Archive for the 'Financial Responsibility' Category

Beware Local Papers Hyping Homeownership

posted on February 20th, 2014 filed under: Financial Responsibility, Real Estate News

Today’s Miami Herald includes a puff piece claiming that it’s still cheaper to buy than rent in Miami, based on the latest nationwide report by real estate data-crunching firm RealtyTrac.

Miami Real Estate -- Herald -- Buy Versus Rent (2014-02-20)

Do not take that report at face value. The methodology RealtyTrac used for its nationwide analysis has major flaws as applied to the Miami market.  From the RealtyTrac website:

To calculate the monthly house payment, RealtyTrac assumed a 20 percent down payment, a 30-year fixed interest rate of 4.46 percent for homes purchased in the fourth quarter of 2013 and a 3.35 percent 30-year fixed interest rate for homes purchased in the fourth quarter of 2012.  Also included in the monthly house payment is a 1.04 percent annual property tax rate, 0.40 percent of the purchase price in annual maintenance costs, 0.35 percent of the purchase price in annual home insurance costs, and subtracting the tax benefit from the mortgage interest deduction and property tax deduction using a 30 percent income tax rate.

For a Miami home-seeker, these assumptions are laughable.  They bear no relation to reality in Miami:

  • The assumption of a 1.04% property tax rate is way too low, generally speaking.  The rule of thumb for property taxes in Miami is closer to 2%.
  • “0.35% in annual property insurance costs”?  Good luck with that.  Florida has the highest property insurance costs in the nation.  Rates vary radically depending on location, year of construction, storm-protection features and other variables, but for purposes of a market-wide generalization, anything less than 1% of home value is probably unreliable.

Even the assumptions not affected by local realities are questionable:

  • Not everyone can muster a 20% downpayment and thereby reduce their monthly mortgage payment by the magic of borrowing less in the first place.
  • A very small portion of the population is in the 30% income-tax bracket that yields a tax-deduction benefit.  According to the IRS (Pub. 1304, Table 3.4), less than 5% of the population was in the 28%-or-higher tax bracket in tax year 2011.  And remember, a portion of the benefit from the mortgage-interest deduction is illusory, because you actually save money only to the extent that the itemized deduction exceeds the standard deduction.  Particularly for lower-income buyers of lower-priced homes, there may be no benefit to itemization at all.

As always, the question whether it’s cheaper to buy or rent depends on your specific circumstances.  REF Real Estate will be glad to help you estimate the true costs of buying versus renting a home in Miami.

Whatever you do . . .

Don’t Believe the Hype.

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2013’s Mortgage Milestone

posted on December 31st, 2013 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

The rebound in real estate markets, especially prices of homes in the hardest-hit markets like Miami, has been a top story in 2013.  One of the less appreciated bits of news was the passage of a major milestone.  In the third quarter of 2013, the total amount of mortgage debt outstanding recorded its first positive number since 2009 (and really since 2008, because 2009 merely saw one quarter of very slightly positive growth).

Fed Flow of Funds Z1 -- Mortgage Borrowing -- 1Q2000 to 3Q2013 -- Chart, Graph

Mortgage debt is the mother’s milk of real-estate prices, so continuation of the uptrend in debt is important to the sustainability of rising prices.  Since the 1950s, mortgage borrowing and home prices had increased without fail, lulling bankers and buyers alike into the ill-fated belief that prices would never fall.

Fed Flow of Funds Z1 -- Mortgage Borrowing -- 1956-2012 -- Chart, Graph

And indeed, when viewed on a logarithmic scale, the explosion in mortgage debt during the bubble might have seemed within reason — in keeping with the constant, long-term destruction of the dollar through inflation.  Unlike in the 1970s, however, incomes were not going along for the ride.  Without income to service the debt, the end was nigh.

Fed Flow of Funds Z1 -- Mortgage Borrowing -- 1956-2008 (Log Scale) -- Chart, Graph

(Negative numbers cannot be plotted on a logarithmic chart, so the preceding chart ends in 2008 — but you get the picture.)

