Buying a Home: Is Now a Good Time?

Not Following the Herd

Be fearful when others are confident and confident when others are fearful.

--Warren Buffett

Of all Buffett's quotes, the one above might be the most popular; it's certainly the most cited the last 2-3 years (and was quoted frequently by Ben Stein at Edina's annual meeting Wednesday).

So, is now a good time to buy a home?

No one really knows for sure.

Instead, ask yourself: 'is the prevailing mood more optimistic or pessimistic?

That one, at least, is an easier call.

As every investor, from Buffett to Ben Graham to George Soros on down knows, there are more and better investing opportunities in a cautious, "cool" market than a hot one (unless you're shorting).

Jeremy Grantham on Market Timing

"Waiting for the Light"

"Be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before."

--Jeremy Grantham, "Reinvesting When Terrified"; (March 2009 Newsletter)

Grantham, who manages $85 billion and is one of the most astute investors around, was actually talking about stocks, but his advice is equally applicable to the housing market.

In the same piece, he also makes two other indisputable points: 1) you'll never catch the low -- by the time it's clear that that has happened, prices will already be higher; and 2) market commentary will be most negative at the bottom. So if you listen to it, you'll either do the wrong thing, or nothing at all.

Interestingly, he rejects conventional wisdom about how to get (back) into a market that has fallen dramatically and still looks risky: 'Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones.'

Prospective home buyers will definitely relate . . .

Waiting for Cheap Housing . . . Since 1997

Timing the Housing Market

As John Maynard Keynes famously observed, "the market can stay irrational longer than you can stay solvent."

Or, in the case of housing the last decade-plus: 'stay above trend line longer than you can stay in a rental.'

Citing the charts reproduced at right, commentators like Barron's Alan Abelson make the point that, despite housing's 25% fall nationally from the 2006 peak, it's still well above historical trend lines.

The obvious implication is, don't rush (back) into the housing market just yet.

The only problem with that advice is that anyone concerned about historical valuations would have been relegated to the sidelines years ago.

Housing prices as a percentage of rent have been above trend line since at least 1998; as a percentage of median family income, since 2001. Some economists might even argue that the latter ratio has been above the long-term trend line since the late '70's!

That's a long time to stay in your in-laws' basement (or a cramped house you bought before you had kids).

In fact, despite the widespread pain in housing since 2006, anyone who bought in 2000 would still be up 30%. That compares with a 50% drop in equities since then. To paraphrase Churchill's line about democracy, "housing is a terrible investment . . except for all the others."

Housing's Benefits

Of course, anyone who's owned their home for almost a decade would likely have amortized a nice chunk of principal by now, and also have benefited from the tax deductions associated with paying mortgage interest.

Meanwhile, anyone selling with a gain up to $500k ($250k for singles) would have escaped paying capital gains taxes, thanks to housing's favored tax treatment.

But most importantly, anyone who bought a home in 2000 . . . would have enjoyed living in their own home since 2000.

As a Realtor with an economics background, my biggest criticism of the much-cited housing price/rent ratio is the underlying assumption that the rental and purchase markets are, if not interchangeable, at least close substitutes.

That may be true in some markets, but not in the one I work in, the Twin Cities.

In general, rental homes here are located in less desirable neighborhoods, are in worse condition, and have fewer amenities, than homes listed for sale. That's especially true as a soft market swells the number of rentals: "involuntary" landlords who can't attract a buyer -- or can't afford to sell their homes because they're underwater -- frequently lack the time and money to keep up their rental properties.

Unlike, say, Manhattan, in the Midwest owning your own home is as much as lifestyle decision as it is an economic or financial one.

It's one thing to jump into (or out of) stocks based on historical valuations.

Doing that with your family, and disrupting your kids' friendships, schooling, etc. is a sacrifice most people aren't willing to make.

Market Timing: Sell or Rent?

Perils of Waiting for the Market to Come Back

People assume when [the sale market] slows down, rental will pick up, but that depends . . . When you're losing jobs, the rental market is also going to suffer.

--"A Month Free? Rents are Falling Fast"; The New York Times (1/30/2009)

Although the story focuses on rapidly falling rents in still-expensive Manhattan, it could easily be a cautionary tale for home sellers anywhere in the country. Just as it is difficult to tell when housing prices are close to a peak, it's also difficult to tell when they've bottomed.

More than one would-be Seller locally noted weakening prices the last two years and decided to pass until conditions improved. They either stayed put, if their circumstances allowed, or found a renter, if their circumstances didn't.

Fast forward one year (or two). On average, Twin Cities home prices are now about 15% lower than a year ago. A recession is gaining momentum, and with, it job losses are accelerating. Neither development is a particularly good omen for home -- or rental -- prices.

Hindsight is 20-20, but in retrospect someone who decided to rent a year ago rather than sell is decidedly worse off now. Assuming that they owned a $300,000 house and were able to rent it for $1,500 a month, they would have collected $18,000 in rent -- and lost almost $50,000 in market value.

Of course, in the interim they would also have had to pay property taxes and home insurance, arranged for property management, and accepted the typical wear-and-tear associated with renting.

So where does the market go from here?

I don't know -- and neither does anyone else. But anyone convinced that they're better off waiting to sell should double-check their assumptions.