14 July, 2008

Real Estate Is the Best Investment You Can Make

So sayeth every American father to his son or daughter for the last 100 years. The best way to make money is to invest in real estate - you get a roof over your head, the tax breaks are great and real estate will always appreciate. In fact, despite the front page news of the last two years, my Dad is still advising me to continue on as a home owner. And on this, we will have to agree to disagree.

I've been reading the news and listening to educated opinions. Fannie Mae and Freddie Mac, the two largest mortgage agencies in the U.S., are floundering and in need of government assistance, in the form of bailouts. This, in the aftermath of a veritable free-for-all in the housing industry in which millions of mortgages were offered and approved to people who perhaps weren't precisely qualified to be homeowners just yet.

No-or-low money down (less than 20%) and Interest-only mortgages are examples of subprime lending practices in which high-risk borrowers are given high-risk loans that previously, they never would have qualified for. The advantage to the investors, of course, is that low risk equals low profit, whereas high risk – when it works out – equals a higher profit. Which is why the subprime mortgages became so popular and so readily available: Greed. The disadvantage, of course, is that no-or-low money down and an interest-only mortgage mean that if the property does not appreciate between the time it is bought and sold, the buyer-turned-seller will be upside-down on the loan and have to pay the difference in full at the Closing. These practices are only advantageous when our fathers are always, entirely correct, which - my apologies to Dads worldwide - they are not.

The last interest-only mortgage craze ended with a wave of foreclosures in the Great Depression. Today's interest-only ARMs are even riskier … Interest-only mortgages were the standard mortgage in the 1920s, but they disappeared during the Great Depression, and for good reason.

Simultaneously, we experienced a too-good-to-be-true appreciation in many metro areas, including Chicago. Between 1997 and 2006 … American house prices rose by 124%. I guess the comforting thing is we were not alone?

America's was not the frothiest housing market: in the same period prices in Britain went up by 194%, those in Spain by 180% and those in Ireland by 253%. What was peculiar to America was the ability of large numbers of subprime borrowers—those with poor credit records—to take out mortgages and buy homes, lured by cheap credit and the belief that house prices could only rise. By 2006 a fifth of all new mortgages were subprime. The interest rates on many of these were adjustable, unlike those on most American mortgages. Low “teaser” rates were charged for a while before higher, market-based rates kicked in.

Fact is, the availability of the higher risk loans, the seemingly-sure gamble of doubling one’s real estate money within a year in conjunction with the never-ending American sense of entitlement as well as other timely factors have all come together to create this Perfect Storm.

I wrote a couple of days ago about the rising cost of gas and how it is now affecting my bank account with this new commute. Jason and I have discussed the possibility of selling our condo to move somewhere closer to both my work and his studio – for instance, the Edison Park neighborhood of Chicago would be nearly ideal (if you ignore the horrendous sales tax in Cook County, of course) due to it being a couple of METRA stops before Mt. Prospect where I work and I could ditch the driving commute almost altogether – and rather than sell and then buy again, I would almost rather sell and then go back to renting – find a safe harbor for the economic shit storm that is about to get even worse.

I explained this to my father yesterday and he disagreed with me, saying that we are making more money by owning than we would by renting which is technically true but there are large withdrawals from our bank account that would not have happened if not for being owners vs. renters. The opportunity (and often necessity) to renovate is hard to quell – since becoming owners, we have become regular customers at Menards and other home improvement warehouses. We have new appliances, new counters, new paint … lots of new things that we would never have invested in had we remained renters.

Did people actually think a half-million dollar one bedroom was going to last at that price? Economics is a roller coaster and what goes way up high must fall pretty damn far because our paychecks certainly aren’t growing that fast and we can’t expect our grandchildren to be able to afford a million dollar one bedroom in their time. As the housing bubble bursts and I see the appreciation failing to appear in many places, I worry about our chances at selling in what’s left of this summer but I think I might worry more about our chances to sell next summer. At least this summer isn’t at rock bottom which is where I think next summer might be, or close to it.

And that’s when I start paying attention when I hear the names Fannie Mae and Freddie Mac uttered on CNN or when our mortgage broker sends us a newsletter with the dire warning of If you want to get a mortgage, even if it isn’t for the next six months, call me BY Monday! I perk up at things like that and I feel a deep sinking in the pit of my stomach. For those who have not bought yet, your best price is coming up really quick. For those of us who already own and would like to sell … yea … we might want to invest in four-leaf clovers and rabbits’ feet or resign ourselves to waiting it out. That’s what I think. And that’s what I think about.

1 comment:

Danielle Filas said...

Interesting post... and I can see both sides of the argument.

You're right... if you need to sell right now it stinks. People who have to sell right now are miserable. And people who, I'm sorry, were dull-witted enough to sign for a loan they couldn't afford (ok ok- I did it too, to pay for grad school... but still, I AM paying it) are also in dire straits.

BUT, if you can buy right now you should. As you point out so rightly, the period after the depression showed enormous growth. In fact, trace back real estate prices and you'll see the general trend is up. You know why? Simple.

They aren't making any more land.

It's too bad for you guys-- I can understand the pull to move closer to your job with gas prices (which will only go up, never down) being what they are. But just stick it out a few more years... OR put your condo on the market and just wait until it sells without a deadline. (Pain in the tukus-- to have people marching through all the time, but a tradeoff) If you can sell it without taking it on the chin too badly, it's absolutely the right time to buy.

Um. But I hear you about Menards. The difference is, you get to keep that stuff you buy. When you rent, you're paying for your landlord to keep all the neat stuff. (BTW- try adding up what we spent while living at Boz. Or don't. It's depressing.)