Can you really look at a buyer today and tell them that they are buying their home at a good price? Sure, you can tell them how the price they are paying compares to what folks have been paying the last few months, or few years. But that doesn’t mean that what you are seeing is the true market price! The actual market price can’t be determined without a free market. Right now, we have anything but a free and stable market in real estate.
Take the government’s free ice cream housing promotion, also known as the Homebuyer Tax Credit. The issue I’m concerned about isn’t that it is going to cost taxpayers about 15 billion dollars if it is allowed to expire on November 30. Nor is the issue that it has cost $43,500 that we, our children and grandchildren will somehow have to pay for each new buyer attracted into the program according to the NAR numbers. The issue is it has artificially increased the value of homes in the market by $8000 and that will end on November 30th, or sometime.
So, that $250,000 home your client just bought and put a mortgage on is really only worth $242,000 when that market distortion is removed. With an FHA loan, and a program to use the tax credit for a down payment, guess who is already upside down in their purchase? Does this sound anything like the too recent past?
Our tax code is already heavily skewed towards home ownership. With our government’s current spending spree and their desire to raise taxes, could the sacred mortgage interest tax deduction eventually be reduced?
While that is probably not the immediate threat, the current rulers prefer government solutions to allowing the private market to function. Be it FHA or State Housing Programs for low income borrowers, a monetary policy of rock bottom interest rates and the mortgage interest deduction the programs and the proposals coming forth further distort the market.
This makes the biggest risk in a real estate investment strategy or even a home purchase predicting the future changes in artificial supports to the market and estimating their effect on the value of those investments.
Imagine a market without a Toxic Assets Program, Troubled Assets Relief Program, Homebuyer’s Tax Credit, a Interest Mortgage Deduction and a distorted monetary policy. If you could do that accurately, you could really determine the market value of real estate. Then you could tell that eager new buyer whether or not they are really getting a good deal in the marketplace. Isn’t that what we should have learned from 2006?
Damon Chetson says:
Hear Hear. This was a post I was thinking about writing today when I heard about the “uptick” in new home construction and in stock prices for certain builders, including Pulte.
Given the extent of government intervention is has become increasingly difficult to predict the market price of a home, rather than the political price of a home – politics being the art of stealing from Peter to give to Paul.
People have given up predicting the “bottom of the market” and now simply try to predict whether Congress will extend the $8,000 credit or whether the Fed will keep rates low.
September 29, 2009 — 4:55 pm
Brian Brady says:
Al,
I regret to say that the inflated prices could be exponentionally more than $8,000. Here’s why:
Let’s assume Susan has $50,000. She wants to use $40,000 purchase a $175,000 home; $35,000 for down payment and $5,000 for closing costs. That leaves her with $10,000 left over.
Enter REALTOR Al and Mortgage Dude Brian, who convince Susan to use ALL of her money since shes getting $8,000 back in Feb or March of next year. Brian explains how $8,000 is really $32,000, when leveraged. Al shows here how that extra $32,000 translates into an extra bedroom, which is the perfect place for Susan’s home office.
September 29, 2009 — 6:27 pm
David Losh says:
That was really well described.
September 29, 2009 — 7:20 pm
Tim Shepard says:
Great Post!
Of the interventions that you mention, I believe the current Monetary Policy is most significant.
In business school I learned that the rate of return that an investor gets is commiserate with risk. Given the current instability of the global economy, the high mortgage default rate, and the increasing unemployment rate, mortgage interest rates should be double digit or higher right now.
I sell houses and don’t give investment advice. I learned that lesson a long time ago. As a realtor, my job is to make sure that the buyer gets the best/fair deal in today’s market. I leave speculation of the future to them.
September 29, 2009 — 10:21 pm
Kevin Schmidtchen says:
Good article and good points. Main issue is that there is never truly a free market. Too many issues are intertwined in our world and we will never be able to say this homes sold price today is 100% the true value.
Basic economics are that the home is worth whatever someone will pay for it today. Now if we could get 100% of people that would ever be able to want home “A” to see it, then maybe the true market value would show up.
Unfortunately this will never happen and maybe one of these people would want the home in 2 months and could pay $20,000 more then…but not today.
It is a no win issue.
September 30, 2009 — 12:49 am
Kevin Pellatiro says:
Two different questions to clarify the discussion of the tax credit… Do we have wide spread proof of values being inflated by $8,000 (the suggestion makes sense to me too, but I haven’t been able to show that empirically)? And do we have a total-benefit-to-our-local-economy-from-the-tax-credit estimate?
Simply, is there an economic upside too?
September 30, 2009 — 3:42 am
Greg Swann says:
> Do we have wide spread proof of values being inflated by $8,000
Values for bread-and-butter homes continue to decline slowly in Metropolitan Phoenix. Lots of transactions, steadily lower prices. When I tell people that, their eyes pop open, but facts are facts.
September 30, 2009 — 6:51 am
Kevin Pellatiro says:
Greg, Thank you. This really is something I’d like to be more informaed about through discussion with you. Doesn’t your experience above speak more towards inventory levels than the $8,000 tax credit?
September 30, 2009 — 8:31 am
Al Lorenz says:
All great comments, none of which I would argue with. If the National Association of Homebuilders is correct and only 150,000 incremental sales were gained by the tax credit(as opposed to the 350,000 claimed by the NAR), the cost of each incremental sale was $100,000. I’m not feeling like this is a good investment for my children to be trying to repay, with interst, for the next 50 or so years.
I’ve been feeling like a grumpy old man about the real estate market lately. I’m frustrated that the market doesn’t really function anymore except through government manipulation at the federal, state and local levels. It pretty much reminds me of the deal a common stock buyer gets after an IPO versus the way insiders are treated on Wall Street. Unless you’re one of the people doing the manipulation in the market, you’re pretty much cannon fodder as an investor.
I’m not mad, just changing course a bit 🙂
September 30, 2009 — 9:22 am
Rob says:
Homes are still ridiculously over priced here in North Atlanta.
I’m often showing $500k homes that used to be $800k and while walking them, I’m thinking, “who the crap would pay $500k for this. Now, then, ever!”
Unreal,
RM
September 30, 2009 — 8:00 pm
Tony Ortiz says:
I understand that people will never come to know about the actual market price of a home.It will differ every now and then depending on the market scenario.During some great times a particular house is brought by someone in $250k,you can see the same person selling that house at $150k during tough times.So one can never judge the true value of a house.
October 1, 2009 — 1:04 am
Kevin Pellatiro says:
> So one can never judge the true value of a house.
Princeton’s ‘Market Value’ definition: the price at which buyers and sellers trade the item in an open marketplace
Open doesn’t seem to indicate fair, but rather open to be participated in. If that is the case, are we not able to determine the likely value right now, even in a less than ideal marketplace? Maybe an earlier question in the process that I need your help with – where can we find the number of sales attributed to first time home buyers over the last ten or twenty years?
October 1, 2009 — 7:12 am
Al Lorenz says:
Kevin & Tony, I think you’re both right about the market. While the market is open as Kevin described it, it is far more influenced today by government policy than ever. What’s even worse is that government policy is so VOLATILE that other typical economic influences are mostly drowned by government actions. I am far less comfortable betting on politics than I am on economics, particularly when I’m betting with the low liquidity that real estate has. I would bet I’m not the only investor, and homeowner, that thinks that way.
October 1, 2009 — 2:57 pm