Learn Me - Housing Market Trends

My wife and I are starting to think about buying a house. We know we'll be in Flagstaff somewhere between 3-5 years. Home are expensive here, at least compared to our east-coast former residencies. Flagstaff is a big retirement area, lots of second homes, also lots of college students and young professionals either getting graduate degrees while working, or starting a career with WL Gore, Northern Arizona University or Flagstaff Medical Center. We know lots of people who would pay out there noses to rent a house with a garage and yard, but homes between 1000-1500 are in such demand that most people can't match their lease terms with a good rental.

Because of this rental market we feel comfortable that we could rent any place that we bought, provided we can get our monthly mortgage to around $1000. That'd allow us to charge $1400 in rent and cover our costs.

But what we'd prefer is to not lose money on the purchase, and not have trouble selling in 3-5 years. How do you read the market trends to determine if what and where your buying will sell within a shorter period of time? Or if you're house will appreciate? What are the investors looking at the helps them know that a house is a solid investment?

Housing market trends: People use their house as an investment, so prices go up and up forever, thus solving the problem once and for all!

Except we know that isn't exactly true.

Normally I'd be all about renting, and when our lease is up in Febuary we may look around for other rentals that are cheaper than our current place but offer a yard and garage.

The problem is, the availability in town is so tight we can't find the type of place we want. Being open to buying would just increase the pool of potential housing.

It is getting insane again. I know several people who put in bids on houses they haven't even SEEN yet just to get a chance at a sale. Sellers are putting houses on the market for fair value, then once interest ramps up they are asking for $10k-$15k on TOP of the original asking price. Forget about appraised price, it is all about what someone will pay to get the house. I'm hearing stories of houses not even making it to the MLS listings before the listing agent already has a buyer lined up.

The crazy part is the housing boom in Atlanta seems to be centered around houses $200k and up. McMansions are sprouting up again, old neighborhoods in desirable areas are getting razed one after another. The house sells for $300k as a TEAR DOWN, then a $1 million McMansions sprouts up in its place.

I've been renting for 10 years now and we made a deal with the landlord to just buy the place for market value, no shenanigans.

3-5 years isn't really long enough to be sure you'll recover your transaction costs when you sell it. You spend quite a bit in fees when buying and commissions when selling, those are costs you never get back. Our last house we were only in for 5 years, sold it for more than we bought it for, and still lost a little money. Less than we would have lost renting, though!

On possibly renting out the house, the calculus for a rental property is very different than for a house you want to live in. A common rule of thumb is to assume that costs (property taxes, insurance, maintenance, management) are going to consume 50% of your market rental rate. So if you rent out the house for $1400, then $700 of it is going to be consumed in costs. Your $1000 hypothetical mortgage might still be okay though as that should include property taxes, a significant portion of your expenses. Just be sure to look at this with an investment mindset not a sentimental one!

Many value investors try to get 1% of purchase price in rent per month. So a $200,000 house would rent out for $2,000/mo. In my looking that's tough to get. But they claim you don't really make money otherwise. I know it would be very tough to find a house I would be willing to live in for 5 years that qualifies for the 1% rule.

PHeller wrote: But what we'd prefer is to not lose money on the purchase, and not have trouble selling in 3-5 years.

I think you are looking at the wrong "break even" point.
I suspect your logic is, "if we buy it for $200k then I would like to be able to sell it for more than $200k in 5 years.
Personally, I think in 5 years your break even sale is $140k. At less than $140k or $60k less then you loose.

The default here is that if you do not buy, you will then rent for 5 years. If your rent is $1k per month then in 60 months you will have spent $60k in rent.

If you buy at $200k and need to get away quickly, price the house to move quickly.

Of course, you also have to be mindful of the dollars you put into the house such as room remodel or additions.

Personally, I bought a condo at the height of the market. Paid $160k for it and when I sold it at the bottom of the market, 8 years later, I let it go for $125k.
Seems I lost $35k but i lived there for about 90 months or about $389 per month of ownership.
I could not have rented it this cheaply; rent would have been about $1k per month. Add to that tax, mortgage interest benefits, etc.
I was happy to see it go.

