housing optimism

[Myth465]

 

3) Cdn gains on a housing sale are tax free, in the US they are not. In the US a $ is a $, in Canada you're paid to hold your property - substantially reducing your risk.

SD

 

US gives you a decent size exclusion if you meet a few requirements. If you are married a nice chuck or most of your gain is typically tax free (as long as you live in it or have lived in it for a number of years)

 

---

 

$250,000 Exclusion on the Sale of a Main Home

 

Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive. In the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence.

You can use this 2-out-of-5 year rule to exclude your profits each time you sell or exchange your main home. Generally, you can claim the exclusion only once every two years. Some exceptions do apply.

[Alekbaylee]

$250,000 Exclusion on the Sale of a Main Home

 

Individuals can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive. In the 5 years prior to the sale of the house, you need to have lived in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence.

You can use this 2-out-of-5 year rule to exclude your profits each time you sell or exchange your main home. Generally, you can claim the exclusion only once every two years. Some exceptions do apply.

 

Looks very appaling, but may have encouraged the speculation...

[Guest Bronco]

Alekbaylee - no doubt that was a part of it!  Lower cap gains rates too! 

 

Add that to CRA, FNMA, investment banks, poor lending standards, idiot politicians, Moody's, greedy homeowners, etc....you may have yourself a housing crisis.

[gaf63]

I rarely post, but I have to pitch in on this one.  My wife and I have been holding off on buying a house for 2 years now.  We have a really good grasp on real estate prices here in California.  A year ago, I remember there was some optimism about the housing market from not only the financial wires, but from some of the posters on here too.  I noticed it in the local housing markets as well.  Prices seemed to blip, even on the Case Schiller index, realtors were starting to be more snobbish again and less desperate, and the supposed outstanding inventory of homes was dropping to between the level of the high and median monthly levels.  Everyone was saying then that it was the TIME to buy.  SHYEAH!  I had to stick to my guns on that one, and it was tough, but I'm glad I did.  Fast forward today and those houses and condos are now selling for 30% less.  I was thinking, "Who is still gonna be able to afford a 700k house around here?"  Those 700k houses in the upper class subdivisions are now selling for under 500k.  Condos and apartments?  $240k down to $170k and below.   This isn't in a crappy inland community.  It's in probably one of the most desirable coastal communities in California. 

 

Just next door, I live next to a house that has been vacant and foreclosed for almost 3 years now (longer than I've been here).  Just up the street is another vacant foreclosed house that has been sitting there for over 2 years.  I've seen another house that has been for sell for over a year down the street.  There are SO much for sale signs around, I don't see how it's possible for that much buyers to exist. 

 

So, do I think housing prices are ready to recover?  No.  I think whenever asset bubbles pop, they take forever to recover.  Nasdaq back to 2000 levels?  How long did it take gold to reach the 80s highs?  Oil, when adjusted for inflation, is STILL below its peak during the 70s oil crisis.  Japan?  etc...  And I've personally seen what happens in a regional housing bust.  It takes FOREVER (and even a major housing bubble) for prices to reach their previous highs.  I'm talking 15-20 years.  There is just way too much headwinds for housing prices to recover.  Interest rates are starting to go up.  When QE2 is over, who knows how high interest rates will hit.  I believe that will kill the housing "recovery".  There is also still way too much inventory out there.  Even by normal estimates, I think there is 2 months of excess inventory.  That's not including the shadow inventory--like what I see around my neighborhood.  Job market?  Who has the income to soak up all this excess inventory?  Although the job market is improving, I doubt these newly employed feel confident enough to buy a home.  And most importantly, prices.  Although prices are much more reasonable now, definitely compared to rents, I think there is still enough pressure to push prices further.  At the very least, I think prices will meander in most markets for several years.  Housing in the bigger cities like San Francisco and New York will probably do better.

