I’ve spent the past three months catching up and really understanding the local property market. Every Sunday, I draw a three mile loop of five open houses to bike or jog to. Might as well get a workout in as well right?
At each open house, I take notes and pictures on interior design, get an idea of price, listing duration, and ask why the owner is selling. I even tested the waters myself for 25 days on the Multiple Listing Service to see if I could lure someone to pay me higher than what I believe is current market.
The main things I learned about the current real estate market are:
1) Inventory is down about 40%-50% Year Over Year. Realtors and buyers are starving for inventory.
2) The majority who are selling are going through a divorce, a trust sale, or “need” a larger space due to a new addition to the family.
3) There is little sense of urgency to sell as sellers are happy to pull their listings off the market if they do not get the price they want. There was no sense of urgency for buyers to buy for for the past five years as well, however, that is changing now that rents are starting to rise and inventory is declining.
4) Realtors will agree with anything you say if it means a potential transaction. I decided to be bearish with five real estate agents and bullish with five other real estate agents to see what their responses would be. When I was bearish and mentioned that I was thinking about selling my home, all five agreed that now is the right time to sell. When I was bullish and mentioned that I should be buying rental properties given low rates and high rents, all five agreed that now is the right time to buy! Try the experiment sometime. You will be astounded by how much they resemble sheep.
5) The agents have all said the sellers have either bought another property or will be buying another property. Not once did the Realtor say their client was selling to rent. I think I can understand the psychology behind this phenomenon because as a homeowner, I don’t ever plan to rent my primary residence. Perhaps it’s because we get accustomed to the mortgage interest and property tax write-offs. I get the feeling many also feel the sense of defeat if they go from owning to renting, not that renting is bad, just a return to when we didn’t have enough money to own.
HOMEOWNERS NEED TO CONTINUE GOING ON STRIKE
Rents have risen at least 20% from two years ago thanks to the surge in startup jobs as well as the general recovery in the economy. I raised my rent by 10% last year, and plan to raise my rent by another 5% this year. I feel bad raising the rent hence, I’m giving her a 5% discount. I’d rather have a great tenant who plans to stay for a while than a bad tenant or one that decides to move after only a year.
Real estate prices always follow what rental prices are doing in the long run. When you can immediately receive a 4+% net cash yield on a rental property while borrowing at 3% with the potential for capital appreciation, you buy real estate. Renters will eventually get fed up with rising rents and also seek to buy, thereby pushing property prices up even further. If renters don’t buy, then there is a further upward increase in rental prices which is good for landlords.
Inventory is down drastically (50% YoY) because owning is cheap due to a decline in mortgage rates. Furthermore, sellers are probably skeptical that they can sell their homes for top dollar since we’re still recovering from the recession. Even in an expensive city like San Francisco, owning a property is cheaper than renting provided you have capital for a 20-30% downpayment.
The media likes to paint pictures of desperation. If they can’t pick on homeowners, they will pick on renters, which is what they are doing now. Even if a homeowner sells for a good price, where is the homeowner going to go given inventory is down 50%? No homeowner wants to compete for a rental in a hot market.
Finally, even after a tremendous shift towards real estate online with companies such as Zillow, Trulia, and Redfin, it is shocking that commission rates have stayed sticky at around 5% in the major markets. 5% is way too high of a commission to charge for a median property price of $650,000 here in San Francisco for example. Realtors complain that there is no inventory, yet refuse to lower their commissions to help increase transactions. As a result, I urge all homeowners to go on strike and not sell until commissions come down to a flat fee!
THE BENEFITS OF NEVER SELLING YOUR PROPERTY
1) You learn to live within your means and appreciate what you have. It always seems to be about more, more, more here in the US and in other developed countries. A 1,500 square foot track homes in the 1970′s used to be the norm. Now we’re talking 3,000+ McMansions with the same number of people in the family! Perhaps it’s because Americans have gotten so much larger over the years we need more space? That’s what the auto manufacturers tell us at least.
2) You put pressure on oligopoly pricing in the real estate market. It is an absolute shame that Realtors will push their clients to buy one home over another just because of higher commissions. I know of Realtors who refuse to even visit a home, even if its perfect for their client because they won’t make enough commissions! We need a flat real estate commission fee. 2% sounds about right.
3) You build incredible memories of happiness. Think back to all the wonderful memories you had growing up as a kid. Chances are, if the median homeownership duration is 5.9 years, you no longer have that house. Now imagine if the house was still a part of the family as an adult 25 years later. Nostalgia is happiness. I love going back to my grandparent’s house every year for my entire life because I love remembering. I love seeing the pictures of when we were kids hanging in the hallway. I love seeing the trees we planted as youngsters grow and bear fruit.
4) You get to live rent-free or mortgage-free for the rest of your life. Sure there is normal maintenance expense and property taxes, but they are a pittance compared to the cost of ever rising rents in a naturally inflating environment. My parents are living debt free, and it is wonderful for them, and for me that I don’t have to worry about them financially. Now that I’m retired, I fully appreciate my rental property income that helps sustain my lifestyle. I plan on accelerating the payoff of my rental property mortgages due to the increased appreciation for cash flow.
5) You help retirees increase their cash flow. Many retirees rely on rental property income plus fixed income to survive. Unfortunately, fixed returns from CDs and dividend yields have declined. By keeping your property off the market, you prevent one more person from owning, thereby helping out our retired landlord friends live better lives by putting upward pressure on rents. Isn’t it our duty to take care of our elders?
6) You get to pass on your home to your loved ones. My grandparents’ vision was to always have their main house be in the family for us to visit, enjoy, and pass down to future generations forever. They may have been tempted at multiple times to sell for a huge profit, but I’m glad they didn’t. I always enjoy going back home. It would be extremely strange to go back to a new house, or different house from the one I began visiting more than 30 years ago.
CONCLUSION: DON’T SELL IF YOU DON’T HAVE TO
Treat your property as a home first, and as an investment second. If you’re buying a place just to make money, then perhaps you should reconsider your purchase. The median homeownership duration of 5.9 years is way too little to build any real wealth.
You’ve got to live somewhere. Reduce the stress that comes with buying, selling, moving, negotiating, and fixing. You’ll wake up 10 years from now and be amazed at how quickly time flies. Hopefully you’ll not only have built a good amount of equity, but also a great amount of wonderful memories.
If you’re curious like I am about the latest value of your home, check Zillow.com. I check at least weekly because their values are updated 3X a week. Just be wary of their Zestimates and study the comparable sales.
Recommendations To Build Your Net Worth
* Manage Your Finances In One Place: The best way to become financially independent is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I’ve got multiple properties which I keep updated with my Personal Capital account.
* Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Landlords will often ask for a renter’s credit score as part of his/her analysis.
* Refinance Your Mortgage. LendingTree Mortgage Refinance offers some of the lowest refinance rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. If you’re looking to buy a new home, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.