Housing is inexpensive and should be attractive to legitimate buyers
Break out the calculators. It's time once again to start crunching the numbers on residential real estate. And I am not talking about the absurd approach of a few years ago when virtually anyone with a pulse could jump into the buying-and-selling craze.
This time around, it will have to be about a reversion to the norm, which means if you can't hold the property for at least five years, don't even bother.
The bottom line is, by virtually every measure, housing is inexpensive and should be attractive to legitimate buyers.
There are reasons to believe that various housing markets around the country could start to experience respectable recoveries with just the slightest nudge from buyers.
According to a new report from JPMorgan Chase & Co., from the peak in 2005, nationwide existing single-family home prices have fallen by 29% in nominal terms and by 37% relative to inflation.
Also, since the first quarter of 2006, the total value of home equity has fallen by 54% to $6.2 trillion, from $13.5 trillion.
In the 49-year period between 1959 and 2008, the lowest annualized rate of housing starts recorded for any month was 798,000, and the average rate was more than 1.5 million.
But according to the JPMorgan report, since January 2009, the highest rate recorded for any month has been 687,000, and the average has been 575,000 housing starts.
PENT-UP DEMAND
This adds up to pent-up demand across the housing market spectrum, according to David Kelly, chief market strategist of J.P. Morgan Funds.
“It's a great time to buy and invest in housing, and as housing comes back, it will give a great boost to the economy,” he said, emphasizing the virtuous cycle that could move rather quickly once it starts gaining momentum. “At these levels, we don't need a lot of people to buy into it initially; we just need a few to get it started.”
Mr. Kelly isn't so much advocating patriotic buying to help the economy as he is encouraging interested buyers to take action ahead of what could be shifting dynamics in the housing market.
“It's similar to what is already happening in the auto industry, where nobody really feels good about it, but people are buying cars because of pent-up demand,” he said.
Although it is impossible to say that the housing market is recovering, some pockets are already seeing signs of new life.
“Here in Birmingham [Mich.], houses are selling in two or three weeks and sometimes with pretty good offers,” said Bert Whitehead, president of Cambridge Connection Inc.
“We're advising clients to take another look at real estate,” he said. “But because all real estate is local, you want to be looking at a market where it has already started to turn.”
Mr. Whitehead acknowledges that buyers might have to do some extra digging through lists of foreclosures and short sales, but he agrees that the numbers are starting to make sense.
A simple formula he uses to weigh the benefits of renting over buying involves comparing the annual cost of paying rent with 4% of a property's selling price.
For example, if you can rent a $250,000 home for less than $10,000 a year, it is a better value to rent.
But as vacancy rates have gone down and rents have started rising in some areas, it might be more difficult to stay below that 4% threshold.
As far as buying a rental property as an investment, Mr. Whitehead said: “If you can buy ... at six to seven times the annual rental income, even with no appreciation, you're making a 14% annual after-tax return,” he said. “Of course, with rental properties, you have to keep in mind that it isn't just an investment, it's also a lousy job.”
A major stumbling block in the real estate market recovery will continue to come from the lenders that have dramatically reversed course from the free-for-all days of a few years ago.
“Financing is a big problem, even though there has been some slow relaxation of the lending standards,” Mr. Kelly said. “There are reasons [such as tighter lending rules] that the housing market has been so depressed, but that doesn't stop individuals from saving money.”
It might be a mistake to assume that the Federal Reserve will continue to keep interest rates low, Mr. Kelly said.
“A lot of people who could buy a house don't feel any sense of urgency, because they believe the Fed will be keeping rates lower,” he said. “And they haven't heard the story that home prices will rise, and as soon as the Fed backs off, rates will go up.”
Questions, observations, stock tips? E-mail Jeff Benjamin at jbenjamin@investmentnews.com
