by Gary North
Whenever I write a report on residential real estate, I get a bunch of
e-mails. It's the same question: "Should I sell my house?"
I am always amused at these letters. First, the person writing is always a
male. This means that he has no authority to sell the house. His wife does.
Wives buy houses; husbands, at best, retain only the right of veto. The wife
has not sent the e-mail. Thus, the poor schnook has not a snowball's chance
in Death Valley of selling his house. It's not his house. He merely makes
the mortgage payments.
Second, the noun is always "house." Should he sell the house? But wives do
not live in houses. They live in homes. Their homes. Homes that reflect
their tastes, their dreams, their sense of the social pecking order, and
their ability to wheedle their husbands into signing 30-year mortgages. What
I do not get is this letter.
My wife and I are concerned that this may be the top of the residential real
estate market in our area. We have talked this over, and we think the equity
in our home may be at a peak. We are both willing to rent. In fact, we have
talked about moving to a region that has a much lower cost of housing. What
do you think?
Such a letter reflects a joint decision - which buying and selling a house
ought to be. It reflects an awareness of economic options.
If a wife sees the options as "owning my own home" vs. "renting," she will
take "owning my own home." If, on the other hand, it's a question of where
to own her own home, and how nice a home, that's a different matter.
A WISE DECISION
Recently, I received a note from a specialist in real estate construction
financing. He lives in northern California. He and his wife recently sold
their house. Their decision process is quite illuminating. It offers a case
study in how to make the decision. Notice his opening words:
I read your article with great interest. I want to share with you my
experience regarding the purchase and sale of my family's home.
He speaks of a home. He also speaks of his family. He understands the
difference between his house and her home. But as soon as he gets to the
economics of the matter, he reverts back to "I." This, too, is reality. He
has to pay for it. She gets to live in it. The motivations are entirely
I purchased my home in California at $320,000 or $16 per square foot in
Either he bought a super bargain or else he made a typo. Sadly, he made a
typo. He bought it for $160 per square foot, as his story later reveals.
That is a lot of money in my book. I recently bought a comparably sized
home - a little under 2,000 square feet - for $90,000, or $47 a square foot.
It is 9 years old, clean, in a middle-class neighborhood in a boom area. But
it's not in California.
The housing market was soft after a run-up in home prices in the late 80s
peaking in 1990. The assessed value of my home was $380,000 which also
indicated that the prior owner purchased the home at the top of the market
Housing can go soft. I remember 1990 well. It was during Bush's recession.
People started leaving California. The only areas where California
residential real estate was not soft were Hispanic barrios, where multiple
families lived and pooled their income to pay the mortgage.
The seller had offered the home for rent after taking back the home from his
sister who could no longer afford to pay on the mortgage. The market was so
soft at that point that he thought he could only rent out the property. I
had been a renter prior to my purchase of this home and was moving into from
Lodi after taking a new position in San Francisco. If it wasn't for the
seller of the house offering seller 15% carry-back financing, I would not
have been able to buy this house.
The seller, as it turned out, made a huge mistake - probably the biggest
economic mistake of his career. He had a rentable property, but he decided
to sell it. He sold it to someone at 15% - presumably a second mortgage.
To sell under these conditions is foolish. Either the buyer is an even
bigger fool - 15% financing is outrageous - and will probably default or be
forced to sell, or else interest rates will fall, and he will borrow cheap
money and pay off the initial loan. The seller will be holding cash. But if
rates come down, housing prices will rise. Conclusion: don't sell the house.
Up until early 1997, my home's value remained at or lower than my purchase
amount. From 1987 through 1997, I was employed as an income property loan
work-out professional for three different Savings and Loans. In 1997, the
housing appreciation boom was fueled by rapid expansion of technology
inter-dependent companies in the Bay Area. Income property loan work-out
died off and I went into Bank lending to help on the real estate
construction boom beginning at that time.
What goes around comes around. Soon, this man will be out of the
construction loan business and back in the property work-out business. In
California and Boston, that's the business of the future.
Concerned over the dot-com bust in 2000 and 2001, I began thinking about
selling my home, fearing we had hit the top of the market at $565,000 or
$282 per square foot for my home.
He was thinking rationally. But the housing market in California is fueled
by wives' emotion and husbands' credit ratings. "Rational" doesn't apply
until lenders get a dose of it.
However, with kids in elementary and high school, my wife resisted intensely
any discussions about selling our home. Also, real estate developers on both
residential and income properties became increasingly bearish in their
outlooks for about twelve months, which was bad for new business. I thought
at that point, we had reached the pinnacle of the market.