Is the current uptrend in debt and prices sustainable?  The negative numbers represented not only a lack of borrowing by home buyers, but destruction of bad loans by banks — and banks have worked through a significant portion of the bad loans by now.  But interest rates have been rising, which creates several risks to continuation of the debt and price uptrends.  If 2013’s buyers paid as much as they could (as buyers are wont to do), and rates continue to rise, then there are four possibilities for real-estate prices in 2014: (1) cash buyers sustain current price levels; (2) incomes rise to offset the higher payments; (3) lending standards loosen to allow bigger and riskier loans to the extent incomes don’t rise; or (4) prices fall.

Don’t count on the first possibility.  Investors have sharply curtailed their purchases in recent months, quite possibly in reaction to the realization that the Fed’s program of interest-rate suppression has reached its limit.

It’s hard to rely on the second possibility either.  Incomes have been rising modestly, but not enough to keep pace with the rise in interest rates since 2012.  The only hope on this score would be that buyers have been uncharacteristically restained in their offers.  Considering the number of multiple-offer sales and the number of homes selling at or above asking price, it’s hard to believe that buyers have much in reserve — at least here in the Miami real estate market.

Will lending standards loosen?  It’s already happened to some extent, and there may be room for further relaxation.  On the other hand, new mortgage-lending regulations take effect in a couple of weeks and are generally expected to have a constrictive effect.

As for possibility number 4 . . . presumably nobody will repeat the mistake of thinking that “prices never fall” anytime soon.

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Miami Price-Income Ratio Defying Gravity Again

posted on October 31st, 2013 filed under: Financial Responsibility, Real Estate Market Data

A year ago, home prices in Miami had already risen so much faster than incomes that the ratio of median home price to median income was higher than at any time outside the bubble that burst.  (See Do Incomes Matter to Home Prices?)

With another year of low interest rates and cash buyers, the relationship between Miami home prices and incomes has deviated significantly further from historical norms.  The median price rose while the median income actually fell, according to data from the National Association of Home Builders.

Price-Income Ratio (NAHB) -- Miami -- Chart, Graph -- 1991-2013

[Geeks’ note: A few of the data points in the above chart were missing from NAHB statistics, and those gaps were filled by interpolation.]

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S&P Case-Shiller Index Shoots Higher Again

posted on July 31st, 2013 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

According to the S&P Case-Shiller Home Price Index, values of single-family homes in the Miami metro area were rising at about 2.49% per month as of May 2013 (more precisely, it’s the May report for the rolling average of the three months that ended in May).  That’s about 30% per year!  The last time — indeed, the only time in Case-Shiller data — that Miami real estate saw such gains was . . . . . . wait for it . . . . . . in June 2005, just before the bubble burst.

S&P Case-Shiller Home Price Index -- Miami -- May 2013 (from Jan 2008) (Chart, Graph)Source:  Standard & Poor’s

The relatively short-term chart above begins when Miami real estate prices peaked in January 2008.  Viewed alongside the black-diamond ski slope of the real estate crash, the price gains of the last year or so seem respectable but perhaps not all that unusual.

On a longer-term chart, however, it is indeed highly abnormal for Miami home prices to rise this rapidly:

S&P Case-Shiller Home Price Index -- Miami -- May 2013 (Chart, Graph)Source:  Standard & Poor’s

After asset bubbles burst, a phenomenon called an “echo bubble” is sometimes observed.  And the Federal Reserve, which intentionally created the housing bubble in the first place to offset the collapse of the late-’90s stock bubble, is up to its old tricks.

Considering that the price-to-income ratio is already above pre-bubble historical highs, incomes are rising at a low single-digit annual percentage, and interest rates spiked in June to drive up mortgage costs by a double-digit percentage, there is reason to doubt whether 30% annualized price gains make sense.  (For a chart illustrating how fast opportunity in the real estate market has vanished, see Bloomberg — American Dream Suddenly Isn’t So Affordable.)

But hey, as one spirited auctioneer liked to say: “C’mon people, it’s worth whatever you pay for it!”

If you must buy Miami real estate (or sell Miami real estate), the least you can do to give yourself a fighting chance is to give REF Real Estate a call.  Buyers get 1% cash back on the purchase price, and sellers get full service for the lowest possible commission.