In my scenario, I owned about 30% of the house and sold it for about 25% less than I paid for it.

This seems like it's going to be a little different for everyone. I'd look at the town as a whole. There should be something that makes it desirable to live there that won't just suddenly disappear. Great schools, nice parks or trails, strong community involvement, a well respected and solid employer (preferably more than one)to act as an "anchor", etc would be good indicators for me that selling a house there wouldn't be difficult so long as the price is right.

If there's no growth happening, lots of unemployment, crappy infrastructure, etc then it may not be wise to buy in that area. I'd also consider overall home values being driven pretty high right now and make sure you don't pay so much for a house that you won't be able to get that back out of it if the market recedes to more normal levels in a couple of years.

Don't look at it as an investment. Look at it as your housing cost, knowing that it will be more or less fixed for the next 3-5 years.

Use the NY Times buy vs rent comparison calculator. Plug in there that you are assuming the house will lose 20% of the value in 5 years--roughly the average decrease from the height of the bubble to the start of the rebound. How are you doing compared to renting?

Also, don't forget that if you as long as you are selling and buying at the same time, you're probably going to do OK. Obviously, we'd all like to buy during a recession. But that might not be possible. There is really no way to accurately predict it, only hindsight is 20/20.

Long but interesting read, with example financials:
http://affordanything.com/2015/11/24/is-renting-better-than-buying-should-i-rent-or-buy/

I've put a fair amount of research into this given our pending exodus from IL. Here are a few things I've noticed:

1 - jobs. If it's difficult for the majority of people to earn a living-wage the community/neighborhood will only draw those who can't afford to live someplace nicer. That in turn usually drives up crime, and drives down property values.

2 - employment diversification. If the area is tied primarily to a small number of large employers, one particular sector, or a government/state institution, and it closes or has significant cutbacks, you're screwed.

3 - location. As I'm discovering along the gulf coast, many people no longer want to live anywhere near the shore post-Katrina. Sure there are a few $1M+ homes near/on the beach, but the rebuilding process is still at a very slow pace 10-years after. All it takes is one event large enough to worry a majority of the population & it can affect an entire area.

My wife's uncle had a good point. California was one of the few places where people lost lots of money on homes because it was coupled with big drops in employment as well as ultra-inflated housing costs. People bought $500k homes because its all that was available, worked for a few years, lost their job, and decided to split when the home was only worth $250,000. Had they rented, even for $2,000 a month, they wouldn't have lost that amount of money.

Most everywhere else in the country, even if you lose some money on the home sale, you're not losing as much as would have renting for a few years.

JohnRW1621 wrote:

PHeller wrote: But what we'd prefer is to not lose money on the purchase, and not have trouble selling in 3-5 years.

I think you are looking at the wrong "break even" point. I suspect your logic is, "if we buy it for $200k then I would like to be able to sell it for more than $200k in 5 years. Personally, I think in 5 years your break even sale is $140k. At less than $140k or $60k less then you loose. The default here is that if you do not buy, you will then rent for 5 years. If your rent is $1k per month then in 60 months you will have spent $60k in rent. If you buy at $200k and need to get away quickly, price the house to move quickly. Of course, you also have to be mindful of the dollars you put into the house such as room remodel or additions. Personally, I bought a condo at the height of the market. Paid $160k for it and when I sold it at the bottom of the market, 8 years later, I let it go for $125k. Seems I lost $35k but i lived there for about 90 months or about $389 per month of ownership. I could not have rented it this cheaply; rent would have been about $1k per month. Add to that tax, mortgage interest benefits, etc. I was happy to see it go. In my scenario, I owned about 30% of the house and sold it for about 25% less than I paid for it.

