The S&P/Case Shiller® composite index for the month of November was released today.
The Reuters headline is that prices dropped unexpectedly.
"'Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall. Weakness was seen as 19 of 20 cities saw average home prices decline in November over October,' says David M. Blitzer, Chairman of the Index Committee at S&P Indices. 'The only positive for the month was Phoenix, one of the hardest hit in recent years. Annual rates were little better as 18 cities and both Composites were negative. Nationally, home prices are lower than a year ago. The 10-City Composite was down 3.6% and the 20-City was down 3.7% compared to November 2010. The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.'"
43 comments:
It looks like DC is down 1.1% and CS also slightly lowered the previous couple of months like usual. Prices are still roughly flat from a year ago and it still looks like we are in the muddle around for many years like myself and many others suggested was going to be the case in late 2009.
Cheap properties were down 3.5%, mid were down 0.7% and high were down 0.4%
What are your thoughts on changing a raised rambler floor plan to a colonial by moving the kitchen to the first level. When you walk in the door there it appears to be just like a colonial, except the kitchen it currently on the second floor. I don't like that, but the price may be better than right including reno costs...
Just looking for comments, thoughts and reasoning as to why or why not.
As I said yesterday:
“Despite continued low interest rates and better real GDP growth in the fourth quarter, home prices continue to fall,” David Blitzer, chairman of the S&P index committee, said in a statement. “The trend is down and there are few, if any, signs in the numbers that a turning point is close at hand.”
The index is off more than 30% from the top.
Reality is this: Housing is not an investment. It is a durable consumer good.
Home prices continue to fall, yes, but is it just that lower priced homes are only coming on the market? Inventory is down and perhaps that can be related to the average price of homes decreasing too?
wunderbar-
That is somewhat unlikely. The CS index tries to take into account differences between houses. It is not just looking at the average price. So even if the mix of housing is switching to cheaper housing that should not impact the index.
The only way mix matters is if for some reason the houses that sell have become run down or damaged, because the index does not adjust for this.
The bigger thing is that prices in this area are close enough to flat that over the last couple of years that you may as well think of the price as flat. This is probably a good thing as inflation can slowly bring down real prices to get them closer historical averages.
Thanks for explaining that! I had always wondered and glad to read they try to compensate for that.
Any comments on changing a raised rambler to a colonial?
I am not that into the design of houses. I generally let my wife pick out everything and don't have much of an opinion. I would think there are a couple of people on here who would have a better idea. I think in general Ace knows a decent amount about construction costs and the advantages of different styles of houses.
Thanks, HB, I at least know the retail-level costs of some things. VA_I may want to chime in too, as she has a lot of experience with a contractor who has reno'd her investment properties.
IMHO, I do not think that simply moving the kitchen will significantly change the way that prospective buyers view a raised rambler vs. a colonial. I assume you mean a bilevel--to me, the raised rambler is one where everything is on one floor but the "basement" is largely above ground. But maybe I am using that term incorrectly.
If the house has the split steps (bilevel) in the entry, it will still feel like a bilevel. If instead the entry has an entire floor of steps leading to the upstairs, and on the entry level there currently is a rec room, maybe a bedroom, and a laundry and bath, then moving the kitchen downstairs might make more of a difference, but I suspect that it would still seem like an odd layout to someone who wants a colonial-style layout with a kitchen, dining room, and more on the first floor. Maybe it would depend on the house, and how much space and light is on the lower floor. If there is a lot of both, I would factor in costs of reconfiguring more than just a kitchen. If there isn't much of either I would say moving the kitchen is definitely is not worth doing, if your concern is with how others would value it.
As others have said, if you are buying the house for yourself rather than for flipping or resale within a short time, then it really is up to you.
HB,
"IMHO, I do not think that simply moving the kitchen will significantly change the way that prospective buyers view a raised rambler vs. a colonial. I assume you mean a bilevel--to me, the raised rambler is one where everything is on one floor but the "basement" is largely above ground. But maybe I am using that term incorrectly."
