NY Times article on why now may be the best time to buy a first home

by Steve Crossland, REALTOR in Austin TX on December 10, 2008 · 27 comments

An article in the Dec 6th NY Times (page B1 of the New York edition) does a good job of outlining why the present, not the future, may be the best time for new home owners to get off the sidelines and buy a house.

Here are a few quotes from the article:

Five or 10 years from now, when the financial crisis has ended and housing prices are up smartly once more, we will look in the rearview mirror and realize that we missed a golden age for first-time home buyers. Then, everyone who sat on their down payment savings accounts for a few years too long will kick themselves for not taking advantage of what may turn out to be the buying opportunity of a lifetime for those who can qualify for a mortgage.

Unfortunately, we do not know when this golden age will begin, because we will be able to identify a bottom to the housing market only with the benefit of hindsight. But as it does with the stock market, the moment will probably arrive when everyone is feeling the most pessimistic.

This is how Sylvia and I feel about the late 1980′s and early 1990s in Austin. Back then, when there was still carnage in the streets from the combination of the Texas Oil Bust, the 1986 Reagan tax law changes and the collapse of the Savings and Loan Industry, RTC and HUD homes could be picked up for $30K all over Austin. I looked at a home on a cherry lot next to Stacy Park in Travis Heights that sold for $50K in 1989. I still remember the seller’s ad in the paper, which started with “Blind or Stupid?”. I was the latter. Seller was offering owner financing at 7%. That lot alone is worth $500K today. We didn’t buy anything back then because we didn’t know any better. We were not forward looking.

We waited until 1994 to purchase our first investment property, a 2/1 in Hyde Park for $58K. How different our balance sheet would look today had we known in 1989/1990 what we know now – that the very best time to buy Austin real estate was when everything looked the gloomiest. The buyer of our Hyde Park House, which we sold for $92K 18 months later paid cash. He had purchased over 100 homes in Austin between 1988 and 1991 and had already sold all but about 20 in 1996. He was buying our home for his sister – just as a gift to her.

I still remember talking to him in the front yard on Avenue G and him saying that when he came to Austin in 1988, all the locals were panicked, everyone had lost money in real estate, but he saw a goldmine opportunity. “I just knew there was no way Austin was going to stay in the tank”, he told me. “It’s too nice of a city and people will always want to live here”. Still true today, isn’t it?

He borrowed money from his family in New York, and bought centrally located homes, most for between around $30K, and he sold most for double what he paid, and was financially finished for life. He was barely 30 years old.

But I’m drifting off topic. The article is about first time buyers.

More from the article:

That moment is certainly getting closer. Housing prices have fallen drastically from their peak levels in many areas of the country. Rates on 30-year fixed-rate mortgages are already close to 5.5 percent, and this week there were suggestions that the federal government might try to drive them down to 4.5 percent, a truly incredible figure to be able to lock in for three decades.

Meanwhile, first-time home buyers have the same advantage they have always had, which is that they do not have to sell their old place before buying a new one. That is an added advantage in areas where many available houses simply are not moving, because the people trying to sell them will not be bidding against you.

I agree with all of these points. Especially in Austin. The author goes on to make many more good arguments for first time buyers buying now, but also balances the piece with fair warnings, so it’s not all roses and candy. But for first timers planning to hold 7 to 10 years, and who are not worried about job loss, the arguments are solid in favor of buying now. I wish our local Austin newspaper writers knew how to write with this level of understanding and perspective.

Here is a link to the full article on the NY Times website.

http://www.nytimes.com/2008/12/06/business/yourmoney/06money.html

{ 27 comments… read them below or add one }

1 Phill Grove December 10, 2008 at 6:21 pm

Great article Steve! Yes, with deals all around and cheap money available, now is indeed an excellent time to BUY. I know I am!

Also, considering that the stock market just proved that stocks can stay flat, OR DOWN, for over a decade, now is a good time to realize that houses are real assets with real value that never become valueless. In other words, what do you have more confidence in being worth more in 10 years: A $100K house in Austin or $100K in stocks in NY. I think both are likely to be much higher, but I’ll bet on the house any day! AND – it only takes $10K to buy a $100K house!!!