[/quote

 

Add to all of the above the fact that banks arent lending at these interest rates unless you have impeccable credit and a good size down payment

In my area of California, also a seaside community,  houses in 1 mil and up range are not moving at all, I've seen these types of homes for

sale for over 2 yrs. with constant reduction in ask prices(altho not realistic drops in prices imo) and still no action

 

And Opihiman , I too am curious where you live in Calif.  I am in the northern end of the Monterey bay area,  Gaf

[opihiman2]

Those 700k houses in the upper class subdivisions are now selling for under 500k.  Condos and apartments?  $240k down to $170k and below.   This isn't in a crappy inland community.  It's in probably one of the most desirable coastal communities in California. 

 

That sounds like crappy inland prices. Where exactly do you live? If it's one of the most desirable coastal communities in CA, I'd like to buy a house there!

 

Monterey.

[opihiman2]

 

 

Add to all of the above the fact that banks arent lending at these interest rates unless you have impeccable credit and a good size down payment

In my area of California, also a seaside community,  houses in 1 mil and up range are not moving at all, I've seen these types of homes for

sale for over 2 yrs. with constant reduction in ask prices(altho not realistic drops in prices imo) and still no action

 

And Opihiman , I too am curious where you live in Calif.  I am in the northern end of the Monterey bay area,  Gaf

 

Oh wow.  What a small world!  That's cool.  Yep, I live in Monterey and have noticed exactly what you're talking about.  Houses in that range have not moved at all.  And have you seen the amount of inventory out here?  I just don't know who is moving out here to buy these properties.  Just a drive through Carmel, and it's mind boggling to see all the houses for sale. 

 

By the way, when you say northern end, are you talking about Marina?

[gaf63]

Nope , the northern part of the Monterey bay area, outside of Aptos

And yes there are a lot of homes for sale,  2 near me have on the market for over 2 yrs

[Smazz]

California has all the cool names for towns/cities

 

I plan to move there one of these years, I just need a sugar momma! ;)

[ubuy2wron]

I am of the opinion that residential real estate in the US is the closest  thing to a Dhando type investment value out there. A middle class home with a decent tennant  in a good neighbourhood and a 30 year fixed mortgage is likely to produce fanatasic returns over the next decade. 

1.5 million households are formed each year in the US and unless the birth rate declines NOTHING is going to change that and living with the in-laws gets stale really fast. New home construction is currently at the lowest pace since the US govt. has been keeping records.  Affordability ie how much of ones income goes to PIT is at the best levels in 30 to 40 years in many mkts. The residential real estate mkt is GE @ 8.00 per share and some of you are dithering because you think it might go to 6. If any of the posters here would like to own a share in a vacation home in the US drop me a line.

[Myth465]

I am of the opinion that residential real estate in the US is the closest  thing to a Dhando type investment value out there. A middle class home with a decent tennant  in a good neighbourhood and a 30 year fixed mortgage is likely to produce fanatasic returns over the next decade. 

1.5 million households are formed each year in the US and unless the birth rate declines NOTHING is going to change that and living with the in-laws gets stale really fast. New home construction is currently at the lowest pace since the US govt. has been keeping records.  Affordability ie how much of ones income goes to PIT is at the best levels in 30 to 40 years in many mkts. The residential real estate mkt is GE @ 8.00 per share and some of you are dithering because you think it might go to 6. If any of the posters here would like to own a share in a vacation home in the US drop me a line.

 

That was a top notch post and I think you are right.

I just dont want to deal with the headaches of RE. I will have to say it is becoming tougher to find value in the market these days.

[cman]

I just bought a large house at 65% of replacement cost with 30 year money at 4.625% and 3.01% after tax

 

Here is the right way to think about it

1) is replacement cost going up or down?

2) are funding costs going up or down?

3) is demand going up or down?

 

Over 20 years the population will grow by say 25%+

Over 20 years inflation will boost replacement cost by 50%+ (this is ultra conservative)

over 20 years my funding cost will stay constant

 

Under what scenario can I possibly do badly? For those who say one where rates go to 20% I would suggest to you that replacement cost will likely go up at 5-15% compounded in that scenario, the alternative option to build new vs buy existing will be massively unattractive from a cost and financing perspective and oh by the way most rental properties are financed at variable rates not fixed so the major alternative to home ownership will be very costly

 

Oh yeah and I am living well for 20+ years

[gaf63]

I agree that real estate is now a great investment, one can find great deals in my area,  if I were younger and were willing to deal with tenants I'd be buying, however I have been there and done that, never again!

