Survey: Buyers Frustrated by Low Inventory, Rising Prices

By Nick Timiraos June 4, 2012, 11:30 AM for www.wsj.com

Active home buyers are increasingly concerned about rising prices, prompting a growing number to slow down their purchase plans, according to a new survey.

The findings are from real-estate brokerage Redfin, which surveyed more than 1,200 home buyers in 18 metro areas who had toured a home since March 1.

The company found that 49% of respondents believe that it’s a good time to buy a home, down from 56% last quarter. The share of buyers who think it’s a good time to sell more than doubled, to 28% of respondents.

Nearly six in 10 respondents said that low inventory remained their top concern with buying right now—by far the most predominant worry of buyers. The supply of homes listed for sale nationally is down by 20% from one year ago, and markets such as Phoenix, Orlando and Oakland, Calif., have around half as many homes for sale as one year ago.

More than seven in 10 buyers said they had faced a competing offer when making an offer for a home.

Given those experiences, perhaps it isn’t surprising that 58% of buyers said they think prices will increase, up from 34% last quarter. Meanwhile, just 9% of buyers said that concerns about falling prices were making them reluctant to buy right now, down from 29% three months ago.

The lack of supply and the uptick in multiple offer situations is surprising to many buyers and could lead some frustrated buyers to stand back. More than one-quarter of buyers said they would stand back from the market if prices went up or they were in a multiple-offer situation, while 10% of respondents said they’d do what it takes to win a competitive bid.

The survey also found that 16% of buyers were worried about fatigue from bidding wars and that 21% were concerned about prices rising beyond what they could afford.

“The overwhelming sentiment among home buyers is that there aren’t enough good homes for sale,” said Glenn Kelman, Redfin’s chief executive. “Who would sell right now if he didn’t have to?”

Inventories are also low because banks have put fewer foreclosed properties on the market. The Redfin survey found that 57% of buyers were very interested in conventional sales, up from 48% three months ago. Buyer interest for new homes, foreclosures, and short sales showed little change from last quarter.

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Original Post: http://blogs.wsj.com/developments/2012/06/04/survey-buyers-frustrated-by-low-inventory-rising-prices/

Renting Prosperity

Americans are getting used to the idea of renting the good life, from cars to couture to homes. Daniel Gross explores our shift from a nation of owners to an economy permanently on the move—and how it will lead to the next boom.

By DANIEL GROSS May 4, 2012, 6:08 p.m. ET for WSJ.com

Photo illustration by The Wall Street Journal

 

In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed.

"The Great Gatsby," the pre-eminent American novel of financial ambition, overextension and downfall, offers a revealing vignette about the great American obsession: real estate. The narrator, Nick Carraway, can't afford to buy in the rarefied Long Island world inhabited by Gatsby, and by Tom and Daisy Buchanan. But he can afford to rent. "When a young man at the office suggested that we take a house together in a commuting town, it sounded like a great idea. He found the house, a weather-beaten cardboard bungalow at eighty a month, but at the last minute the firm ordered him to Washington, and I went out to the country alone," he notes. "I had a view of the water, a partial view of my neighbor's lawn, and the consoling proximity of millionaires—all for eighty dollars a month."

 

 

The economy needs the dynamism that renting enables as much as—if not more than—the stability that ownership engenders.

In the American mind, renting has long symbolized striving—striving, that is, well short of achieving. But as we climb our way out of the Great Recession, it seems something has changed. Americans are getting over the idea of owning the American dream; increasingly, they're OK with renting it. Homeownership is on the decline, and home rentership is on the rise. But the trend isn't limited to the housing market. Across the board—for goods ranging from cars to books to clothes—Americans are increasingly acclimating to the idea of giving up the stability of being an owner for the flexibility of being a renter. This may sound like a decline in living standards. But the new realities of our increasingly mobile economy make it more likely that this transition from an Ownership Society to what might be called a Rentership Society, far from being a drag, will unleash a wave of economic efficiency that could fuel the next boom.

 

 

While downgrading the place of ownership in the American psyche may sound like a traumatic task, the cold, unsentimental fact about the American dream is that Americans never really owned it in the first place. For the past three decades, especially, consumers haven't so much bought their quality of life as they've borrowed it from banks and credit card companies. And since the Great Recession, Americans have been busy rebuilding their balance sheets and avoiding new financial encumbrances. When American consumers can't—or won't—borrow to purchase the goods and services they've come to consider part of their standard of living, how does the economy get back on its feet?

