Why One in Three Millennials may be making a serious mistake when purchasing a home

It was not so long ago when one purchased a home with the rationale of not only having a roof over’s one head but also a vehicle to keep up with and even better beat inflation and have enjoy some added tax deduction benefits.

While the above value concept may have been eroding for some time:

  • Assuming a residence can only increase in value (the Great Recession shattered that myth).
  • Using equity in one’s residence as leverage (the House as Personal ATM).
  • Limitations on the deductibility concerning real estate taxes.

As a broker I completely understand the desire for a home purchase especially when we see markets with low inventory and continued historically low-interest rates. Yet are Millennials setting themselves up for future challenges?

Yes most millennials went through the Great Recession and while experienced may not have been in the workforce or owned a residence. They may not have witnessed the job losses, foreclosures and the evaporation of paper wealth over that period. While the economy has come roaring back (even though I question the longevity of this bull market) as I always advise past performance is not indicative of future returns.

This is why a recent survey from The Bank of the West truly concerns me as follows:  “The fact that nearly one in three millennials who already own their homes have dipped into their retirement nest eggs to finance their down payment is alarming. With careful financial planning, millennials can have it all – the dream home today, without compromising their retirement security tomorrow.” Ryan Bailey, Head of the Retail Banking Group at Bank of the West.

Basic reality; a mortgage is debt, plan and simple. While a long-term mortgage with a low monthly payment and a fixed interest rate may be attractive and definitely can be a hedge in an inflationary environment, it is still debt.

Yes the mortgage payment may in fact be less than comparable rent (yet did the buyer factor in the down-payment).

While there are tax advantages including mortgage interest and real estate tax deductions, are the benefits truly appreciable concerning one’s income? The debt to income ratio can be an eye-opener.

Unlike retirement investing which is usually liquid and easily revised depending on market conditions, a residence is truly illiquid and can incur major costs when trying to sell i.e. commissions, preparation to sell and so forth.

Home ownership can be a foundation for a lifetime. This is not necessarily a positive attribute. What happens if the homeowner decides to entertain an employment opportunity elsewhere? What if the market during that time is a buyer’s market?  What if market rent would NOT cover the monthly PITI? In such scenarios one may be losing precious investment opportunities while covering the monthly payment coupled with an inflation reduced asset.

Mortgages do provide leverage and equity via one’s down-payment HOWEVER during the recession the terms negative equity, short-sales and foreclosures entered the vernacular and unfortunately we all have collective short-memories. Just last week I viewed a home on S. Monaco in the Southmoor neighborhood. While needing some cosmetic updates the home is in good condition and state of repair. Lowest priced home in the area concerning both asking and on a PSF basis. The asking $475,000 yet this is a short-sale with a loan balance of $515,000. Yes in the present sellers market a short-sale!

In addition to all of the above what concerns me locally here in Denver is the type and location of residences millennial’s are purchasing. I am seeing a proliferation of townhouse style residences as well as condos and similar attached multi-family construction in all the most desirable neighborhoods i.e. Golden Triangle, LoHi, Highlands, Sloans Lake and others. Concerning affordable, think again, many are $500K+ some pushing 7 figures. Yet I am seeing younger buyers purchasing with the assumption that 1) housing will continue to appreciate,  2) they plan to live in or potentially rent if they move or lifestyle change and 3) using monies allocated for retirement and/or using family capital to assist in purchase with the belief that inflation coupled with low mortgage loan rates is a winning combination.

While these new homes are beautiful and contemporary and perfect for the single or young DINK (dual-income no kids) couple; lifestyles change. Are these buyers considering children in the future? Are the local schools the caliber they desire for their offspring? Is there a risk of a glut in the area when the market adjusts course? How deep is the rental market for their unit style? Will rent cover their PITI?

I recently worked with a couple and this was their course concerning home ownership over the past decade and my forecast for their future:

  • Years 1-4: First Purchase: Smaller Home in West Washington Park
  • Years 4-8: Sold West Washington Park Home. Purchased in Stapleton as one child heading to elementary school and another on the way.
  • Year 10: Sold out of Stapleton, purchased in Littleton, house triple the size of Denver and large lot, literally 1/2 the cost of anything within 8 miles of downtown, more attractive school system yet more challenging commute (both work in downtown) however easy access to light-rail and Santa Fe Drive.
  • ————————————————————-
  • Year 10-15: Forecast – Will stay in Littleton until youngest goes off to college.
  • Year 16: Forecast – Sell Littleton home, move to Cherry Creek North.

I am a firm believe one’s first home can be a great foundation for future success from lifestyle to investing. However I also feel one’s first home should not be over-extended i.e. live within one’s means, consider allocating some housing expenditures to the equities market to take advantage of compound interest and if planning so change jobs, careers, locations be realistic as if changes are happening in 3-5 years the potential loss of equity concerning one’s home can happen. Ask all the buyers in 2006 which sold between 2008 and 2013…..

