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Well Born and Raised, we can go back and forth forever, but I think we will have to agree to disagree. You think the economy will never get better, I feel we are close to a turnaround. You tell people not to buy and I say buy. You believe that we are in a "new" world and I like to follow the real estate trends from the past 100 years because I think there is a similarity to current conditions.
So my advice is as follows:
Potential buyers will never accurately predict the bottom of this real estate slide and waiting too long will leave you in a position that i have been in before. Waiting for positive economic signs may be too late, especially because the depth and length of this real estate downturn. So I say forget everything from the real estate bubble and remember that real estate is not something that can be bought and sold like a stock. Real estate is a long term investment and if you are ready to make a long term investment I can't think of a better time in recent history.
In terms of the economy, you got me there I am not going to say there are many positive signs. The only thing that I can currently point to is the low interest rates since banks are historically tight in bad economies so maybe they know something we don't. Well unless you live in North Dakota, Alaska, or Washington D.C., since these were the only areas with positive job growth last month. So I may keep this one going, especially when there is positive economic growth, but for now I am moving on and I wish future buyers the best.
Re: ND and Alaska are in unique positions. They have a very high quality work force (low welfare / under performers). Unlike MN, their budgets are healthy and they can afford to be business friendly. Same thing goes for Nebraska, and Wyoming.
ND and Alaska get another boost from oil and they have received an increase in (non-sustainable) government jobs.
As for DC. Think government jobs plus defense contractor. The economic make-up has a lot of recession proof college jobs as well (#3 sector). There has been a lot of lobbyist job growth in DC as well. Follow the government money.
What does US oil jobs, government jobs, defense contractors, college jobs all have in common???? Answer: They cannot be outsourced. Many times job growth of areas like Sioux Falls comes on the backs of companies moving there from areas like Minnesota. Some areas are growing because other areas are shrinking.
As I have stated earlier, motivated high performance and educated people will feel the pressure in specific career areas but not nearly as much as lower skilled employees that have stiff foreign competition. Therefore some areas may not currently feel any pressure.
That doesn’t change the fact that as an whole, we will struggle deeply for years unless we find some rabbit to pull out of a hat.
So my advice is as follows:
We agree that potential buyers will never accurately predict the bottom of this real estate slide. Waiting for positive economic signs is a smart move even if you miss the bottom. On average, if you buy now when indicators point lower than you are trying to be a knife catcher.
We are in a different era because there are rational scenarios that could mean a real long term negative growth of even deflation. Warning signs are resurfacing and I can promise you those in charge are scared of what can unfold. If you are scraping to buy a home and a 1% interest rate hike pushes you out of the market, you are the exact person that should be waiting to see how bad it gets unless you are buying a lower priced home and you can take in a renter. The problem with real estate is in a downturn, is cannot be bought and sold like a stock. You cannot push a sell button and take your losses to become liquid again. If you lose $30K and need to sell, then you have to come up with $30K cash. Expensive properties COULD trap you into your home. Just look at the statistics from 2007 – 2009 and the percentages of homes that sold over $400K. It was a very tough sell. No one should buy something and assume that they won’t change 9jobs, locations, marriage, health etc. In the past, we didn’t have to worry but now we do.
Real Estate isn’t a long term investment. Things change in the long term that no one can predict. Think Detroit or Cleveland. In 1990, who thought that GM and Chrysler could go bankrupt at the same time or that Detroit unemployment would soar to 28%?? Who thought that manufacturing towns like Cleveland would have 20+% unemployment??
All I’m saying is in 2010 with a GLOBAL economy you no longer can look at a house as an “investment”. And certainly not a long term investment. There are so many things that can screw us in the future. Do you know what the average guy pays in taxes in Europe??? 40-45%. It HAS to happen here as well. We cannot spend more than we take in forever. If I am correct, what do you think will happen to the affordability of a $400K home?? Has the average guy in the history of the US paid 40% taxes like they do in Europe??? Then what is the value at looking at the housing history??? In 1990, we were 4% of the population and we consumed 25% of the energy? What do you think will happen to the price of energy when China, Indonesia, and India economies turn on?? Demand is higher and the cost of energy will increase. What happened to affordability when gas prices went up to $4 a gallon?? Now how about the cost of electricity and natural gas soaring??
