Current Update on the LV Real Estate Market -- Part II (Las Vegas: unincorporated, boulevard)
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forget about historical norms, they no longer apply, this is uncharted territory.
We'll see. I think construction is going to trickle back. My position has always been that construction is the prime of our economic pump. They don't save much (in general), and instead buy RVs, boats, guns, motorcycles and every other toy they can lay their hands on. Why? All their co-workers are doing it.
So like I said, we'll see. I think by December we'll know one way or another if this is a recovery or an "Indian Summer." (I hate that term, but it fits.)
The ratio between home equity and disposable personal income is far below levels ever seen since recording began in 1950. This has severely weakened household spending, esp. the middle-income group because home equity is a larger share of their aggregate wealth. Those of the upper-income levels who dine on the aforementioned $200 slab of dead animal flesh are the minority.
12-million underwater mortgages, that's 1 in 5. Negative equity is a HUGE problem! If a financial difficulty arises for a homeowner he has very few options. This looms large as the economy continues to sputter.
Something else everyone conveniently overlooks when they speak about a housing recovery is the banks reluctance to lend. Borrowers well within GSE purchase parameters (620 FICO/10% down) are being denied loans because the lenders fear the loan repurchase requirement if the borrower defaults. They didn't seem to mind when the taxpayer shouldered the burden but now it's their liability and that has stifled borrowing. First-time buyers are typically the foundation of the housing market and there has been a dramatic drop off in that segment of buyers. All these factors weigh heavily and suggest a decline in borrowing.
Lest I mention, high unemployment, weak-to-non-existent (real) wage income growth, uncertainty about prospects for the economy and labor market.
The near term pressure on home prices is huge, forget about historical norms, they no longer apply, this is uncharted territory.
To what everyone believes, Vegas is still on a downward trend. Our state needs to STOP building more homes. Our state needs to lure businesses to our state.
There are many things that need to happen before we see our state recover. Unfortunately this is not going to happen soon.
Something else everyone conveniently overlooks when they speak about a housing recovery is the banks reluctance to lend. Borrowers well within GSE purchase parameters (620 FICO/10% down) are being denied loans because the lenders fear the loan repurchase requirement if the borrower defaults. They didn't seem to mind when the taxpayer shouldered the burden but now it's their liability and that has stifled borrowing. First-time buyers are typically the foundation of the housing market and there has been a dramatic drop off in that segment of buyers. All these factors weigh heavily and suggest a decline in borrowing.
I went through a nightmare getting a mortgage here even though I was moving for a job I had held for 3 years to expand the company. We put 20% down, have perfect credit, and had paid off many loans over the years. I could not figure who was getting loans if we were not. We finally found someone but had to pay about a .25% interest markup. We assumed it was just because of it being Las Vegas.
Another interesting thing happened when we moved and changed our address. Both of my credit cards immediately dropped my limit by more than 50%, and one removed my ability to get a cash advance that I never used anyway. Banks seem to have little trust in this town, and with all of the people walking away from underwater mortgages they could otherwise pay, I can't say I blame them.
Looser lending practices will certainly help things recover. Home buying creates a lot of jobs and taxes. It will do a lot of good to get some churn going. It looks like it is right now while prices bounce around this sideways pattern we have been on for about 9 months.
Weep? The Jan to Feb weakness isn't surprising. A lot of activity has picked up in just the last two months.
Local data for March from analytical firm SalesTraq showed that — amid indications of tightening supply — Las Vegas-area median existing home prices rose from $100,800 in February to $103,000 in March.
Still, that’s down 4.3 percent below March 2011.
SalesTraq reported that in the Las Vegas new home market, closings increased from 288 in February to 352 in March. The median new home price of $201,668 was up from $195,250 in February and was up 1.6 percent from March 2011.
Weep? The Jan to Feb weakness isn't surprising. A lot of activity has picked up in just the last two months.
Local data for March from analytical firm SalesTraq showed that — amid indications of tightening supply — Las Vegas-area median existing home prices rose from $100,800 in February to $103,000 in March.
Still, that’s down 4.3 percent below March 2011.
