Exactly why is our primary residence is considered an investment?

Somewhere along the way, a dogma was established, perhaps by the RE industry, that we should think of our home as an investment as opposed to shelter.

I can see purchasing a home because it makes financial sense when compared to renting. But does that make it an investment? For example we often purchase cars because it makes more financial sense than renting or leasing? But they are not considered investments because they rarely appreciate in value.

I think we have been conditioned to think of a home as an investment, because there is an implicit assumption that homes primarily appreciate in value. But looking at most inflation adjusted charts we see that is not necessarily true historically.

There are very few things that we actually use (which deteriorate with age), that are considered investments. The only other things I can think of are jewelry and artwork (and they don't really deteriorate much). Do we take out loans using them as collateral? Rarely. (Personally I hate the idea of art as an investment….seems contrary to the whole idea of art).

Collateral is the only aspect of a home that really seems characteristic of an investment. We can take out loans against our homes. But homes are not very liquid assets. As many have learned the hard way, just because you can use it as collateral, doesn’t mean you should.

Trends in East Sacramento 95819

By request......

Unfortunately I couldn't get all three metrics, total sales, median sales price, and median per square foot on the same chart.....

To build, to fix, or to merely live

As mentioned in an earlier post, how we think about housing can really shape our actions. At my current stage in life, I see a house as the place I want to raise my young family not as an investment opportunity.

As a mom I am fortunate to work for a flexible company and still make good money. Why is this relevant? Its relevant because I don't think any home project will produce a return equivalent to my hourly wage. In economic speak, fixing or building a house is not worth the opportunity cost of my time. I highly value the time I have with my family and don't want to give that up to work on a house (We already fixed up one house, and I am not willing to do that right now. As discussed when we were looking at a serious fixer this summer).

So for right now, a move-in, or near-move in condition home is what I am looking for even though we aren't likely to find everything on our wish list. I know Mr. BT would love to build a custom home (his family has extensive construction experience). Once the kids are grown and want nothing to do with us, I would be willing to build a home to spend the rest of our days in.

Here are the pros and cons associated with the different strategies:

To Build:
In general building custom is cheaper than buying custom. You get exactly what you want and are willing to pay for. Not much control over how the neighborhood turns out. Very time intensive. Managing contractors can be frustrating and picking out all the trimmings can be a bit overwhelming.

To Fix:
You get closer to what you want for less $$. an be time intensive.

To Merely Live (move-in condition):
You pay more, but you are not spending nights and weekends working on the house or managing contractors. You aren't likely to get exactly what you want. You have a pretty good idea how the neighborhood will age.

Average Buyer's Holiday Wish List

Well since it's that time of the year...thought I would put in my request with Santa.

Keep in mind this is a wish list.....I will likely add to it from time to time since its good to have something like this on hand. As always, additional suggestions and thoughts are welcome.

Listed more or less in order of importance.....

• 2000-2400 sq ft. and quality construction (min 3 beds and 2 baths, with an office or den)
• Large lot (1/2 acre would be wonderful)
• House set back on lot, and not too close to the neighbors (e.g. privacy) and not too close to a busy street
• Established neighborhood with nice trees
• 5 minute access to hwy 50 in Folsom, CP, or EDH (implies good schools, low crime, and no flooding)
• No HOA or Mello-Roos fees
• Single story
• 3 car garage with a small workshop and side storage for a small boat
• Hardwood or tile floors (not oak)
• Relatively Flat lot
• Quite street where kids can play with friendly neighbors, sidewalks
• Lots of storage space
• No oak cabinets, no tile counters or showers (I hate cleaning grout....but I don't "need" granite)
• Close to park
• Gas range and water heater, solar
• Covered porches (front and back)
• Front of house faces North or South so harsh summer sun doesn't overheat the backyard in summer, but allows some warmth in winter.
• Fruit trees (including avocado) in the backyard
• No dining room or separate living room unless they can be easily turned into a play area for the kids, otherwise they are wasted space.

Weekly Screen Scrape - Shopping

Well the weekly screen scrape numbers from last Wednesday indicated a strong jump in contracts...probably smoothing out last weeks dry spell. Inventory finally took a small dip, and average price per square foot moved higher.

Not a thing to give thanks for this last week......sigh. Maybe Santa will bring me something to cheer about.

Taxing us out of House and Home

After reading the article about Elk Grove's insane tax bill levied on a custom home.....I thought it was time to talk taxes. The following is probably more opinion than educated analysis, as I am still trying to figure out California's system of local housing and property taxes.

I was just a wee lass when Prop 13 and the District Mello-Roos initiatives were passed in California. Combined, these two initiatives really make it tough for new comers to the state, first-time buyers, and new housing developments (basically all the things that help grow an economy).

I do favor localized taxes for localized benefits, like taxing the folks living in the flood plains to strengthen the levy. In theory their lower home value reflects that they live in a flood plain, just as homes under the approach path of an airport tend to be priced lower as well to reflect the environmental externalities.

However, the way I understand many of the new development taxes and the Mello-Roos, it seems only the newly purchased homes get taxed at higher rates (property taxes for both resale and new homes, and Mello-Roos for the new homes and newer resales). So us new buyers end up paying more taxes, while everyone in the community benefits from the services those taxes provide. This doesn't sit well with me.

While I am happy to pay taxes for local infrastructure and schools, I shouldn't have to pay twice as much compared to others down the street in my local community. The perverse economic and social consequences created by this system have wrought havoc on our once well performing school system and forced local governments to promote unfettered growth so they can collect adequate revenue.

