Let’s buy some houses!

Is it time to buy a house? Maybe.

This morning we received a bouquet of flowers. It was from the woman who just sold us a house in Baltimore. She sent the flowers to say “thanks”.

“We must have paid too much,” we said to Elizabeth. “She likes us. She probably figures she was lucky to find such stupid buyers.”

We needed a house. We found one we liked. It was one of a kind. We bought it, even though the price seemed high. We weren’t even bidding against anyone. She hadn’t had an offer in months, maybe years. But she held out and got the price she wanted.

Meanwhile, the Wall Street Journal reports that the housing market may have bottomed out. Of course, that’s what the press has been saying for the last four years. But now, WSJ says buyers are bidding against one another:

A new development is catching home buyers off guard as the spring sales season gets under way: Bidding wars are back.
From California to Florida, many buyers are increasingly competing for the same house. Unlike the bidding wars that typified the go-go years and largely reflected surging sales, today’s are a result of supply shortages.

We don’t know. But our guess is that there’s more pain to come from this housing bear market … lower prices. And more collateral damage too.

In the 1960s, Americans had housing equity equal to 70% of their homes’ values. Now, it is barely 40%. Forget about trading up. Homeowners don’t have anything to trade with.

And with four million homeowners still underwater, that’s a lot of inventory to work down. It could take a while and lower prices before the bottom is finally reached. Recent buyers are still losing money. And CoreLogic says prices are still falling. Here’s a Reuters report:

(Reuters) – More than 1 million Americans who have taken out mortgages in the past two years now owe more on their loans than their homes are worth, and Federal Housing Administration loans that require only a tiny down payment are partly to blame.

That figure, provided to Reuters by tracking firm CoreLogic, represents about one out of 10 home loans made during that period.

It is a sobering indication the U.S. housing market remains deeply troubled.

But that doesn’t mean that houses are a bad deal. Or that you will lose money buying now.

To the contrary, this could be the best time to buy in many, many years. More below…

And more thoughts

• Things are a-changin’. And they affect the outlook for housing for many years into the future.

For one thing, young people don’t seem to be getting together and pitchin’ woo the way they used to. They’re waiting longer. They used to get married and have children in their 20s. Now they wait until their 30s.

So, they don’t need to buy a house until years later. In the meantime, they rent. Rentals are up which could be good news – if you’re a landlord.

Home ownership is at its lowest level in 13 years; it seems to be going down, even though houses are much more affordable than they’ve been in many years.

Unemployment among young people is much higher than usual; fewer young people have the wherewithal to buy a house.

Young people also have much more debt than they used to. Student debt, for example, recently topped the $1 trillion level. No jobs, no spouses or children shackled to student debt – young people are unlikely prospects for house-builders.

But “US housing is the best value play in America,” says colleague Chris Mayer. “If you own a house then look to buy and rent another.”

Here’s the idea. You can now buy a decent house for $60,000 to $80,000 depending on where you are. You spend a little to put it into rentable condition. Then, you can rent it for $1,000 a month, maybe $1,500. At $1,200 a month on a $60,000 house you have a gross rental yield of nearly 20%. Assume you spend half of that on taxes, maintenance, etc. That leaves you with 10% net. Not bad.

Better yet, mortgage it for 30 years. Say you put up cash of $20,000 and mortgage the rest. Your mortgage payments should be a good deal less than $250 a month. So, after expenses (assuming they are 50% of your gross rent) you are netting $250 a month, which works out to a 15% yield on your cash.

And what happens to that $40,000 mortgage? Could be that it is a burden for years and you pay it off with no gain or loss. More likely, it gets cheaper, year after year. Inflation knocks it down. Perhaps slowly at first – 3%, 5%…

But we wouldn’t be at all surprised to see it get knocked away completely in a few years. Most likely, within ten years a $40,000 mortgage at today’s fixed rates will be worth less than half of what it is today. So, you’ll make another $20,000 over ten years, giving you a real yield on your investment over 20%.

This seems to us like the perfect investment for a retired person with time on his hands. Put $60,000 of savings into a money fund and you’ll get, what? $100 a month?

Instead, buy three houses for $60,000 each, mortgaging $40,000 on each one. You’ll have to work to fix them up and find the right tenants. But you’ll end up with positive cashflow of about $750 a month plus, maybe a bonus of $60,000 more over ten years as your mortgages get whittled down by inflation.

• We were wrong about Harley Davidson.

A few months ago we guessed that it was time to sell the big hog builder in Milwaukee. We noticed who rides Harleys. Big, fat, old guys. Not much future in that, we reasoned. Especially when times are tough. The old guys will sell their bikes, we said.

Alas, your Daily Reckoning stock research department seems to have erred.

A report in the Financial Times tells us that Harley Davidson profits rose 44% in the first quarter of this year. Turns out they’re selling more bikes than they expected. To whom?

Foreigners. Two thirds of the sales happen overseas.

A total of a quarter of a million motorcycles are expected to sell this year.

Amazing. We didn’t know there were that many fat, old guys overseas.

Harley Davidson seems to have created a worldwide brand.

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Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Appropriate independent advice should be obtained before making any such decision. Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Customer services: 020 7633 3600. Fleet Street Publications Ltd is authorised and regulated by the Financial Services Authority. http://www.fsa.gov.uk/register/home.do FSA number: 1152 34

3 Responses

  1. 01/05/2012, Angus Palmer wrote

    Right here outside little Godalming in Surrey Harley Davidson opened a showroom a while ago filled with smart new bikes. There must be plenty of big fat old guys in our town.

  2. 01/05/2012, gerry wrote

    Harley Riders, Hardly able to do it more like it, best wishes out there

  3. 02/05/2012, Rajesh Narain wrote

    Couldn’t help laughing on reading “Amazing. We didn’t know there were that many fat, old guys overseas. “

    In fact, you should see the craze for Harleys among the noveau-riche 30-somethings, in India.

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