[Smazz]

not taking any direct shots but man, I see alot of assumptions here.

[jb85]

what is everyone's general thesis on trying to make money on the housing market?  I know people have done it but it seems like a tough game to play, especially if you are just buying one house.  I could see where ifyou go around and buy distressed property, then you might make money, but a buy and hold approach seems difficult to me.   I mean house prices in general have had 0% real return over the past century, and are still historically high...seems like in general prices are still above the trendline, so just trying to see people's thoughts.  Again, not saying it can't be done, but I'm just trying to learn more about specific ideas.

 

As far as building costs and population go.  Does a rise in both of those signal a rise in house prices?  Shillers charts tend to show that over the past 100 years, there is little correlation to between buildingcosts/population and the house price.  Population and Building costs rose substantially over the past 100 years, yet house prices remained flat (in real terms).

 

here is the shiller graph (about half way down called "Long term US real house prices")

http://financialfollies.blogspot.com/2010/12/cult-of-property.html

 

One way i judge ideas is to look the general market for my area (Seattle), and one of better ratios in my mind is the rent to buy info.  

 

http://info.trulia.com/index.php?s=43&item=113

 

 

[Myth465]

One thing no one has harped on is regulatory risk.

 

Everyone is gunning for housing changes which will crash that market. Amercans wont do well with 20% down, we are struggling with 3% down. I think its a cant lose trade if you are prepared to sit on a house for 20 years. At some point you will make money but if its just picking an asset thats going to outperform for 20 years I would rather own FFH or BRK with none recourse leverage.

 

http://www.washingtonpost.com/business/economy/housing-regulators-propose-20percent-down-payment-for-best-rates/2011/03/29/AFIRw5vB_story.html

 

20% down would kill the high end to mid end markets.

[ERICOPOLY]

It stands to reason that the volume of new homes built will need to triple.  So there should be opportunity to be found there.  Some of the builders (like Lennar) have figured out how to make money on the current low volumes, and some (like PulteGroup) have figured out how to turn the corner.  Now we're looking at an almost certain tripling of home building activity -- likely in a few years.  You can't keep building at 300k volumes -- it will create a housing shortage.  I have been reading some of the CC transcripts for PulteGroup and they say the distressed lot opportunities in good locations are now gone.  So that inventory is clearing is how I understand it, and PulteGroup has 147,000 lots in it's possession (31% are developed).

 

[Myth465]

It stands to reason that the volume of new homes built will need to triple.  So there should be opportunity to be found there.  Some of the builders (like Lennar) have figured out how to make money on the current low volumes, and some (like PulteGroup) have figured out how to turn the corner.  Now we're looking at an almost certain tripling of home building activity -- likely in a few years.  You can't keep building at 300k volumes -- it will create a housing shortage.  I have been reading some of the CC transcripts for PulteGroup and they say the distressed lot opportunities in good locations are now gone.  So that inventory is clearing is how I understand it, and PulteGroup has 147,000 lots in it's possession (31% are developed).

 

 

This is similar to natural gas. At some point you will get a decent return but is it worth the wait?

You are essentially making a macro bet on recover in the US economy. If things get worse then households wont be formed and immigrants will stop coming or will be kicked out.

 

Growth is not for sure inmo. The public sector is getting its ass handed to it and that will result in shrinking household formation. Kids coming out of school are leaving dorms and headed straight for their parents house decreasing the number of households. We will need to build houses at some point, but if its 2014 or 2015 your annual compound will suck. If its later then it justs worse.

 

You should be asking yourself how you feel about Macro, because thats the key to that call. I would prefer to play the banks and may have to take them out of the too hard pile. Anyone got a banking for dummies book?

