Is It Time to Buy a House?

Is it time to buy a house? Maybe…

This morning we received a bouquet of flowers. It was from the woman who just sold us a house in Baltimore. She sent the flowers to say ‘thanks.’

“We must have paid too much,” we said to Elizabeth. ”She likes us. She probably figures she was lucky to find such retarded buyers.”

We needed a house. We found one we liked. It was one of a kind. We bought it, even though the price seemed high. We weren’t even bidding against anyone. She hadn’t had an offer in months…maybe years. But she held out…and got the price she wanted.

Meanwhile, The Wall Street Journal reports that the housing market may have bottomed out. Of course, that’s what the press has been saying for the last 4 years. But now, the WSJ says buyers are bidding against one another:

A new development is catching home buyers off guard as the spring sales season gets under way: Bidding wars are back.

From California to Florida, many buyers are increasingly competing for the same house. Unlike the bidding wars that typified the go-go years and largely reflected surging sales, today’s are a result of supply shortages.

“It’s a little surprising because we thought bidding wars were done with,” said Andy Aley, who is looking to buy his first home in Seattle’s Beacon Hill neighborhood. The 31-year-old attorney was outbid this year when he offered up to $23,000 above the $357,000 listing price and agreed to waive inspections and other closing conditions.

Competitive bidding in the current environment isn’t producing huge price increases or leaving sellers with hefty profits, as occurred during the housing boom. Still, the bidding wars caused by tight inventory provide the latest evidence that housing demand is starting to pick up after a six-year-long slump.

An index that measures the number of contracts signed to purchase previously owned homes rose in March to its highest level in nearly two years, up 12.8% from a year ago and 4.1% from February, the National Association of Realtors reported on Thursday.

“We very much believe we’ve hit bottom,” said Ivy Zelman, chief executive of a research firm, who was among the first to warn of a downturn seven years ago. Earlier this week, she raised her home-price forecast for the year, calling for a 1% annual gain, up from a 1% decline.

We don’t know. But our guess is that there’s more pain to come from this housing bear market…lower prices. And more collateral damage too.

In the 1960s, Americans had housing equity equal to 70% of their homes’ values. Now, it is barely 40%. Forget about trading up…homeowners don’t have anything to trade with.

And with 4 million homeowners still underwater, that’s a lot of inventory to work down. It could take a while…and lower prices…before the bottom is finally reached. Recent buyers are still losing money. And CoreLogic says prices are still falling. Here’s a Reuters report:

(Reuters) — More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.

That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period.

It is a sobering indication the US housing market remains deeply troubled, with home values still falling in many parts of the country, and raises the question of whether low-down payment loans backed by the FHA are putting another generation of buyers at risk.

As of December 2011, the latest figures available, 31 percent of the US home loans that were in negative equity — in which the outstanding loan balance exceeds the value of the home — were FHA-insured mortgages, according to CoreLogic.

Many borrowers, particularly since late 2010, thought they were buying at the bottom of a housing market that had already suffered steep declines, but have been caught out by a continued fall in prices in wide swaths of America.

Even for loans taken out in December — less than four months ago and the last month for which data is available — nearly 44,000 borrowers, or about 7.5 percent of the total, now find themselves under water.

“The overwhelming majority of the US is still seeing home prices decline,” said CoreLogic senior economist Sam Khater. “Many borrowers continue to be quickly wiped out.”

According to the S&P/Case-Shiller 20-city composite index, which tracks home values in 20 major US metropolitan areas, US home prices were down 3.5 percent in February from a year earlier and are now at their lowest level since late 2002. Over the past 12 months, 15 of the 20 major metropolitan areas monitored saw declines.

But that doesn’t mean that houses are a bad deal. Or that you will lose money buying now.

To the contrary, this could be the best time to buy in many, many years.

Things are a’changin’. And they affect the outlook for housing for many years into the future.

For one thing, young people don’t seem to be getting together and pitchin’ woo the way they used to. They’re waiting longer. They used to get married and have children in their 20s. Now they wait until their 30s.

So, they don’t need to buy a house until years later. In the meantime, they rent. Rentals are up…which could be good news — if you’re a landlord.

Home ownership is at its lowest level in 13 years; it seems to be going down, even though houses are much more affordable than they’ve been in many years.

Unemployment among young people is much higher than usual; fewer young people have the wherewithal to buy a house.

Young people also have much more debt than they used to. Student debt, for example, recently topped the $1 trillion level. No jobs…no spouses or children…shackled to student debt — young people are unlikely prospects for house-builders.

But “US housing is the best value play in America,” says colleague Chris Mayer. ”If you own a house then look to buy and rent another.”

Here’s the idea. You can now buy a decent house for $60,000 to $80,000 depending on where you are. You spend a little to put it into rentable condition. Then, you can rent it for $1,000 a month…maybe $1,500. At $1,200 a month on a $60,000 house you have a gross rental yield of nearly 20%. Assume you spend half of that on taxes, maintenance, etc. That leaves you with 10% net. Not bad.

Better yet, mortgage it for 30 years. Say you put up cash of $20,000…and mortgage the rest. Your mortgage payments should be a good deal less than $250 a month. So, after expenses (assuming they are 50% of your gross rent) you are netting $250 a month, which works out to a 15% yield on your cash.

And what happens to that $40,000 mortgage? Could be that it is a burden for years…and you pay it off with no gain or loss. More likely, it gets cheaper, year after year. Inflation knocks it down. Perhaps slowly at first — 3%…5%…

But we wouldn’t be at all surprised to see it get knocked away completely in a few years. Most likely, within 10 years a $40,000 mortgage…at today’s fixed rates…will be worth less than half of what it is today. So, you’ll make another $20,000 over 10 years…giving you a real yield on your investment over 20%…

This seems to us like the perfect investment for a retired person with time on his hands. Put $60,000 of savings into a money fund and you’ll get…what…$100 a month?

Instead, buy 3 houses for $60,000 each…mortgaging $40,000 on each one. You’ll have to work to fix them up and find the right tenants. But you’ll end up with positive cashflow of about $750 a month…plus, maybe a bonus of $60,000 more over 10 years as your mortgages get whittled down by inflation.

*** We were wrong about Harley Davidson.

A few months ago we guessed that it was time to sell the big hog builder in Milwaukee. We noticed who rides Harleys. Big, fat, old guys. Not much future in that, we reasoned. Especially when times are tough. The old guys will sell their bikes, we said.

Alas, your Daily Reckoning stock research department seems to have erred.

A report in The Financial Times tells us that Harley Davidson profits rose 44% in the first quarter of this year. Turns out they’re selling more bikes in the US than they expected. To whom?

Foreigners. Two thirds of the sales happen overseas.

A total of a quarter of a million motorcycles are expected to sell this year.

Amazing. We didn’t know there were that many fat, old guys overseas.

Harley Davidson seems to have created a worldwide brand.


Bill Bonner,
for The Daily Reckoning

The Daily Reckoning