Second Homes 40% of Market

[REWahoo]

By Noelle Knox, USA TODAY

Americans snapping up second homes — as investments or vacation properties — accounted for four out of every 10 sales of existing homes last year, a record that helped drive the real estate market to new highs, according to a report being released today by the National Association of Realtors.

Nearly 28% of homes bought last year were for investment purposes, and an additional 12% were vacation homes, the figures show. Most of the buyers were baby boomers in their top earning years, looking toward retirement and hoping to build wealth or find a more desirable place to live.

http://www.usatoday.com/money/economy/housing/2006-04-04-real-estate-usat_x.htm

 

[Maximillion]

The Homes bought for Investment purposes sound good, but since the population is ageing, the younger generation cannot afford them, where are the buyers coming from

My youngest Son is ready for a Condo, we are building up a War Chest, All Cash, No Conditions, I know there will be some very good deals coming down the pipe.

10% Mortgages within 3 Years.

 

[BigMoneyJim]

I saw the headline in a paper vending box today; I did a double-take. 40%?!?

I didn't read the article, but what about people who buy a home and afterwards sell their old one? Are they counting those as second homes?

People are so in debt I can't figure out how they would manage to pay two mortgages.

 

[REWahoo]

I didn't read the article, but...

While I try to answer this for you, would you also like me to peel you a grape? :

...what about people who buy a home and afterwards sell their old one? Are they counting those as second homes?

People are so in debt I can't figure out how they would manage to pay two mortgages.

From the article:

"The trend really started after 1997, when Congress changed the tax code, allowing most homeowners to duck capital gains taxes when they sold their homes. The exemption is $500,000 for married couples, $250,000 for singles, if it was their primary residence for two of the past five years.

Under the old system, the only way to avoid the tax was to "roll" the gains into another home of equal or greater value. Americans bought bigger and costlier homes. But now, they can downsize and use the equity built up in their homes to buy second homes."

 

[macdaddy]

"People are so in debt I can't figure out how they would manage to pay two mortgages."

There are many more poor, struggling, indebted people out there than anyone realizes. There are also many more debt-free, wealthy, flush with cash people out there than anyone realizes.

I think this statistic may be misleading. In each of the past 4 years, my parents have purchased a condo. Each time as a "second home" because this allowed them better mortgage rates, terms, and conditions. Of course, each condo then became a rental (3 of which now have positive cash flow). I think 2 of these purchases were done in the same fiscal year. So, 40% may be a little misleading...

 

[lazygood4nothinbum]

i've read that the transfer of wealth from the wwii generation to the baby boomers is the greatest transfer of wealth in the history of the world. i don't know if that's true but it was impressive when i read it. i've heard figures ranging from $10 to over $40 trillion.

so i wonder if that might be fueling the second home phenomenon. makes sense if you think the parents had a bunch of money and only one or two houses but now the money gets divided up to a bunch of kids who used to only have one house, but now have the money for a bunch of houses.

 

[Nords]

so i wonder if that might be fueling the second home phenomenon.

Nah, I think it's taxes. Lower taxes (free is best) and deductibility are driving people's investment decisions.

Second homes used to be great places to "lose" money against taxes... until 1986.

It used to be no fun buying a home unless you were trading up (reinvesting all cap gains) or able to take the one-time over-age-55 exclusion. Now anyone with two years' patience and a tolerance for moving can make phenomenal tax-free cap gains. Some military can flip every tour if the market keeps rising.

Look how much dividend investing has grown since businesses stopped being taxed twice (encouraging them to pay dividends) and individual tax brackets have dropped (encouraging us to receive dividends).

At first everyone could deduct the interest on consumer debt-- until we couldn't. Then it got really cheap again, along with interest rates, and money liquidity was incredibly boosted by the transfer of repayment risk from the banks & credit unions to the pension-funds & retail CMO investors.

So now it's easy to buy a second home with cheap debt, rent it out for whatever deductible & passive losses are available, and plan someday to downsize without worrying about age or cap-gains taxes...

 

[lazygood4nothinbum]

along with interest rates, and money liquidity was incredibly boosted by the transfer of repayment risk from the banks & credit unions to the pension-funds & retail CMO investors.

well of course it wouldn't be something simple enough for me to understand. i haven't even figured out amt yet. will you be my financial advisor?

 

[Nords]

i haven't even figured out amt yet. will you be my financial advisor?

I haven't figured it out either and I'm hoping to live the rest of my life without that experience, so the only way I'd be ANYONE's financial advisor is if they promised not to get involved in AMT.

Read a library copy of Frank Partnoy's "Infectious Greed" for the story of CMOs & other derivatives. It's a nice review of all the cases where people said "It's really different this time."

Basically banks & other financial institutions have figured out ways to repackage & sell their debt as collateralized mortgage obligations or other derivatives, which are bought by institutions, pension funds, and us retail investors. Clearing the crap debt off their balance sheets frees the banks to make more loans, repackage & sell more debt, and keep the plates spinning. At some point people end up holding junk or even defaulted debt (also known as "toxic waste") but it won't be the bank's problem!

 

[wabmester]

The USA Today article is a regurgitation of a NAR article.

The NAR site is mostly real estate rah-rah, but there they do collect some interesting stats.    Read their argument against a real estate bubble here:

The Real Story About Today's Real Estate Boom

Even in their cheerleading, they seem to think the party's over for San Diego and a few others.

 

[lazygood4nothinbum]

nords: put on my reading list. thanx. and interesting explanation. fortunately i have the time to read all this stuff now.

wab, love the nar stuff. florida migration over 1/2 mil in 3 years. no wonder our traffic sucks.