[ERICOPOLY]

In the past 3 years I think we've worked off about 2,500,000 housing units -- this I think exceeds the amount of oversupply created during the building boom.  So if construction takes years still to recover, then wow... what a party it is going to be when employment come back.  Curious, how many jobs are currently missing because of the lack of building?

 

Here is the building data (and boy is 2011 off to a slow start):

http://www.nahb.org/generic.aspx?genericContentID=554

 

I believe it's about 1.5m housing units created annually at equilibrium  -- about 1.2m from new household formation and 300k destroyed.

 

Only about 400k new households were formed last year: living at home with Mom or renting a room in the back of a house is going to get old, but it must be good for the banks to have that extra cash flow going to the existing mortgages.

 

So yes, it's a macro thing.  When will people get jobs?  And when they do if they can't make a 20% down payment, they will want to rent.  That will put pressure on rents -- perhaps investors will buy houses and rent them out to them. 

[SharperDingaan]

 

Keep in mind:

 

Boomer retirement. If you were born in the 60's you are the apex of the baby boomers, & in your 50's. In 10-15 yrs you will be retiring & selling your mansion to downsize - but who are you going to sell it to? If if takes 10 yrs to work off the existing cheap inventory, boomer net selling will be just in time to ensure that pricing stays low - for an additional 10 yrs. Great if you want to live in the place, not so hot if it was supposed to be an investment.

 

Vacation home. Add up the property tax, upkeep & maintenance costs, driving cost to/from, & divide by maybe the 3 weeks/yr you use it? For most folks the cost/day is > the cost of a hotel room - which could be anywhere vs the same place year after year. To work - this has to be either an investment, or your future retirement home. If there's questionable appreciation, it can only be a transitional thing.

 

Inflation/deflation. We all hope its inflation, but if we're wrong ? Inflation is too much money chasing the same supply of goods - but it assumes that everyone still wants those goods. If you allready have what you need/want (or are buying the 'experience' vs 'goods') you're not buying those goods, & have just increased the supply of those goods for everyone else - making inflation harder to achieve. Recent retirees 'keep up with the Jones's' by buying cruises - not houses - & they're selling houses (downsizing) to pay for those cruises. With multiple hits against inflation, & in rising numbers, how do you get inflation ? 

 

Demographic. Young growing families buy new/bigger houses, aging ones sell. To get housing inflation when more are selling than buying, you have to be where those other sellers want to live - ie living in a local bubble. You also need the right kind of dwelling - if you aren't as mobile anymore you want a large & swank apartment, with someone else to shovel the snow &/or do the maintainance; not the multi-level townhouse &/or condo. Obviously bubbles do exist; Vancouver, California, Hong Kong, etc. but there aren't many of them.

 

If your 2nd/3rd home is the right kind of dwelling, & located in a bubble - all the power to you. But if it is not, expect tears.

 

SD

[Granitepost]

I think a little perspective might be good here based on what has happened in Ontario, Canada, in the past.  In about 1974 during a period of huge house price increase, the Government suddenly brought in a Land Speculation Tax that put a tax of over 100% on any profits for those who bought and sold a house in a short period of time.  Immediately the housing market went dead.  I asked a real estate agent at the time how the market was and she simply said there was no market.  It took years for a normal market to return thus taking away the liquidity from an investor in residential real estate.   Another delightful Government action was to bring in rent controls on residential apartments and houses, where each year the Government would only allow landlords to impose a certain very low percentage of rent increase to existing tenants.   Also, landlords were not allowed to terminate a residential lease except for a few very specific reasons as set out in certain legal forms devised for this purpose.  One reason was to substantially renovate the house, but in this case the former tenant had to be given the opportunity to move back when the reno was finished.   Another reason was that the landlord or a member of his immediate family wanted to move in himself.  If the landlord wanted a higher rent increase, he could try to justify it to the Government at the prescribed hearing by showing certain unusual cost increases and where the tenant could also present their information at a hearing prescribed by the Government.   The Land Spec Tax is long gone now but regulation on rental housing is still a pain.   In addition, mortgage interest rates at one time went up to about 22% in an effort to stop inflation so mortgage renewals were almost impossible to get, forcing property to be sold.