 

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$60,500 in 2014 sold for $199,000 in 2018 Would You Take That Return

Compelling yes; however what about the person who purchased in 1998 and 10 years later lost the unit to foreclosure.

Earlier this week I closed the seller-side of a condo at Monaco Place in SE Denver.  From a previous blog post I suggested this complex represented the Denver Real Estate Market of the past decade.

This is a complex with a stellar location i.e. 1 block east of I-25 and Hampden Avenue. Excellent walk score, units ranging from 1-2 bedrooms in various configurations. Ample open areas professionally landscaped. Amenities include an indoor pool, workout facility and the HOA provides both heat and air-conditioning.

The complex was built in the early to mid 1970’s. Stacked 2-3 stories most units included wood burning fireplaces. Top floor units have vaulted ceilings. There are communal washers/dryers and some units have stackable units installed.  Each unit comes with one deeded carport parking space and guest parking is ample. The units did fall on hard times from decay of the exteriors to investment units outnumbering owner-occupied (of note at present 63% owner-occupied and climbing).

Thus the unit I am going to profile I believe represents the Denver market and may be an indicator of where the market is going. Spoiler alert, softening yet not a crash landing.

Being respectful of the seller and buyer I will not disclose the actual address and unit #. I can advise the unit is a 2BD/1.75BA top floor condo. My seller during his tenure did various cosmetic and mechanical upgrades totaling approximately $15,000 over his time of ownership during which time the unit was rented.

Based on Denver Assessor Office Records:

  • 9/30/98:       Purchased for $59,000
    •            -$91,210 in today’s dollars
  • 7/9/08           Foreclosed upon by Bank of New York
  • 9/5/08           Placed on market by Bank of New York asking $29,500
    •                -$34, 526 in today’s dollars
  • 10/30/08      Unit sells and closes for $36,375
    •             -$42,573 in today’s dollars
  • 2/14/14        Placed on market for $69,000
  • 2/24/14        Sold for $60,500
    •            -$64,400 in today’s dollars
  • 6/6/18           Placed on market for $209,900
    •             – Asking based on comps selling for $209-$216 within prior 3 month
  • 6/17/18        Asking reduced to $199,000
    •             -Prior week 4 showings no offer
  • 7/23/18        Sold for $199,000 minus $3,000 Concession
    •            Net Sale $196,000

Thus looking at the history, the 10 years between 1998 and 2008 were not kind to the owner of this unit including a foreclosure during the Great Recession.

The next owner did well i.e. in 6 years of ownership enjoyed a gain of $24,000 or $4,000/year equity appreciation. Of note the seller was attending college in the area, thus owning not only comparable to rent yet also enjoyed equity appreciation of $4,000/year.

However my seller literally knocked it out of the ballpark with a gain of $135,500!

In addition to the rental income i.e. $1,200/month – HOA fees of approximately $450/month, my seller was netting $750/month on his initial $60,500 investment.

Over the 4 years and 3 months of ownership:

  • Initial Investment     ($60,500)
  • Net Rental Income    $38,250
  • Upkeep and Maint.   ($15,000)

Thus just from rental income over the 4 years 3 months of ownership my seller netted literally half his initial investment.

And he sold the unit for $196,000 after seller concession.

Thus once calculating all the numbers, his net gain over the 4 years and 3 months excluding commissions:

$158,750 or a staggering $3,100/month during his ownership tenure.

My view is a follows:

  • Such gains will NOT be replicated for the foreseeable future if ever.
  • When we priced at $209,900 was based on market, had to reduce to $199K to sell.
  • Market may be softening due to higher yet still historically low interest rates.
  • Rents seem to be retreating coupled with additional inventory.

At $199K w/ 30 year fixed including HOA and taxes comparable rent i.e. similar unit asking $1,495/month. Factor in tax benefits and potential equity appreciation still an attractive opportunity for the buyer.

While I am not an economic forecaster I do believe within the next few years we will witness a softening of the market in real estate coupled with the potential of a mild recession. Further out I am more concerned with another Great Recession or potential Depression gripping the world economy around 2030.

My prediction is based on economic cycles, tax cuts which will balloon our deficit, rising interest rates worldwide to tame potential inflation, higher oil and overall commodity prices and I have not even considered the potential impacts of a trade war waged with tariffs.

BTW: I am not alone in my thinking: Dr. Alan Beaulieu, President of ITR Economics

The following article is great reading: 2019 Recession/2030 Depression

 

 

 

 

How did The Brady Bunch do in The Real Estate Market

Remember The Brady Bunch the iconic television series of the late 1960’s. Well the famous house (the façade shown in the opening and closing credits) is up for sale; the first time since 1973.