The answer lies in consumers following the example of corporations—that is, becoming more efficient. The reaction to extended leverage and foolish borrowing isn't to stop consuming and buying; it is to consume and buy more intelligently. That's what the Rentership Society is all about. And it starts at home. Literally. Housing is the biggest single component of consumption in the U.S. economy and the source of much of our present misery. According to the Bureau of Labor Statistics, the typical consumer spends about 32% of his or her budget on shelter. In the last decade, that generally meant borrowing a lot of money to take "ownership" of a home.

The vast mortgage-political-financial complex, for a variety of reasons, valued homeownership as a good in its own right. Democrats saw the extension of credit to people on the lower end of the income scale as a matter of social justice; Republicans thought homeownership would make people more bourgeois. Banks and Wall Street firms salivated at the fees mortgages could generate.

So, during the boom, the homeownership rate grew steadily, peaking at a record 69% in 2006, according to the Census Bureau. But those gains were short-lived and came at a truly massive cost: a huge mortgage bust, expensive bailouts of Fannie Mae and Freddie Mac, an overhang of millions of foreclosed properties and falling home prices. Ownership-boosters failed to note that homes purchased in 2005 and 2006 with no-money-down, interest-only mortgages weren't really bought. They were simply rented until the "owner" flipped them or walked away from the mortgage. Far from strengthening low-income neighborhoods, this destabilized them through the inevitability of foreclosure.

In the post-bust climate, renting has emerged as a much more economically efficient way to pay for housing. A one-year lease represents a far less onerous financial obligation than a 30-year mortgage. It's difficult to get into too much financial trouble as a renter. The homeownership rate has fallen from its peak in 2006 to 65.4% today. The foreclosure crisis, which has caused millions of Americans to turn over homes to lenders, is responsible for much of this decline. What's more, given the weak labor market and higher lending standards, more Americans today have a difficult time scraping together the required down payments.

For an increasing number of Americans, though, it simply makes more sense to rent these days. According to Moody's, by late 2011 it was cheaper to rent than to own in 72% of American metropolitan areas, up from 54% a decade ago. And the more people who do it, the more socially acceptable and desirable it becomes. The decline in the ownership rate means that about three million more households rent today than did at the height of the bubble.

It's tempting to view the rise of rentership as an economic step backward. Renters can't build up equity, and they have less control over their living standards than owners. Renting is generally seen as something you do when you've failed as a homeowner or are not yet ready to be one. But I'd argue the rise of rentership is a sign of a system adapting—albeit too slowly—to new realities.

Alamy

 

Renting has emerged as a much more economically efficient way to pay for housing, argues Daniel Gross.

The U.S. economy needs the dynamism that renting enables as much as—if not more than—it needs the stability that ownership engenders. In the current economy, there are vast gulfs between the employment pictures in different regions and states, from 12% unemployment in Nevada to 3% unemployment in North Dakota. But a steelworker in Buffalo, or an underemployed construction worker in Las Vegas, can't easily take his skills to where they are needed in North Dakota or Wyoming if he's underwater on his mortgage. Economists, in fact, have found that there is frequently a correlation between persistently high local unemployment rates and high levels of homeownership.

Home builders and property owners have caught on to the economic opportunity presented by the move toward rental. Fannie Mae and Freddie Mac have become reluctant owners of more than 200,000 properties thanks to the foreclosure crisis, working through the backlog, one painstaking foreclosure sale at a time. But in February, Fannie Mae said it would put up for sale some 2,490 homes as a package, asking for $321 million. The Wall Street Journal reported that an assortment of real estate companies and private-equity investors were considering making bids. The presumption was that these sophisticated investors would turn the homes into rental properties. No less a sage than Warren Buffett told CNBC in February that he'd love to buy "a couple hundred thousand" single-family homes for rentals.

The depressed home-building industry has also shifted gears to adapt to the new reality. Housing starts for multifamily units have risen sharply since 2009, according to the Census Bureau. In 2011, whereas single-family housing starts fell 9% from the year before, starts of structures with five or more units were up 60%. In the first quarter of 2012, starts of multifamily housing structures were up another 27%, while single-family starts were up only 16.7%.

What's more, the builders of these structures increasingly intend to rent them out. In 2007, only 62% of the housing units in buildings with two or more units were built for rent. In 2009, 84% of the units in such buildings were built to be rented. In 2011, 91% of the units in such structures were aimed at the rental market.