Phill Grove

2 Ray December 10, 2008 at 11:44 pm

I clearly remember looking in Hyde Park in 1994 and the closet I ever saw to that value after months of looking was a complete wreck of a shack (a 2/1) for $89K. Another experience was whilst living in Santa Barbara: I remember trying to place a sealed bid on a tear down public Auction lot in 1997 and never ever being able to reach the listing realtor or get anyone to answer my voice messages. I found out that the winning bidder on that place, several blocks from the Pacific, was a realtor, who got it for close to $100K.

3 Teddy December 11, 2008 at 7:47 am

Well… IMO… you make your money in real estate when you buy. The lower priced central markets are good markets, but if you by in Lakeway right now you will lose money unless you are prepared to hold for a long time.

4 dean December 11, 2008 at 9:15 am

Well that’s great, but no one is selling thier homes for big losses in Austin yet. I’d check back once lay offs hit full steam(~10% unemployement) and people are forced to take the loss or starve. Now if Obama Nation decides to bailout the homeowners and inflate the dollar then this may never happen. Things are uncomparable to the 80′s/90′s…no more easy credit to save us and we haven’t come close to making reparitions for the past excesses of the last 20 years. Real estate has one big pyramid sceme, what good is it to be on top if it all comes crashing down…Best advice right now, buy gold.

5 Tim December 11, 2008 at 1:19 pm

I think Austin is still too strong to compare to the eighties. It might be a fantastic time to buy in Hutto, but if prices start going below $200k in Austin there are still enough people ready to jump on them. Our prices are still not inflated enough for much of a fall.

That said. If we end up with gasoline near $6-10 in the next year or two, then buying a close in property now will seem like the deal of the century. I think gasoline prices are going to be the next big trend in real estate. And it might not be a bad idea to bet on that with our current interest rates.

6 arz December 11, 2008 at 6:27 pm

are we talking about buy low sell high (investment) or finding your own home? or both?

clearly, the investment scheme is not going to work because 1) what on earth can I borrow money from my New York family? I aint got any, even if I got, they all have their money tied up in the market right now – if they cash out, they lose big time. 2) where are the $30k homes? In 1989-1990 standard, $30k is probably about a middle class family medium income. In 2008? Where can I find a $70k or even a $100k home in Hyde Park? Not even in Hutto you can find a $100k home unless it’s a shack. 3) so you will have to take some risk borrow form bank or some people who want to make money on you. Will you be willing to take that risk?

That last question is not going to be easily answered. Even if you “known better”, when the moment come, you will still be likely to not jump in cause the risk factor. It’s not as easy as you think.

7 Leon Fu December 12, 2008 at 8:23 am

Sorry Steve,

I think you are still too early. Yes, it’s a great time to buy a house. But it might be a better time 6 months from now.

Why are you encouraging people to catch a falling knife? The markets are clearly deteriorating. Unemployment in Austin is better than the rest of the country, but it is getting worse. Right now we are at 4.8% unemployment in Austin. We will get to 7% to 9% if the national average goes above 10%.

If it was great in 1989, it was still great in 1990, 1991, 1992, etc when the market was heading back up. In other words, in a bull market, you time to get in. There is no hurry.

Right now all asset classes are declining (not just real estate). Why not wait for the economy to turn around and prices to start heading up?

We are very fortunate to be living in Texas and Austin because we are holding up better than the rest of the country. But it is delusional to think we are immune from what is happening in the rest of the country. The problems going on elsewhere will drag us down with them. Hopefully it won’t be as bad, but things are set to get worse from here.

8 Steve Crossland December 12, 2008 at 10:17 am

Hi Leon,

I’m not encouraging everyone to buy. Not everyone should buy. And there are certainly areas and price ranges within Austin where I would agree there is no hurry if price is the only factor you want to consider. And yes, I didn’t mean to imply that the current buying environment is as promising as we had in 1989, but was simply pointing out the cost of waiting, as I’ve personally experienced it in my lifetime.

And, I was mainly just sharing the article that made a lot of points with which I agree.

