Are you irrationally loss averse?
[M]ost of us wildly overestimate the benefits of waiting. We convince ourselves that avoiding a potential future loss is the same as saving money. We underestimate the risks that we’ll face by waiting another year. And we totally ignore the real, measurable costs of staying in a home that’s too big or too small or poorly located....
Lots of detail at the link. Here's an analogy:
Overall, it’s helpful to think of house prices as a river that flows forward and, on very rare occasions, backward. It’s natural for us to prefer to jump from one raft to the next when the river is moving forward—that is, when prices are rising, not falling. But even when the river is flowing backward, jumping rafts midstream can make sense. When the river is flowing backward, we tend to fixate on the speed of the next raft relative to the stationary riverbank (e.g., “My next home is going to fall 5% in value after I buy it”). We should focus instead on the speed of the two rafts relative to each other (e.g., “Both homes are going to fall 5% in value”).
Thus, "only first-time buyers face a substantial risk when buying in a declining market."
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74 comments:
Why would you be able to buy a better house after selling your current one?
Lots of people are underwater on their mortages, which means they will only be able to move into a "worse" house.
I guess people with significant equity or money saved could go ahead and upgrade, but why? Why tie up more money in an overvalued market like housing? If you have the cash, invest in something else instead.
Maybe they're contemplating the cash they'll have to bring to closing just to get rid of the place.
There is truth in all of this. Of course if your raft is already underwater and still sinking, it makes jumping to a different home a lot harder.
I have a house in Virginia (DC suburb) that I plan to sell this summer. The pain of lost equity is eased somewhat because I can get a better price on another house here in Madison.
I've heard anecdotally that some Eastern markets are coming back a bit (including DC). I know that Seattle has been lagging in the cycle by a couple of years, and is still in decline. I don't know how Madison is.
A house is a vehicle by which local governments can extract money from your bank account. Somehow, people still want to buy them.
Not sure why. Maybe that's why there are so many for sale in Madison. Five in one block on Monroe Street!
These days, foreclosures seem to be a sensible way to go. Any thoughts?
"Somehow, people still want to buy them."
Well, it's better than being homeless, and it's not like property taxes go away if your landlord paid them. You're still paying them.
by owning a house, you get a lot more control over your circumstance. You can improve it, or not, based on tax, if you care that much.
If you do so smartly, you save a lot of money in the long run.
I'd suggest selling houses in state capitols and buying them in Texas, if you're just looking at the investments. Look where there are bubbles: those are places where property values may slide as demand for homes collapses as jobs are cut.
the one real downside to home ownership, other than basic responsibility, is that you're anchored in place. This is why I have a hard time understanding tax incentives or government rebates for first time home buyers. Those people need to be able to move where the jobs are.
These days, foreclosures seem to be a sensible way to go. Any thoughts?
If big companies can get bailed out of poor investments, then why not the rest of us?
According to this article, Miami home sales are up by 14.4% (contrast this to this week's announcement that Florida real estate is down down down in the doldrums):
"(MIAMI, FL) -- Based on data from the Miami Association of Realtors and the Southeast Florida Multiple Listing Service (SEFMLS), total current cumulative pending home sales - including single-family homes and condominiums - in Miami-Dade County increased 14.4% compared to a year ago, from 10,392 to 11,887, and 3%, up from 11,544, compared to the previous month."
Of course, it makes sense that major urban markets will see surges in home buying ahead of secondary markets, but I still wonder. Certainly, in Miami-Dade, home owners that I've spoken to are very downbeat.
In addition to the endowment effect (we tend to overvalue property that we own), there is inertia. It's not the profit or loss. It's the packing of all those damn boxes.
The ideal strategy is to buy at the bottom, sell at the peak and rent until the next low. My crystal ball ain't that good.
Or buy a home now and rent your current residence out until prices rise, if you can qualify.
What you can also do now is lock-in a low mortgage interest rate on an extended (365 day) lock on a yet to be determined property.
Mark G, not sure what you meant, but I meant people buying a foreclosed home to live in.
