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Real estate

Real Estate: What does the future hold?

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One of my Realtor friends says that not so long ago, he seriously considered declaring bankruptcy to get clear of the three properties he bought at the height of the bubble. He’s dropped the plan, seeing that things are slowly turning around, but he’s skill skeptical about the future.

Meanwhile, some speculators think real estate is set to grow at a fast clip. Yeah: any time now. Yale economics and finance professor Robert J. Schiller reports on surveys of home buyers’ attitudes. In 2009, 311 people responded. Asked how much they expect their property value to change annually over the next decade, their average answer was an increase of 11.2 percent; the median response was 5 percent.  Asked about short-term prospects, respondents answered, on average, that they expected a 2.3 percent rise in their home value over the next 12 months.

He who thinks his single-family residential property value is going to increase 11.2 percent per annum over the next ten years is stuffing his pipe with some mighty potent happy weed.

Over the decade I owned my last house, its value rose about 8 percent a year. But I got a good deal on it when I bought it out of an estate at the tag end of the recession that followed the savings and loan fiasco, and I sold it just as the late, great bubble prices were starting to run up. A four-bedroom house with many designer remodels, it stood on a nice street bordering a prime central neighborhood, within walking distance of an acceptable public school.

My guess is we’ll see a plodding annual increase of about 2.5 percent for the next several years, followed by a rise to 3 percent for a couple years, then settling into to 5 or 6 percent for the duration. More optimistically, I can imagine a 3 percent growth rate for several years that then drifts past 4 percent and 5 percent to arrive and stick at a steady rate of 6 percent per annum.

If you owe, say, $211,000 on a house for which you paid $235,000 and that’s now worth $160,000, what does that mean for you?

Scenario 1. Sale value rises by 2.5 percent for four years, then 3 percent for two  years, then 5 percent for 3 more years:

• Value rises to $176,610 after 4 years.
• It reaches $187,366 two years later, after a total of 6 years.
• And it hits $216,899 3 years later.

You’ve held the property for 9 long years. Interest has picked your pocket thoroughly and you won’t get your down payment back, but if you sell the house, at least you don’t have to bring any greenbacks to the table.

Scenario 2. Value rises at 3 percent for three years, then 4 percent for a year, then 5 percent for a year, then 6%:

• In 3 years, it’s worth $174,836.
• Another year later, at 4 percent, it reaches $181,830.
• The next year, as appreciation shifts upward another percentage point, it’s worth $190,921.
• The following year, at 6 percent, it reaches $202,377. Six years have passed. You’re still upside down, but today if you try to sell it you only have to bring $8,623 to the table, far better than the $41,000 you’d have had to come up with if you sold it in a panic at the outset.
• With appreciation holding steady, you hang onto it for 3 more years at about 6% p.a. (simply by way of comparing it to the first scenario), and it’s worth $241,034.

Because you’ve had to pour a lot of interest into the thing, when you sell it at the end of year 9 you don’t walk away with anything to make Uncle Scrooge proud. But at least you can unload the place without having to pay cash to the bank to get out from under the loan.

IMHO, that’s about the best we can expect. If that’s so, either of two strategies can help turn this lemon into lemonade:

1. If it’s a decent house in a safe neighborhood, live in it and enjoy it for nine years.
2. If it’s not anything you’re comfortable living in, rent it and use the rental income to turn the house into a gigantic tax deduction. Use the revenue to pay the mortgage bills, defraying some of the losses on the investment. If, as expected, inflation goes into the stratosphere, over time you’ll be able to charge enough rent to cover the payments and have some left-over cash to put in savings. Assuming you have a fixed-rate mortgage.

Let’s suppose a miracle happens and houses start to appreciate at 4 percent. This puts you right-side up in about seven years. Well, what the heck! If a miracle like that can take place, surely an immediate annual appreciation of 6 percent isn’t impossible. That would haul you out of the deep end in a little over five years.

There’s another possibility, of course: massive inflation. In that scenario, the real purchasing value of the money you owe on your monthly payments drops. If you manage to get and hold a job, the payments become more affordable over time. The dollar value of your house rises, but then the dollars are worth a lot less. You reach a point where you can sell the house for the number of dollars you paid for it, but those dollars won’t put a better (maybe not even a comparable) roof over your head.

Back in the days when bankers were bankers, they used to say real estate should always be seen as a long-term investment. Guess those old guys knew what they were talking about! And the only thing they smoked in their pipes was tobacco.

Image: Bungalow in Darien, Connecticut. Public Domain. Wikipedia Commons.