And the rising popularity of rentership is hardly contained to the housing market. Indeed, it has spurred the creation and growth of innovative businesses in a number of other realms—particularly those that cater to America's cash-strapped, credit-wary youth.

Take cars. The Bureau of Labor Statistics says that private transportation—owning and running a car—is the second largest cost for a typical American household, accounting for 16% of expenditures. Factoring in finance costs, depreciation, repairs, insurance, taxes and gas, AAA calculates that an owner of a midsize sedan who drives 15,000 miles a year spends $8,588 a year on his car.

Enter auto-sharing firm Zipcar. Founded in 2000, it grew by focusing on cities and college campuses. It uses information technology to manage its fleet, and control access—people get cards that let them into garages where cars are kept and into the cars themselves. Users in New York pay a $60 annual fee and then $8.75 per hour on weekdays and $13.75 per hour on weekends—no extra charge for gas or insurance or miles. As the U.S. economy contracted, Zipcar went into hyper-growth: from 225,000 members in 2008 to 650,000 members and 9,500 cars in November 2011. Zipcar, which went public in 2011, has had success in the predictable big cities like Boston, New York and San Francisco, but its vehicles can also be found on 350 college campuses and in smaller cities like Providence, R.I., and Portland, Ore. Large rental agencies like Enterprise and Avis have responded by rolling out similar services.

Or take textbooks. College textbooks are, in effect, rental goods. Students buy them at retail, use them for four months, and then resell them to the campus store or a used-book dealer. In 2010, the U.S. college-textbook market was worth about $4.5 billion, according to the American Association of Publishers. But why buy textbooks when you can spend less and rent them? Chegg.com, founded in 2001, has raised more than $200 million in funding and is aiming to displace the college bookstore. An undergrad can buy an economics textbook new for, say, $263. At Chegg.com, she can rent a hard copy of the same book for $94 for 180 days, or an electronic copy for $128 for the same period. As more students come to campus with Kindles, Nooks and other e-readers, the more efficient consumption of college textbooks is likely to grow rapidly.

Rent the Runway, another Rentership Society business, has likewise found a foothold on college campuses. The company was started in 2009 by Harvard Business School classmates Jennifer Hyman and Jennifer Fleiss. Ms. Hyman has called the company "the Netflix for fashion." As with Netflix, customers open accounts and then pay for the temporary use of goods sent to them through the mail. A Thread Social Poppy Sweetheart Dress (retail price: $365) rents for $50. Accessorize with Crislu Crystal Tear Earrings (retail $96, rent for $20). In business for less than two years, Rent the Runway has raised $31 million in venture capital, attracted one million customers and is turning a profit.

All these models involve more sharing than American consumers are typically accustomed to doing. But the culture is changing. Consider how quickly the attitude of consumers toward housing has changed. And I'm not just talking about the rising incidence, popularity and acceptance of home and apartment rental. At the height of the boom, people believed their homes generated cash by serving as a source of home equity credit, or by returning profits when they were sold. Today, not so much.

But thanks to another postrecession business, efficiency-seeking homeowners have come to realize that their homes can still generate cash. Airbnb, founded in August 2008, is dedicated to the promise that lots of people are willing to earn money by renting out a room in their home and that lots of people are willing to save money by crashing in strangers' abodes rather than in motels or hotels.

Only in America could entrepreneurs rapidly transform couch-surfing into a high-tech business worth more than $1 billion in the space of 36 months. With over 100,000 listings available in more than 16,000 cities and 186 countries, it's a real business. It has booked over 5 million nights. In July 2011, Airbnb raised $112 million from venture-capital firms Andreessen Horowitz, DST Global and General Catalyst. But the real value of Airbnb isn't necessarily what profits it brings to investors. Rather, it's the cash it puts into the hands of homeowners. That cash is not enough to turn around the economy. But it's part of a sea change in how people view the true value of their property and how they role of ownership in their lives as a whole.

Finally, perhaps, Americans are absorbing a piece of wisdom not from Gatsby, but from Thoreau: "And when the farmer has got his house, he may not be the richer but the poorer for it, and it be the house that has got him."

—Mr. Gross is economics editor at Yahoo Finance. This essay is adapted from his new book, "Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy," which will be published Tuesday by the Free Press.

