The merits of investing in residential real estate will remain questionable until the market rebuilds one of its core metrics: consumer confidence. Real estate professionals are hopeful spring will bring increased sales and clear signs of a housing recovery. However, based on early indicators, only a modest improvement is likely.
The lackluster outlook is largely the result of low consumer confidence. Until the average consumer believes the recession is over, and feels it's safe once again to purchase a home, the market will attract limited players. For now, there are only three main players: homeowners forced to sell for professional or personal reasons, wealthy buyers unconcerned about jobs or money, and investors with enough liquidity to buy bargain properties and hold onto them until the market recovers. The key demographic -- first-time home buyers -- will likely remain on the sidelines.
The Conference Board Consumer Confidence Index dropped sharply in March, falling from 72.0 in February to 63.4. Lynn Franco, director of The Conference Board Consumer Research Center, attributed the sharp decline in confidence to a sharp decline in expectations. "Consumers’ inflation expectations rose significantly in March and their income expectations soured, a combination that will likely impact spending decisions,” she warns.
Other consumer sentiment barometers are mixed, at best, the survey found. Those who view business conditions as “good” increased to 15.1% from 12.4%. But those who say jobs are “hard to get” edged up, slightly, to 44.6% from 44.4%. Consumers expecting business conditions to improve during the next six months declined from 25.2% to 20.6%, and those anticipating business conditions to worsen increased to 16.2% from 10.3%.
Finally, consumers expecting an increase in their incomes declined significantly, falling from 17.4% to 15.3%. While some prospective buyers may spend the spring touring open houses, few are likely to have the gumption to sign a purchase contract.
Most analysts believe first-time home buyers will continue to find it difficult to enter the market because of tight lending requirements, including increasingly common 20% minimum down payments. In addition, entry-level buyers will likely continue to be nervous because of the fragile economic recovery. And there's more bleak news ahead. In coming months, many middle-income wage earners will lose their state and local government jobs as municipalities and school districts cut budgets. Higher fuel costs will also act as a disincentive for first-time home buyers.
Robert I. Toll, executive chairman of Toll Brothers, Inc. (NYSE: TOL), a leading builder of new homes, may have summed up the mood in the housing market the best. Toll, who announced improved earnings in the firm’s quarter that ended January 31, noted:
The industry needs to string a few good quarters together to create confidence. Improved confidence will pull customers off the fence and into the market, creating volume and pricing power. We are cautiously optimistic as we head into the spring selling season with the emphasis on "cautious." While some data suggests an improving economy, many customers remain hesitant.
During the past few years the industry has, naturally, put very little ground through the approval process. We believe demand is increasing somewhat in certain markets, and that eventually, this demand will bump up against constrained supply. When this happens, we foresee happier days ahead for those home building companies with reputations intact and the capital and home sites to meet that demand.
When the happier days will return is open to speculation. For now, one thing is clear. The housing market will remain fragile until average buyers start believing in it again.
I found this interesting analysis on marketoracle.co.uk
"At the end of the day, what we find is that housing's renewed decline is mostly a positive development. It will cause problems, to be sure. But in the long run, it will produce a healthier economy with more jobs. And hopefully the whole experience will teach us that houses are not a one-way bet (meaning that prices don't only increase -they can go down, as well). Thus, we should know better than to commit the bulk of our wealth to such an unproductive investment."
I hope that the recent housing bubble problem will be a wake-up call that your house should not be viewed as an "investment"; it is where you live. If the value increases and you make a profit when you sell it, that is great. But, do not "bank" on it to be your retirement income or a way to get rich quick. Many people did and now they are broke or "underwater".
Anyone buying real estate tax liens? Might be an interesting safe play for now. I studied them as an investment option a while agofor the "safe" portion of my portfolio, never took any action, but recently I've ended up holding a few unintentinally (through a private fund that was shutting down and parceling out assets). I love the good rates of return, and the spetacular safety. Any opinions?
Noreen: It is a crisis of confidence. All the ingredients are in place to have a robust sales market: low interest rates, low prices and sellers willing to deal.