The home is a true raised rambler, they really should have just either made it a one floor ranch or a colonial because the "basement" that is above ground is fully above ground. The changes would be to please me, the prospective buyer.
Current floor plan has you walk in on the first floor (which is the basement in a raised rambler). On the first floor there is a long room with a fireplace to the right of the entrace. To the left of the entrance is a room that could be an office/den type space. There is a closet right as you walk in about 10 feet from the door and to the right of that are the stairs to the second floor. on the back half of the house (which is a big rectangle), there is a room behind the library with sliding doors going out to the paito. Next to that is a bathroom with sink in the hallway (very awkward) then closets all arranged wierd and the utility area and more closets followed by a room that is perhaps 12 x 12. That is basically the entire first floor.
When you go up the stairs, directly to the right is a living room and that walks into a dining room. at the top of the stairs is the kitchen, which is a VERY LONG room that has double doors going out to the second floor patio and eat in area. Directly at the top of the stairs is a bathroom at the beginning of the hallway to the left. There are 3 bedrooms on that half of the house with another bathroom.
Basically, we would want to move the kitchen downstairs and create a master bedroom/bathroom in that current area. Turn the second floor dining room into a fifth bedroom/office and keep the living space.
The first floor would have the area in the back half of the house refigured with a kitchen, laundry room, utility room and completely redo/move the bathroom.
I hope that makes sense to explain the details of the home. It is approx $150k less than prices we are looking at so a reno would be fine with us (plus it's like getting everything new).
and so I babble, hopefully not too much...
Essentially, we want to turn it into a colonial floorplan where living space is on the first floor and bedrooms are on the second.
DC never goes down.
Just ask Contrarian.
HB Says
"
The bigger thing is that prices in this area are close enough to flat that over the last couple of years that you may as well think of the price as flat. This is probably a good thing as inflation can slowly bring down real prices to get them closer historical averages."
I'm sure Anon can show you how the optimal time to buy was March 09 and the index tells all.
sehrwunderbar,
I agree with everything Ace said.
However, if you are saying that the basement is fully above ground from all four sides of the house (backyard, front yard and side yards) you could potentially convert it to a colonial without a basement.
You will need to change also the facade to resemble a colonial, since now you will not need outer stairs coming into the second floor. You probably want to have a redesign of the facade so it looks nice.
In terms of resale value, some people who buy colonials still want to have a basement. So it would probably have more value (particularly since you are doing everything new and may have space to add more rooms upstairs, but not comparable to a house with three levels. Think about space for storing things if needed.
sehrwunderbar,
If the difference in price between this house and a true three-level colonial is $150K, I would be careful about it. I think the redesign could cost you up to $100K, particulary with the redesign of facade, and maybe side and back elevations. I would also try to keep a bathroom, or at least half bath, on that first floor level.
The new house would not have a basement so the resale value would be lower compared to other colonials with new kitchens.
You want the floor plan to resemble other colonials as much as possible, otherwise the house would be kind of odd. By that, I mean have a living room, family room, dining room, kitchen and half bath at least on that first floor (if that is the floor plan of colonials in that neighborhood).
Also consider if other true colonials have a two-car garage. If you do not have it, it can cost $50k to add a two-car garage.
Without costing it out, is difficult to tell. Granted you do not have to do everything at the same time.
Thanks for the info. From the outside, the home looks exactly like a colonial and the entrance is on the first floor. I thought it was a colonial until we went in and noticed the difference in floorplan. The outside facade would not have to be changed at all because the first floor (basement) is completely above ground.
I just don't understand why they built it that way to begin with, they should have built either a ranch or a colonial. But yeah, we just got a total ballpark estimate from a contractor and looks like it'd cost $67kish to completely do what we'd want. But that includes $8k to repaint the whole house and my DH and uncle could do that, lol, but it's nice to have that figure to see an estimate. The area has a huge array of floorplans.
This is a foreclosure which is why we're considering it, it's such a cheap home that adding that much to reno it still keeps us $100kish below what we were going to spend on a comparable home in another area.
I sent our estimate to our realtor to see what he thinks. AT least this is a good exercise on seeing reno costs.