A version of this article appeared May 5, 2012, on page C1 in some U.S. editions of The Wall Street Journal, with the headline: Renting Prosperity.

Original Post: http://online.wsj.com/article/SB10001424052702304746604577382321021920372.html?mod=WSJ_RealEstate_RIGHTTopCarousel

Q&A: Step-by-step guide to foreclosure

Q&A: Step-by-step guide to foreclosure

WEST PALM BEACH, Fla. – Nov. 29, 2011 – Question: I read in the paper that the banks are starting the foreclosures again. I just got served with a foreclosure lawsuit. Can you explain the process in layman’s terms?

Tony

Answer: Each state has different versions of the foreclosure process. In Florida and some other states, a lender must get permission from a judge before it can repossess your home.

When you are served with a foreclosure lawsuit, your lender files a “complaint” against you, laying out the facts as it sees it. It’s basically telling a story as to why it thinks that it should get your house as payment toward the debt that you owe.

Along with the complaint, it serves several other documents, such as the “summons,” which gives the court power over you, and the “lis pendens,” which is a document filed in the public records to let everyone know that the property is the subject of a lawsuit.

When you are served with a lawsuit, you typically have 20 days to respond or you will be in “default,” which means that you have waived all of your defenses to the lawsuit, allowing the bank to proceed with the foreclosure. This is not a good idea. At this point, your attorney will respond to the suit with a “motion to dismiss” or an “answer.” If your attorney feels that the bank has no chance to win based on everything that it alleged in the complaint, he or she will file a motion to dismiss the suit.

If, however, the suit is not defective as filed, your attorney will file an answer, in which he or she admits or denies each of the bank’s statements from the complaint. The answer also will also set forth your “affirmative defenses.”

An affirmative defense explains why the bank should not get your home even though you may not be making your mortgage payments.

At this point in the lawsuit, several months or more will have gone by and the attorneys will begin “discovery.” That’s the process of getting to the truth by asking each other questions and getting documents from the other side for review.

During the discovery phase, you and your lender will probably go to a “mediation.” In a mediation, both you and your lender will lay out your side of the story before an unbiased third party, the mediator, who will encourage you both to voluntarily settle the case. At a mediation, no one is forced to settle the case. Both sides need to agree.

The discovery process can take six months or more. Once it is complete, you or your lender may make a “motion for summary judgment,” which is basically saying to the court that your side of the case is so strong that there is no possible way for you to lose. Most foreclosure cases end at the summary judgment hearing because the judge rules for the lender. But if the judge thinks there are still some questions to be answered, there will be a trial. At trial, the judge (or jury) will determine the truth and decide who wins the case.

If you win, the lender has failed and you keep your house. If the lender wins, which is much more likely, the judge will set a date for your home to be sold, with the proceeds from the sale going toward paying your lender back for the money that you borrowed.

If the fair market value of your home is not enough to pay your loan back in full, your lender may ask for a “deficiency judgment.” That gives the lender the right to come after you for the difference between the market value of your home and the amount that you owe your lender.

If the sale brings more money than you owe your bank, you get back what’s left over. (Check with an attorney about the process for receiving any refund.)

If you hire an attorney, the entire process typically will take about two years, during which time you can be working with your lender toward a loan modification, short sale or deed in lieu of foreclosure. Of course, if all else fails, there is always bankruptcy, but that’s a different topic for another column.

About the writer: Gary M. Singer is a Florida attorney and board-certified as an expert in real estate law by the Florida Bar. He is the chairperson of the Real Estate Section of the Broward County Bar Association and is an adjunct professor for the Nova Southeastern University Paralegal Studies program. Send him questions online at http://sunsent.nl/mR20t7 or follow him on Twitter @GarySingerLaw.

The information and materials in this column are provided for general informational purposes only and are not intended to be legal advice. No attorney-client relationship is formed. Nothing in this column is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction.

© 2011 the Sun Sentinel (Fort Lauderdale, Fla.), Gary M. Singer. Distributed by McClatchy-Tribune News Service.

Original Post: http://www.floridarealtors.org/NewsAndEvents/article.cfm?id=267984

How to Figure the Fuzzy Math of Internet Home Values

Original Post: http://online.wsj.com/article/SB10001424052970204554204577026131448329006.html?mod=WSJ_RealEstate_RIGHTTopCarousel

By ALYSSA ABKOWITZ

Jason Gonsalves worked hard to turn his 6,500-square-foot stucco-and-stone home in the suburbs of Sacramento into the ultimate grown-up party pad, complete with game room, custom wine cellar and an infinity-edge pool overlooking Folsom Lake. When interest rates fell recently, Mr. Gonsalves, who runs a lobbying firm, looked into refinancing his $750,000 mortgage. That's when he got startling news—the home had dropped more than $200,000 in value while he was renovating.

