The Continuing Saga of Your House as An "Investment"

Sorry for getting this up late.

CoreLogic released its Negative Equity report for Q3 2012 on January 17, 2013. See here. It reports the number and percentage of homeowners that are “underwater” in their mortgages (owe more than their home is worth) by state.

All in all, 1.3 million mortgages moved from negative to positive equity during the quarter, a generally postive development. Across the nation, 22% of all mortgages are still underwater, down from 23.7% in the Q2 report. Nevada is the undisputed "titleholder" with 57% of mortgages under water; Florida occupies the second slot with 42%.  Nevada and Florida are also first and second in terms of high average loan-to-value ratios with Nevada at an astounding 109% and Florida at 86%.

Other highlights:

• Arizona (39%), Georgia (36%), and Michigan (32%) rounded out the top 5 states with highest percentage of negative equity loans.
  
• Nationally, there are 1.8 million more loans that are only 5% underwater. Another year of increases in prices could wipe another 18% of the negative equity mortgages off the list.
  
• The bulk of the negative equity situation is at the market's low end (homes valued < $200,000). Nationally, 28.7% of all mortgaged homes with values under $200,000  are underwater compared with just 14.5% for homes valued above $200,000.
  
• Net homeowners’ equity in all mortgaged properties increased $200 billion during the quarter from $3.6 trillion to $3.8 trillion. California accounted for 25% of this increase or about $52 billion (California accounts for 22% of the value of all mortgaged residential property). The top 5 states (those listed above) with the most negative equity loans accounted for another 25% of the $200 billion increase in national net homeowners’ equity.

In looking at the data, it's apparent that the worse states showed the most significant improvements. This is most likely due to the higher than average number of foreclosures and short sales (which eliminate mortgage debt entirely) in those states. Also, three of these states (Nevada, Arizona, and Florida) experienced large rates of appreciation in the 3^rd quarter, with some pundits are attributing this to large scale buying by investment groups, such as Blackstone and JP Morgan.

The Continuing Saga of Your House As An Investment

From the Report issued by CoreLogic:

CoreLogic reports that 11 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the second quarter of 2010, down from 11.2 million and 24 percent from the first quarter of 2010. Foreclosures, rather than meaningful price appreciation, were the primary driver in the change in negative equity. An additional 2.4 million borrowers had less than five percent equity. Together, negative equity and near negative equity mortgages accounted for nearly 28 percent of all residential properties with a mortgage nationwide.

Housing: The Temporary Reprieve

Let's see. A home-buying credit? Check. A second round of home-buying credits? Check. Tax write-offs of losses for builders? Check. State subsidies for builders? Check. Government "nationalization" of the mortgage origination market(Fannie, Freddie, FHA with 95% market share)? Check. What did all of this get us? Take a look! Here's the Case-Shiller Index of National Housing Prices for 1Q 2010. See the little bump in the graph for a few months? Is that all? Yep.



Sure looks like more declines ahead. Housing as an investment? Nah.

UPDATE 6/4/10: "Credits just shifted demand forward. Price gains not sustainable- Fannie Mae Economist." Story here.

Guess I'm not the only one who thinks so.

That Great "Investment": Housing

Ah, a blast from the past. The cover from the National Association of Realtors chief economist David Lereah's book.

Readers know that I am on a bit of a rant here. Too many people were sucked into the "housing is always a great investment" shtick at the worst of all times. We've already shown what the 100+ year returns from housing have been. The low natural returns didn't prevent one of the biggest bubbles EVER from being blown or its natural aftermath. (You do know that all bubbles collapse, don't you?)

Well, here's the latest data point. The number of "underwater" mortgages continues to climb. "Underwater" is another way of saying that you owe more on the property than it is worth in the marketplace. From the Wall Street Journal:

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

Negative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job." Borrowers who owe more than 120% of their home's value, he said, were more likely to default.

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay -- more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. "The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that," the study said.

Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.

Many borrowers are so deeply under water that they can't take advantage of lower rates and refinance their mortgage. "We're declining hundreds of loans each month," said Steve Walsh, a mortgage broker in Scottsdale, Ariz. "The only way we will make headway is if we allow for a streamlined refinance where the appraisal is irrelevant."

Did everyone catch that? Eleven percent of owners who bought IN 2009 are already underwater. The housing bust is not over. On a national level more declines are coming, a view shared by Ivy Zelman, one of the more prescient experts on the housing crisis. If you are lucky enough to live in selected areas, house prices may be stable to slightly increasing. But for the rest of the country great care must be taken in purchasing a home.

The government is throwing ALL KINDS of stimulus at this. From artificially lowering the cost of mortgages to goosing demand through tax credits for first time (and now long time) buyers. It has had the effect of TEMPORARILY stabilizing the rate of descent. That is all. We are likely to see very poor data come out in this area from now until the spring 2010 selling season.

"Invest" at your own risk.

More Stimulus: The New Homebuyer Tax Credit

When George Washington threw the dollar across the Rappahannock River, he didn't realize he was establishing a precedent for government spending.

-Harold Coffin, "The San Francisco Examiner"


Quick Summary of the First-Time Homebuyer Credit

For 2008: up to $7,500, the credit is paid back over 15 years.

For Jan - Nov 2009: up to $8,000, the credit does not need to be paid back.

For Dec 2009 - April 2010: up to $8,000 for first-time buyers, the credit does not need to be paid back.

For Nov 7, 2009 - April 2010: up to $6,500 for "long-term residents" buying a new home, the credit does not need to be paid back.

Until April 30, 2011: homebuyer credit continues to be available for qualified members of the U.S. uniformed services.