{gasp!} Property tax bill

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The county finally got around to sending this year’s property tax bill, only a month or so late. They’re so close on the deadline that I’ll have to transfer the money out of savings instantly and ship off a check this weekend; otherwise I’ll be delinquent.

The tab: $2,058.86. Now…yes, I do realize that compared to property taxes in certain Midwestern and Eastern Seaboard states, this is as nothing. (But let’s remember: the educational system and other accouterments of a civil society are also as nothing here.) Compared to last year’s tab, it’s exactly $20 less.

That’s surprising. SDXB’s tax bill, which is rock bottom because his part of Sun City was never gerrymandered into a school district, rose by fifty bucks this year.

Everyone’s bill was jacked up, despite the large cut in property valuation occasioned by the busted real estate bubble, because our cash-strapped “no tax-and-spend” state legislators revived a defunct state property tax. So even though our valuations are in the sub-basement, where they belong, our taxes are just as high as they were at the height of the bubble.

We won’t comment on what they buy. Oh, what the heck…yes, we will: vast layoffs of state workers, grade school classes with 50 kids in them, reduced forces of emergency workers, closed museums, reduced library hours…all manifestations of a Killed Beast.

I’m grateful to get a bill that’s no higher than last year’s. Next year, it should drop considerably, because of various political promises to undo this, that, and the other device to raise funds. But by then, property values will have risen closer to normal, providing another reason to raise the tax bill.

Don’t mind paying taxes if we get some value received…but just now, that doesn’t seem to be happening. My two thousand bucks could keep a state worker on the payroll a good month (maybe more). Taken together, everyone on this block could keep her working a year or 18 months. So…let’s see that happen, boys!

Why is the grass never greener…?

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Am I the only person who keeps imagining the grass is greener on the other side of the fence and then, once I’m in the pasture, discovering that’s not grass—it’s Astroturf?

On the way home from Saturday’s six-hour choir workshop, what should I spot but an open-house sign (Sotheby’s: around here, that spells “if you have to ask, you can’t afford it”). It pointed to a tract of new construction smack in the middle of the desirable Seventh Street to Seventh Avenue corridor known as North Central, just a few steps away from the old-money Episcopalian church I frequent. Since the outfit that tried to install a set of pricey ersatz “lofts” directly across the street from said House of God went belly-up, leaving a partially built hulk to weather away in the middle of a weed-strewn lot, I figured this developer couldn’t be much better off.

Indeed not.

The perky blonde Realtor said the four units they’d completed had been sitting there for over a year. One of the houses had a contract on it, but if it fell through, she remarked, the developer would probably be foreclosed. When the four models were built over a year ago, she said, the developer had asked upwards of $500,000 for them. The current asking prices ranged from $365,000 to $399,000.

Interesting. Though $365,000 is $100,000 more than I can afford, it’s edging toward a killer bargain for 2,200-plus square feet in a tony in-town district. Asked if the seller would come down some more or relieve the buyer of her own house, the Realtor thought not.

The models were very nice: big kitchens with top-of-the-line appliances (including gas stoves), attractive design, landscaping included. And pretty clearly, if a person were to wait long enough, a person could buy them from the bank for significantly less than 385 grand. The infill land the developer had acquired had room for 18 houses. So far he had built four and sold exactly zero new dwellings.

Even the Realtor remarked that she would be cautious about buying in a development so far from being built out. With four models up (only one of them provisionally sold), we were looking at the possibility of living in a tract full of weed-infested empty lots.

On the other hand…for the startling monthly HOA fee, the four future owners (assuming four buyers ever materialize) could afford to grass over the empty lots and turn their surroundings into a pocket park. Or, what the heck: put Astroturf down over the whole place and never have to water it. 😉

Speaking of Astroturf, after a perusal of all four formerly half-million-dollar models, here’s what became evident:

• Though the houses had common walls, the developer had the effrontery to claim they were free-standing structures with “no common walls” (so say his flyers) because they’re built with a pocket of air inside the contiguous walls.

• The HOA fee starts at an exorbitant $151 a month, and all that covers is maintenance of some low-cost desert landscaping and single short asphalt road leading into the tiny tract. No insurance, no pool, no tennis court, no community lighting, no nothing. Around here, that is very high for a tiny HOA with almost no costs.

• Every house had two stories. This meant no one would have any privacy, because everyone could see into at least two neighbors’ backyards and windows.