@deborah: There are many grounds on which a foreclosure can be contested. Avoid like the plague if it is being contested.
The problem isn't that people are afraid to sell. The problem is that too few people want to buy.
Ann, would you undelete my reply about the Miami real estate market? I think the long link I provided, got me squashed by Blogger.
See you guys later, for the Royal Wedding! Hopefully, there will be a thread. If not, Twitter. :P
wv: tuppines (Happy Tupperware)
Well, Obama says when you can't afford gas, buy a new hybrid van! (When they finally build one, of course.)
So when you are underwater with your mortgage, sell it for a huge loss and buy a big green energy-saving house!
Problem solved, Obama style.
A house is a vehicle by which local governments can extract money from your bank account. Somehow, people still want to buy them.
I'm living in an extended-stay hotel while waiting for my renters to leave. I like it a lot, and it's a lot cheaper than living in my house. But it's going to get old someday. So would all the moving that goes with renting. I don't think people are ever going to not want to own their own.
Thanks, William, great point.
To me, the biggest problem with renting is that after you fall in love with the place after several year, you could be made to leave.
Until the bottom is reached, nobody will get loans apart from cash flow rich Doctors and FHA/VA borrowers. The remaining banks are hiding out. New home borrowers in general can forget it.
The foreclosure market is something to look into. Perhaps even to unload an above-water house at market and then acquire a foreclosure. It might make sense if you can work through the hassles.
And houses will sell if they're priced appropriately.
What's missing is a financial instrument that lets people trade what house collateralizes a mortgage.
So that if you have an underwater mortgage, you can sell and buy another house with the proceeds and have the new house, also underwater then, collateralize the old mortgage instead.
At the moment, you're kept from moving because you have to temporarily monetize the negative value of your equity, which can't be done.
An equivalent fix, some way to trade houses with underwater mortages with central clearing, so you just swap houses with somebody else with similarly underwater equity.
The argument presupposes that the price of the current house and that of the "new" house are the same. If you change from a $200k house to a $400k house, and they both decline at the same 5% rate, here are the results after 1 year.
$200k house worth $190k. (Loss $10k)
$400k house worth $380k. (Loss $20k)
The relative economic losses are even greater when you figure the effect of leverage. You will lose an even greater percentage of your investment with the $400k house.
The Blonde, who's had her real estate license since her teens (yes, she is a woman of many parts), is dicey about selling, but the NE OH climate is such that she feels we should move.
Since she believes in paying cash as much as possible, our problem is a good price on the one we have.
Not if, but how.
>i>According to this article, Miami home sales are up by 14.4%>/i>
The title of the article
"Foreign Buyers Driving Miami's Pending Home Sales Uptick" I doubt if foreigners are going to be buying much property outside of the few attractive resort areas.
Have you seen the price of the Euro? $1.48 today and climbing.
I didn't click through to read the link, but what's posted is not right.
If prices are flowing backward, I want to jump from a big raft to a small raft. If I jump from a $200,000 house to a $100,000 house, the 5% price decline nicks me for $5,000 instead of $10,000. Basically, you have everyone migrating from big rafts to small rafts or in other words out of housing, so it is not true that only first time homeowners are affected.
Why tie up more money in an overvalued market like housing?
In the inflationary 70's, real estate (in decent neighborhoods) was about the only good investment.
The stock market as a whole was flat, actually declining in constant dollars.
I doubt if foreigners are going to be buying much property outside of the few attractive resort areas.
Perhaps true, but I sold my first house in Virginia to a guy from Tijuana who paid cash. I learned a new Spanish word at closing: "termitas". Apparently, some were found in the mulch I'd spread around the azaleas. It almost broke the deal.
The house was an investment for him. He had the basement finished and then rented it out.
It is impossible to make a profit buying a home. Think about it a bit.
I bought a $50,000 four-bedroom home in a nice neighborhood 30 years ago. Now it is worth $400,000. I could sell it and "make" $350,000. And what could I buy with the $400,000 proceeds? A four-bedroom home in the same neighborhood! There was no gain. Just some dollar devaluation.