Now I always questioned why Mike, an architect would design the children’s bedrooms to be triple occupancy and share a Jack-and-Jill or a Greg-and-Marcia bathroom. Mike and Carol’s bedroom had an en-suite and Alice had her room (see floor-plan link below). Yet the children ensconced in their shared bedroom until Greg had the brilliant idea to convert Mike’s study and later the attic to his own pad including beads and mood lighting. And those kids having to play in the yard with fake grass. I assume Mr. Phillip’s; Mike’s boss was paying him well.

Floorplan of the fictional Brady Residence

The Listing as presented on Zillow: 11222 Dilling Street, North Hollywood, CA 91602

Do to the popularity a low fence had been installed: Brady House Then and Now

Back to the real estate. While the home’s façade was famous the actual filming of the series was on a lot and not in the house. Now the house has not changed much since 1973 as the interior shots show via Zillow.

I was curious on how the fictional Brady’s would have done if they actually owned the house. Now realistically the kids would have moved on by now, or so I hope. Or Jan stayed at home with the parents to take care of them. Greg and Carol would probably be challenged to install a stair-lift on the contemporary staircase. And Alice’s room would probably now be the room of their live-in aid or Jan’s abode.

  • In 1973 the house was purchased for $61,000
  • Adjusted for inflation, that $61,000 would be $346,200 today.
  • The asking price is $1,885,000.

Thus not a bad windfall. The sad news is most likely the next owner may consider razing the home due to its 12,500 SF lot in Studio City, which is a geographically most attractive area of West Los Angeles. If one were to renovate to today’s code and tastes, most likely $400K or higher. Of note being the most photographed house in the United States only 2ndto The White House (the house is surrounded by mature shrubs which has not dissuaded visitors) you are guaranteed all day voyeurs.

Thus The Brady’s at asking will net over $1.5M in 2018 dollars before commissions.

If you may be interested my firm affiliation  Engel and Volkers does have shops in the Los Angeles area.

The Whipsawing of the Real Estate Market, an example in Cherry Creek North

The 200 block of Harrison Street in Cherry Creek North is an interesting block and one I have some familiarity with as I resided on it for 27.5 years. The east side abuts Colorado Blvd, the west side somewhat sheltered from the traffic. Yet old-time brokers know Jackson St and Harrison St. were always more challenging due to their proximity to Colorado Blvd. Yet in recent years developers have found opportunities on these blocks for redevelopment and advantages with the higher natural topography allowing for unobstructed mountain views.

With interest I have been watching 235 Harrison St, the south side of a duplex. Constructed during the tail end of the boom in the mid 2000’s I always appreciated the contemporary design. While most of the block is of traditional design including a bungalow, the expansive glass and landscaping truly set this duplex apart.

The unit is presently on the market and seems to have been struggling to find a buyer thus I decided to look at the history (please see inflation adjusted to 2018 dollars as noted by the *):

  • The unit came on the market on 4/26/18 for $1,100,000
  • The most recent price adjustment happened on 6/8/18 down to $950,000

Thus I decided to look back at the history a little further:

4/30/08:Comes on the market as new construction for $899,000.

*In 2018 Dollars: $1,050,500

-Of note the beginning of The Great Recession is happening.

1/13/09:Sells for $750,000

*In 2018 Dollars: $879,526

-Basically 6 months later and a $149,000 price reduction from initial asking.

2/09/12: Comes onto market at $799,900

*In 2018 Dollars: $875,540

-$49,000 above last resale 3 years earlier does not sell!

After multiple iterations on the market and price adjustments:

2/24/14: The unit sells for $764,276

*In 2018 Dollars: $812,224

Thus from January 2009 to February 2014 the unit in real dollars increased $14,000 and based on inflation has lost $60,000+.

  • 4/28/18: The unit comes on the market at $1,100,000
  • 5/16/18: Asking reduced to $1,050,000
  • 5/23/18: Asking reduced to $1,000,000
  • 6/08/18: Asking reduced to $950,000

As mentioned this is a lovely residence perfect for the buyer who wishes to own a contemporary residence with mountain views and a roof deck. However as astute buyers, sellers and investors we usually desire our real estate holdings at minimum keep up with inflation and even better exceed inflation coupled with various tax advantages (which are usually negated by maintenance and upkeep).

Thus for 235 Harrison Street the past decade has not been a wise investment. Historically buyers and sellers have come close to breaking even yet when factoring in inflation, which has been historically low over the past decade the ownership, has in fact lost money.

Most economists believe inflation will be making a comeback as we witness low unemployment, increased pricing for basic goods and services from gasoline to commodities coupled with potential trade disputes all coupled with rising mortgage interest rates and a possible recession.

What is interesting I have been watching similar designed row houses going up on Harrison Street south of First Avenue; units with a more pronounced impact from Colorado Boulevard and south of 1st Avenue. Will be interesting to see how the market reacts to those units. Granted new construction does have a premium.

Concerning 235 Harrison as a broker, unless one can get a better price on the purchase consider renting or if making an offer present the information from this blog. Good luck out there.