While Wall Street is doing fine, consumers are still reluctant to step back into the housing market. Yes, they may now be thinking about buying a new flat screen TV or doing the renovation they had put off for their basement or master bath, however, they either do not have the resources or are still unwilling to make the major invesestment to buy the new house. For many existng homebuyers, they can't sell their house for the price they require to buy the new home they want.
Combine that with lawmakers in Washington discussing eliminating or putting restructions on the Mortgage Interest Rate Deduction, and it is no wonder that housing sales are still struggling.
Hey John...I think you brought into focus one of the lingering effects of this depression (yes, that's what I intrinsically believe it to be). We lost faith in everything that seemed so solid before: investment banks, job security, auto makers, our ability to provide for our families. In this environment, it takes a real leap of faith to sign a purchase agreement. There's even more reluctance in high tax states such as New York, where the tax advantages of ownership are diluted by the haunting fear of AMT. In NY, it's common to pay $15,000 (or more) on a $500,000 house (which in the NYC area is equal to or less than median sale price). Throw $15,000 of property tax on your 1040 -- add in a few dependents and even a moderate wage -- and AMT kicks in. Given all that, renting seems to have its advantages.
All good Qs. I've done this before personally - actually, I've acquired a property on a ren-to-own basis and then instead of living there, I put in my own rent-to-own tenant-buyer (that's what they are called). Of course I received a spread on both the rent and the price of the property. As such, I know the details of how these work and it would be able to put together a simpler rent-to-own for someone who planned to live in the home.
Fundamentally, the way to put together a rent-to-own is with two documents - a lease, and a unilateral option to buy at some point down the road. The eventual purchase price can be determine many ways, but if I were to be the teant buyer, I'd prefer to put in a fixed price so that I might have some upside. If you don't want to gable like that, you can agree to have an appraisal done at that time.
Brief answers to some of your Qs...
Can he/she leave whenever they chose to?
Sort of. Depending on how the lease is written, that would be breaking the lease with whatever remedies are in the lease and local laws.
What if they chose to leave because of Job/health,etc,etc and then come back after a few years??? Does their equity have to start from Zero all over Again???
What equity? Whether there's any equity build-up during the term of the lease-option is up to both parties. When I'm the owner-landlord, I do typically offer what are typically called rent credits (extra rent payments that go towards the eventual purchase if exercised).
How does the Owner of the Property Gain from the Transaction?
Most owners wouldn't benefit from this unless they have a special situation.
You saw one above (when I used this strategy to make money on the spread).
If you're willing to keep your loan in place (if you have one), you can often command a higher price since the tenant buyers often can't get a loan for one reasons or another. Of course, you'd want some reasons to belive that they will be able to down the road.
Often, the tenant buys don't buy. This means you've gotten rent payments for a period of time (perhaps while a market recovers) and still own the house after the lease and option expire.
There are lots more details to make these work well - especially as a business (e.g. make sure that if you're the owner, you get rid of most of the standard landlord traps, etc.)
I think the real estate markets in Asia are very different than our North American one. Even in Asia, the difference between Singarpore and Dubai is very big. I am afraid we can't just use one way to measure it.
In terms of the real estate market in Singarpore, it has its own unique feature. The governent set the rule that people needs to buy a house before they can apply for a permenant resident in that country. There is very high demand to become a permanent resident in Singarpore, based on past seveal years data. So it is probably safe to say the real estate market will be quite stable in the next several years.
About farm land, especially in Asia, the story is also different. In some countries, individual can't buy/sell farm land. In other countries, farm land doesn't have real resell value.
I believe there are lots of opportunies in Asia markets. But we need to do more homework before we dive into them.
It's probably true for any market and any investment.
In middle class America almost since the end of the second world war, the family home was viewed as a retirement savings plan. It provides shelter during your life, but with tax incentives and an almost continuing rise in pricing, it was one of the largest and best performing investments most people ever made. As the market heated up with easy money, prices started to rise much faster than the rate if infaltion and real estate became a bubble. Many people for the first time came to understand that prices can go down as well as up. This had a profound effect as savings went away and many buyers who had made low or no down payments found themselves " under water". This has spawned a crisis in confidence as people really hesitate to buy housing. Couple that with a still large inventory of distressed properties and I think it will be some time before the market really recovers. This will not be a quick process.
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