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So You Wanna Be a Landlord?

posted on February 28th, 2013 filed under: Financial Responsibility, Properties in Focus, Real Estate Market Data

Investors big and small have suddenly decided that it’s a great idea to buy single-family homes for rental income and future price appreciation, according to a flood of media reports.  A quip about how quickly we forget would be too easy.  And indeed, these investors are far more responsible than the yahoos who bought homes during the bubble.  Those were bad investors, and these are good ones.  Right?

Renting a house is hardly a newfangled way to earn income.  This big new idea is actually an old idea that previously had limited appeal.  What changed?  For one thing, the government rolled out big subsidies for institutional investors.  For another, Federal Reserve policies are starving small investors of a fair yield on their bank deposits, forcing people to hunt for yield in places they never considered before.

Such things tend to end poorly, but in case that observation strikes you as unconvincing and platitudinous, let’s look at a few recent sales to see what they say about how profitable buying and renting single-family homes really is.

The math is not hard.  In the simplest sense, your yield equals rent, minus carrying costs, divided by purchase price.  This is also known as your capitalization rate, or cap rate.

The major carrying costs annually are property taxes, homeowner’s insurance, and maintenance.  In the Miami area, property taxes approach 2% of the purchase price, homeowner’s insurance can be about 1% to 2% of the purchase price depending on the age and structural characteristics of the home, and maintenance should be budgeted at or near 1% as a rule of thumb anywhere.

If you finance, then the interest is a carrying cost but the out-of-pocket purchase price is effectively reduced by the amount you borrow.  We’ll ignore financing, as it’s often a wash.

So what does this simplified analysis say about buying homes for rental income in the Miami and Coral Gables real estate markets these days?  Consider several homes that recently sold and were also recently rented or offered for rent.

The home at 629 Madeira Avenue in Coral Gables recently sold for $370,000, and recently rented for $1,900 a month ($22,800 annually).  Property taxes are about $7,000.  Insurance can’t be known without getting a quote, but the house was built in 1940, so it probably doesn’t qualify for the cheapest rate.  Call it $5,000.  Add another $3,000 for maintenance and you’re at $15,000 in carrying costs.  Subtract that from the $22,800 and you have net income of $7,800 annually.  Divide $7,800 by $370,000 and you get a yield of 2.1%.  Salivating yet?

629 Madeira Avenue

629 Madeira Avenue

Here’s another.  The home at 1248 Milan Avenue in Coral Gables recently sold for $430,000, and recently rented for $2,000 a month ($24,000 annually).  The house is so small (1,335 sq. ft.) that property taxes are about $5,200.  It was built in 1924, so insurance is probably high for the home’s size, but that isn’t saying much.  Call it $4,000.  For such a small home, add a mere $2,800 for maintenance and you’re at $12,000 in carrying costs.  Subtract that from the $24,000 and you have net income of $12,000 annually.  Divide $12,000 by $430,000 and you get a yield of 2.8%.

1248 Milan Avenue

1248 Milan Avenue

One more — this time on the higher end.  The home at 5309 Alhambra Circle in Coral Gables recently sold for $1,261,000, and was recently offered for rent at $6,950 ($83,400 annually).  Property taxes are about $19,000.  It was built in 1926, so insurance probably is expensive.  Call it $11,000.  Add $8,000 for maintenance and you have $38,000 in carrying costs.  Subtract that from the $83,400 and you have net income of $45,400 annually.  Divide $45,400 by $1,261,000 and you get a yield of 3.6%.

5309 Alhambra Circle

5309 Alhambra Circle

The higher-end home seemingly fared better than the others, but still yields just 3.6% — and that’s based on the asking rent.  It didn’t actually rent for that much, so the yield might well have been less than 3.6% if a tenant had been found.

Which raises another consideration: An important factor omitted from these case studies is the vacancy rate.  There’s a big difference between listing a home for rent and renting the home.  Until it’s rented, your income is not just zero, but negative, because you still owe all the carrying costs.  Professional landlords accordingly reduce their anticipated income by the share of time they think a property will be vacant in between tenants.  A safe margin would probably be at least 5% to 10% for single-family homes, and as 5309 Alhambra Circle shows, it can drag on for much longer.  How long would you be able to take that heat before either cashing out or renting your home on the cheap to seven fraternity brothers and a four-legged mascot?