Of course, I can't even do that because the real estate vultures will want 6% ($24,000) for placing a listing in the local MLS.
So all I can really buy with the proceeds from my $400,000 is a $376,000 house in the same neighborhood.
The last few bizarre years notwithstanding, over the past century housing prices have barely kept pace with inflation. A house is a store of wealth, not a means of acquiring wealth. If your bucket has a leak and you are losing wealth, I recommend you put your assets in a bucket with NO leak. For the last decade, I have been a very content, wealth-building renter.
vbspurs and ampersand, Sales may have increased but where are prices. Another 20% discount for Latin Americans, Canadians and Europeans. You do not have to worry about global cooling in Miami.
I'm trying to sell a house in economically depressed Southern Oregon so I can moved back to economically depressed Arizona. If I can seel mine, I hope to buy a foreclosure or short sale in Arizona.
What ticks me off is that as the value of my house goes down, the property taxes on it continue to rise.
MeadeHouse is moving.
I've lost a ton of equity in my home. Thankfully, it wasn't realized equity in that I never took advantage of mortgaging that equity, so in essence, I never really lost a thing since I never really had it. However, what I have lost is real dollars from the sale price of my home to what it is now and that has been vicious. My wife and I have thought about down-sizing and it makes sense, but right now, it doesn't make sense to uproot everything for the sheer sake of perceived savings. I'm not underwater and I'm employed, even in this shitty economy and market and so is my wife. We are making due with what we have, so we consider ourselves the lucky ones and that can easily change overnight.
A house is a store of wealth, not a means of acquiring wealth.
No. It is a place to live.
However, I personally believe that recurring yearly property taxes are bullshit and should be done away with completely. The level of income a locality will see from the savings its homeowners realize by not paying tribute every six months to these shameless bureauweenies who waste it anyway needs to end for good.
T J Sawyer said...
It is impossible to make a profit buying a home. Think about it a bit.
I bought a $50,000 four-bedroom home in a nice neighborhood 30 years ago. Now it is worth $400,000. I could sell it and "make" $350,000. And what could I buy with the $400,000 proceeds? A four-bedroom home in the same neighborhood! There was no gain. Just some dollar devaluation.
Of course, I can't even do that because the real estate vultures will want 6% ($24,000) for placing a listing in the local MLS.
So all I can really buy with the proceeds from my $400,000 is a $376,000 house in the same neighborhood
You forgot the higher realized property taxes on that $400k home too. Same size, same lot, bigger tax. Go figure. The whole thing is a giant scam at this point and this economy really has shown it to be one. From the way homes are MLS listed at the 6% take, to the bullshit that are comps.
Interestingly, my taxes on my house have never gone up.
And I mean ever.
And if they did, there would be a bloodbath at the polls.
My school district is excellent, and while I think I pay a fair share of taxes for that, I benefit so much from Californian businesses that keep moving to my part of Texas.
Thanks, democrats! I love you guys. Keep sending those nasty employers over here.
Sure, my home's value has steadily increased, but it's just not creating much of a difference in my tax burden. When I check the police blotter, I have to go back almost a year before I find a serious crime anywhere near me.
Honestly, you WI folks need to consider moving to Texas. If you like our politics, that is. If you don't, stay where you are.
MeadeHouse is moving.
Meade wants bigger trees to cut down.
Phil Candreva said...
For the last decade, I have been a very content, wealth-building renter.
Renting is great if the a lot of conditions are suited to that wealth building culture for you. The first is the size of the rent. Many rents are almost the same if not more than the mortgage on the home/condo being rented. Secondly is size of home. Thirdly is the consideration for your family structure. Also, the downside risks to renting can be a bear to deal with.
Friend is a huge bond portfolio manager.
Rule 1 - cut losses immediately, ride profits for a while.
Exactly the opposite of most human nature.
edutcher -- give the climate in NE Ohio a little time, it might improve. All I am saying, is give Kasich a chance.
Re. buying a house right now: It seems like a good time to me -- I just bought a rental out of foreclosure. It needs some work, but once it's done it will be a nice place in a good location. I paid $14,000 for it. And no, it's not in Detroit -- it's in a nice little town in NW Ohio.