Oh and it already has an attached 2 car garage, so that's a plus.
so the Index is back to 2004 pricing.
I guess the median buyer has been
without appreciation for 7 years.
Pat,
The 2004 median buyer had tremendous appreciation for the first 2 years of their ownership. If they sold, they made a killing.
Meanwhile, the patient median buyer that waited until March of 2009 saw prices come down approximately 33% (below even what the 2004 median buyer paid) and has seen their value slowly climb or move sideways.
In my opinion, the 2009 buyer was buying into a less risky situation than the 2004 buyer.
My $0.02
Hasn't the 2004 median buyer also saved money because they weren't renting for those 5 years?
DC2, back atcha--I agree with all of your additional comments.
Sehr, one other consideration is whether the $100K (because of the additional changes DC2 described, and because big reno's on older homes usually cost more than the estimates, due to unforeseeable problems, changes, etc.), and no basement, would then price the home above the neighborhood? Or is the list price now $150K below the average comparable's price?
Ace,
The home is priced approx $100k below area comps. It would take perhaps $67kish to do what we want to the house and would be considered almost a complete renovation. Due to the now cheap price, I believe that reno costs would be worth it due to the comp price points.
I also think that there is more demand for colonial floorplans. This house already looks like a colonial from the outside except the darn kitchen is on the second floor. The only thing is it would be a 2 level colonial with no basement. But it has such massive sq ft now (around 3k) that I don't think that matters as much as if it had been 2k or lower sq ft.
We would be moving the kitchen downstairs, creating a laundry room, pantry, redoing all bathrooms (3), and bringing it to be 5 bedrooms instead of 4. All without changing outside looks or facade. All the work needed is on the inside.
I am iffy about the whole thing because it's not my desired location, but my husband loves the place and is ok with the extra 15 minutes commute (bringing him to about an hour each way commute). Even after reno the price would be $50-$100k below the price range we were looking to buy anyways.
But I've never dealt with renovations before (my husband once owned a HUD house that he redid, even the roof completely himself, so I know he's into that).
sehrwunderbahr
What is the moral difference between renting a house and renting money to buy a house, that you later sell?
sehr, thanks, but as I said, if a contractor gave you a ball park estimate of $67K, just for changes you thought were obviously needed, count on the actual cost being substantially higher than that.
If it were up to me, I would not do it, given everything you've said and the availability of other places requiring significantly less change. Reno on a large scale also is a large hassle. But I'm not you, and I realize YMMV.
Pat,
I know you did not direct the coment to me, but you have to look at the interest payment, minus the deduction, to compare if the rent for a comparable place would have been higher or lower than what you are paying in interest.
So, regarding if there is a difference between rent and mortgage, yes there is. Not to mention rents go up generally speaking while the interest payment goes down.
The point of my answer is that you cannot make a blanket assumptoin that all rents are cheaper than the interest (minus deductions) you would pay on a property you buy (when both properties are comparable). The principal of course is like savings, and in a market with price appreciation, those savings are also appreciating in dollar value.
dc2,
I would argue that property tax almost offsets the money the mortgage interest deduction saves you. Add in general maintenance costs and renting the house seems like it would be cheaper than renting the money to buy it.
Jeremy,
That is very likely, particluarly in pricier neighborhoods. But there are other neigbhorhoods where it may still be cheaper to buy.
VA investor bought a lot of properties where she can get a good rental income to more than offset her investment. You have to run the numbers.
Also consider, the first few years the rent may not cover your entire morgage (principal and interest), but because rents go up, eventually it will cover it. So if you plan to be in the property for a long time, you will come ahead eventually.
Again we are talking about comparable properties.
Jeremy,
State property taxes are also deductible on a federal return. So for the purpose of this discussion it simply adds up with the interest paid.
My $0.02
mytwocents,
Just because you can deduct for example $5000 property tax paid and get very roughly $1500 benefit back in a tax refund doesn't offset the fact that you still paid $3500 that a renter didn't.
