"home-price Cycles Can Lead To A Loss"

[trompe le monde]

http://www.mcall.com/business/realestate/a...srealestate-hed

Home-price cycles can lead to a loss

| Anybody thinking about buying or selling a house this spring probably is asking the same questions: In terms of historical real estate cycles, is this a smart time for me to be in the market?

After a record five-year boom in prices and sales, isn't it obvious to everybody that the party is pretty much over — especially in high-fizz, high-cost markets of the West Coast, Florida, Washington, D.C., Phoenix and Las Vegas? Won't rising mortgage rates and fast-accumulating inventories of unsold houses cool the market even further in the months ahead? Could appreciation rates sag — or actually swing negative — making any purchase I might close this spring look like a dumb move a year or two down the road?

Lehigh Valley Local Links

These are all intelligent questions, and let's be frank: Nobody has the answers. But new statistical research on the periodic ups and downs of home real estate cycles offers some important insights into timing, lengths of ownership and rates of return on housing investments.

The research examined price data on 50 metropolitan housing markets from 1986 through 2005. During that period, price appreciation rates in some parts of the country — California, Texas, New England among others — went through boom and bust cycles of differing magnitudes. In other areas, especially the Midwest, real estate appreciation was steady and moderate with virtually no declines.

The study was conducted by Mark Milner, the chief risk officer for PMI Mortgage Insurance Co., a major loan underwriter that stands to lose large amounts of money when property values decline in any region of the country. The research used quarterly price data provided by the Office of Federal Housing Enterprise Oversight (OFHEO), which tracks home real estate values in more than 300 metropolitan areas.

Milner concedes that his own personal experience on timing home purchases hasn't been without setbacks. ''I'm one of the unlucky ones,'' he says. ''In 1989, I bought a home in Los Angeles — right before the bottom fell out of the market. When I got a job in another city and sold seven years later, I lost my down payment and everything I'd put in since, and I even wrote a check to the bank for a little bit extra.''

Ouch! Many homes in the Los Angeles area lost 25 percent to 30 percent of their resale value during the early 1990s, but leveled off and began appreciating again by the mid-1990s.

''But here's the thing,'' Milner continues, ''I went on and bought another house, and then still another after that. Despite a loss during the first seven years, in 17 years of homeownership, I've recouped that initial loss and a lot more — enough to make sending two kids to college a lot less daunting.''

Milner's study assumed a 20 percent down payment on the median-priced home in each of the 50 metropolitan markets. Then it tracked the quarter-by-quarter appreciation performance of the median priced home, and came up with a statistical ''proxy'' for returns on investment in each market area.

Some broad conclusions relevant to the questions posed above about timing and cycles and profits and losses:

Anybody who thinks home real estate values can't go down is simply out to lunch. When local economies lose jobs, demand for houses drops and so do property values. Markets where prices have accelerated in part because of speculation by investors are particularly vulnerable when local economies go flat.

The risk of loss is accentuated for purchasers who do not hold on to their properties for extended periods of time. The longer you own a house, the greater your probability of making net profits on it, even if the local economy hits the skids for a while.

For example, looking at all 50 metropolitan areas during the recession-impaired 1991-1995 time period, owners who sold after just five years of holding experienced the biggest losses, with 12 percent of owners suffering net losses of about 10 percent. People who purchased during that period and hung on for 10 years ultimately made net returns, despite the intervening recession years.

Between 1996 and 2000, buyers who sold their houses within five years of purchase had a 1 in 20 chance of losing money on the transaction, with losses averaging 10 percent. Between 1986 and 2005, 99.6 percent of home buyers who held on to their houses for at least 10 years made money.

The upshot: Yes, timing matters. If you buy at the top of an inflation cycle as a speculator and sell into an economic down cycle a couple of years later, you can lose a bunch of money. But if you buy a house and live in it for five, seven, 10 years, the odds are good that you'll come out ahead — even if, like Milner, you bought at the wrong time upfront.

Ken Harney's e-mail address is kenharney@earthlink.net.

A sensible article from over the pond. Not applicable here, of course, as prices only ever go up in the UK.

TLM

Edited April 30, 2006 by trompe le monde

[Warwickshire Lad]

It's my belief that the downswing will be a lot worse this time, purely because the upswing was so much worse than last time.