Not bad, seeing as how it sold for $70,000 a few years ago. And what else am I going to do with my money right now? I could let it sit in a savings account and earn 0.5%, which gas has doubled in the last year.
This seems like a good time to trade up, too. Suppose you own your house outright, which you paid $100,000 for a few years ago, and let's assume everything is worth half what it once was, for the sake of simplicity. You could sell it for $50,000 and then buy a house for $200,000 that would have cost you $400,000 a few years ago.
So you'd have a $150,000 mortgage on a house that would have required a $300,000 mortgage had you done the same swap a few years ago.
Althouse, if you're thinking of moving out of that communist hell-hole you call home, I'll take the two of you on a tour of Bryan, Ohio. I think you'd like it.
CF is right. Houses are places to live, not wealth machines. Especially if it takes forever to pay one off -- the interest you pay over the course of a long loan is astounding.
Houses can make you some wealth -- you just need someone to pay you while you own it. The rent I collect on my duplex offsets my mortgage, taxes, insurance to the point that I would pay more if I rented an equivilent-sized apartment. This allows me to pay the loan faster. Every extra $100 per month saves $7000 in saved interest over the life of a 15 year loan.
Landlording has its drawbacks, but cashing the monthly rent check isn't one of them.
Owning a house requires discipline. Too many forgot that aspect and it caused everyone to suffer.
WV: pennepor
Have you seen the price of the Euro? $1.48 today and climbing.
Who could have predicted that printing hundreds of billions of dollars would devalue them?
It was only one year ago, that the Euro was sinking against the Dollar and we were all pondering cheap European vacations.
A house is a box made out of wood, that sits in the rain and rots.
There, feel better now?
Owning a house requires discipline.
Yup. And not using it as a piggybank. Pay off your mortgage. Don't take out loans against the value of the house for something that will not outlive the house.
My wife is a very active Realtor is a relatively good market. Most sellers are upside down having bought recently or borrowing against equity at the peak. Amazing the number of owners who have been in a home 10 plus years but upside down.
The idea that home ownership for everyone is something the government should make happen was really bad.
I have a condo in Cambridge, Mass and a "cottage" in Ptown.
I am renting them out now and the rent pays for my mortgage and condo fees (on the place in Cambridge).
There is always a big international and domestic demand for renting out the place in Ptown so I am not too worried about continuing renting it out. Granted, that some drug crazed fag doesn't destroy it.
And in the place in Cambridge, which has an enormous transient population, is also in demand. You can walk to Harvard or bike to MIT.
A big plus to my building in Cambridge is that it is DIVA central. Blake Gottesman, lives one floor before me. He was George W Bush's personal assistant while he was in the White House. Then we have a MIT Phd hottie who is American but writes for Newsweek in Japanese. Two fag Harvard Docs. A Harvard fag Lawyer and his Big Time Real Estate husband. A trust fund hot Brazil chick who just parties. A German Phd who works for Biogen. And a Harvard Professor. Oh, and sadly, one subsidized couple who bring the entire place down. My unit is on the Penthouse. I love when anywhere asks me my address and I have to say Penthouse. Also, there is a waiting list for buyers who want to get into the building.
5 minute walk to Porter Square, Union Square, Inman Square, Harvard Square and 10 minutes to Kendall Square. Fab restaurants and shops.
Now if my condo was in a suburb in Phoenix or Las Vegas I would be crying big tears.
What happened to my poop posting?
Wow..
An early Trump endorsement.. very early ;)
Real estate sales in my part of FL--the SW--are up, too, and it is mostly 'foreigners', including those from US snow country. The properties being sold, though, all seem to be of the second-home category. Last week, the most expensive house ever sold here went for $12.5 million.
What's keeping a lot of people from buying depreciated houses is real estate taxes. FL has no income tax on person incomes, so the state and counties rely on real estate taxes to fund just about everything. The tax rates are out of whack, though, and serve as a real barrier for young families whose taxes could amount to as much as 50% of what their annual mortgage payments would be.