• The staircases were exceptionally long and steep, with only one handrail. Sprain an ankle or have your back go out (to say nothing of, say, suffering a stroke or a debilitating heart attack), and you’d be sleeping on a downstairs sofa. And of course, everyone loves dragging a vacuum cleaner up dozens of steps, cleaning each one on the way.

• The lots were so tiny that even with the houses jammed together like duplexes, each house had no front yard and a postage stamp in back. One model essentially had no back yard: its downstairs master bedroom occupied the entire back end of its lot.

• In a laudable attempt to escape the snout-house look, the developer had built the garages in back, accessible from city-maintained alleys. This meant that to haul your groceries in, you had trudge across the back yard, enter through a back door, and traipse through the family room or dining room into the kitchen. Nothing like getting your exercise, rain or 118-degree shine!

• The models’ backyards were landscaped. Whoever designed the landscaping hadn’t a single clue about plantings and trees. In two of the teensy yards, they had planted sissoo trees. In the biggest of the houses—one that had a studio over the garage, giving it around 3,000 livable square feet under roof—they had planted two sissoos! Sissoo trees get huge, quickly reaching sixty feet in height with forty-foot-wide canopies, and they have a fine proclivity for heaving sidewalks and foundations. They’re widely considered to be a nuisance tree. Because the yards were so minuscule, there was no way to place such a monster tree far enough away from the structure to avoid damage.

• The handsome kitchens looked, at first glance, to be very upscale, but on closer inspection, the cabinetry was the same Kraft-Maid stuff that the previous owner of my house had ordered up from Home Depot and installed himself! The wall cabinets didn’t extend to the ceilings (which were not unduly high), and so they didn’t hold much and their tops functioned as efficient dust-catchers. I can testify that my cabinets do not hold a set of Costco wine glasses, which are generally too tall to fit. If you adjust the shelves so you can fit a few wine glasses within reach, you end up with one shelf space that’s too shallow to hold anything taller than a cookie sheet. For the half-million bucks the developer originally hoped to get for these places, he could’ve afforded to hire a finish cabinet maker to build some custom cabinetry.

The gas stovetops were amazingly small. Mine is not large, and I can just fit a large frying pan next to a saucepan. The design of these left even less space to array four pots and pans. At most, the four burners would accommodate only two large pans at once.

The sink was nothing special. The Koehler unit I installed in my house, with its two large, deep sinks and gooseneck faucet, is far more usable.

It was, in short a faux gourmet kitchen designed for people who eat out most of the time.

• The view from the second floor revealed that most of the neighborhood consisted of aging high-density housing: old apartments dating back to the 1950s, at least one of them distinctly down at the heels. The best of the models, on the north side of the little tract, backed onto the playing field of a large public middle school. Though the traffic generated by such a school would concentrate on the other side of the building, residents of the new tract would enjoy a constant serenade of P.A. system announcements, blaring, electronic change-of-class bells, and kids hollering. The private school a half-block to the south is not served by school buses or public transportation. This means hundreds of parents parade past every morning and every afternoon, dropping off and picking up their kids.

• Each house had two air-conditioning units, except for the large model with the studio over the garage, which had three. Think of that. If one AC unit generates $220 bills during a 116-degree July, three could present you with a $660 tab!

IMHO, a two-story duplex—tucked between aging apartment complexes and a large, noisy school and amazingly dubbed a “single-family detached home” because it’s separated from its adjacent neighbor by a three-inch-wide air pocket—is a far cry from my block house on a quarter of an acre with a large pool, five citrus trees, and room to grow a sissoo if one were so inclined. They may be new and they may be on the “right” side of Seventh Avenue, but they’re not worth $100,000 to $150,000 more than my place.

Astroturf. Very overpriced Astroturf.

Landscaping job wraps up

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Richard’s men are almost done with the big landscaping job at the downtown house. We’d hired his company, Dick’s Landscaping, to xeriscape both the front and back yards, huge plots of land compared to modern tract lots.

They’ve ripped out a decrepit walkway, built a front courtyard and new brick walkway, installed an automatic watering system (front and back), laid three brick patios, planted eight trees and a bunch of ornamental grasses and shrubs, laid weed fabric over the bermudagrass-infested ground, and spread 75 tons of quarter-minus crushed granite. And the place is looking a lot better!

Here’s a “before” view of the backyard:

For a good view, click on the images

And an after:

We’re looking at a lemon tree, a lime tree, a Texas ebony, deer grass, a Mexican bird of paradise. Both the Lisbon lemon and the Mexican lime will get to be good-sized trees. Texas ebony is slow-growing, but over time it develops into a very handsome xeric tree. Not much we can do about the overhead wires, which actually are over the alley, other than consider them quaint characteristics of a character-filled antique bungalow.