This is understandable. But he did not count on one thing: Alan Greenspan's
commitment to fiat money. Greenspan talks the "woe, woe - inflation is
coming" line, but he worries most about recession. The FED in 2001 pumped in
liquidity like there was no tomorrow. Rates fell.
Post 9/11 interest rate drops had changed housing outlook. With over 350,000
jobs lost and housing demand off, there was no doubt in my mind that a
housing deflationary period would begin to occur. However, 40-year low
interest rates together with hyper liquidity in the real estate markets
began to emerge in home mortgage financing to an extent that demand for
housing perked-up and has not slowed for the past three years.
This lucky soul was sitting in a 2,000 square foot house in the midst of a
housing mania. Nice work if you can get it!
I sold and closed on my house in March 2005 at $900,000 or $450 per square
foot. The demand for housing is so acute that all contingencies of sale were
waived at the offer table on the first day of our open house. The buyers
purchased the property with 100% financing and closed within 30 days.
Buy low, sell high. Not a bad way to do business. He has unloaded his house
onto the shoulders of a much greater fool.
He did not retain ownership. He could have rented it. But he is in the real
estate field. He senses what is likely to take place. The price offered was
too good: $450 per square foot, cash. As my friend, real estate guru and
certifiable good-old-boy Jimmy Napier says, "When someone puts a million
dollars in your hand, close your hand."
I ended up renting a bigger 2,300 square foot home in a better residential
neighborhood for a year lease at $2,500 month. With no debt, a great deal of
liquidity, and excellent positive after-tax cash flow, I figure I can wait
out the market until it swings back to a buyer's market. It is a good time
to sell and be a renter in my case.
He is thinking clearly. The poor lump who bought his house wasn't. He will
wait out the market. That is to say, he will buy some other poor lump's bad
decision at a discount.
He says: "My wife was at first very resistant." I can imagine. But he had
outside support: the local property tax assessor. There is nothing like a
property tax assessor to bring a little dose of reality into the lives of
Living paycheck to paycheck with a mortgage, property taxes, and mounting
maintenance costs was becoming very stressful for both of us.
Costs rise. This is the same in its effect as rising rents. Yet rents are
not rising in California at a rate to match the housing mania. Why not?
Because, at the margin, renters cannot and will not pay more. Renters vs.
renters set the price. Consumers are sovereign, not producers.
Also, there are owners of rental units who bought early and who can do quite
well by renting at today's rental prices. Life is therefore better for
renters in California than for new buyers.
We now feel free to pick and choose how we want to live and not be dependent
on consumer debt to pay unexpected expenses. We can now pay unexpected
expenses with free monthly cash flow and actually save money every month.
Being a serf is no fun and is no way to economically provide shelter for a
family unless the monthly cost of shelter is 25% or less of your monthly
income. Not the 45% or more many lenders are accepting as a minimum for
qualifying for a ridiculous interest-only loan!
He can see it. She can see it. But the marginal home buyer and the marginal
mortgage lender who loans him the money to buy do not see it. That will soon
enough be their problem, not his. He is sitting on well over half a million
dollars in the bank, or wherever it is.
It is maddening to see what I am observing in the home purchase marketplace.
With the aggregation of incomes not increasing in the Bay Area for the past
few yew years, it will be only a matter of time that the buyers at the
margin will become distressed sellers. Those who are liquid and disinvested
will be the few in the market that will be able to take advantage of these
attractive home buying opportunities.
He has the picture! He will be a buyer in a buyer's market because he
persuaded his wife to be a seller in a seller's market. But notice what
persuaded her: not entrepreneurial timing but the financial pressure of
ownership. They had become serfs. They were legally tied to a loan and a
house. They could get free only by selling.
She was not thinking "Let's become real estate speculators." She was
thinking: "How can I pay the bills?" She had outside pressure that she
wanted to escape. They escaped, and took a pile of cash with them.
A house is not a home. (That would make a great book title.) A house is
dwelling space. A home is a happy family. You can take your home with you
when you sell your overpriced house. An overpriced house tends to disrupt
If I were in the letter-writer's shoes, I would start looking for a new job
in a new state. I would put my money to better use. That $600,000 in cash
would buy six or seven houses debt-free in my area. He could be paid at
least $7,000 a month in rental income, and probably would double his money
in seven or eight years. Or he could make down payments, buy 20 homes, and
get renters to pay off his mortgages in 20 years.
To stay where he is an expensive decision. It is costing him a fortune.
He should go to John Schaub's site and do exactly what it says.
But at least he is no longer a serf.
After all these years of "knowing better" people still make and eat
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