Buy a house...then buy another

Renting in the City: All the Cool Kids Are Doing It

* The trend is favoring a lifetime of renting
* But buying a house may still be a great hedge against QE3 through QE6
* For the sake of your finances please forget that suburbia ever existed

Gary Gibson, Baltimore, Maryland…

It’s getting more expensive to live in Baltimore….at least if you’re a renter.

According to a recent article in the Baltimore Sun rents are up more than 6% over what they were last year in the Baltimore metro area. If you count the drop in various concessions — like waived application fees or initial free rent — then the increase is even more.

There is a drag on the rental market, however: the regretful buyers who now need to rent out the homes they can’t sell.

Lois Foster, a Baltimore real estate agent who helps people find homes to rent and manages properties for owners-turned-landlords, said she’s seeing rents of $200 to $500 less a month than owners could have gotten two or three years ago. There’s just a lot of competition, she said.

The guild is off the buying lily. All the credit that oozed out of the banks found its way into the national psyche. There it gave off a funny smelling gas that puffed up hopes and dizzied senses.

Stock prices were the first beneficiaries. Fattening 401(k)s danced 1920’s-style energetic jigs with dreams of early retirement. Even as those 401(k)s and those hopes tired and finally dropped dead on the dance floor, the Fed held down interest rates and more funny air kept the nation high. People pinned new hopes on — and sent reams of borrowed new money into — real estate.

That’s came to the sort of end you’d expect. While government cheerleading and easy credit drew in increasing numbers of bigger fools, the rental market found itself a lot emptier. All the people who really couldn’t afford to buy and who should have been renting were too busy buying on greater margins and not renting.

Some hotspot cities like New York and Boston saw their rental markets surging along with their real estate markets…but third-stringers like Baltimore…” Cohan, with Southern Management, said some competitors were offering as much as three to four months of free rent to get people in the door in 2008 and 2009. Not anymore.”

It’s no wonder that they were having such a hard time. The real estate market started to crater in 2006, but the ship of public opinion doesn’t exactly turn on a dime. You don’t nearly a century of brainwashing at the start of a downturn. By 2008 and 2009, renters were still considered to be socially backward and intellectually impaired…maybe even in need of corrective medication.

Upon finding out that a person was renting, someone else was likely to voice sincere worry: “What’s wrong with him? Is he unemployed? Illiterate? Dead?”

Being a renter was worse than gauche. For men it was worse than driving a beaten up old car. Even $7-an-hour female filing clerks were all getting mortgage approvals for $200,000 homes. Any man who couldn’t (or wouldn’t) score a mortgage was parading his lack of fitness to breed. To rent instead of own was to advertise your status as a loser, not the kind of sire any sensible woman would settle for. Your only hope was to troll among hipsters and other car-less, urban trash. A corpse could get a mortgage, but a renter couldn’t get a date.

But now opinions are changing, as they must. Reality can only be ignored for so long. According to a 2010 study o the Joint Center for Housing Studies of Harvard University, between 2004 and 2009, the number of renter households rose nearly 10%.

From the article “The Echo Boom: A New Wave of Market Change” on Wrightwood.com (emphases mine)…

Certainly, most young people rent apartments in their first years out of college, but there are reasons to believe that this generation will be renting far longer than their parents did. They have the largest college debt load in history – averaging over $20,000 per student. They also face a very different labor market from their parents: a fifth of them will likely be self-employed following the trend for all employers to offer more and more short-term contracts. Renting may make economic sense, not just when they are beginning their careers, but for many more years to come. Since the end of World War II, the trend was for more and more young families to purchase a home in the suburbs, leaving rental apartments to young singles. Based on the economics today, that trend may shift towards renting throughout their lives.

And from a July, 2010, article on CNN.com…

In May, U.S. Housing and Urban Development Secretary Shaun Donovan testified before a House committee that the financial crisis proved the need for a better balance between ownership and rental housing. And HUD senior official Raphael Bostic last week told the Washington Post: “In previous eras, we haven’t seen people question whether homeownership was the right decision. It was just assumed that’s where you want to go,” Bostic said. “You’re not going to hear us say that.”

Left to its own devices, the market pretty efficiently figures out who ought to own and who ought to rent. Those who can afford to do so buy a home because under normal circumstances, buying a home is not any more of an investment than owning one.

So the policies from DC that got their start under that busybody Herbert Hoover to “encourage” homeownership were never a good idea.

The article continues…

Hoover signed the Federal Home Loan Act, and in 1933, Franklin D. Roosevelt created the Home Owners’ Loan Corporation to provide low interest loans.