Scott Pollack

Or at least, that's what one real-estate website told him. Another valued the house at only $640,500. And these online estimates left him all the more confused when a real-life appraiser, assessing the house for the refinancing loan, pinned its value at $1.5 million. "I have no idea how those numbers could be so different," Mr. Gonsalves says.

Right or wrong, they're the numbers millions of consumers are clamoring for. After years of real-estate pros holding all the informational cards in the home-sale game, Web-driven companies like Zillow, Homes.com and Realtor.com are reshuffling the deck, giving home shoppers and owners estimates of what almost any home is worth. People have flocked to the data in startling numbers: Together, four of the biggest sites that offer home-value estimates get 100 million visits a month, with web surfers using them to determine what to ask or bid for a home, or whether to refinance.

Zillow, Trulia and other websites post estimates of home values. But as Alyssa Abkowitz explains on Lunch Break, these popular sites can be -- by their own admission -- wildly inaccurate.

But for figures that can carry such weight, critics say, the estimates can be far rougher than most people realize. Valuations that are 20% or even 50% higher or lower than a property's eventual sale price are not uncommon, as the sites themselves acknowledge. The estimates frequently change, too—sometimes by hundreds of thousands of dollars—as sites plug new data into their algorithms.

More

• What the Sites Get Right and Wrong

All of the competitors make it clear their numbers are guesstimates, not gospel. "A Trulia estimate is just that—an estimate," says a disclaimer on that site's new home-value tool. Zillow goes a step further, publishing precise numbers about how imprecise its estimates can be. And every major site urges home-price hunters to consult appraisers or real-estate agents to refine their results.

But despite the disclaimers, homeowners and real-estate agents say, many Web surfers put enough faith in the estimates to sway the way they shop and sell.

After Frank and Sue Parks put their manor-style house in Louisville, Ky., on the market, they watched as Zillow put a $331,000 value on the dwelling in May; by July it had climbed to $1.5 million. (Zillow says the lower estimate reflected errors in its statistical model.) The couple got potential buyer referrals from the site, but they fended off a stream of lowball offers before they sold this fall. Mrs. Parks says the estimate roller coaster "really affected our ability to move the place."

Determining a home's value has traditionally been the job of an appraiser, who gathers data on recently sold homes and compares them with the "subject property" to arrive at an estimate.

In the late 1980s, economists started developing automated valuation models, or AVMs, computer models that could analyze data about comparable sales, square footage, number of bedrooms and the like, in a matter of seconds. For years, these tools were mostly reserved for in-house analysts at lending banks.

It wasn't until 2006 that Zillow took them to the masses, with its Zestimates, which now offer values for more than 100 million homes based on the company's own algorithms. "Humans don't make these decisions," says Stan Humphries, chief economist at Zillow.

Numbers like these have become weapons in the arsenal of consumers like Simms Jenkins, an Atlanta marketing executive, who has recently relied on online estimates to help him both buy and sell homes. "I can't imagine 25 years ago, when people would just go out and spend their entire Saturday looking at homes," he says. "You don't have to do that now."

But appraisers and real-estate consultants say the online models can veer off target with alarming frequency. Most data for the models come from two sources: records from tax assessors and listing data for recent sales. Collection is a challenge, however, because not every county tracks properties the same way—some calculate home size by number of bedrooms, others by overall square footage. And automated models aren't designed to account for the unique construction details that often make or break a deal, or for intangible factors like a neighborhood's gentrification. "You cannot use a computer model in certain areas and expect the value to come out right," says John May, the former assessor of Jefferson County, Ky., which includes the state's largest city, Louisville.

For all these reasons, models that banks use often add a "confidence score" to their estimates. Consumer-oriented sites, meanwhile, rely on disclaimers, some of which are eye-opening. Zillow surfers who read the "About Zestimates" page find out that the site's overall error rate—the amount its estimates vary from a homes' actual value—is 8.5%, and that about one-fourth of the estimates are at least 20% off the eventual sale price. In some places, the numbers are far more dramatic: In Hamilton County, Ohio, which includes Cincinnati, it's 82%.