Work in progress in front:

Men working, in front

And here’s the result:

The little tree is a multi-trunked desert willow, which grows to a medium height and bears lovely deep purple flowers for  many months during the late winter and spring. In a year or two, it should shade the front window and, with the mature carob tree just to its west, cool and shade the new courtyard.

More to come: We just had Richard’s crew do the heavy lifting for us. After the worst of the heat passes, M’hijito will plant more ornamentals and set various potted plants around the yard. And in back, we’ll lay flagstone stepping stones to build a pathway from the covered patio to the new sitting area in back.

The 1,450 bricks that came from the estate sale sufficed to build most of the three patios, and we still have a few left. Amazing buy!

Our project inspired the down-at-the-heels neighbor across the street to do a little keeping-up-with-the-jonesing: he snagged our workmen and hired them to lay a wide driveway in his front yard. Maybe some of the rolling stock will get moved off the lawn!

Pay off debt or build savings?

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Over at I’ve Paid for This Twice Already, Paid Twice invites her readers to think about the relative importance of paying off debt or building savings. Which should be a person’s top priority? It is, as she points out, not a clear-cut decision.

Some people say that there’s “good debt” (such as home and student loans, owed on property or training that eventually returns more than you pay…supposedly) and “bad debt” (everything else; especially credit cards). I personally would argue that there’s only debt, and debt is slavery. Debt forces you to stay in the traces until you pay it off or until you die, whichever comes first. Over at Debt Kid, Jessica describes experiencing the same revelation.

Freedom from debt is freedom to live as you choose. Period. If working brings you personal fulfillment, you can do it—and a debt-free worker is one who has a great deal more disposable income (to say nothing of more options) than one who labors under the lender’s lash. If you want to retire or devote your energy to low-paid but altruistic work, debt freedom will make either of those choices possible.

I’ve used savings—in direct contradiction of advice from money advisers—to pay off debt and never once regretted it. Here’s why:

1) Revolving debt cuts your purchasing power by the amount of the interest gouge. If you pay 18 percent for everything you put on a charge card, then each dollar you spend is really worth only 82 cents.

2) You don’t actually own anything when you’re making payments on it. The bank owns it; you’re just renting it.

3) For most mere mortals, the so-called tax benefits of mortgage interest are negligible.

4) If you own your home outright, the absence of a mortgage payment increases your real take-home pay enormously. I couldn’t live on my net income if I owed on my house or had to pay rent. I paid $100,000 for my first house, for which I put down $20,000. Until I paid off the loan, I owed $9,960/year on the PITI. In the best of times, that $100,000 earned $8,000 a year in mutual funds. Paying off the mortgage freed up $830 a month for living expenses and savings. Taxes and insurance on my present house, purchased with the proceeds of the sale of my first paid-off home, are about $2,200 a year, meaning that today I have to set aside about $183 a month to cover those annual bills. That’s a far cry from an $830/month bite…which at the time I paid off the loan represented half my monthly take-home pay.

5) Where real estate is concerned, in normal market conditions (which one day will return), when a house is paid off and appreciating in value, the money you put into it is growing just as it would grow in a conservative investment, at about 6 to 8 percent a year. Thus the $100,000 I paid for my first house yielded $211,000 a few years later, allowing me to buy my next house in cash. Once a house is paid off, you’ll never lack for cash to keep a comparable paid-off roof over your head.

6) This is not true while you’re paying on a mortgage, because the mortgage interest eats up the gains created by the property’s appreciation in value. Over 30 years at 6 percent, a you’ll pay $115,838 in interest on a $100,000 loan; in other words, you’ll pay $215,828.45 for your $100,000 house. If you’d put that extra $115,838 in mutual funds over the same period, the compounding interest would have been paying you, not the bank. Paying just $200 a month extra against principal would cut your payback time from 30 years to 16 years and 3 months and drop your total interest gouge to $57,386.

7) Clearing off  debt opens the way for larger and faster savings. If you could afford to make a payment on a car, a house, or a credit card, then once you’ve paid off the debt you can afford to put the amount of the payments directly into savings and investments.

So, in a way, debt pay-down is a form of saving.

On the other hand, in recessionary times when one’s income is at risk, you need a substantial emergency fund. If you find yourself starting out during a recession, your first priority obviously should be to stash enough to live on for at least six months, preferably longer. IMHO the ideal emergency fund contains one year’s worth of your present net income.  Once you have it, though, you’re justified in devoting every extra penny to paring down debt of all kinds.