And the government was just getting started: a flurry of legislation was passed over the ensuing decades, helping veterans, minorities and the populace as a whole secure mortgages. But it appears the pendulum has swung.

“The government shouldn’t blindly encourage homeownership,” says Joe Gyourko, real estate finance professor at University of Pennsylvania’s Wharton School. “If the government does anything the government should encourage people to make the right decision.”

Owners don’t pay the landlord, but they pay taxes and maintenance costs on their house, and Gyourko says those costs can end up being roughly the same.

As far as buying a house as a smart long-term investment, Gyourko says that’s not always true. He says between 1975 and 2008, the price for houses of similar quality and size appreciated an average of about 1% per year after inflation. Investors could have earned more by buying Treasury bills.

Turns out that under most circumstances, homeownership is just another form of consumption. You need a place to live. So you can pay rent, out of which the landlord collects some small profit after mortgage, taxes and maintenance…or you can “buy” your house, or more accurately saddle yourself with debt and pay the mortgage, taxes and maintenance yourself.

But when you have meddling federal policies to encourage it…coupled with ever-increasing amounts of central bank credit to fuel the bidding…prices tend to rise enough to make generations sing in unison “housing always goes up!”

It took generations for this debt-addled Ponzi scheme to collapse; years of government meddling finally coupled furiously with easy credit from the central bank. The result is a veritable orgasm of tumbling prices. We’re in the shame and regret phase that follows these sorts of things. Stay tuned for more.

Buy a House… Then Buy Another

Investment ideas are cyclical. They come and go, like fashions or cicadas, obeying their own curious rhythms. In the last few years, rare was the investment thinker who said you should buy a house. Housing was in a bubble that was deflating.

But the investment seasons turn. Today some smart investors are once again saying you should a buy house. John Paulson is one of them.

You may know him as the man who turned the greatest trade of all time. Betting against the housing market, he netted a cool billion dollars for himself in 2007. One fund he managed rose 590% that year. Today, he is one of the richest men in America.

His advice today is very different. “If you don’t own a home, buy one,” Paulson said. “If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

That’s a strong endorsement. It sounds similar to the advice another investor gave his audience in 1971, at the dawn of another inflationary age. It was Adam Smith (George Goodman) on The Dick Cavett Show. Here is a snippet from that conversation:

Smith: The best investment you can make is a house. That one is easy.

Cavett: A house? We were talking about the stock market. Investments…

Smith: You asked me the best investment. There are always individual stocks that will go up more, but you don’t want to give tips on a television show. For most people, the best investment is a house.

Cavett: I already own a house. Now what?

Smith: Buy another one.

It was good advice. In the 1970s, U.S. stocks returned about 5% annually, which failed to keep pace with inflation. Still, it was an up-and-down ride. In 1974, the stock market fell 49%. But here are the average selling prices for existing homes in the 1970s as inflation heated up:

* 1972 — $30,000
* 1973 — $32,900
* 1974 — $35,800
* 1975 — $39,000
* 1976 — $42,200
* 1977 — $47,900
* 1978 — $55,500
* 1979 — $64,200

You can see that housing held up pretty well. And think about the effect of a mortgage on 80% of that house in 1972. That would mean $6,000 in equity, a sum that went up fivefold in eight years. It’s hard to find a better inflation fighter than that. Granted, today’s market is different, but still.

Apart from this, you might also reflect on the fact that it is quite absurd today to think that anyone can buy an average house for any of these prices — and that, too, is the point. The average price today is $257,500 — even after the great collapse in the last few years.

“If you have a 7% mortgage and your house is worth half a million dollars,” Adam Smith writes, “you may gripe about shoes and lamb chops and tuitions like everybody else, but your heart isn’t in it.” Your heart won’t be in it because you’ll be in fine fettle with your house.

Of course, you can do a lot better than 7% today. For the first time, the rate on 30-year mortgages slipped below that on the 30-year Treasury bond. You can get a 30-year mortgage at little more than 4% today.

Factoring in mortgage rates, housing affordability is back to where it was in September 1996. Then mortgage rates were 8% and the average price of a home was $171,600. As Murray Stahl writes: “One can actually buy a home for a monthly payment that is not very many dollars different from the monthly payment one would have needed in September 1996, when rates were significantly higher.”

Adjusted for inflation, Stahl points out that the payment for an average-priced home today is about 30% lower than it was 14 years ago.

The advice of Paulson and Smith starts to make sense now, doesn’t it?

Essentially, real estate is a way to buy now and pay later. It is a way to short (or bet against) the dollar. And the case for housing extends to other property types, too. Owners of quality real estate are getting deals on mortgages that we are unlikely to see for a generation.

-Whiskey & Gunpowder-