The sites argue that, over time, edits and corrections will help them perfect their numbers—with many fixes coming from their customers.

On Homes.com, anyone who knows a homeowner's surname and the year the home was last purchased, can edit the details of a property listing in ways that can eventually change the estimated value.

Zillow has accepted revisions on 25 million homes—perhaps the strongest testament to how seriously consumers take its estimates. Today, the site says its figures are accurate enough to give consumers a good sense of any home's value. In the meantime, says Mr. Humphries, its economist, "We're always tweaking the algorithm or building a new one."
—Email: editors@smartmoney.com

It's Time to Buy That House

By JACK HOUGH
U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression.

The good news? Two key measures now suggest it's an excellent time to buy a house, either to live in for the long term or for investment income (but not for a quick flip). First, the nation's ratio of house prices to yearly rents is nearly restored to its prebubble average. Second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades.

Two of the silliest mantras during the real-estate bubble were that a house is the best investment you will ever make and that a renter "throws money down the drain." Whether buying is a better deal than renting isn't a stagnant fact but a changing condition that depends on the relationship between prices and rents, the cost of financing and other factors.

But the math is turning in buyers' favor. Stock-oriented folks can think of a house's price/rent ratio as akin to a stock's price/earnings ratio, in that it compares the cost of an asset with the money the asset is capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else equal.

Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody's Analytics. The average from 1989 to 2003 was about 10, so valuations aren't quite back to normal.

But for most home buyers, mortgage rates are a key determinant of their total costs. Rates are so low now that houses in many markets look like bargains, even if price/rent ratios aren't hitting new lows. The 30-year mortgage rate rose to 4.12% this week from a record low of 3.94% last week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or "points.") The latest rate is still less than half the average since 1971.

As a result, house payments are more affordable than they have been in decades. The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. The index's historic average is roughly 120. A reading of 100 would mean that a median-income family with a 20% down payment can afford a mortgage on a median-price home. So today's buyers can afford handsome houses—but prudent ones might opt for moderate houses with skimpy payments.

For example, the median home in the greater Phoenix market, including houses, condos and co-ops, costs $121,700, according to Zillow.com. With a 20% down payment and a 4.12% mortgage rate, a buyer's monthly payment would be about $470. Rent for a comparable house would be more than $1,100 a month, according to data provided by Zillow.com.

Of course, all of this assumes mortgages are available—no given now that lending standards have tightened. But long-term data on down payments and credit scores suggest conditions are more normal than many buyers think, according to Stan Humphries, chief economist at Zillow. "If you have good credit, a job and a down payment, you can get a mortgage," Mr. Humphries says. "There's more paperwork and scrutiny than five years ago, but things are pretty much like they were in the '80s and '90s."

Not all housing markets are bargains. Mr. Humphries says Zillow has developed a new price/rent ratio that uses estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. A fresh look at the numbers suggests Detroit and Miami are plenty cheap for buyers, with price/rent ratios of 5.6 and 7.7, respectively. New York and San Francisco are more expensive, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.

For investors seeking income, one back-of-the-envelope way of seeing how these numbers stack up against yields for other assets is to divide 1 by the price/rent ratio, resulting in a rent "yield." The median market's rent yield is 9.3% and Detroit's is 17.9%.

Investors would then subtract for taxes, insurance, upkeep and other expenses—costs that vary widely. But suppose total costs were 4% of the purchase price. That would still leave a 5.3% rent yield in the typical market. With the 10-year Treasury yield at 2.2% and the Standard & Poor's 500-stock index carrying a dividend yield of 2.1%, rents for residential housing in many markets look attractive.

A few caveats are in order. First, not all transactions are average ones. Even in low-priced markets, buyers should shop carefully. Second, prices could fall further. Celia Chen, a senior director at Moody's Analytics, expects prices to drop 3% before bottoming early next year and rising slowly thereafter. "If the economy slips back into recession, however, we could easily see a 10% drop," Ms. Chen says.

And property "flipping" can be dangerous even when prices are rising. That is because, absent a real-estate boom, house price gains simply aren't that exciting. Research by Yale economist Robert Shiller suggests houses more or less track the rate of inflation over long time periods.

