A few thoughts regarding a house purchase in the context of an “investment”.

Although I’ve never felt it overly wise, or even helpful, to view a house purchase strictly as an “investment”, at the same time I believe it would be negligent to ignore some of the more obvious macro data that exists that might help determine what constitutes a relatively good (or bad) environment (and/or time) to buy into. Since the latter half of last decade, the question of good v bad time to buy has certainly become more prominent and that is for fairly good and obvious reasons.

The NAR (National Association of Realtors) recently generated statistics that show that housing pricing in the U.S. grew at a rate of 6.4%, on average, between the years of 1968 and 2004. Needless to say, there were some obvious “hiccups” in this statistic over this timeline. None, however, proved particularly crippling, or long lasting to the individual buyer.

I feel it is important to note that this statistic does not account for regional diversions from the mean, nor does it account for the ever growing average house size that has taken place in this country over that same time frame. By definition then, this overall increase in house size (on average) will predicate higher average values in the housing space. Subsequently housing prices from 10,20 and 30 years ago would not really constitute an apples to apples comparison to those of today.

As averages go, however, I still find this housing growth stat fairly important in terms of what it has meant to the “average” buyer of this countries housing for the better part of some 35 years. That is, all things being equal, housing generally has generated a fairly good – to very good investment for the typical home buyer in this country over this time line.

This would prove particularly true, after one adjusts these average cash/cash returns in our “housing investment” for the leverage most all of us have used to purchase our homes via our mortgage lenders. Perhaps more to the point, though, is the belief that this statistically based understanding underscores why owning a home has largely helped to define what most of us think of when we talk about achieving the “American dream”.

What is also interesting about this statistic, is that it was generated up through 2004. Why not 2005, or even 2010? As the NAR are the original housing cheerleaders, I’m guessing that this largely has to do with the fact that the 2004-2010 time period was aberrant enough, that it might have skewed this statistic considerably downward as a result of the real estate implosion that took place in this country over that period. So buying in years like 2004-2008ish (generally speaking) is obviously something we all would have liked to and still want to avoid, if at all possible. That said, where might the evidence be that suggests potential home buyers today are avoiding that type of aberrant and financially destructive time frame for buying?

I think it is here: according to another recent study done in the Economist, the average house price in 2004/05 represented roughly 4X the average purchasers income level. Today that  multiple has shrunken to and stands at a much more reasonable 3X. Concurrently, the 3X also corresponds very closely to the historic price/income average generated from this study. This in mind, this analysis seems to help provide a very good statistical backdrop to the question .. “is it a good time to buy?”.

The comparison of the 3X income versus the 4X is, to my mind, very telling and suggests that today is an objectively reasonable time to buy. When you incorporate mortgage rates that are near there 50 year lows into the broader equation, I’d suggest this time might represent a very good to even excellent time to be purchasing a home, should that be on your radar. So if you are thinking of buying, hopefully this will help answer the ever pressing question of.. is it a good time.

Condo Convergence

I recently read a report that indicated that national home ownership in relation to the countries current population is at its’ lowest level in 50 years. Concurrently, first time home ownership is at it’s lowest level in 30 years. The lack, or inability, of first time buyers to obtain homes/mortgages is almost certainly driving the overall low.

At the same time I saw the story mentioned above, there was another that came out almost simultaneously that showed that the average fico score of today’s home buyer is as high as it has ever been ( I think 755). A persons ability to get a mortgage, largely determines their ability to buy a house. So high FICO requirements predicate low housing purchases, which is obviously what we as a country are experiencing at this time. Not exactly Einsteins theory of relativity, but there it is.

In the meantime, there is much conversation about how to enable more people (particularly those trying to buy for the first time) to purchase homes, as historically home ownership in America has generally been the first step towards an individuals path to financial security. Obviously there have been periods (such as 2005-2010) where this hasn’t worked, but generally speaking, a house purchase has helped us individually and as a country start to build a foundation for financial health and wealth.

Subsequent to the housing debacle referenced above (2005-2010), FHA, FNMA and Freddie Mac instituted a number of different regulations and policy’s that have made it very difficult to near impossible to finance a condo purchase. It is estimated that Condos make up just 2.8% of all housing purchases at this time. This is compared to the 5%+ percentage, that is considered to be more the historical average. In the meantime, Condo’s represent a potentially obvious purchase option for the all important and ever elusive first time home buyer. This is a bi-product of Condos relatively low price points and because the majority of them are located in urban settings and in down towns, or where many of the younger demographic have indicated wanting to be and live. It doesn’t seem difficult to imagine then that trying to remedy the recently imposed and highly restrictive condo financing constraints, will help to kick start first time home buyer inclusion into the housing market once again.

Luckily, I’m not the only observer who has taken note of this issue. In fact there is a bi-partisan bill being generated in Congress (HR3700) as I write, that is designed largely to help amend some of the more constrictive elements of the current lending legislation and regulation, and particularly as it/they apply to the much put upon condo class of real estate. I am of the mind that this bill’s chance of success is very high. High enough in fact, that I will place it under the category of “too obviously beneficial to fail”. Should this bill pass, condo’s will once again represent a very viable option of housing ownership for many who would like to own, but who are not able to right now.

In conclusion, I have no doubt that the anticipated passing of HR3700 (in some form or fashion) will occur and will prove a great leg up for many of today’s hopeful home/condo buyers. This should have positive economic consequences for all of us. Increased housing purchase necessarily drives economic activity, which in turn drives employment, which drives financial security etc… This is not an economic hypothesis so much as it is an economic certainty. Further, it highlights why so many politicians and people who monitor such things want to see our housing industry get back on track.

Note to investors: A bi-product of this bills passing would almost necessarily include a jump in over all Condo values. Increase first time buyer ability to own and you will see more demand at the condo end of the housing continuum. As a result, associate price points should/will rise accordingly. So, if you have cash..which is largely the only medium of exchange that works in condo land currently, I’d highly recommend looking at this type of product for investment. To my mind, Condo’s are “artificially” cheap now, because of the financing constraints referenced. Reduce those same restrictions (via hr3700 etc..) to a more “normal” consideration and I believe you will see a fairly quick (and potentially significant) reversal of overall value in this much depressed property class. In short, should you have the capacity to do so, I’d be an investor in condos.

Market Mayhem

It would be tough not to have taken notice of the recent volatile nature of the equity markets of all descriptions (and nationalities) over these last couple of weeks. If the DOW isn’t dropping 400 + points as it is today, it is adding 400+ as it did last Thursday. Like many I have money in the markets, but I am an investor in real estate. These more recent stock market fluctuations both here and abroad remind me, yet again, of why this is so.

Accepting a couple of instances in modern times, and perhaps most notably the “instance” that occurred in this country from roughly 2000-2010, real estate has proven a much more predictable, I believe more productive and certainly less stressful form of investment relative to something like stocks/equities. Further, most of us (adults) in this country have invested in real estate at some time or other, via our own housing purchases. For this reason alone, I feel it is worth spending more time than average both monitoring this countries real estate market, as well as trying to figure out where values might be heading next as we all push forward in these very uncertain economic times.

As a person who makes his living in real estate, I have been keeping a fairly close watch on this investment class (generally) for most of the last 20 years. I do this sort of thing as a matter of happenstance. So, to the extant that I might be able to turn some of my more recent studies/musings/contemplation’s regarding this market into something that approaches value, the effort made here should be advantageous for me. Should any one else choose to spend time reviewing some of this subject matter with me, with luck you may get something out of it as well.