It’s also why I say a $150K is safe. Lower cost homes are selling better now because they are affordable. If we have higher taxes or less in wages or permanent high unemployment or higher energy costs then inexpensive homes will have upwards pricing pressure. To stare in the future, what kind of new homes are being built right now??? They are more basic homes with an eye towards more energy efficiency.
The people who are predicting what goes on in housing are carefully looking at the employment numbers. We are still shedding jobs. When we shed jobs people are defaulting pushing down values. Upside down people are then stategically defaulting especially in the non-recourse states. MN is a non-recourse state by the way. It seems Track is worried people will miss out because homes will quiclky rebound or rates will go up even though every bit of the data is pointign the other direction. Do you think three months is going to make the difference in most situations?? Then why not wait and see??
If you are in the market to buy, personally I’d watch the prices and the economy and reassess what is going on in a few months. I’d look at what you do for a living as part of the risk. If you sell a retail luxury item to the housing market I’d be worried your sales could tank. If you are a tenured Professor or you are a Doctor sleep easier. Independent of that, there is no harm done by waiting a few more months to see what will occur especially when the indicators are pointing down. If you really want to spend around $400K, I’ll give you a sweat deal on a home in Andover!
Last edited by MN-Born-n-Raised; 07-25-2010 at 05:14 AM..
Location: The Flagship City and Vacation in the Paris of Appalachia
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MN Born and Raised does bring up some good points and I agree with much of what they have posted, however, we disagree when it comes to the bold statements like "real estate is not a long term investment" and "the economy is forever changed." The first statement about real estate is almost laughable and many of the people in the areas you mentioned knew what was coming. When the factories were shutting down and the car manufactures were making less cars, people knew what was going on. Also, GM and many other companies in these areas were operating under a model that was not sustainable. Detroit has had issues for years and the same thing with Cleveland, the economy only made things worse. Also, these are examples of why real estate is a long term investment if I have ever seen one.
Next, you mention that if you buy a house and it decreases in value by $30,000, what do you do? Well that is simple, ask the bank for a short sale and if they will not give it to you give them the keys and go into foreclosure or take the loss and you will get a huge tax benefit. Foreclosure is not the dirty word it used to be and I personally know people that have purchased homes gone into foreclosure and 2 years later they are in their next house. I don't advocate this since I feel that it is playing the game and using the system, but if you have no other choice than I have no problem with it.
Your ideas are not very progressive and the statements about the European tax system are not very accurate. In the U.S. we pay a fraction of the taxes that are levied on the people in European countries, but you are also taxed more on what you own and buy in these countries, not what you make so it is a complete different system. For example, many places like Switzerland have 50 and 100 year mortgages because you pay taxes based on the percentage of the house you own. So it is not a good idea to own there and people simply "own" and when they leave sell the house back to the bank. In the U.S. you can deduct your mortgage interest and real estate taxes, home energy improvements, etc. and if you lose money on the sale, oh well that is another deduction.
Thanks for the offer to buy your house, I already own one house in St. Paul, but given your situation I would be more than happy to buy your house for $149,999 because I can't buy over $150,000 and you feel that we are headed way down in the next year. So when you are ready to sell your house for my price I will be more than happy to purchase it, just let me know when we are at that point Also, I will need an independent appraisal, seller assist closing costs, and 12 different allowances that I will determine after viewing the house.
Let's change the verbiage from "the economy will change forever” to “there is a paradigm shift in the economy that will affect the affordability of large purchases”. Does that sound better to you?? It sounds like you agree with a lot of what I am saying.
You missed my point. In 1990 if you lived in Detroit or Cleveland and you bought that home for a “long term investment” how is it going for them right now or even in 10 years??? In 1990, do you think people thought the town would have a 28% unemployment rate and that the largest car manufacture in the world would need to be saved?? Who predicted in 1990 that manufacturing would be exported; one industry by one industry?