Houses aren't the magic wealth creators they were made out to be during the bubble. But when prices are low, loans are cheap and plump investment yields are scarce, buyers should jump.
—Jack Hough is a columnist at SmartMoney.com. Email: jack.hough@dowjones.com

Why You Should Consider Buying a New Home

In this day of drop-dead prices on existing homes, why would anyone shell out for a new house? Amy Hoak on Lunch Break says there are a few good reasons why home buyers should not ignore new-home construction in their search.

How the $8,000 Tax Credit Cost Home Buyers $15,000

Original Post: http://blogs.wsj.com/developments/2011/05/11/the-8000-credit-cost-some-home-buyers-much-more/
By Jack Hough

Getty Images

The government's recent $8,000 cash incentive for first-time home buyers has proved even more costly for recipients than for taxpayers, according to data released Monday. Typical buyers have lost twice as much to price declines as they received from the program.

The median home value fell to about $170,000 in March from $185,000 a year earlier, according to Zillow.com. That means a buyer who closed on a house just before the tax-credit program expired in April 2010 collected $8,000 but has since lost $15,000 in value. Those who bought earlier in the program have done worse; the median price is down $20,000 from March 2009.

"The $8,000 first-time home buyers tax credit . . . has brought many new families into the housing market," the White House boasted in November 2009 upon announcing an extension and expansion of the program. Judging by sales declines since, that seems beyond doubt. Over the past year, the pace of existing home sales has fallen more than 6% and that of new home sales has fallen 22%.

The credit wasn't great for taxpayers, either. IRS says it paid $26 billion in home buyer credits in 2009 and 2010, enough to cover the maximum $8,000 credit for more than 3 million buyers. (It says at least $513 million went for fraudulent claims. Some claimants hadn't bought houses. Some filed twice. Some were under age 18 or incarcerated.)

In October 2009, when the extension of the $8,000 credit for homebuyers was under consideration, I outlined five reasons the U.S. didn't need more housing perks. These included already-high prices and an abundance of benefits, the questionable stimulus value of home subsidies and a gaping budget deficit. In January 2010, with the extension passed, I recommended that eager buyers wait at least nine months and purposely miss the $8,000 tax credit deadline to take advantage of price declines after. The median price fell about $8,000 over the next nine months and another $8,000 since.

I realize that writing an apology for this program's failure probably isn't high on Congress's or the President's list of priorities right now. But just in case someone's conscience is bothering them, let me offer a simple draft:

"We thought the $8,000 tax credits would raise house prices and spur the economy. We were wrong. For starters, it makes no sense for a housing affordability program to have the stated goal of raising prices, because higher prices mean less affordability, not more. Another thing: The program didn't work. We squandered taxpayer cash, increased the debt and lured many Americans into losses. We're deeply sorry. We'll try not to repeat the mistake. If anything, in light of America's daunting fiscal challenges, we're going to consider sun-setting costly, existing programs that lure house buyers, like the mortgage interest deduction and capital gains exemption, which together are more than 10 times as expensive as the expired tax credit program, costing about $1,200 per household last year alone."

For homeowners who are wondering if prices are done falling, and for renters who want to know if now is the time to buy, here's my best guess. In April 2007, when I first wrote that renting had come to make more financial sense than home-ownership, I calculated that prices would have to decline by half to restore the historic relationship between prices and rents. Since then, they've fallen 30% nationwide. Inflation has eaten another 8% of their value. So the worst of the plunge seems done, but prices might drift lower or lose ground to inflation in coming years. In some hard-hit markets, of course, houses are a good deal. For a very rough gauge of value in a specific area, divide recent sale prices by the yearly amount charged to renters for comparable properties. If the result is over 20, prices are probably too high. If it's less than 10, houses might be a steal. If it's in between, well, it's in between.

For another take on prices, consider something I and others have argued about the natural rate of price increase for houses. It's exactly the rate of inflation. Houses, after all, are sticks and stones and other ordinary things, and inflation by definition is the gradual rise in the price of ordinary things. If house prices forever rose faster than the rate of inflation, they'd become infinitely expensive relative to rents, incomes and the cost of building materials.

House prices indeed tracked the rate of inflation during the 1970s, 1980s and 1990s, straying only slightly and briefly and returning each time. In 2000, house prices began to detach from the inflation rate and race ahead of it. Therefore, normalcy might be restored once the house price rise since 2000 matches the rate of inflation since then.

Houses are up 41% since 2000. Inflation has increased other costs by 32%. By this measure, too, prices on a national level seem nearly back to normal but not quite there yet.