These are the kind of restrictions that people may not consider when making a decision on buying and renting a house as an investment.   These laws may suddenly appear after an investor has bought and prevent a safe retreat without a substantial loss of capital.

 

[Granitepost]

I should add that the baby boom's retreat from the large family home may very well mean that the price of large houses fall and that of small houses (especially bungalows with no stairs) rise due to supply and demand.  It might even turn out that the smaller and larger houses end up having the same value as people move to have less to maintain and heat.  The location that is in demand may very well change over time as the need to live close to large metropolitan areas (where the jobs are) declines as the baby boom approaches retirement.  Thus, the sleeper here may be the smaller bungalow away from the congestion of big cities.

[Guest Dazel]

 

 

every aspect of the U.S system is a benefit to the home buyer compared to Canada other than realty taxes where you get harder in most parts of the country.

 

So my question is why is a house on a small lake in Canada worth more than one on the ocean in California? pricing is wrong somewhere...my

thought is Canada is in a bubble...having said that Vancouver has been in bubble for 20 years...it is just excepted that you will pay$800k for a bungalow...

and never lose!! sound familiar?

I am in Scottsdale next week to look at firesales...I will post on it later.

 

Dazel.

[ubuy2wron]

Ericopoly wrote about jobs and the housing industry. Every recovery since WW2 in the US has had a jump in new home construction but this one ... yet. Cars and homes eat the largest portion of the avg. persons pay cheque, with every recession since WW2 has been proceeded by a slow down in new home construction. It has been posited by some that the building cycle is THE source of the economic cycle. Regarding res. re and its investment merits . If a property can produce a positive return after P.I.T ie it cash flows out of the box where the heck is the risk given you can get a decent tennant.

[Uccmal]

Canadian Situation - why I dont think there is an extreme situation.

 

Last Spring - 2010 - we started a large reno on our house.  My Wife and I went to the local bank to get a HELOC to finance the whole thing.  I didn't want to dig into the investment money too much since my chances of exceeding a 6.0% after tax hurdle is pretty good.  

 

Anyway, we have an uninterrupted record of payment on the existing house going back 7 years.  I could have posted non home equity collateral to cover the whole amount borrowed - 220k - no dice.  The money borrowed plus the mortgage was calculated to come to 80% of the low ball assessed value of the house - pre reno.  

 

In addition:  

- Both of our FICO scores were reviewed: both in the mid 800s

- We both had to provide paystubs and proof of employment - both of us have good jobs by any standard - my Wife's is much better.

- Proof of Home Insurance

- We had to sign multiple pieces of paper that we were declining mortgage insurance.

- Records of our mortgage - with a different lender

 

The hoops we went through were so extreme that I was nearly ready to give up and just pay for it out of my margin account.  

 

I truly dont know where anyone would get a mortgage in Canada that had less requirements at this time.  The one subprime lender I am aware of here is in runoff - Xceed.  For the factors mentioned by other posters and my own experience I dont think there is a bubble in Canadian Housing.  

 

There are obviously isolated pockets of high prices such as Vancouver but that is partly situational - anyone who knows Vancouver at all or perhaps lives there knows why prices stay high.  The whole city is sardined between a mountain range and the Ocean.  It is more akin to Hong Kong or Macau.  

 

As for Real Estate investing anywhere I concur with most comments above.  The one advantage with Real Estate is that you can use leverage which will work really well in times of rising prices and inflation.  Everything else I see is a disadvantage:

- local knowledge required

- borrowing issues

- maintenance and upkeep

- lack of financial mobility

- blah, blah, blah.

 

And after all that my 7 year old has decided he wants to sleep with his toddler sister, so we didn't need the extra room anyways.   :P

[ERICOPOLY]

The baby boomers will want to buy new construction when they downsize -- they don't want to be renovating and/or fixing.  That's Del Webb's argument (a PulteGroup subsidiary).