A house is not an investment, it’s an expense. If you happen to buy in the right time and place over the long haul it certainly can work out well for you (for example buying a home on Lake Minnetonka in 1970). But as I said before, what really appreciated?? The lot or the home?? Who wants a 1970 lake Minnetonka home??? Most buyers bulldoze it down. It’s the LOT that appreciated and it’s pretty easy to see what happens if you pick the wrong lot (maybe you bought a lot in Detroit for instance). That was what my point was with my Andover lot. It did much better in appreciation on the lot portion than the home ($19K to $89K) but nowhere near as good if I bought that Plymouth lot for only $23K more back in 1991. You are generalizing that a home is a “long term investment” and it’s really not. Like stocks, there are better and worse bets and no one can predict what is going to happen in 30 years (think Detroit).
So the gamble is to pick the right lot so it appreciates. Most metro lots go up because of inflation and even the old looking stick built portion of the equation goes up a little in most cases because it costs more for materials. Lots can go up more than inflation because they become more desirable when areas are filled and people desire shorter commutes than the new farther out suburbs. So history has shown that lots usually become more valuable over time but that is not applicable in many small towns where the lot doesn’t keep up with inflation. If it doesn’t keep up with inflation, IT’S A BAD INVESTMENT!
Now let’s look at that MTKA lake lot. From 0000 to 1980, that lot went from $1 a frontage foot to $1000 a frontage foot. We are at now at $10,000 + a frontage foot. It took 1,980 years to go up $1000 dollars and 25 years to increase to 10,000 a frontage foot! So the question is do you think that there could be a long term scenario where that over priced lot that SKYROCKETED over a small time frame could come down to a more realistic price?? Gee I don’t know… maybe it could drop to $5000 a foot (a $500,000 loss)??? What do you think is happening to the land values in Northern MN lakes as we speak?? When you have such LARGE price growth on high valued lots I see a risk of it going down from ridiculous to just over priced. Don’t you??
Re: Europe. I’ve’ had many conversations with European’s when I visit. Let’s pick on Denmark. Their tax rate is from 42 (lowest)-63% (highest). They also have a value added tax of 25%. You don’t believe me??? See http://en.wikipedia.org/wiki/Economy_of_Denmark . Your wrong.
Re: walking if you are stuck in your home. Do a little research on the impact of filing for a foreclosure. You are underestimating all of the ramifications. Think being dropped by insurances, not getting hired, etc. I’m an employer and pull credit scores. I would not hire a person who walked on their mortgage. I’m not alone.
Also, lenders are going to start cracking down on people who walk away from their mortgage but could technically still pay.
In MN, we are a "non-recourse state" which is not common. There is no recourse for the lender to gain judgement with strategic defaulters unless they file the foreclosure differently. A.K.A. a "Judicial Foreclosure". If they do a non-juducial foreclosure (as is nearly always the case) the mortgage company cannot come after you. See Minnesota Foreclosure Laws - Foreclosure.com
Non-Recourse States:
Alaska
Arizona
California
Connecticut
Florida
Idaho
Minnesota
North Carolina
North Dakota
Texas
Utah
Washington
Location: The Flagship City and Vacation in the Paris of Appalachia
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Well Born and Raised again I think we agree to disagree again, in the U.S our tax rate is no where near that of European countries and I have family in Rotterdam that I visit quite often so yes I know what I am talking about. In our country a house is almost a necessity for the wealthy to "hide" some of their wealth or pay less taxes and in many European countries a house can actually increase your taxes. You can't simply factor in maintenance costs of a house in the U.S. and potential appreciation/depreciation and say it is typically a bad investment. You have to also factor in the tremendous tax benefits many of us would not receive if we were renting. For example, I believe renters in Minnesota can deduct a portion of their rent from their taxes annually, but only if they make less than $53,500 (correct me if I am wrong here). Well otherwise the money your spending on housing, i.e. renting is not wasted since you are receiving a place to live, but it not something you can sell at a later date or borrow against to increase your liquid assets. In the Netherlands, they have an interesting system, where the owner and occupant are assessed a tax, but for the most part even in the bigger cities it is less than we usually pay for property taxes. The majority of taxes in Europe are based not only on income, but also what you own and the more you own the more you pay. For instance, in the Netherlands you are taxed on the value of your savings account. Also, you are discounting the fact that many European countries have much higher wages than we do in the first place. For example, in 2009 the median household income, even after taxes and healthcare costs, in Switzerland was almost $63,000, while in the U.S. it was closer to $52,000 before taxes. I would much rather have high taxes and higher cost of living with a higher income and better social services.