What I'm trying to point out is in the example Pat posted with zero appreciation from 2004-09 that renting the house would have been cheaper than renting the money. Assuming Rent+Renter's Insurance is somewhat less than Principal+Interest+Taxes+Insurance+Maintenance - (Taxes*YourTaxRate + Interest*YourTaxRate) then the renter is ahead by whatever that difference is times 84 months PLUS whatever return he has earned on his down payment in the mean time.
Now someone will undoubtedly say, "but the buyer would be 7 years into their 30 year amortization schedule." True, but the renter should now have more than those 7 years of payments in the bank from their savings and would end up with a smaller loan and pay less in interest over the life of the loan. They could probably swing a 20 year loan with a better interest rate since their down payment was so much bigger than the buyer in 2004.
Of course there are other reasons to buy. We bought because we wanted time to get everything settled with the house (paint, new furniture, etc) before having a baby. Many people buy just because that is what you are "supposed to do."
Jeremy-
I agree about the 04-09 period because rents were clearly cheaper. I am not sure that is the case or at least it is very close.
I live in a brand new TH that is 2400 sq. ft. including a garage ~2K without it that is 0.4 miles from the metro. I don't know what the rent would be, but my 1k sq. ft. apartment was 2k, so I assume this play would be ~3k. My total payment principal, interest, insurance, taxes, and HOA is 2,900 (1K goes to principal and 1,700 goes to taxes so I get just under 600 back). Basically the entire house is covered by the home builders warranty for 5-10 years so there is very little maintenance cost.
With these numbers you need to assume some mix of ~3% a year depreciation for 5 years or the person was earning ~15% a year on a 20% downpayment. Both of those may happen for a year or two but are very unlikely to continue for 5 years.
Jeremy-
Also one more caveat. If we are choosing 04-09 to be the time frame we are looking at then you should assume the renter earned nothing on their DP. The 5 year treasury was at ~3% so they would have made 15% on their bonds and the stock market fell ~30% (although only 20% after dividends). So assuming they had some reasonable mix of the two they would have ended up roughly flat from 04-09.
Jeremy,
It's very common for people to want to own when children come along. It's both psychological and practical. Unless you rent in a "complex", there is always the chance that the LL will sell and a tenant would be uprooted.
People who rent in complexes tend to be transient (although some do stay for years). Right or wrong, there is a personal satisfaction in owning a home that can't be quantified. There are also the practical - painting, gardening, adding a deck or putting in a new kitchen.
I have no doubt that rents will exceed costs of ownership at some point. I don't know when but I can certainly guarantee that this will occur long before the house is paid-off.
Jeremy,
Kind of obvious but, you're assuming that the renter is paying less. That's not always the case. It's also sort of the point that Anon has been trying to get Pat to admit. At some point, with rent and home prices inexorably creeping higher, there comes a point when it makes sense to buy.
My $0.02
Well I was trying to limit the scope to the 2004-09 time frame Pat brought up, where the assumption was that home prices didn't creep up since Case-Schiller is back at the 2004 number.
As for renting a comparable place costing more than buying it, that has to be the exception rather than the rule. Maybe it occurs more frequently than I expect in condos/townhouses - I never shopped those. I still contend that given the absence of home price appreciation a renter who saves the extra money would have more money in the bank at the end of the 2004-09 time frame than the buyer had equity in their home.
Jeremy-
I think high end houses are generally cheaper to rent than buy, for most places particularly not in expensive areas of the country renting is more expensive than buying
Re: the difference between the 2004 vs the 2009 buyer, the main difference is...
The 2009 buyer is 2 years in to his 30 year term of renting money...28 years to go until finally free...
The 2004 buyer is 7 years in to his 30 year term of renting money...23 years to go until he is finally free...
Pat said...I'm sure Anon can show you how the optimal time to buy was March 09 and the index tells all."
Out of curiosity, are you planning on charging me rent for allowing me to live in your head like this?
Anon,
I plainly stated above how the 2009 buyer should have a bigger down payment from all the money saved while renting. So the 2009 buyer's down payment would result in more equity than the 2004 buyer has managed to gain (due to all the interest they've been paying renting money and other home ownership costs). The 2009 buyer would have the option of taking a 15-20 year mortgage with the same monthly payment and a better interest rate than the 2004 buyer, and be closer to freedom as a result.