In good times or bad, saving should be part of your agenda. But since freedom from debt makes your money go further and allows you to save substantially more, getting out from under debt should be your top priority.

Real estate as investment

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Yesterday I followed open-house signs to a foreclosure in the Windsor Square district, a gentrified enclave of 1930s and 1940s houses tucked behind the gourmet grocer at Central and Camelback. The house, a pretty little money sink in the very best part of the neighborhood—as far away from any of the main drags as you can get—had bankrupted a speculator who’d fixed up it handsomely and imagined he could sell it for $600,000.

At 1,900 square feet, it was cobbled together from a tiny 1949 structure with a couple of additions, both of which appeared to have been professionally designed and built. the result left the two original dwarf-sized bedrooms free to be used as offices or game rooms, while a big new master bedroom with a gigantic walk-in closet and handsome bathroom looked out into the backyard.

The buyer would need to install a stove, dishwasher, and fridge, but BFD: you usually end up having to buy those for any used house. The backyard needed a cleanup: Gerardo, $150. One nice thing about it—very nice, in Phoenix’s vintage central-city neighborhoods—was that it had a functioning two-car garage in excellent condition.

I wanted it.

Unfortunately, the bank already had an offer of $300,000, more than I could reasonably expect to clear on the sale of my present home and so, since I’m not going into retirement with a mortgage on my residence, out of my price range.

But…wow. If someone is “stealing” an old jumbled-together house out of bankruptcy for three hundred grand, then the truth is, the downtown house M’hijito and I are upside down on was a good buy. It’s only about five blocks away from Windsor Square, within walking distance of the much-touted light rail and of the very fancy gourmet store and all the very fancy restaurants and shopping around it. Eventually, young professionals who want to live near Central and Camelback will notice, and when they do, they’ll start to drive the prices up in our area.

I really love houses of that vintage. They still have the lath-and-plaster walls with their rounded corners and thick block or brick exteriors. They retain some of the charm of still older houses, but they’re not as decrepit as the property in the Willo and Coronado districts. Personally, I could live very comfortably in our downtown house, and in fact, given half a chance, I will.

If and when M’hijito decides to move on, lured away by a better job, graduate school, or a wife, I plan to buy the downtown house by selling my house, paying whatever we owe on the mortgage, and reimbursing him for his investment in the house. If that happened today (which it won’t), it would put $30,000 or $40,000 in my pocket, and I’d end up with a much-desired smaller place, no pool to have to tend, and a sweet environment built to our taste.

The real estate market, even in beleaguered Phoenix, is pretty clearly bottoming out. My house has never lost value, and in fact has gained value at about 3 percent a year since 2004. That means that within the next year or two, as employers start to hire again (we sincerely hope!), my house will start to increase in value and demand will rise markedly. The central areas are always in demand, and as gasoline prices rise, demand follows in lockstep.  Meanwhile, the principal on the downtown house’s mortgage isn’t going anywhere…meaning that its payoff “cost” drops as inflation rises and the sale price of my house goes up.

In a few years, about when I expect my son to experience some sort of life change that will have him wanting to move up or out, I should be able to clear about $50,000 or $60,000 by selling my house. If the price of my house rises to $300,000 (about what it should be worth in five years), the difference between my selling price and the mortgage principal on the downtown house will be about $90,000. So I can easily pay off that principal, fork over $30,000 or $40,000 to my son and still have a significant amount to add to the retirement fund. If I die before he’s ready to move on, he’ll be able to sell my house for enough to pay off the mortgage and pocket at least $50,000, or else rent the downtown house for enough to cover the mortgage payments and move into my place. Or…who knows? Rent or sell them both!

Considering that my initial investment in my first paid-off house was $100,000, that’s not a bad return. Of course, it doesn’t count the amounts we’ve put in to renovating and improving the three houses or our down payments and interest gouges on the downtown house. I’d guess those costs would come to a little over a hundred grand, all told. So we’re looking at a $90,000 gain on about $200,000 invested over 15 years…not too bad, considering that the amount invested also put a very pleasant roof over my head and got my son out of a dangerous firetrap.

Could we have made more in the stock market? Maybe, absent the Cheney-Bush economic melt-down. But we each still would have had to live someplace, requiring us to pour rent or mortgage interest down the drain.

So…while I don’t think real estate is a great investment—and we know it certainly isn’t risk-free—as long as you’re in a buy-and-hold mode, it’s probably not as bad an investment as it seems just now.