Investment opinions are like, um, noses: Everyone has one. Buy stocks, sell bonds? Go long steel and short copper? Buy sheep, sell deer?
It’s pretty easy to see both sides of an investment argument. But it’s hard to argue against buying a house now, assuming you can get a loan.
The housing cycle is a long one, in part because buying a house moves at a glacial pace, at least compared with the time it takes to buy a stock or bond. If you’re not pre-approved for a mortgage, you have to submit to a credit check, which, these days, is only slightly less intrusive than a CIA background check. You have to get the home inspected. You have to figure out the various fees your bank charges, including the one marked “Just because we can.”
How long is a housing cycle? Pretty long. A relatively modest housing bubble, by today’s standards, occurred in Boston in the late 1980s. Average home prices, adjusted for inflation, hit $310,000 in October 1987. Home prices didn’t hit that level again until May of 2000. Someone who bought at the high had a long wait to get even — particularly in light of the standard broker’s commission of 6%.
Home prices bottomed, however, in March 1993 — roughly six years after the top. History doesn’t repeat itself precisely, but it’s interesting to note that the top of the last housing bubble was six years ago, in 2006.
Why be bullish on housing?
•Prices. You can always buy low and watch prices go lower. But by many measures, home prices are still cheap. The median single-family home price — half higher, half lower — hit its nadir in January, dropping to $154,600, the lowest since October 2001, according to the National Association of Realtors. That’s down from a high of $230,900 in July 2006.
Existing-home prices rose in June to a median $190,100, up 8% from June 2011. Those are still 2003 levels.
•Supply. The good news is that the enormous supply on the market is shrinking. It takes a wearisome amount of time for supply to shrink, in part because there are people who have been wanting to sell their homes for many years, but haven’t been able to get the price they want. As prices rise, more homes come on the market.
Nevertheless, Ned Davis Research, a respected institutional research firm, estimates that excess supply of houses on the market should be eliminated by the end of 2013. When excess supply dries up, people start building more new houses, which has the virtuous effect of reducing the unemployment rate and increasing the economy generally.
•Mortgage rates. The average 30-year fixed-rate mortgage rate is 3.59%, according to mortgage giantFreddie Mac. That’s above the all-time low of 3.49% the week of July 26, but close enough. It’s conceivable that at some point in the next 30 years, your interest rate would be less than the rate of inflation.
Assuming you financed 80% of the median single-family home, or $152,080, your mortgage payment would be about $691, excluding taxes and other irritations. About $5,589 of your first year’s payments would be tax-deductible mortgage interest.
Thanks mainly to low home prices and interest rates, the NAR’s housing affordability index rose to its highest level on record. (The higher the index, the more affordable the average home. The index also takes into account average family income, which has been falling since 2008.)
What could go wrong? All sorts of things. You may not be able get a loan. Bankers are insisting on checking things that seemed far too troublesome during the housing bubble, like whether you have a decent credit rating, a down payment, or a job.
The other problem is that houses are leveraged investments — that is, you borrow money to buy them. Let’s consider the example above, where someone buys a $190,100 house and finances $152,080. Your investment is $38,020. Let’s say that the worst happens: home prices fall, and you have to sell the house for $175,000.
Unfortunately, the bank won’t split the loss with you. You’ll get back $22,920 from the sale, and wave goodbye to $15,100 of your down payment. That’s a 40% loss, even though your house has fallen 8% in value.
There are other risks with homeownership, ranging from termites to ghosts in the hall closet. But if you’re planning to live in your home for a long time, you have the money, and you can get financing, it’s a fine time to buy.
Home builders are cheering the latest Improving Markets Index, which suggests the sector may be finding its footing again.
While the triple-digit reading seen back in April remains elusive, Monday’s report from the National Association of Home Builders says that the list grew by four to 84 markets in July. The monthly index is based on a number of factors measured over six months, including employment growth, house-price appreciation and increases in single-family housing permits.
“The index appears to have stabilized following a dramatic slowdown over the past three months in which the index fell from 101 to 80,” writes Stephen East, a builder analyst with ISI Homebuilding Research, in a client note.
This recent batch of healing cities includes Phoenix and Tampa, which were among the areas hardest hit when the market crashed. Newcomers include smaller markets such as Prescott, Ariz., and Springfield, Mass. But a notable new addition was Houston, one of the nation’s largest housing markets.
“The geographic diversity and growing number of metros on the latest [index] help spotlight the improvements we have begun to see,” crows NAHB Chairman Barry Rutenberg, a builder from Gainesville, Fla.
Another NAHB report, this one with the Home Builders Institute, found that 40% of single-family home builders plan to work with laborers during the next year, indicating they expect to be building more homes. Nearly half of builders in the Midwest and West expect to hire, while 39% in the South do.
But the hard-hit sector continues limping along. Home builders complain that appraisals are being skewed by foreclosures. Credit standards also remain stringent, which is keeping plenty of would-be buyers out of the market. Indeed, seven markets fell off the improving markets list, including Rochester, N.Y., and Owensboro, Ky.
Still, industry watchers remain optimistic. “This is evidence that the housing recovery is slowly but surely taking root, one market at a time,” says NAHB Chief Economist David Crowe.
May 23, 2012 – Sales of newly built, single-family homes rose 3.3 percent in April to a seasonally adjusted annual rate of 343,000 units, according to newly released data from HUD and the U.S. Census Bureau.
“The increase in April sales activity is in line with other important housing measures that have shown continued, gradual improvement from the first quarter as more consumers look to take advantage of today’s low interest rates and affordable home prices,” noted National Association of Home Builders (NAHB) Chairman Barry Rutenberg, a home builder from Gainesville, Fla. “In markets where demand is rising, we could be seeing a faster pace of recovery if not for persistently tight lending conditions that are slowing both the building and buying of new homes.”
“Today’s report is representative of the kind of modest but consistent gains that we expect to see in new-home sales through the remainder of 2012,” said NAHB Chief Economist David Crowe. “As indicated by our most recent builder surveys, more consumers are taking advantage of historically low mortgage rates amidst firming economic and job market conditions in certain areas.”
On a regional basis, new-home sales rose 7.7 percent in the Northeast, 28.2 percent in the Midwest and 27.5 percent in the West in April. The South was the only region to post a decline for the month, of 10.6 percent.
Meanwhile, the inventory of new homes for sale held virtually unchanged at just 146,000 units in April, which is a historically slim 5.1-month supply at the current sales pace.
Banker and Tradesman posted an exciting article about the rise in home sales in March.
“Sales of single-family homes and condominiums in Massachusetts rose by double-digit percentages in March -marking the strongest first quarter since 2007, according a new report by The Warren Group, publisher of Banker & Tradesman.
Single-family home sales increased nearly 20 percent to 3,205 in March, up from 2,688 in March 2011. Home sales in the first quarter are up 17 percent to 7,964 from 6,802 in last year’s first quarter. This is the third consecutive quarterly increase in Bay State home sales, and the strongest March since 2007 when there were 3,853 sales.” READ MORE.