@Revenant: 'better' doesn't necessarily mean 'bigger'. As one gets older, things that don't include shoveling snow, mowing lawns, fixing roofs, etc. can definitely be 'better'.
“Do you want to wait this market out in your current house or do you want to wait it out in your next house?”
For the commoner Kate and her prince the answer is NO?
I like that Kate has almost no upper lip. Shes the antiJolie
BTW - does anybody know if Althouse plans to live-blog the wedding ceremony?
"Houses are places to live, not wealth machines"
I agree with that, although I watched some friends (with envy) flip houses in the late 90's and early 2000's for nice profits. I was always too cautious (and not handy enough) to try it.
Best advice I received when buying my first house was from a co-worker whose house had recently been burned to the ground - don't think of your house as an investment, think of it as your family's home. For me that worked because I have been in one location for the past 12 years and have been satisfied to slowly improve the house. If forced to move for a different job, I would certainly need to think about the house from an "investment" point of view.
The most likely thing to make me move now: increasing taxes in my city - I could afford about 25% more house by moving 5-15 miles to another township.
I like that Kate has almost no upper lip.
I like her sister better. Kate is too skinny. So when does the wedding start?
Here's CNN's info: It takes place at the following times around the world: 4 a.m. in Los Angeles 6 a.m. in New York...
Hmm, I'm confused. So what about ABC: The following schedule of royal wedding events is in Eastern Standard Time.
Do I need to convert it or is it that they don't realize it's Daylight Savings Time?
Is is true that journalism is the white collar job that requires the least intelligence of all?
The wedding starts at 5am CDT, take it or leave it.
There is a huge inventory of empty property in the Seattle area. We are well over-built.
We bought 15 years ago, and I worry about being underwater.
Four years ago, I was a millionaire....not so much now. The house next door has been empty for three years.
The owners are demented, or dead. The kids..my age (55+)..live out-of-state. They over-value the house while trying to pay for Dad's nursing home.
The housing bubble implodes.
Apparently we had a little excitement at my local bank just a few blocks away.
Police officers wounded an armed man who attempted to rob a Chase Bank branch on Union Avenue in Rutherford on Thursday, shooting him several times after a brief hostage standoff, authorities and witnesses said.
That's my branch.. I've gotten to know the tellers. They got one ATM and its on a drive thru. Often cars are going thru so I just walk in and sign in for the cash.
Its going to be kind of weird going back.. maybe.
There is an Elementary School across the street from the Bank.
So you can imagine the panic as word spread.
The Union School was put on lockdown after the robbery was reported. Students and teachers said a “stay in place” order was issued over the school’s public-address system around 2:15 p.m. Students and staff then gathered in the school’s hallways, away from windows, where they sat in silence for close to a half-hour.
The all-clear notice was given around 2:45 p.m. The school has 488 students in grades four through eight, most of whom were released to their parents from a side entrance around 3 p.m.
In the comment section of the story there is one pissed off mother.
Friday April 29, 2011, 12:29 AM - UnionMom says:
I am a mother of a 5th grader and an 8th grader from Union School and they did NOT release my children to me either. To the "UnionParent" who posted above, I agree with you. It was a very scary scene outside and parents should have been contacted to pick up their kids safely. I was really outraged that I wasn't called to get my kids. They had an hour to call me. I am still furious. I got a call from my daughter afterschool that "there are SWAT teams and cops everywhere, someone was shot. I'm scared." I almost had a heartattack as I raced to the school, and I couldn't get anywhere near the school. I parked and started to walk towards the pizzeria where my kids were waiting. The cop questioned why I was walking towards that direction. I told him I was getting my kids. He then proceeded to give me 'permission' to go. I would have went anyway...my kids were scared waiting for me and they should have been kept in the school until parents picked them up. Although I do comment their lock down procedure, I dont understand why they would let them out without parents. Mind-boggling. I dont want to send my kids back, I am scared. I do commend the police and teams for keeping us safe, but I am furious at the school.
UnionMom is very likely suing.
Btw.. the pizza at that pizzeria.. not that great.
