to pay 15% later.
Again, when an agent starts talking tax benefits to sell you a home, PLEASE PLEASE PLEASE call your CPA first. (and don’t even get me started on the mortgage interest deduction….I can’t tell you how many flat out lies I’ve read regarding that benefit….unless your paying well over $1000/mo in interest, it’s just not much of a break!!) And so you know, I own a house and am not trying to be anti-own….I just get sick of the bad tax advice as a marketing tool.
The mistake that most people make is in thinking of their house as an asset. It’s not. An asset generates income.
Ridiculous. An asset does NOT have to generate income.
But then that’s why owners always make money, even in a down market
Again, ridiculous.
Nice,
Also, re: point #4:
It’s also important to remember that all that awesome control you gain ends at your property line.
As a young reporter in a developing area I can’t tell you how many people moved into the area thinking that lovely stand of trees behind their house was part of what they paid for.
They were often surprised and upset when the bulldozers came in and made room for some new neighbors.
Apologies if someone noted this above.
Well, I find some of the commments on this site nonsensical, to say the least.
I’m a Realtor. I’m also graduate educated. My family happens to own one of the most successful and profitable real estate corporations in South Texas.
**********************************
ASensibleRealtor
Your education is obviously not in accounting. That said, I think you will find that many of us on this blog are well educated. I am glad you are among the ethical RE professionals. Realtor used to mean something that set you apart from the RE miscreants. Southern Texas was mostly spared from the shenanigans that was foisted on the public in the early part of this decade.
BTW I agree with your sentiments on what homeownership means. I also think that you mean homeownership is not an investment per se it is a place to live. As for it beating the stock market, which years are you referring to just the last or the last 50 years because I think you are quite wrong.
Ahab again?
http://en.wikipedia.org/wiki/Asset