The home at 5309 Alhambra is particularly interesting because the seller bought it in December 2011 for $1,215,000, then listed it in March 2012 for sale or for rent.  The list price for sale was $1,397,000.  The list price for rent was $8,200.  It looks like a failed flip that neither yielded a capital gain (remember the brokers probably took 6%) nor successfully rented even after the asking rent was substantially reduced.

Still wanna be a landlord?

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Do Incomes Matter to Home Prices?

posted on November 23rd, 2012 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

A little dose of reality to put the black in your Black Friday . . .

Price-Income Ratio (NAHB) -- Miami -- Chart, Graph -- 1991-2012

Home prices have stabilized recently, and even gained in some areas.  But this recent price action may face significant headwinds going forward.  The ratio of median home price to median income in the Miami area has once again reached the highest level on record outside of the housing bubble.

The price-income ratio is like the price-earnings ratio of stocks.  When it’s historically high, so is risk.  And when it’s historically low, that’s usually a good opportunity.

The most important factors in the recent bounce in the price-income ratio are probably (1) record-low interest rates that enable buyers to pay more, and (2) continued investment by cash buyers, for whom income is by definition irrelevant.  Perhaps these influences will persist, but rates may not fall much further (having fallen very little since the Federal Reserve announced QEternity), and cash buyers seem like slender support for a major metropolitan area’s housing market.

Of course, it’s a bit late to time the market.  The crash already happened.  And with rock-bottom interest rates, you can’t go too wrong in buying that perfect home if it comes along.  Just be aware of the possibility of detours along the road to recovery.

[Geeks’ note: A few of the data points in the above chart were missing from NAHB statistics, and those gaps were filled by interpolation.]

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The Best Advice, Right Here

posted on April 20th, 2012 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

Miami Real Estate Photos -- Biscayne Bay and Waterfront Homes on Palm Island

“[P]rices in Miami will fall 30% to 50% over a period of three to four years, and not return to their old highs until more than a decade has passed.”

House Price Index Update — New York and Miami, Sept. 4, 2008.

How many other real estate agents warned you at all, much less so accurately?  Heck, how many economists did?

The best advice.  The best real-estate representation.  Right here.

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2805 Columbus Boulevard Sells for $527 Per Square Foot

posted on January 18th, 2012 filed under: Financial Responsibility, Properties in Focus, Real Estate Market Data, Real Estate News

The home at 2805 Columbus Boulevard recently sold for $3.3 million.  Just a couple of shady blocks up the tree-canopied street from the elegant Biltmore Hotel, it’s easy to see the attraction.

2805 Columbus Blvd

2805 Columbus Blvd.

But the sale will pose a challenge for anyone trying to understand the value of luxury real estate in north Coral Gables.  At 6,255 square feet and built in 2004, the home sold for $527 per square foot.  The lot is 16,500 square feet, and not on water or a golf course.

Compare the recent sale of nearby 1260 Anastasia Avenue, an 8,701-sf Mediterranean built in 2001 on a 24,400-sf lot.  Located directly on the Biltmore golf course, the home sold in August for $3.05 million.

1260 Anastasia Ave.

1260 Anastasia Ave.

Granted, the clean lines of the architecture and interior at 2805 Columbus might have resonated especially well with today’s luxury home buyer.  But are Mediterraneans really going out of style, to the point that you can get 25% more house on 50% more lot, throw in the Biltmore golf course location, and still pay 13% less?

No, there is no objective explanation for the disparity in these two sales.  In real estate, subjective factors sometimes dominate.  That’s troubling if you want to believe that the market is rational.  But it’s also promising, because it means the market will occasionally present you with opportunities.

In the case of 2805 Columbus, the buyer was a Puerto Rico limited liability company, and the same agent both listed the property and found the buyer.  The transaction is essentially opaque.

The buyers of 1260 Anastasia, meanwhile, were James and Pamula Schlesinger.  Mr. Schlesinger appears to be the president and CEO of AWE Talisman, a real estate development firm.  Obviously, Mr. Schlesinger would not be likely to overpay for real estate.

