Free House! (with qualifying land purchase)

Buy the Land . . . Get the House for Free

Benjamin Graham, the father of value investing, famously recommended buying stocks that trade at a discount to the company's underlying "book value" (basically, assets minus liabilities).

His rationale was that a company's book value established a floor under its stock price: even if the company's business went away, investors' share in the company's net assets would make them whole (if not a profit).

In the housing market, an analogous approach would be to buy homes selling for less than the value of the land they sit on. Even if the home is assigned a value of zero, in theory the value of the land literally puts a floor under the owner's investment.

Today, it's possible to find hundreds of Twin Cities homes selling for less than their "book value" -- that is, the tax-assessed value of the land underneath them.

However, before you rush out to buy one of them, two caveats:

One. A lot with a house on it is not the same as an empty, buildable lot. Transforming the former into the latter can easily cost $20,000 in demolition, permits, etc.

Two. Who's going to buy the lot? In a healthier market, demand would come from both developers, who would put up "spec" housing ("build it and they will come"), or, owner-occupants who wanted new construction.

In a recession, neither group is very active.

Nov. - Dec. Housing Statistics

Foreclosures Explain Latest
Housing Price Drop

The most recent batch of housing statistics -- from S&P/Case-Shiller and NAR -- show that housing prices are continuing to fall nationally. Depending on how you slice and dice the market (sale pairs, top 20 markets vs. all markets, all homes vs. those under $417k, etc.), the year-over-year annual decline ranged from 13% to 18%. Nationally, the cumulative decline from the 2006 peak now is about 25%.

As a boots-on-the-ground realtor, mostly what I'm seeing is that the activity is at the low end of the market, specifically in foreclosures. Locally, lender-mediated transactions (foreclosures and short sales) now account for a staggering 40% of Twin Cities housing transactions.

What market-wide statistics obscure is that there's a disconnect in the pricing of foreclosures, and "traditional" sales.

Depending on the condition, foreclosed properties can sell for discounts of as much as 50%-75% from what they'd fetch in "mint," move-in condition. On top of run-of-the mill neglect and dated features, many foreclosed homes have freeze damage (busted pipes and radiators), no functioning heat, numerous code violations, and a trail of tax and third party liens. It's also the case that they are overwhelmingly concentrated in what were already lower-priced neighborhoods to begin with.

Compounding matters further (if that's possible), most banks won't lend on condemned homes (automatic with no heat). That means that prospective Buyers must hunt for a bank that will, or pay cash. Then, they must figure out how to finance all the aforementioned repairs and updates.

When everything is said and done, the home's purchase price can be little more than a down payment on all the post-closing expenses to come.

How much of a discount would you need to take on such a project??

At this point in the downturn, more and more transactions meeting the foregoing description are being mixed into -- and driving -- the housing statistics regularly being reported by the media.

If you separated the foreclosure sales from the non-foreclosure sales, you'd undoubtedly find that the former dropped much more than 17%, while the latter dropped much less.

P.S.: I discuss the "bifurcated market" phenomenon more fully in two other posts, "Housing's Wal-Mart Effect" and "A Tale of Two Markets."

Record "Housing Affordability"

Has Housing Hit Bottom?
Key Metric Says "Maybe"

Falling prices plus low interest rates equals improved housing affordability, right? Maybe. Even if it does, however, Buyers may be too gun-shy at the moment for that to matter.

According to the four local realtor associations, the Twin Cities' Housing Affordability Index ("HAI") is now at 192, the highest number since the statistic was first tracked in 1990.

What that means is the median family income in the Twin Cities is 192% of the income needed to qualify for the median priced home, using a 20% down payment and 30-year fixed mortgage.

By contrast, that number fell to as low as 120% in mid-2006. Not coincidentally, mid-2006 was very close to the peak of the housing bubble.

Watch the Numerator

So is a record-high HAI now signaling that the housing market is close to a bottom?

It depends on the wild card in the equation: Buyers' income.

In a recession, unemployment rises, and wages typically stagnate or fall. I don't compile the HAI statistics, but you'd guess that the income component of the HAI is a lagging number, and is now likely weakening along with the overall housing market.

So some consumer skepticism may be warranted.

Of course, prospective home buyers are not just backward looking, but forward-looking, too.

For now, people who are watching home prices fall and who are worried about losing their jobs clearly are listening to what their gut tells them, not their brain (and certainly not their realtor!).

Recession Hits Housing Prices

Oct. Case-Shiller Numbers:
Down 18% from '07

“People who think they’re going to lose their job don’t buy a home”
--Steven Ricchiuto, chief economist at Mizuho Securities; NY Times (12/30/08)

There's not much mystery about the most recent leg down in the national housing market: recessions destroy jobs, and people who are unemployed -- or worry they may soon be -- don't make major purchases.

For most people, there's no bigger financial commitment than buying a home.