 

[Maximillion]

Musical Chairs, just hope the band keeps playing??

 

[brewer12345]

I haven't figured it out either and I'm hoping to live the rest of my life without that experience, so the only way I'd be ANYONE's financial advisor is if they promised not to get involved in AMT.

Read a library copy of Frank Partnoy's "Infectious Greed" for the story of CMOs & other derivatives.  It's a nice review of all the cases where people said "It's really different this time." 

Basically banks & other financial institutions have figured out ways to repackage & sell their debt as collateralized mortgage obligations or other derivatives, which are bought by institutions, pension funds, and us retail investors.  Clearing the crap debt off their balance sheets frees the banks to make more loans, repackage & sell more debt, and keep the plates spinning.  At some point people end up holding junk or even defaulted debt (also known as "toxic waste") but it won't be the bank's problem!

Hmmm, I think I am going to have to call "shenanigans" on this one (get out the brooms).  Partnoy is (IMO) an opportunistic doom&gloomer who has fanned people's fears of derivatoves and other things they don't understand into a nice publishing career.

Most of the paper that comes out of CMOs (issued by banks, REITs, conduits, and other entities) is investment grade (much of it Aaa, in fact).  the good stuff is what gets sold to pension fuds, insurance companies, retail investors, etc.  This stuff is primo quality and the possibility of it becoming junk rated is remote.  The chances of the holders of this paper suffering actual credit losses is infinitesimal.  The main risk of this paper is prepayment risk.  Banks hate prepayment risk because it makes it virtually impossible for them to do effective duration hedging, so they have used CMOs (among other things) to transfer that risk to investors who are more able to bear that risk, namely pension funds, certain types of life insurers, and retail holders.

The credit risk in the underlying assets is mostly retained by the bank (or other issuer) of the CMO.  They retain this risk in the form of a residual/equity tranche ("first loss" bond), excess spread IO strips, overcollateralization, etc.  In recent years there has been a more active market in this stuff as hedge funds and other risk tolerant investors have been eager buyers of this very risky paper.  But then again, these buyers have a higher risk tolerance and presumably understand what they are getting into.

So I think it is more a case of securitization allowing different types of risk to be more easily parsed out to those most willing and able to bear it.  Are there some stupid people taking undue risks?  Sure, but it is easy enough to do that without CMOs, derivatives or handguns.

 

[Maximillion]

brewer, good post, the Magic Word, "Derivatives", smart money or a House of Cards??

A click of a mouse can cause unintended losses, as in the Copper Fiasco in China, a major down turn in a thin currency, kinda scary, fact is most people have no idea of the complexities of the Markets.

Bonds, dull, but the chances are pretty good that you will get paid.

I think the differance is about 2% , Long Term, on returns of Bonds versus Stocks, correct me if I am wrong??

 

[Nords]

Hmmm, I think I am going to have to call "shenanigans" on this one (get out the brooms).  Partnoy is (IMO) an opportunistic doom&gloomer who has fanned people's fears of derivatoves and other things they don't understand into a nice publishing career.

Well, that's the whole point. People don't understand how much to pay for a derivative or even worse, they get the assumputions & math wrong. It never occurs to them that they might be the sucker.

We don't have to shoot Partnoy when Lewis, Eichenwald, Lowenstein, and a host of others have written about the same topic in books & articles.

Banks presumably know how to do this or they stop being in the business via an accepted Darwinian process. They get relieved of their money and have to stop.

Retail investors who'll leap into anything labeled "bonds" because it's not as risky as them there stock thingies (1) don't know what they're doing and (2) they'll also get relieved of their money but aren't insured by the FDIC.

I don't think derivatives are inherently evil. However, like any power tool used instead of a hand tool, people can get in trouble much more quickly when they don't know what they're doing.

 

[Maximillion]

Nords, company goes Bankrupt, Bond Holders are ahead of Stock Holders, most times , even in worst case scenarios, get something on the dollar.

Nothing is absolute, your house gets hit by a sink hole, you don't have insurance, your former company goes bankrupt, you get no or reduced pension, etc.

No absolutes, but if things are taken to the lowest common denominator, we are all in the same life boat, you just gotta hope you don't get tossed overboard.

Mortgage free House??

Government needs money, there go your property taxes, can't afford them, sell your house at distressed price and move.

Asset Allocation does not eliminate Risk, but you can atempt to mitigate it

Gold and Commodities are up, Collectible Cars going through the ceiling, Fine Wines appreciating rapidly, land shooting up, might be time to go very short on Bonds or have a maturity you can live with, and lock in long rates on your mortgage.

Thanks for some of the more insiteful posts on finance that I have read for awhile.

 

[bearkeley]

We have a second home that we bought as our weekend home (we work from here on Fridays). I bought our primary house 15 years ago for 90k. When my wife and I got married we rented our here condo for a 400 a month cash flow.

We were both working at relatively good paying jobs and we were getting killed with taxes with taxes. So we took 50k out in equity from the first house and put it down on the second which cost 315k. Given that we were both working and got really low intrest rates on both loans (5%) it was pretty painless on the budget and helped keep us from blowing all our money on new shoes.

So based on our experience 12% does not seem crazy if they are minority of people who have old shoes and cars ect... and both are working buy a second home lets you stick your money somewhere it can lower your taxes and maybe apprecitate rather than blow it on STUFF.

Just by luck it turns out that at least for the last 4 years that second home was also a pretty great place to have your margin account invested.