Lem, and all interested in the Royal Wedding -- BBC coverage begins now. I'll let you know what's up, if there are news.
Been a while that I've pimped my blog on Althouse, but here is the Royal Wedding thread at Sundries.
Comments are moderated, due to the Chinese spammers.
@Revenant: 'better' doesn't necessarily mean 'bigger'. As one gets older, things that don't include shoveling snow, mowing lawns, fixing roofs, etc. can definitely be 'better'.
That's a good point; I hadn't considered that. There's also moving from an expensive market like California to a cheaper one like Arizona.
Regarding houses as an "investment" vs "a place to live" -- in the pricier states, most of the value of your "house" is the land it is sitting on. *That* definitely qualifies as an investment, even if the house itself does not.
When I bought my house (at the peak of the bubble -- ouch) around 90% of what I paid was for the land. The house itself was worth a fraction of my down payment.
The housing prices of the future will need to be affordable to the wages of the global economy. Housing will continue to decline in price until equilibrium has been reached with wages. There is much more pain for those who bought at the top.
Housing prices in the City of Racine are collapsing. Ghetto properties are gong for under 10 grand, housing in West Racine is seeing prices in the 30's-60's. Remember these places were going for 100K + during the mania.
Look for prices to continue to fall. It will be to your advantage if you don't view housing as an investment.
Another thought: Before you think the value of your house, or other investments have gone up, price them in gold or silver. Remember that a Federal Reserve Note is a fiat currency backed by faith and nothing else.
For instance: Silver is still Constitutional money, so while gasoline costs $4/gal in FRN's, priced in silver gasoline costs 8 cents a gallon. Gold is now at $1536.00/oz, so figure your house prices in gold. Remember, the value of gold and silver are more or less a constant, it is the value of a fiat currency that rises and falls. The Federal Reserve, by printing dollars has been INFLATING the currency. You can have LOTS of fiat dollars and still have nothing of value. Remember: In Zimbabwe, everyone is a billionaire. LOL.
http://www.google.com/search?q=zimbabwe+currency&hl=en&rlz=1I7DLUS_en&prmd=ivnsu&tbm=isch&tbo=u&source=univ&sa=X&ei=V5S6TcrkE8HYgQfSldC5BQ&ved=0CDMQsAQ&biw=1131&bih=634
According to my local paper today, pending area home sales are at their highest in six years. That equilibrium price point may have been reached, here at least.
Re: Forclosure.
People that I know who are 'underwater' on their mortgages, paying a higher interest rate and unable to refinance are letting their homes go into forclosure. THEN when the house is on the auction block (so to speak) they have a family member, generally parents, buy the house back at a song and then rent or buy from the parents. In otherwords, they get to keep their cake and eat it too.
Re buying forclosed homes.
I'm not in the business (fincancial advisory) now that I'm retired, but when the downturn in houseing started, many of my more wealthy clients liquidated some of their fixed income investements that were paying low returns and purchased forclosures in upper end nice neighborhoods in the Bay Area.
It was a very good financial move, of which I heartily approved. They were able to buy new homes at deep discount and are generating more income from their portfolio with rental income and tax write offs from the rental management.
Real estate generates a much bigger return on their portfolio. And real estate carries a better chance of appreciation of capital as opposed to a low interest rate fixed income investment which is guaranteed to decline in value when interest rates go up.
John Burgess said...
According to my local paper today, pending area home sales are at their highest in six years. That equilibrium price point may have been reached, here at least.
Not sure where you live, but I'm out here in San Diego and I can tell you that the bottom hasn't been seen yet. Now with double dip coming or already here, this isn't going to be fun at all.
Looking at the New Richmond News, a weekly newspaper for the area, there are 8 foreclosures, and 5 sheriff sales of properties.
This has been a weekly thing for about 2 years, if not longer.
Not sure where you live, but I'm out here in San Diego and I can tell you that the bottom hasn't been seen yet. Now with double dip coming or already here, this isn't going to be fun at all.
Yeah, I figure house prices have at least another 30% drop to go. Ouch.
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