SalesTraq reported that in the Las Vegas new home market, closings increased from 288 in February to 352 in March. The median new home price of $201,668 was up from $195,250 in February and was up 1.6 percent from March 2011.
Prices rose due to restricted supply.
Prices were down 8.5% from Feb. 2011
New home sales/prices increased again, due to restricted supply.
Sounds like prices may be going up until supply unrestricts, which who knows when that will be. No indications the supply floodgate is opening any time soon.
Quote:
Originally Posted by eventusstultorummagister
Prices rose due to restricted supply.
Prices were down 8.5% from Feb. 2011
New home sales/prices increased again, due to restricted supply.
There is a temporary small increase in home values, this is because of the low inventory and that is also why new home sales are up. REO companies tell me they expect to see inventory come back in 90 days once the banks have complied with the new law AB284 where they have to prove they own note before they can foreclose. There could be some caveats regarding how much inventory will be released to the regular buyer or the little investor. Banks are getting ready to bundle foreclosed homes and sell them to hedge funds that will rent them out instead of sell.
And some lending institutions will rent them to the home owner once they have foreclosed with a 3 year agreement that after 3 years they will sell the property. But all that can change depending on market conditions. So with all this going on inventory to the regular buyer and investor could be continue to be low. The operative word is COULD.
What I see that could be the next bubble coming is the rental bubble. It always seems that when one entity sees a good things everyone want's a piece of it too and before you know it there is too much of good thing that just went bad. Just like our earlier housing bubble.
My mortgage on a 15 yr after putting 20% down is $1400 including insurance and taxes. Interest rates are down almost 1% from when I bought too, so it would be even less to buy. The identical houses, which are almost certain to be of lower quality because mine has a lot of extras from a recent upgrade, rent for $1600-$1700.
Over $700 of my payment goes to the principle, meaning I pay off about $10,000 a year right now. The loss of the value of the house is about half that in the past year. I also get about a $6500 mortgage interest deduction, and since I have other deductions, I can claim it. That saves me about one full mortgage payment in taxes. Deducting the property taxes saves another $500 in taxes.
Had I rented the same house for $1650, I would have paid $29,700 in rent in 18 months, and would not have $3000 in tax credits over 18 months for my $6500/yr in interest and $2000 a year in property taxes.
If the home loses 15% a year, the actual loss gets smaller and smaller as the value of the house lowers. I came up with that number, which is probably more like 12%, because I am paying off more and more of the principle as the mortgage matures by several thousands of dollars a year. I am also saving $5000 a year by not renting between tax benefits and higher rent. This means between paying off the principle and the tax savings, I am theoretically saving $16k-$18k over paying rent with equity and tax savings, assuming the house goes sideways which it has for essentially the last 9 months. It would have to go down nearly double digit % for me to lose, and that number will get bigger as I get deeper into the mortgage and pay off more of it annually.
Looking at this from the 30 year loan standpoint makes it even better. A 30 year mortgage payment is about half of what rent is right now, but they will obviously not pay off the loan as fast.
This makes no sense at all. Do you really not think you are paying these things when you rent? Everything except repairs are cleverly disguised in your rent, or are comparable. Since 100% of the rent is lost, and interest is deductible, including it in here makes even less sense. You do not get to deduct the interest or property taxes your landlord pays. You also have the added expense of renter's insurance, in addition to all of the costs included in rent that covers the landlord's insurance. My homeowner's insurance is $350 a year. I would imagine an investor would be paying much more and passing that on in the rent.
A 30 year mortgage payment is about half of what rent is right now. I stand behind my statement that anyone that is here for any middle term residency is making a mistake by continuing to rent. Even if the market continues its slow drop, their mortgage payment will still be half of what it is to rent the comparable home. Even if rents come down, that gap is not going to completely close.
Maybe you think the market is going to drop 25% a year and that the city is a few years away from being a ghost town. I don't share that opinion, but you have every right to have it.
The problem is you are confusing cash flow with profit/loss, and confusing balance sheet items with P&L statement items. You can have have positive cash flow during a period but suffer a loss during that time, and it's also possible to have negative cash flow during a period but yet have a profit during that period.
