Back in February I linked to a Press Democrat article where a local agent, Logan Adams, was claiming that buyers realized that there was "no waiting any longer for prices to bottom out" for homes under $300,000. Anything under $300,000 was "gone".
In the comment section, 'Out at the Peak' was quick to link to several examples disproving this claim.
Given that housing prices continue to decline, I was curious to see what advice Mr. Adams was giving his clients looking to buy a home.
The advice at his website highlights exactly what I find so disturbing about some Realtors. Part of the reason the country is in the financial mess it is in is that Realtors over-hyped the returns on real estate. It is here, I feel, his website provides a case study of this practice.
He states that as a general rule housing prices go up about 5% a year, but if you take a second look it is actually much better than this. I'll quote him directly at length (click here and then 'Buyers' to access this page):
Presumably, if you bought a $200,000 house, you did not pay cash for the home. You got a mortgage, too. Suppose you put as much as twenty percent down – that would be an investment of $40,000.
At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual "return on investment" would be a whopping twenty-five percent.
Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs. However, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase.
Your rate of return when buying a home is higher than most any other investment you could make.
Did you get that? A "whooping twenty-five percent" return... "higher than most any other investment you could make."
Yes, leverage will increase your returns. But it also has a downside, namely, you can also lose more than you invest.
If the $200,000 home in the example above were to fall by 30% to $140,000 you would lose your down payment of $10,000 plus an additional $20,000. That's a return of NEGATIVE 300%. [And if you feel this is an unrealistic price decline please click here and here.]
If you are in the market to buy a home it's important to understand the risks. Obviously these risks get amplified by higher housing prices and lower down payments. There is no such thing as a free lunch, and as the last two years have shown if someone is pitching you an easy way to make an annual 25% return hold on to your wallet.
"Your annual "return on investment" would be a whopping twenty-five percent."
ReplyDeleteRealtors everywhere said it, and buyers did not do their homework and bought into the greed--sound familiar to that big Ponzi scheme? And, laws usually apply to any business which makes a claim of return to its customers. Do realtors really think they are exempt? I think homebuyers would be better off without the realtor loop--just hire a laywer to close the deal, sans spin.
Did gary watts change his name and move to Sonoma County? I will be nice and merely suggest that this broker is delusional,lazy and not very bright.I am actually licensed as a broker and can not think of a combination of drugs that would convince me to claim that a 5% appreciation annually is reasonable in the next two or three years absent hyperinflation.Is Mr Adams Cognizant of our "Shadow Inventory"? Or does he think that our local economy is going to expand due to the entrepeneurial efforts of the 23-30% of Agilent employee's that are about to be laid off? I just looked at a listing of a small 50 year old fixer upper in Sebastopol that is offered at more than $450 sq ft...this is going up in price? And Marine Explorer,IF yu are familiar with an area AND capable of doing your own due diligence then no, you do not need a buyers agent.
ReplyDeleteThe claim is not that homes will appreciate 5% in the next 2-3 years. That is what they have done historically.
ReplyDeleteJust because the stock market goes up historically 10% per year doesn't mean that will happen in the near future. But history is our only guide.
Also, keep in mind real-estate like gold and oil increases with inflation. So if you are worried about "hyperinflation" then it is a good thing to own.
I do not believe that Real Estate has historically risen 3-5% annually.neither the Case-shiller-weiss studies or the long term study i holland support this.As far as Real Estate being a gedge against inflation,it has been when prices were at sustainable levels to begin with and the inflation was WAGE inflation as well as price inflation.I see price inflation,but given global wage arbitrage and overproduction I see no signs of wage inflation.Wages have been declining in real terms since 2000 and I see no indication that they will rise soon,do you?
ReplyDeleteI wish lending standards would become very stiff and disallow variable rate loans for mortgages. Appraisers should not get blacklisted for marking a property at a low but correct value.
ReplyDeleteI've heard that RE traditionally rises 1% above inflation. But that cannot be true at the same time that a median house should not exceed the area's median income 3x-4x (in a normal market).