This is good advice, but the amount of money you likely pay in mortgage interest needs to be 'added back in' for a truly fair consideration. This is not small, and especially at the beginning of a 30 yr loan you are mostly paying back interest owed during the first few years. As well as any repairs (hot water heater, AC, roof, kitchen, etc) that you spend on the house during the time you own it, and things like homeowners insurance, PMI (if needed), etc.

The other thing I will add is seasonality is VERY real. For example, in Chicago or Madison, NO ONE wants to try and move in Jan or Feb. and rightly so. Prices reflect that (often with 2-3-5% swings). Arizona may be opposite? I don't really know.

slefain wrote: It is getting insane again. I know several people who put in bids on houses they haven't even SEEN yet just to get a chance at a sale. Sellers are putting houses on the market for fair value, then once interest ramps up they are asking for $10k-$15k on TOP of the original asking price. Forget about appraised price, it is all about what someone will pay to get the house. I'm hearing stories of houses not even making it to the MLS listings before the listing agent already has a buyer lined up.

Strange... I pass by a number of houses for sale in central NJ. Mostly in the $300-500K range. They've been on the market for months (and some for literally years). Often sitting empty. Houses I've seen listed for under $200K sell pretty quickly, though.

Taxes are the brutal part here. I would love - LOVE - to move closer to work, but I just can't wrap my head around paying +/- $1000/mo in taxes alone, plus the mortgage.

I feel dumb for asking this question:

When you sell your house, what determines how much equity you get back out of it?

So lets say you've got a $100,000 house that you put 20% down on, and after 5 years you've paid down interest and you owe $50,000 on it.

But when you go to sell it, you can only get $90,000 for it. Do you still get back all of your $50,000?

You wouldn't get $50,000, the bank does.

You get the loan. You have to pay back the full value of the loan no matter what. If you sell the house before you have paid off the loan, the bank will take the balance that is left on the loan from the sale of the house. You get the remainder.

In your situation, you have an $80,000 loan. You owe $50,000 on it. If you sell it for $90,000, then you get $40,000 back.

This:

dculberson wrote: 3-5 years isn't really long enough to be sure you'll recover your transaction costs when you sell it. You spend quite a bit in fees when buying and commissions when selling, those are costs you never get back. Our last house we were only in for 5 years, sold it for more than we bought it for, and still lost a little money. Less than we would have lost renting, though!

Which leads to this...

JohnRW1621 wrote: I think you are looking at the wrong "break even" point. I suspect your logic is, "if we buy it for $200k then I would like to be able to sell it for more than $200k in 5 years. Personally, I think in 5 years your break even sale is $140k. At less than $140k or $60k less then you loose. The default here is that if you do not buy, you will then rent for 5 years. If your rent is $1k per month then in 60 months you will have spent $60k in rent.

GRM logic. Nicely done.

BUT:

Robbie wrote: This is good advice, but the amount of money you likely pay in mortgage interest needs to be 'added back in' for a truly fair consideration. This is not small, and especially at the beginning of a 30 yr loan you are mostly paying back interest owed during the first few years. As well as any repairs (hot water heater, AC, roof, kitchen, etc) that you spend on the house during the time you own it, and things like homeowners insurance, PMI (if needed), etc.

This needed to be said too.

It's not like if you buy a house it's free to live there every month. Unless you're paying cash for the purchase price, in which case yes you only have upkeep and taxes. Assuming you have a mortgage, most of your payment is going to interest and escrow for taxes, all of which you'll never get back. Only a small % drops the principal amount in the first 5 years like you are considering.

So, while I agree with JohnRW, it's not quite as simple as the math he uses. The general idea stands though.

In reply to mtn:

$40k less transaction fees, though. Keep that mind as those are at least another 6% of the sale price.

On a 3-5 year time horizon, the cost of the transaction will dominate the overall picture unless we get another housing crater à la 2007/2008. You're looking at closing costs at least once, potentially twice, realtor fees for your realtor and the buyer's realtor, the misc fees that come with applying for a mortgage, at least one (better two) home inspections, the repairs the buyers demand from you before closing etc etc.