I think many people forget that the U.S. used to have the largest population of the middle class in the world, but that is not the case anymore and the percentage of middle class is shrinking in the U.S. significantly. Next time you call a house an expense, you might want to think about for who is it an expense? For the lower middle class/poor and those who can receive rent tax deductions yes that may be the case. However, the middle class and wealthy often depend on the tax deductions of real estate interest and taxes and also tax advantage of home equity. You need to consider all of the benefits of owning a home in the U.S. before you simply say it is an expense. I would and currently do gladly pay for my "expense," I mean house and I love doing it since it helps with my taxes and if I were in an apartment there would be no chance for tax deductions or home equity loans.
Ok now onto your next point about foreclosures, yes it is possible to walk away from a mortgage and rather easily as you pointed out in your other post. So as an employer you pull ongoing credit checks on your current employees? I am just wondering because many people with perfectly good jobs and incomes are walking away from their houses since banks will not allow them to refinance or short sell their houses. As an employer that is your prerogative to pull credit reports on future employees, but I say you are using poor judgement, by not giving those a chance who have been in foreclosure recently. I am by no means condoning giving your house to the bank, I would hopefully never have to do this, but I understand we are in a very unique economic situation currently and if someone is forced to move due to job loss I would not hold their recent foreclosure against them. Think about the cities you mentioned before, if you did everything right and put 20% down on a house in Detroit and lived there for 5+ years, but lost your house and went into foreclosure, you would really hold that against a potential employee? Oh and a final thing about foreclosures, since they are currently so many and there have been many recently it is hard for a bank to call back all these notes and go after anyone. So if you go into voluntary foreclosure and do your best to help the bank (i.e. not destroy the house before you leave) you have much better odds of being able to piece your life back together without going bankrupt than in the past.
Your ideas about Minnetonka are pretty good, but I am not sure what a reasonable price would be for a premium, local vacation area like this in the Twin Cities. I mean people in Minnesota seem to love having a lake house and buying low like right now may be a pretty good investment because I feel like you can have lake house and the location with this area. I could be wrong, not saying that has not happened before, but I know I would certainly enjoy more time on the water and less time in the car.
Ok I think this is the last thing, are you really comparing the Twin Cities to Detroit and Cleveland? I hope this is not the case and if you are, please look at the diversity of employers in this area compared to the steel and car industries of the aforementioned cities. Growing up in Pittsburgh I know what it is like to live in a area dependent on one main industry and it is much different than here. Oh and I know it is not the best barometer of the economy, but it is one indicator, gas prices seem to be going down again, which is very rare in the summer and usually means the boys on Wall Street are a little nervous. Lets just hope this is temporary and things start getting better soon. I will continue to be the resident real estate and economy optimist for this forum.
Location: The Flagship City and Vacation in the Paris of Appalachia
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Born and Raised we finally agree on something, in Minnesota it is much easier to walk away from a foreclosure than in some other states. Thanks for posting the foreclosure laws, lets hope we don't encourage too many people to do it from our recent posts, because that is the last thing our real estate market needs.
Track. I think you are missing my point. In Europe, they have higher taxes because they have government run (fill in the blank) where government spending is over 50% of the GDP. When the government is involved, decisions are made with politics in mind. More often than not, political decisions cost a lot more money. For example, occupy a country to “win” when it really makes sense to leave. That political decision can cost you $100B a month even if your guy is in office. If you want a few hundred expensive examples, just ask.
I gave you that link that illustrates the tax structure in Denmark. It’s 42-63% plus a VAT tax of 25%. My point had nothing to do with housing tax. It had everything to do with how much you can afford on a home if the government is digging in your pocket to (poorly) run more of the economy? So if you make $45K a year in Denmark with a family of 4, you get taxed 42% plus 25% of everything you buy. Currently in the USA, that $45K of income gets written down and your adjusted income might be $33K after a few deductions and 7% MN sdales tax on some items. In the USA you pay ZERO federal and ZERO state taxes. In Denmark you pay 42% of $50K or $21,000. Their system breeds coasters with demotivated high achievers.
