Less than zero: Local activity can give false positives about overall housing market


Resale homes with views of one of the two courses at Dataw Island (by Arthur Hills and Tom Fazio) begin in the mid $200s.  With 20% down and a conventional 30-year mortgage, monthly payments on such a home could be just a little over $1,000, certainly competitive with rental payments on similar properties.


    In 1978, I purchased my first home for one reason, and one reason only:  It was cheaper than renting.  A year earlier, I had been transferred by my employer, J.C. Penney Company, from New York City to the company's southeast regional office in Atlanta.  My (now former) wife, our one-year-old son and I moved into a nice two-bedroom apartment just north of the city.  The rent, as I recall, was something like $650 a month.  
    On weekends we would strap the baby into the car and drive through the country north and west of the city.  One Saturday we found ourselves in a new development, Timber Bluff, located midway between Marietta and Roswell, GA.  The surrounding area was quite rural but Timber Bluff was only a 35-minute commute to my job in downtown Atlanta.

First home for $42,000

    Just for kicks, we stopped in Timber Bluff's sales office and asked about the price of the homes and, rubes that we were, were shocked to find out that
Real estate professionals depend on churn; be wary about activity in a depressed market as a predictor of trends elsewhere.

a brand spanking new cedar and stone faced contemporary three bedroom, two and a half bath house would cost us just $42,000, with only $5,000 down.  My frame of reference was the New York area, where such homes sold for two and three times that price.  When I did the math on a 30-year conventional loan, the payments for a brand new house would be less than the rent on our apartment.  A week later, we bought a house to be built on an already-poured foundation in Timber Bluff and moved in four months later.  (Postscript:  I was transferred back to New York a year later, sold the house for $43,500 and bought a home in northern Westchester County for $15,000 more, with a one hour, pain-in-the-neck train commute to NYC.)
    I recalled this bit of personal history as I read an article about homes selling in Sacramento, CA, to renters because their monthly mortgage payments would be less than their rent payments.  The market yes men are fairly frothing at the mouth over the increased sales in depressed markets like Sacramento where prices fell early and fell hard.  Rabid promoters, mostly real estate people who
The overall housing market will rebound when businesses start transferring people and stock market volatility abates.

depend on churn for their livelihoods, are touting the increased activity as a sign that prices will rise quickly across the land, and that anyone who sits on the sidelines is a fool.  Haven't we seen this movie reel before?   The fact is that more than 30% of mortgaged homes in California are "under water" -- their owners owe more than their homes are worth.  They are going nowhere fast, literally and figuratively, and when those who are securely employed in the 11% unemployment state have exchanged their rent payments for mortgage payments -- assuming they can get a mortgage -- California dreamin' stories will dry up too.
    Sales activity in depressed markets like Sacramento and numerous others is essentially irrelevant to the prices most of us will get for our homes when we sell.  As the ad says, what happens in Vegas stays in Vegas.  Activity there is no predictor of activity in Boston, Indianapolis, Dubuque or Albany.  Until employment stabilizes and businesses start transferring people again, until the threat of inflation (from bailouts and bloated government budgets) abates, and until the era of stock market volatility ends, we will not see anything approaching the glory years of real estate for some years to come.

No time like the right time to sell and buy (and maybe the right time is now)

    I tend to trust more the stories about increased sales activity from more stable markets, and many of them are in the southern U.S.  Real estate professionals I know are reporting increased activity, if not increased prices, in a number of areas I have visited and reviewed.  Some of this

A sustained stock market rally and renewed confidence in the economy could bring Baby Boomers off the sidelines, and fast.

could be the normal spring movement of parents who want to make sure they are situated before school starts in the fall.  But in the southern U.S. especially, any increase in activity could signal a longer term trend if a sustained stock market rally and renewed confidence in the economy brings all those Baby Boomers off the sidelines and back onto the migration train south.
    The advice remains:  If you have equity in your home and a plan to move to a warm-weather retirement home, there is zero reason to wait.  The value of your current home is not likely to rise any faster than the one you would move to; sheer demographics implies that homes north of the Mason/Dixon line will appreciate more slowly than those south of the line, even in the rosiest of forecasts. 

    The size of the Baby Boomer generation has not shrunk much, and pure demographic inertia will increase the competition for the best value homes in the south.  It may take Miami years, maybe decades, to recover from its housing woes, but most of the rest of the south will rise again.

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