That's why from a financial point of view, you're better off renting if you're on a short time horizon. And don't forget that renting out a house brings its own set of problems and costs with it if you're not local.

Are you handy enough to shine up a diamond in the rough? That's where the smart house money goes. It's amazing how a house that was 300K is discounted to 200K due to outdated paint and light fixtures. Buy the worst house in the nicest neighborhood you can afford. Spend a few evenings painting the place, update the 20 years old fixtures with pretty stuff from LowesDepot and when you sell in 3-5 you owe no capital gains taxes.

3-5 is borderline in making back transaction costs in my area. That being said, when people say they are only going to live in such and such property for X years it usually ends up being X+2 years so it may work out for you.

Don't try to time the market. If the costs of renting > the cost of buying for the time period you're going to be there....buy.Don't forget the intangible value of renting vs buying either. Renting has it's drawbacks (seller sells teh property, E36 M3ty landlord, inability to modify to your liking ) and it's assets (flexible, stable costs). Buying has its perks (could be cheaper, build out that garage, know you wont be homeless) and drawbacks (repairs, tied down to a particular area for generally a minimum of 4 years) too.

In reply to xflowgolf:

You are correct, I used simple math to show a point.
At that time, I did the longer math which includes in my additional months of ownership while I was not living there and renting another place in the new town. Also ad in some home improvements, etc.
That math is closer to $1k lost per month of ownership.
Yeah, I got killed but just about the same as had I rented.

I have bought and sold twice in the past 10 years. Trying to time the market won't work unless you are asking for someone else to pay the mortgage.

JohnRW1621 wrote: In reply to xflowgolf: You are correct, I used simple math to show a point. At that time, I did the longer math which includes in my additional months of ownership while I was not living there and renting another place in the new town. Also ad in some home improvements, etc. That math is closer to $1k lost per month of ownership. Yeah, I got killed but just about the same as had I rented.

It's a good way to look at it for sure! My first house I bought when I was younger and even dumber, paid a bit too much, and fixed it up way beyond what the area would support. I ended up losing a bunch of money on it (about $45k by my calcs) but still walked away with $40k in equity and learned a lot and honed a ton of skills I never would have learned otherwise. $45k (plus property taxes and mortgage interest and homeowner's insurance) to live in a place for 10 years isn't too bad, I suppose!

I should look at what those other costs were for that time period ... or maybe not. ;-)

PHeller wrote: Because of this rental market we feel comfortable that we could rent any place that we bought, provided we can get our monthly mortgage to around $1000. That'd allow us to charge $1400 in rent and cover our costs.

Is that $1000 for just the mortgage...Or mortgage, taxes, insurance, PMI if applicable, and HOA if applicable? Because there are significant additional (expected and unexpected) costs involved in being a landlord than just those, that I would think you'll want to have covered as well.

.

PHeller wrote: How do you read the market trends to determine if what and where your buying will sell within a shorter period of time? Or if you're house will appreciate? What are the investors looking at the helps them know that a house is a solid investment?

Location, location, and location. Timing might just be the next most important thing, including both short term price/inventory fluctuations and long term market strength fluctuations.

Beyond that it's some combination of experience, research, and luck...Not all of which has to be entirely your own either.

Ultimately, not only is a house going to be your biggest asset, but your biggest liability as well. They're also typically not as good of an "investment" as many people would like to believe, or have you believe.

slefain wrote: Sellers are putting houses on the market for fair value, then once interest ramps up they are asking for $10k-$15k on TOP of the original asking price.

$10k-$15k above asking? If only we had that "problem" here in Vancouver:

http://www.vancouversun.com/business/barbara+yaffe+time+government+intervention+real+estate+market/11541248/story.html?__lsa=8c74-4d36

http://www.vancouversun.com/business/Average+price+home+Metro+Vancouver+cracks+seven+figures+with+video/10857618/story.html?__lsa=8c74-4d36

How long before interest rates start climbing at a noticeable rate?