Archive for August, 2008

The Majority of U.S. Homeowners Thinks Their Home is Insulated from the Housing Crisis

According to Zillow Q2 Homeowner Confidence Survey 62% of homeowners believe their home’s value has increased or stayed the same in the past year yet 77% of U.S. homes actually declined in value

Short-Term Outlook: More optimism for own home vs. neighbors’ homes in next six months although 70% say they are concerned foreclosures will decrease home values in their market within next year; 56% planning home improvements


SEATTLE (August 6, 2008) -  Despite widely covered housing woes and significant market data to the contrary, homeowners reveal high confidence in the value of their own home with even greater optimism for the next six months, according to the Zillow® Q2 Homeowner Confidence Survey of 1,361 U.S homeowners conducted by Harris Interactive®.  Highlights of the survey are below.

“Not My House!” Sentiment Showcases Wide Homeowner Perception-Reality Gap

Nearly two out of three (62%) homeowners think their home value has increased or remained the same in the past year.  Unfortunately, the reality of the market is not quite as bright; in fact, it’s getting worse. Seventy-seven percent of U.S. homes lost value in the past 12 months, according to preliminary analysis of Zillow’s Q2 Real Estate Market Reports, due to be released August 12, while only 19 percent increased and 5 percent remained the same. Whether it’s apathy, confusion or just plain denial, homeowners seem to believe the housing crisis affects every other home but “not my house,” underscoring a wide gap between homeowners’ inflated perception of their home values and the gloomy market reality. 

To monitor this perception-reality gap over time, Zillow has created the Home Value Misperception Index, which is the difference between the adjusted percentage of homeowners who believe their home value increased over the past year and the adjusted percentage of homes that have increased in value.  Nationwide, the Q2 Home Value Misperception Index is 32, reflecting this broad gap.  Those in the West, which has the highest proportion of homes (88%) that declined in value during the quarter, seem to have the best grasp on reality with a Misperception Index of 23, while those in the South have the widest gap at 36.

Not a big fan of his music but Kid is right on point on this.

Hat tip to my buddy Mark for telling me about this.

I read an interesting article this morning on Marketwatch.com. Specifically a piece by Marshall Loeb.

Now as a finance guy I normally skip articles by Loeb and his cohorts at competing web sites, because their content is bland, vanilla, and always so overly general that nothing they recommend or discuss can ever be directly implemented. And after reading them I usually I feel like a cross between the AFLAC duck as he walks out of the barber shop after the “conversation” with Yogi Berra and someone that just got off the phone with Microsoft technical support.

Such is the constraint of trying to dispense deep and meaningful financial guidance in 500 words I suppose.

And the piece that I read this morning was no different, dispensing overly generalized “wisdom” that hasn’t a prayer of being implemented by anyone. So I’ll spare you the  meaningless content.

The title, though was what caught my eye.

It read: “How To Buy Rental Property” and the tag line added “And Take Advantage Of A Down Market”.

????

This is the first time since the real estate downturn started that a mainstream, widely read finance columnist (at least one that I have seen/read) has even remotely suggested that real estate would make a good investment. And in fact most have continued to screech the benefits of continuing to invest in mutual funds and ignore the losses because we should have a “long-term focus”.  (Side note: Have you ever done the math on how long it takes to make back a 30% loss in your portfolio’s value? If not you should – it would be eye opening.)

But this recommendation is really a disturbing development. And it can only mean BAD news for real estate investors.

Why?

Because for most of the last two years investing in real estate, especially in severely distressed markets like we have here in Metro Detroit, was exclusively the domain of the truly contrarian investor. That is, investors that enjoyed swimming against a tide of opinion that was 100% against them, with the exception of other contrarians.

And they have been rewarded handsomely for their resolve.

But now this – this populist columnist – is now suggesting that you need not be a contrarian to invest in real estate?

For me this signals the bottom of the market.

In this real estate market there is no good reason to buy a property that you plan to hold and rent if it needs any more than about $2500 worth of work.

It’s just not necessary, because there are so many great properties on the market – and I mean listed on the MLS and STILL occupied – that will cash flow as a rental at or near full asking price.

I took a quick look last night at one of the cities that I track and in about five minutes I identified six properties that met that criteria.