As for catching falling knives, my overall investment philosophy is long term and I never try to time markets. I always look at things one deal at a time, and part of the evaluation is most certainly current market environment. But I would never sit around waiting for a “better time”.

But I said a year ago, and the stats support it, that if someone thought they could wait until summer 2008 and get a better deal on a $200K house in a good location in Austin, that they would be disappointed to learn that they will in fact pay more for the house, not less.

And right now I believe that the house one of our investors just closed on yesterday for $199K in SW Austin will NOT be selling for less in the summer 2009. And I can’t say that the interest rate will still be 5.5% in 2009. This is the second home this investor has bought in Austin and he plans to hold on 10+ years.

And even if the value of the house does stay flat or even fall a bit for the first year or two. So what? The upside available 5 to 10 years from now will make that unimportant.

That’s what I believe and we have buyers who have independently come to the same conclusion and are buying. We also heard Mark Sprauge from Residential Strategies who spoke at our office yesterday and said the same thing. Austin will have a new home shortage in 2 years and that will drive up existing home values. Austin has the best real estate market in the nation. We will recover sooner and faster than the rest of the nation and by the time most people realize what’s happening, prices will have already started climbing and multiple offers will have returned.

Steve

9 Leon Fu December 13, 2008 at 8:46 pm

Steve,

I think it depends where in Austin you are talking about. There are many areas in Austin where the real estate markets have been down a lot. There are also places where the market has held up. But to make a blanket statement that someone will pay more in 2008, than before is not accurate. It depends on where in Austin you are speaking about.

I certainly hope you are correct that prices will start climbing within 2 years. Afterall, I own 2 properties Austin. But as an individual home buyer or investor, why not wait until we start seeing signs of a shortage and multiple offers coming in that you speak of? We may see this within 2 years, but the risk is that it might not happen until prices get much lower.

This isn’t about timing the market. It’s more like waiting for the train to stop (going down) before trying to hop on. This is especially true for the style of real estate investing you advocate. Based on your previous writings, you don’t advocate investing for cash flows or buying in areas of Austin where the rents can produce positive cash flows. In fact most of the areas you recommend investors buy would have negative cash flows, but more potential for capital appreciation. With this strategy, timing is very important. You aren’t paid to wait until the market turns around. Instead, your clients are putting more money into a property that is stagnating or declining in value.

If the market stays flat or declines for 2 years, that’s potentially tens of thousands of dollars in losses (negative cash flow and depreciation). And to buy right now when the economy is clearly set to deteriorate before it gets better does not seem smart.

10 Zach December 14, 2008 at 6:38 pm

Hey Leon,

Have you ever looked at at investment in terms of monthly payment? If you are just talking about Price, Price, Price and Price, you are leaving out a major factor…. INTEREST RATE.

Take Your $200,000 property. Let’s say you finance 90% of it and have a loan of $180,000.

Let’s say you can get $180,000 for 6% right now. Your payment would be $1079.

Or we wait, like you are proposing and interest rates go to 8% – your payment would be $1,321 or a difference of $242/month. If you held the home for 10 years, you would pay $29,040 MORE in interest.

Also, what do you think is going to be more appealing to a end buyer in 10 years when you give them the option to assume your qualifying loan at 6% or 8 or 9%?

Oh and by the way, if you bought now and prices fell, but you held for 10 years – your loan amount at the 10 year mark would be paid down to $150,634(originally $180,000). So even if the property was sold in 10 years at the same price you paid $200,000 – you would have almost $50,000 in equity. That’s if prices were FLAT.

Let’s say the house went down in value to $180,000(a 20% decline!!) in 10 years (why would it, buy let’s say it did) … Your loan balance is still only $150,634… you sell for $180,000 and have $30K in equity.

I would suggest you look a little deeper when making statements about investing. It is easy to get caught up in the short term chaos of the “market”.

11 Leon Fu December 15, 2008 at 8:55 am

Zack,

The issue isn’t whether or not you have equity. It’s whether or not you would be better off (financially) waiting to buy vs. renting. Do the math. On a $200K property, after interest, taxes, insurance, HOA, maintenance, and all the other expenses associated with home ownership. Is it better to buy or rent while the property stagnates or depreciates? Since the good areas in Austin generally have negative cash flow, it’s cheaper to rent than buy if the value of your home isn’t going up.