When you make a mortgage payment, the principal part of the payment is not income or expense and doesn't affect your P&L statement. It simply shifts that much from the liability section of your balance sheet to the equity section. The interest portion of the payment is an expense on your P&L.
To get a true apples to apples comparison of how your purchase investment has performed during the past 18 months vs renting, treat both as if you are completely liquidating and walking away, and see which way you would have more cash in your pocket today, i.e. the effects of each on your net worth for that time frame:
Renting is easy to figure. You would have $29,700 less in your pocket today than when you started. It makes no difference if you label this cost "rent", "repair cost disguised as rent", or whatever. At this point you can decide at no cost if you want to continue renting or purchase a place moving forward.
Now look at your purchase 18 months ago and what you would have in your pocket if you liquidate and walk away today. First you admit it is worth $20k less today than you paid for it. You pay $2000/yr in property tax ($3000 for the 18 months), $6500/yr in interest ($9750 for the 18 months), $350/yr insurance ($525). We are already up $33,275 in cost. Now credit back the tax savings of $3000 and we are at $30,275, already slightly higher than renting.
But we still have some sizable ownerships costs that you didn't provide the amounts. Maintenance, repairs, and likely HOA fees. Though you didn't provide exact numbers, these will certainly avg in the thousands. You're thus thousands of dollars worse off compared to renting in only 18 months at this point in the analysis, stating in your first post the market has only declined 6% during this time (which is only a 4% annual rate of decline), and yet now you want to try to argue that buying is better as long as the market doesn't decline at a rate of 12-15% annually??
Taking a minute at this point to assume you want to live in LV forever and would never liquidate the investment, you would still be in a lot better financial position if we convert the rental situation to a purchase in order to compare apples to apples. If you had rented an equivalent house for the past 18 months and then purchased that house or an equivalent one today, you would have lived in the same (or equivalent) house the entire time, be in the same ownership position today, but be thousands of dollars ahead compared to having bought 18 years ago. And you would have a better interest rate moving forward.
Now suppose you want to cash out everything in the USA and move to Macau for example or maybe the rent market value has dropped and you'd like to get out of ownership and start renting. A renter has no additional expense. He packs his bags and leaves or continues to rent at the lower rent price. The owner, who is already thousands of dollars behind compared to the renter as outlined above, must now incur more expenses to liquidate in order get out of his obligations and put himself in the same position as the renter. If you sell through a realtor, the sales commission alone will be 5 figures. Even if you do a "for sale by owner", you'll still have some seller's closing costs.
I think what makes it look deceivingly attractive to you at this point in time is because you have suffered a $20k market value depreciation loss which is a paper loss at this point since you haven't closed out the investment yet, so cash flows are looking good even though your P&L relative to having been renting is not due to the yet unrealized "paper loss". I also think you are likely too narrowly focused on comparing a mortgage payment to a rental amount, and not adequately factoring in the down payment and other expenses you incurred as an owner. Let's look at where you'd be cash flow wise if you liquidated this investment to cash at today's market value...
You paid around $220K for the house, putting $44k down, borrowing $176k. You've paid off about $15k of that in the past 18 months, so the current balance is about $161k. You've made mortgage pmts of $1400/month, or a total of $25,200. You also paid property tax of $3000 for the 18 months, $525 for insurance, an unknown amount for maintenance/repairs, and probably HOA fees. Now you sell the house for today's market value of $200k. Where does that put you?
You paid out:
$44k down payment
$25k in mortgage payments
$3k in property taxes
$525 in insurance
?? in maintenance/repairs
?? in HOA fees
So you probably paid out about $75k-80k.
During this time or at sales closing you receive:
$3k in tax savings
$39k sales proceeds ($200k sales price less $161k current mortgage balance)
So you would be somewhere around $35k negative cash flow (give or take, depending on the amount of the listed expenses with unknown amount) compared to $29k negative cash flow for renting. In other words, your net worth today is about $6k less than it would be if you had been renting an equivalent house for the past 18 months instead of buying. Actually it's worse than that because this is without allowing for any sales cost.
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