But yet every week I hear about and get emails from investors that are seriously negotiating on properties with mold, with foundation problems, and even one with termites (Yes, there are homes with termites here in the Midwest. Not many but they do exist.)

And I shake my head and ask “why?”.

Because the last three properties that I purchased needed, all together, a grand total of $3500 worth of work. And that amount included one electrical upgrade from fuses to breakers ($500) and one black-pipe gas line ($750). The rest was paint and minor stuff like smoke detectors and basement stairway hand rails.

But the two things that really don’t make sense about taking on these huge projects are the repair costs and holding costs.

Think about it. You buy a home for $20,000 and you put $20,000 more into it to turn it into the nicest $850 per month 3 bedroom rental house in town.

How are you going to get your money out? The new lending rules say that you can’t refinance based on appraised value until 12 months after purchase, so your $20,000 in repair cost gets to sit locked up in the property for an entire year when it could be off earning greater returns elsewhere. Heaven forbid that you used a line of credit for the rehab – you’d have negative cash flow from day 1.

But you’d still have the honor of having the nicest $850 per month 3 bedroom rental house in town!

The second problem is holding costs. You obviously can’t rent the property while you’re working on it, and even a small renovation project can take upwards of 60-90 days, so at a minimum you need to pay taxes, insurance, utilities, and maintenance/yard care for two to three months, and you may even have principal and/or interest if you financed the purchase.

The striking thing is that if you do the math you’re realize that holding costs for three months of rehab can amount to the rental profit on a property for up to three years.

So in other words, by doing a big rehab on a property that you want to rent and hold, you’ll need to rent it out for up to three years just to break even on the holding costs.

Why would you want to handcuff yourself like that?

Contrast that with the no rehab houses that can be bought off of the MLS. As I have written here in the past – I collected a deposit for the most recent one that I bought before I even closed on it, and the weekend following the closing I traded the keys for the first month’s rent. So there was virtually no gap between buying it and putting it into profitable service.

Which would you rather be? Profitable in month 1, or profitable in month 37?

I’m a recovering finance guy, so for me it’s obvious!   ;-)

We had a family crisis last weekend. A Red-Alert-level crisis.

We were on our first solo family camping trip in the Waterloo State Recreation Area out past Chelsea. First time camping without a big group like the cub scouts. Aside from forgetting my trusty Swiss Army knife and a lighter for my cigars we did pretty well with the packing.

We had great weather – the lake temp was perfect and it had a sandy bottom that only got to about six feet deep fifty yards out.

And the kids were excited (or maybe it was the sugar) because they know that camping trips mean junk food – and lots of it – because it’s easy to transport and doesn’t need to be in the cooler.

All was going along fine until after dinner on the first night (and BTW – this was the LAST time that I’m cooking all the meals over the fire. It may sound all quaint and fun but I must have burned my hand five times).

Then my wife brought out the treats. Double Stuff Oreos. That’s when the trouble began.

Because as soon as she opened the package and we unscrewed our first cookies it was obvious that these were NOT double stuff. Not even close. Maybe a tad more than single stuff. But definitely not double.

Now if these were your simple run-of-the mill boring faceless cookies and something seemed amiss, I would have probably just chalked it up to a perception problem. But not this time.

Why? Double Stuff Oreos were introduced in 1975. And since then, my family has been dedicated to becoming experts in the field. (The fact that we were married in 1991 is irrelevant). And I estimate that in total our family has a combined level of experience in this area is 75 years. THAT’S credibility I’d say.

And our more that 75 years of combined experience told us that these were NOT double stuff.

We checked and double checked the package. The package CLEARLY said that it contained Double Stuff Oreos. This was validated independently by each of our four very interested elementary school age kids.

And the consensus was unanimous – the package said they were, but the visual inspection and taste test said otherwise.

Another victim of the economic times that we live in.

So what was going on here?

De-contenting of course. That’s a fancy shmancy automotive industry term that roughly translates into “what can we remove from the content of the product and still be able to charge the same price for it”.

Have you ever tried to explain “de-contenting” to elementary school kids?

So thanks again Federal Reserve. Your monkeying around with the economy caused inflation which caused the price of “Stuff” to skyrocket which caused Nabisco to de-content Double Stuff Oreos which disappointed my kids last weekend.

Just stay away from Santa and the Easter Bunny. Nobody needs your “help” there.