In other words, if after 10 years the market doesn’t go up. and you paid rent instead of buying, and saved the money left over (say in a CD paying 3%), you would have MORE equity than buying. Not only that, rents are right now declining, so the difference is even more.

I’m not saying that’s going to happen now. Instead, I’m saying that it is very much in the realm of possibilities. It’s happened before. In NJ (where I’m from), we had a real estate crash in the early 90′s. It took 10 years for prices to come back to where they were. I believe it has also happened in Texas during the oil bust. (Steve?)

12 dean December 15, 2008 at 8:56 am

All that really matters is jobs, talk anyone at Dell and you hear the sounds of the layoff train that is coming…expect record breaking drops in central texas homes in 2009. That 300K central east austin home will be 100K in less than two years. Or whatever kind of price can one could afford on a walmart salary.

13 Teddy December 15, 2008 at 10:40 am

Leon… I owned two homes in NJ one during the 80′s real estate bust and one during the 90′s and ended up having to rent the homes because they wouldn’t sell for anything close to what I bought them for. I finally sold them but at quite a discount to their original purchase price after owning them for over 10 years.

The Austin real estate market reminds me a lot of the those east coast markets of the 80′s and 90′s. I think the difference this time though is that those in their 40′s and 50′s are likely to see a 2nd decade with no retirement appreciation. These people are going to have to start saving for retirement and college costs and are going to decrease their living expenses as they start to save for the future.

14 Leon December 15, 2008 at 1:21 pm

Hey Teddy,

Same here for my parents. They owned 2 homes in NJ. The first in Parsippany and second one in Whippany. They owned the first home for 7 years and basically broke even. They owned their second home for 11 years from 1989 to 2000 and it also did not go up in value. Of course, it took off right after they sold it, but they had to sell because they were getting divorced.

Timing is everything, which is why I’m ranting a bit on Steve saying it being a great time to buy. It might be, but being that the next Great Depression is still a real possibility with the deflationary spiral we are in, it’s very high risk right now…

15 Observer December 15, 2008 at 7:13 pm

Agree with Leon. “It will get worse before it gets better” (c)Obama

16 Steve Crossland December 15, 2008 at 7:30 pm

So for those against buying real estate, where would you put an extra $50K that you didn’t need for the next 20 years? In stocks? CD’s?
Steve

17 roots planted here December 15, 2008 at 8:57 pm

50K? maybe a few cases of Chateau Ausone 2005? or perhaps a two year trip around the world….Or how about 3000 or 4000 shares of Intel, yielding 4%+.

The buy vs rent debate is great. Just so you know, since 1998ish its never been a good time to buy in Austin if your beholden to the math. The catch is you must save the spread AND get a good return on it for the next 30 years. That is not as easy as it looks on a spread sheet.

Until recently I rented a wonderful place in central Austin for about 1/2 of what it would cost to own it. The catch is the really great spots in this city aren’t for rent…in fact they rarely are available to buy. That is what this downturn is all about. The news of deflation and depression is spooking a bunch of the old Austin guard out of the most wonderful and unique properties in the city and the average prequalified buyer actually has a chance at getting in one at a reasonable price. Its a perfect time to grab a unique slice of Austin at a reasonable price at a reasonable pace and on your terms. If your looking for a KB look alike or some other cookie cutter subdivision, I wait or bid low…really low.

18 Steve Crossland December 15, 2008 at 9:43 pm

> Just so you know, since 1998ish its never been a good time to buy in Austin if your beholden to the math.

Not true. Not true at all.

I bought a commercial building in 1998 for $50K cash, plus $25K rehab expense. It’s worth $250K+ today and rented for $1695/mo. I still own it.

Bought a house on two acres in 1999 for $139K, and got the two acres next door for free with the house. Sold the house for $240K in 2003. Built a new house on the other two acres in 2003 for $289K and sold it for $495K in 2007. Both sales were free of capital gains since we lived in both homes more than two years.

I bought three duplexes in 1999. Sold one of them a year later for $30K more than I paid. Sold another of the three in 2003 for double what I paid. Still have the third one.