Dollar Amounts of the Homebuyer Tax Credit

The tax credit is worth 10% of the purchase price of the home. For 2008, the maximum credit is $7,500 ($3,750 for married couples filing separate returns). The credit is also limited to the same $7,500 maximum for unmarried persons who purchase a residence together.

For 2009 and 2010, the maximum credit is $8,000 (or $4,000 for married couples filing separately).

Long-term residents purchasing a new home have a lower maximum credit of $6,500, or $3,250 for married couples filing separate returns.

Limit based on Maximum Purchase Price

No tax credit is allowed if the purchase price of the home exceeds $800,000. There's no phase-out or gradual reduction of the credit.

Qualifying as a First-Time Homebuyer

For the purpose of this tax credit, a first-time homebuyer is defined as someone who has not owned a primary residence in the three-year period ending on the date of purchasing the home. Married couples are considered first-time buyers if neither spouse has owned a residence in the previous three years.

Qualifying as a Long-Term Resident Homebuyer

People who already own a home can qualify for the tax credit if they buy another home. The qualify, individuals needs to have owned and lived in their residence for at least five consecutive years in the eight-year period that ends on the purchase date of the new property.

Limited Time Period for Purchasing a Residence

The credit has a very limited life-span. Individuals will need to purchase a residence after April 9, 2008, and before May 1, 2010. Qualified service-members must purchase a residence before May 1, 2011.

Income Phase-out Range

The credit is phased out for individuals with modified adjusted gross income between $75,000 and $95,000. For married couples filing a joint return, the phase out range is $150,000 to $170,000. Effective Nov 6, 2009, the phase out ranges start at $125,000, or $225,000 for married couples.

Modified AGI for the First-Time Homebuyer Credit

To determine if the tax credit is reduced or eliminated by the income phase-out range, individuals will need to determine their modified adjusted gross income.(Excerpted from About.com)

There's more. (Isn't there always?) The IRS announcement of the expanded credit can be found here.

Form 5405, the tax form to claim the first-time homebuyer credit can be found here.

"Real" Home Price Index

A little graphical followup to my previous article about housing as an investment. This from Case-Shiller, their Real Home Price Index from 1890-2009.



A bit above a mean of zero return, a bit below, then BOOM! the Great Housing Bubble and subsequent crash. Going nowhere but in an interesting way.

Housing As An Investment: Responses

A party has pointed out- smugly I may add- that his father was quite successful buying houses in need of repair, fixing them up, and reselling them for profit. Surely I was wrong in thinking that houses could not be investments?

Answer: Your father owned a small business. The inventory for that business was old stock housing. Through a business process he altered the characteristics of the inventory to reach a finished product. Re-manufactured them if you will. He was not relying on the original state of the house itself to provide a return. He was using it as an input. The return came from his process, labor and skills. All the characteristics of a business venture.

Next, someone asked about the common practice in 2004-2006 to buy and flip houses. These people made LOTS of money she points out. Surely those were investments?

Alas I have to disagree. While such an activity bears some relation to investing as discussed in the article, what these people were doing was "speculating". They were traders, much as people left good dependable jobs in the late 90's to trade stocks online at their kitchen tables, these people used Deeds and other ownership interests to entice a "greater fool" to take the piece of paper off their hands for a higher price in a rising market. That is not "investing". Money was made, surely. Buckets of it by some. But it was not investing.

My point in the article is not that no one ever makes any money through house ownership. Some people surely do. In fact, *I* have made money buying dilapidated housing, fixing it and reselling it. That activity paid off all my wife's student loans and got us debt free early in our lives. But that activity was not investing and the notion of houses as "an investment" is just wrong thinking in my opinion.

Housing As An Investment?

I have always been amazed at the notion that a person's or family's home was being bought "as an investment". I hope that recent events have forever disabused anyone in my generation from ever expressing such an inanity again. Homes are bought to provide shelter ("shelter services" as some economists refer to it), perhaps for comfort, or even vanity. But as an investment? No!

Back in 2007, near the top of the bubble, Robert Shiller, the economist from Yale and co-inventor of the Case-Shiller Housing Index was asked about the notion. He found it equally perplexing. From 1890-1990, he said, the return from residential real estate in the U.S. was nearly flat after inflation, showing appreciation of approximately 3% per year. From 1997-2007, he conceded, the pace had quickened, averaging a 6% gain per annum. Not to worry though, housing was about to revert to the mean he added. But he cautioned that wasn't a prediction, but a cool analysis of the historical record.

He should have called it a prediction.

From the blog Calculated Risk, the following:


This graph shows the price to rent ratio (Q1 1997 = 1.0) for the Case-Shiller national Home Price Index. For rents, the national Owners' Equivalent Rent from the BLS is used.

Looking at the price-to-rent ratio based on the Case-Shiller index, the adjustment in the price-to-rent ratio is maybe 85% complete as of Q1 2009 on a national basis. This ratio will probably continue to decline.






This graph is based off the Case-Shiller national index, and the Census Bureau's median income Historical Income Tables - Households (and an estimate of 2% increase in household median income for 2008 and flat for 2009).

Using national median income and house prices provides a gross overview of price-to-income (it would be better to do this analysis on a local area). However this does shows that the price-to-income is still too high, and that this ratio needs to fall another 10% or so. A further decline in this ratio could be a combination of falling house prices and/or rising nominal incomes.


The reversion toward the mean has been swift and brutal. Having reached bubbly heights, the tendency of all asset classes to revert-- in this case housing-- has held true. It is still falling despite any talk you hear about "stabilization" or "green shoots".

Housing as "an investment"? Take T-Bills/Notes any day.