Speaking of the Netherlands, The brackets are 2.35%, 10.85%, 42% and 52%. The first two lower brackets do not contain the Social Security payments that are mandated. So after you pay the government for their inefficient services, the real tax rate is effectively 33.5%, 42%, 42% and 52%. Source: http://en.wikipedia.org/wiki/Taxation_in_the_Netherlands For the value added tax, there are two categories: foods and essentials, and non-foods and luxuries. These two categories have rates of 6% and 19%, respectively. And yes, anything in the bank over € 20,315 is taxed.
To make sure you get my point, if you take out money from people’s pockets like in Europe you will have less $$’s to spend on a home. That pushes home prices down especially on the bigger ones ($400K). If you think the USA can take over healthcare, the banks and underwrite risky mortgages, bail out the car companies, give years of unemployment away, pay out generous pensions, fight two expensive wars and not increase taxes a lot in the long run you are crazy!
So my questions are: will a high tax rate hurt a families home buying power (they now cannot afford as much)?? Do you see this paradigm shift in the tax base happening some time down the road? If it happens and it will IMHO, how can a person assume a home purchase can be predicted as a “long term investment”??? When did we have a high tax rate on the average Joe before?? Fast forward 10 years. Expect a lot higher taxes on everyone or we will be bankrupt. If our country is bankrupt / in shambles for refusing to take in a lot more revenue, what happens to the price of housing as that “long term investment”???
You made a few other wrong points. A home is a terrible tax shelter for the rich. Think alternative minimum tax (see Home Mortgage Interest (http://www.1040return.com/newsletter/homemortgageinterest.html - broken link) ).
Read the book “Rich Dad Poor Dad”. It's required reading for my 16 year old and 19 year old. He addresses the obvious point that a home is not an investment because it is an expense.
As a side note I feel smart that my home is paid for. Some people seem to feel lucky that they can write off the interest. The “rich” lose a percentage of their interest deduction because of the AMT and it is capped. If they have a high mortgage and think it is smart, then they are getting bad advice from their accountant who isn’t rich. Most of the people I know who are Ubber wealthy are debt free on their home. If you use your home interest to fund your business by getting a lower interest rate then that is smart. I tell my Kid’s to be careful who they take advice from including their teachers / Professors or even an accountant. Debt isn’t a good thing unless it is necessary or it makes you money. If you can pay off a home that is smart. As a side note, your home equity loan will keep you poorer unless you use the money to buy a business or as a shot term loan to spin a property.
Last edited by MN-Born-n-Raised; 07-26-2010 at 05:00 AM..
So you don't like home ownership, fine, don't buy a house but I still disagree with your premise that homeownership is a expense. Over time a home is going to appreciate, period. The first home we bought we paid $42,000 in 1990, it is currently on the market for $140,000 with no major improvements since we owned the home. We bought and sold this house pretty much at the height of the housing market in that town. It has had 3 other owners since we owned the house.
Please tell me how sinking money into rent with nothing to show for it in the end is a better deal then owning a home?? I look at the first apartment we rented, at the time we rented for $400/month, our house payment was $325/month. That same apartment is now renting for $700/month. Had we stayed in that first house we would have paid it off by now with NO monthly payments but even if it had not been paid off, we still would have had a house payment of $325/month.
Then next house we bought was a 1920's Craftsman that we paid $66,000 for. That house recently sold for $220,000 with NO improvements-heck, the outside needed to be painted when we sold and it STILL isn't done.
Both of these examples are current prices-the one is on the market now (has an accepted offer, just not done) and the other sold this spring. Tell me how this is a bad deal?
We bought this house in Feb of 2006, right before the market crashed, couldn't have timed it worse. It is still worth what we have into it. It appraised for higher than what we paid and we pretty much only lost that "value". We have no plans to move and fully expect housing prices to go up before we move-when we can no longer walk up and down stairs and we are old and our grandkids will be moving our junk out of here--or, if someone gives us an offer we can't refuse.
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Also, I will need an independent appraisal, seller assist closing costs, and 12 different allowances that I will determine after viewing the house.
In Europe, they have higher taxes because they have government run (fill in the blank) where government spending is over 50% of the GDP. When the government is involved, decisions are made with politics in mind. More often than not, political decisions cost a lot more money. For example, occupy a country to “win” when it really makes sense to leave. That political decision can cost you $100B a month even if your guy is in office. If you want a few hundred expensive examples, just ask.