Bought a lake house for $185K in 2002. Sold it for $235K eight months later. Basically had a free lake house for us and the kids that year, plus made a little profit.

I could go on. Which of these post-1998 purchase were bought at the wrong time? Which one should I have “waited for a better time” to buy?

Pick any year you want, anywhere you want, and there were good purchases made by smart investors. The good buys might require more work and careful diligence in slower times, but they are out there. Sitting on the sidelines may be the right choice for some, but it’s not where you find the astute wealth builders sitting.

Steve

19 roots planted here December 16, 2008 at 4:19 am

This is the Buy vs Rent calc I was referring to….If I can get 5% on my savings, have a 2.2% tax rate, rent for 1/2 the cost to own and get annual appreciation of 3% the it takes a decade plus to break even. Not convincing for the sidelined buyer. Now, what I am saying is its time to toss the math out and go get a a unique “classic” Austin home at a reasonable price and at a pace reasonable for a first timer. Just like the article above say…. so we agree.

“I could go on. Which of these post-1998 purchase were bought at the wrong time? Which one should I have “waited for a better time” to buy?”

I thought this tread was about first time home buyers jumping in from renting…not about commercial properties, duplexes, residential construction and so on which are generally a bit much for the first time home buyer.

Plus your a realtor! You do this for a living and so does your wife. You know the laws, can move on a dime, have access to propitiatory information and so on. Most 20 somethings thinking about career, kids, school loans and the like have neither the time or resources to get involved in transactions like the above.

Again, the market, to me seems so inefficient right now that with some hard work one can make the leap into home ownership and feel confident about the decision.

20 roots planted here December 16, 2008 at 4:20 am
21 Steve Crossland December 16, 2008 at 6:50 am

The problem with Rent vs. Buy Calculators, for periods longer than 2 years, is that it fails to factor in the cost of moving multiple times for those renting houses or duplexes.

Each year, a renter faces the possibility of non-renewal. Moving is costly and inconvenient. Not to mention the non-monetary costs of stress, switching schools or having to accept a less than ideal home in the school district you do want. I’ve dealt with thousands of renters in Austin since 1990, many were moving the third time in three years against their will, and it’s absolutely no fun. They are frustrated when I can’t promise longer than a 1 year lease, because they don’t want to move again a year later.

We closed on a first time buyer yesterday. His apartment was raising rent, he didn’t want to renew for another year, and was tired of living in an apartment.

He couldn’t be happier as a new home owner, plans to remain in the home long term, works in a stable industry (property management of all things), got an incredible interest rate, and isn’t at all concerned about tracking his home value as if it were a mutual fund. He is buying for many of the reasons I just outlined, the timing is perfect for him and his life, and no rational argument could be made for him to “wait for a better time”.

Steve

22 Steve Crossland December 16, 2008 at 7:01 am

> ….If I can get 5% on my savings, have a 2.2% tax rate, rent for 1/2 the cost to own and get annual appreciation of 3% the it takes a decade plus to break even.

I plugged in more realist numbers, which would be rent at $1400 for a $200K house, interest rate of 5.5%, annual appreciation of 3%, annual rent increase of 3% – the breakeven on renting is 3 years, which is generally what we tell people is the minimum amount of time they need to own if they want to buy, otherwise it is in fact better to rent.

Steve

23 Todd December 16, 2008 at 8:02 am

http://www.calculatedriskblog.com/2008/12/housing-starts-decline-to-record-low.html

Link to analysis of today’s housing starts number. This supports a trend view toward a supply shortage 2-3 years down the road. Credit and builder capacity should not ramp as fast as in the past due to credit impairments and stronger commercial loan covenants.

As to Steve’s question on a 20 year investment, I would say long dated Treasury TIPS. Similar inflation hedge to real estate, but the issue is the lack of leverage. A $3 trillion Fed balance sheet portends inflation over the intermediate term.

Leon – yes, timing is indeed everything. Steve was able to “buy right” and lock in money on the front end. It is more difficult for the non-insider, but not impossible to find deals. Just takes time, effort, patience and being prepared to move quickly when opportunity presents.