If you, too, would like to avoid overpaying for a home in Miami, Miami Beach or Coral Gables, REF Real Estate will be glad to assist — and give you a hefty commission rebate.

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Miami: Affordability and Risk

posted on November 18th, 2011 filed under: Financial Responsibility, Real Estate Market Data

The boom and bust have played out in the charts posted here (with appropriate dire warnings) over time.  Here’s another view, this time based on the monthly median single-family home price for the Miami metro area, tracked by the Florida Association of Realtors.

Miami Real Estate -- Median Price -- Single-Family Homes (Jan 1994 to Sept 2011)

It looks like prices are roughly back where they belong.  Basically, the show is over.  And it’s tempting not to try to put too fine a point on it.  But don’t let the boom and bust cloud your judgment.  Before the boom, the notion of a decline in home prices was consigned to insignificant seasonal wiggles within a gradual upward trend.  The idea of even a 10% decline in prices would have shaken people to the core.  Now that we have lived through a >50% decline, there is a temptation to glibly brush off another 10% or so.  Yet if you’re only putting 10% down, a 10% decline wipes out your equity.

So we really do still need to care about the risk-reward balance.

On the reward side, interest rates are at record lows:

30-Year Fixed Interest Rate (Freddie Mac)

The combination of nearer-to-normal prices and record-low interest rates makes the cost of borrowing as low as it has been since the beginning of the median price series in 1994.  Consider the product of multiplying the median home price by the prevailing interest rate on the 30-year fixed mortgage. (Multiplying price by interest rate is not the same as the annual mortgage payment, but it’s a fair index of borrowing cost.)

Miami Real Estate -- Median Price x Interest Rate (Jan 1994 to Sept 2011)

That’s a beautiful chart for anyone who sat out the boom and wants to buy for the long haul.

So where’s the risk?  Primarily, in the uncertainty about when, or how fast, the punch bowl of low interest rates will be taken away.  Low rates fueled the boom, and rising rates helped prick the bubble and bring on the bust.  (“When the tide goes out, you find out who’s been swimming naked.”)

True, the risk of ruin from rising rates is much lower when buying near historically normal prices.  For one thing, rates are not supposed to rise unless the economy does better, and wage gains could then offset rising rates (as in the 1970s, when inflation ran hot but wage gains did too, and home prices actually rose smartly even as the 30-year mortgage rose from 8% to 16%).

But extraordinary measures have been taken.  A vast sum of money has been printed.  The Federal Reserve has reportedly surpassed China to become the single largest owner of U.S. Treasury debt.  If (or as some would say, when) inflation runs hot, rates could go up even as wages remain under pressure from economic weakness, foreign competition, etc.  Higher rates without higher wages could put new downward pressure on prices.

If you’re thinking of buying real estate in Miami (South Beach, Brickell, Coral Gables, Coconut Grove, Pinecrest, etc.), the low rates make it temptingly affordable.  Just know the risk when you reach for that reward.

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Almost Back to Normal Months’ Supply of Homes for Sale in Coral Gables

posted on October 16th, 2011 filed under: Financial Responsibility, Real Estate Market Data

The vast oversupply of homes for sale in Coral Gables has almost been worked off, even in the luxury segment of the market.  340 homes are currently for sale, and 40 sold last month, which works out to 8.5 months of supply.  This is a fundamental barometer for the real estate market.  Six to eight months’ supply is generally regarded as indicating a roughly equal balance of power between buyers and sellers.

Months Supply of Homes for Sale -- Coral Gables Real Estate -- Oct 2011 (Table)

Sales of luxury homes in Coral Gables continue to shows signs of life.  It’s normal for higher-priced homes to sell more slowly, but for a while, they were hardly selling at all.

Months Supply of Homes for Sale -- Coral Gables -- Oct 2011 (Chart, Graph)

Real estate in Miami and Coral Gables remains vulnerable to further price declines on several measures: historical valuations, the price-to-income ratio, and the cost of owning versus renting.  But those measures are decreasingly troublesome, and combined with the normalization of the months’ supply measure, suggest dissipating risk for buyers.

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