HB said...
I think high end houses are generally cheaper to rent than buy...
HB,
I think most all SFH in the NoVA area would count as "high end" because of the obnoxious prices here. Since Pat did specify the median buyer, that very well could be a condo/TH in Arlington/DC. I am too lazy to look that up right now.
Cheryl says
"painting, gardening, adding a deck or putting in a new kitchen."
nothing prevents a renter from Painting, gardening, adding a deck, or putting in a new kitchen.
The tentant downstairs repainted 2 times in 4 years and the day she moved out, she painted the walls white.
I put in a organic garden last year.
i've known other tenants who put in track lighting or redid the kitchen appliances.
depends upon how good of a deal you have on your rent.
And Anon is now playing amateur psychologist. Just goes to prove some government workers are just time fillers.
Jeremy-
I agree around here there are many if not most places that cost more to buy than rent. I just figured I would make it clear that this is abnormal for the country.
I don't know that it is reasonable to use the 2004-2009 time period as a "standard" to determine the rent/buy winner. In addition to the "timing" aspect, some here were renting places that clearly were not apples to apples.
If you rented a lesser house, I don't think it's reasonable to declare huge savings by not buying your end home until now. I also don't think that peak prices were a reasonable time to buy. It may have been luck (priced out) or an educated assessment of the market - only the buyer knows. I wasn't buying from 2003-2008.
I didn't anticipate rates dropping this low. I knew a correction in prices was coming, but I thought that in 2003. I couldn't believe that this went into 2005. I saw an over-correction coming in some hard hit areas and stepped back in when the "numbers" looked good. In many cases those properties are up 30-40% off bottom.
I don't consider my home an investment. I hope it keeps up with inflation. I believe that I could rent it with a positive CF, eventhough I just did a cash-out refi and owe more than I paid.
I would never rent out my home unless I had to. People that rent large homes tend to be relocatee's that will buy in a year or two. Turnover is a killer, particularly in a large house.
From what I am seeing, investor's are snapping up anything under 200K for rentals and flips up to 400 or 500K. I try not to go over 200K on a rental. I have 20 rentals now and am only looking for flips.
I don't care too much if we stagnate for 5 yrs or so (ala 1990's) as my rentals are on a 12yr am.
Closed yesterday on my latest flip. My price 154K. Comps 215K.
Nice 2 level condo built in 1998. Anticipated fix-up is 10K or less. I have to hold it 90 days due to a deed restriction imposed by the short-sale bank. I'll update when it goes on the market. Not a homerun, but I hope to net 25-30K.
"Jeremy said...So the 2009 buyer's down payment would result in more equity than the 2004 buyer has managed to gain (due to all the interest they've been paying renting money and other home ownership costs)."
Thats fine. Just note, by that same line of argument, the 2014 buyer would have a 15 year mortgage and the 2031 buyer would pay cash (or whatever, you get the idea).
The only assumption I am making when making these arguments, is one is either "ready" to buy, or they are not. You can define being ready however you want. For some that is 5% down. For others its 50% down and 100K cash reserve...whatever floats your boat. Thus if one was "ready" in 2004, they are in the same position (pricewise) as they are in 09, albeit with 5 years of unnecessary rent in the interim.
Now, could they be "more ready" by waiting another 5 years? I suppose so. Yet, I would argue that if thats the case, they really werent "ready" 5 years prior.
Again, and I cannot stress this strongly enough. If you are not yet "ready" (however one defines it, and for most here, thats pretty conservatively), it is good to rent as long as it takes to make oneself "ready".
Also, if you are over a certain age, given the large rent/price differential in this area, I think its a good idea to rent perhaps for the rest of ones life.
That said, if one is truly (and I mean truly as in 100% ready) to buy in 2004, he has absolutely gained an advantage over the 2009 buyer in that 5 years (roughly 10 % of his adult life) was spent in the (persumably) optimal living situation over his former situation of renting (otherwise he would not have bought in the first place).
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