24 Leon Fu December 16, 2008 at 10:27 am

Steve,

I’ve walked into several apartment complexes and all of them are dropping rents right now. I don’t know who your renter is, but it’s not hard to find apartments dropping rents right now.

Sure, a house is not a mutual fund. It has a real use and benefits and is not just a financial instrument meant to be sold for a profit. But that doesn’t necessary mean it’s a good investment.

I don’t think anyone here is “against owning real estate” as you say. Afterall, this is a real estate blog. It’s a question of timing…

25 Steve Crossland December 16, 2008 at 10:46 am

Leon:
1) When will the timing be right again? Do you know the date?
2) When exactly did the timing cease to be good in Austin? What month/year?

I think we’re going round and round here, but my point is that it’s very possible, and does happen, that buyers make very poor purchases in “good” markets, and that buyers can make excellent purchases in “bad” markets. And those purchases have little to do with timing and everything to do with one’s ability to assess the deal within the context of current conditions.

The right time to buy is when you need a house and can afford one and know how to pay the right price.

Steve

26 Leon Fu December 16, 2008 at 11:41 am

Steve,

The timing became bad during the month of October this year when the credit markets collapsed. Austin was holding up surprisingly well up until that point.

Credit is the lifeblood for the economy. When that credit was cut off because of the loss in confidence of the banking system (triggered by the sub prime mess and the failures of the nation’s largest financial institutions), you saw the economy fall off a cliff.

That was when this became something much more sinister than an ordinary recession. It has now become a global credit crisis. Before that even, Austin’s economy was probably strong enough to weather thru the recession as the damage was limited to California, Florida, and a few other states.

Of course I don’t know the exact date and of course there are always great buys and bad buys in any market. But that’s not the point of your article. The article you are citing is saying that now is a good time to buy for first time home buyers because of market conditions. It’s a market timing call and it’s trying to call a bottom (catch a falling knife analogy).

The argument is flawed. He is arguing that just because prices and interest rates have fallen drastically, it must be a good time to buy because the last time prices and interest rates have fallen so much, it was a good time to buy. Well yes that’s true, but the flaw in that kind of thinking is that prices can fall even more drastically even after already falling drastically. Just because something has dropped X% doesn’t mean it can’t drop X% again.

The timing will be right again when we see sales pick up (#sold). That’s what I want to see as a first time buyer. Looking at the October data you’ve compiled, I see Austin’s real estate sales are down 28.54% year over year. I see a 19% drop in sales month over month (Sep to Oct). Prices are not going to move up until the buyers step up and the buyers are clearly not stepping up yet at these prices. I want to see inventories decline because buyers are buying up the excess inventory. So I’m looking for a pickup in sales along with a drop in inventory first. These things need to happen before prices can move up.

Based on the data you’ve compiled and browsing thru the MLS listings, it’s still early. Now I agree with you that that doesn’t there aren’t any good buys now. But the overall market is still down, which means most people (esp. the non professionals that are your clients) are going to lose money buying real estate.

27 Leon Fu December 20, 2008 at 5:57 pm

Steve,

FYI, November stats are out over at Austintowers.net

http://www.austintowers.net/Austin_Downtown/files/austin_november_2007_mls_statistics.html#unique-entry-id-272

This is exactly what I fear. Sales have collapsed with a 39% drop compared with November of last year. Prices are holding and down modestly (3%).

Does your data confirm this?

I believe prices are holding because unemployment in Austin is still relatively low compared with the rest of the nation. As long as people have jobs, they don’t have to sell and stay put. But it is clear prices are too high because they buyers have disappeared.

Unemployment is set to deteriorate nationwide and that will force sellers to lower prices. Austin will fair better than the rest of the nation, but we are not immune. Once unemployment rises another percentage point or two, that will force the sellers hand. Those people will need to sell and lower prices.

Watch those stats from the Texas Workforce Commission because I believe that’s what will determine if prices go much lower from here. Austin’s unemployment rate was 5% in November compared with 4.8% in October. Last year (Nov ’07) it was 3.5%. If credit does not come back and unemployment rises to 6% or 7%, we are in big, big trouble. It is an incredibly risky time to buy…

Leon

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