Buying now is going to keep the homeowner in a financial paralysis for a very long time. But at least they'll be "on the ladder".

[trompe le monde]

It's my belief that the downswing will be a lot worse this time, purely because the upswing was so much worse than last time.

Buying now is going to keep the homeowner in a financial paralysis for a very long time. But at least they'll be "on the ladder".

agreed, especially when you get such excellent advice like this in the 'quality press' - maybe they're too young to remember 1989?

http://money.independent.co.uk/personal_fi...ticle360953.ece

Ask Sindie: North and South: a tale of two houses

Should a couple rent out their former home, or sell up now to beat the taxman?

Published: 30 April 2006

Q: My partner and I moved away from the south of England in spring 2003. We decided to rent out our house in Reading and use the equity in the property to purchase our new home in Liverpool.

We are now wondering whether we should sell the original property and use the money to reduce the mortgage on our current home. Or should we stick with our plan to keep the first property as an investment/pension fund?

It all boils down to the question of long-term trends in the housing market. We are worried we could end up sacrificing the opportunity to move South again in the future, and would have no foothold there should we need one.

I understand we may also avoid capital gains tax [CGT] if we sell within three years of moving out - in which case we have only a few months left in which to do so.

What factors should we consider before making our decision? My partner is a higher-rate taxpayer, while I am self-employed but also do some part-time work as an employee.

LV, Liverpool

A: First and foremost, you have to remember that property is a long-term investment.

"Property does tend to appreciate in value - but there can be peaks and troughs in the short term," says Melanie Bien from broker Savills Private Finance. "You need to view it as a long-term investment of five years or more - and the longer, the better."

The estate agent Knight Frank predicts that the south of the country will outperform the UK market over the next few years. On this basis, retaining your Reading house seems to make sense, although a lot depends on your future investment objectives.

"If you are committed to residential property as an investment, then you would probably be best to stick to your original plans," says Liam Bailey, a spokesman for Knight Frank. "Unless you have identified a new property hotspot for investment, the last thing you want to do is sell up in the South, clear the mortgage on your northern home, and then find yourselves looking to buy another investment property in a year or two."

Remember, too, that you will incur heavy costs in buying or selling a house - including stamp duty and fees from mortgage lenders and brokers, legal firms and surveyors.

Keeping on your Reading home will give you the flexibility to choose where you live in the future. If you do sell now, you could find yourselves quickly priced out of the market down South. That said, you need to consider your particular situation - and not just the property market generally.

"Selling now and paying off all or most of your mortgage on the new home will be great for cashflow," says Nick Gardner from Chase de Vere Mortgage Management, a broker. "This will enable you to save money towards your retirement in other ways."

But he adds that it is impossible to say whether this strategy will prove more profitable than renting out your southern home.

"Assuming the rent on your Reading property makes a comfortable profit over the mortgage, you will enjoy many years of extra income that you can use to pay down that mortgage. If your main priority is to try to boost your retirement income, then I think keeping the property and renting it out is still the best idea."

Rents, he adds, are likely to keep rising as demand for properties continues to outstrip supply.

Ms Bien agrees that selling up may not be the right decision: "As you seem to regard the original property as an investment or pension opportunity - and also an income over time - then capital appreciation in the longer run may be welcome."

Andrew Montlake, a partner at Cobalt Capital, another broker, adds that historically, property has generated strong returns. He notes: "It doesn't strike me that you urgently need to reduce the mortgage on your current home."

As you say in your letter, there could be a big saving in CGT if you sell a previous main residence within three years of moving out. But this is not the be-all and end-all: other tax issues will come into play if you decide to retain the property - which you should talk through with a specialist tax adviser.

"Generally speaking, the longer you hold a rental property, the better the tax position becomes," says Mr Montlake. "This is due to taper relief, which will reduce potential liability."

You might also let the property more tax-efficiently, he says, by increasing the mortgage to ensure there is minimal tax due on the rental income.

Further, given that your partner is a higher-rate taxpayer, you may want to look at how ownership of the property is structured. A solicitor can advise on this process.

If you need help from our consumer champion, write to Sindie at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email sindie@ independent.co.uk. We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.