I am not arguing with taxes based on the assessed value of the home, as I feel its a good surrogate for ability to pay. The system they had in Virginia where I lived seemed to work relatively well....and their pubic schools and transportation system are consistently ranked top in the nation.

Focusing In

After checking out various Sacramento neighborhoods for the better part of the year......we have begun to seriously focus on a couple areas which are all off the 50 South of the American and have reputable public schools. Below I list out the associated pros and cons as I see them.

Gold River - Larger tract homes, in nice established neighborhood. Closest to downtown. SMUD (much cheaper than PG&E I hear). River close by, but in the flats.
Folsom -Nice smaller city within a city. Lots of family related activities available. Primarily tract homes. SMUD. Traffic and congestion becoming more of an issue as more retail is added. Lake close by, some hills.
El Dorado Hills - Mix of older custom homes and new tract homes (we can't afford the newer custom ones). PG&E is very expensive. Our daycare is here. Rather conservative crowd. Reminds me of SoCal. Lake close by, foothills, potential asbestos exposure.
Cameron Park - Some nicer custom homes on larger lots. Must drive down the hill to Folsom and EDH for most activities. In addition to expensive power, I hear water is also very expensive. Longest commute to downtown. People seem to be more friendly and down to earth compared to EDH. Above the fog line, potential asbestos exposure, cooler in summer and winter.

There are a couple notable exceptions to our main target areas...... such as the "bring all offers!" house near Sac State.

Unfortunately, even with a hefty correction I think East Sac/Midtown and Davis will remain too expensive.

Folsom & El Dorado Hills October Update

Not much of note this month. I have more or less run out of new topics to cover...so I will likely post charts like these for some other zip codes in the near future (after Turkey day). However I won't update them monthly the way I do for Folsom and El Dorado Hills.

Month's Inventory by Zip for Oct/Nov

Finally some data I can sink my teeth into. Looks like month's inventory has shrunk considerably. Sales have increased compared to last month, and inventory has decreased....for a double whammy.

Does this mean I'm going to get a new letter from my lender......heck no...we are still at an average of 10.6 month's inventory for the zips I track. Only 3 holdouts below the 6 month demarcation line (where buyers and sellers are believed to be on equal footing).


In case you are new to the blog....the inventory is gathered from ZipRealty (single family homes), and the sales are from DataQuick via the Sacramento Bee.

The Weekly Screen Scrape - Early Holiday?

Well it seems home shoppers have taken an early holiday. Not a single home went pending last week. While I don't keep stats on this (only the total pending), I believe this is a first.

To boot, inventory crept higher as well. Of course these trends only apply to the homes that come up within my search parameters in EDH and Folsom.

Curious to know if anyone tried home shopping via Comcast OnDemand.....they show a lot of commercials for it. We tried it once and there was very little selection.

Tale of Two Cities

Its now been a little over a year since we left the D.C. metro area. Upon reflection, its amazing how quickly our expectations have adapted to the local market conditions in Sacramento. Both metro areas heavily dependent on government largess, however D.C.'s economy is a bit more diversified than Sacramento's.

Sacramento's data is shown with the solid markers, and D.C.s has the transparent markers. Over the years, the two cities have experienced remarkably similar housing cycles (I haven't compared with the rest of the nation to know if this is common or not). However the last two years has seen some divergence.

Sacramento prices are adjusting downward, while D.C. appears to be hitting a plateau. Looking at income statistics by county can explain some of what we are seeing. Fairfax County, where we lived, and neighboring Alexandria, Arlington, Fall Church, and Loudoun (as well as across the Potomac in Montgomery County MD) all rank within the top 25 in the nation. As for California, only 4 Bay Area Counties make it into this top 25.

November Inventory Changes by Zip Code

Total inventory declined 1.5%. Some zips are still experiencing growth despite the seasonal slowdown. Inventory for Single Family Homes was gathered from ZipRealty.

Waiting for the market to rebound might cost even more!

From Wednesday's EDH section of the Sac Bee, looks like they are considering fines for vacant homes:

"The Board of Supervisors on Tuesday directed staff members to draft an ordinance setting standards for maintaining vacant buildings, and fines for banks, mortgage companies and investors that fail to meet them."

"Board chairwoman Helen Baumann said she requested figures on foreclosures after residents attending a recent community meeting in El Dorado Hills raised concerns about the effect of vacant homes on neighboring property values." (emphasis is mine)

"Jim Wassner, county code enforcement supervisor, reported that as of Oct. 6, 199 homes were in foreclosure in El Dorado County. An additional 514 were in the pre-foreclosure stage, and 104 were in bankruptcy. Citing Nov. 5 figures for several communities, he reported that 119 homes in El Dorado Hills were in foreclosure, 126 in pre-foreclosure and 26 in bankruptcy."

Commentary - Silly neighbors....if they make it more costly to hold vacant homes, owners are more likely to reduce their asking price to sell.....its a no win situation for property values. The fines, just speed up the process.

The Weekly Screen Scrape - Defying Gravity

Wow...big jump in inventory for this week's screen scrape. The inventory of homes that meet my criteria (in Folsom and EDH) now stands at an all time high.

How can it be you ask? Isn't inventory falling? Yes, but so are prices. As prices drop on existing inventory, they eventually show up in my screen scrape.

However when prices fall, contract activity goes up. The best deals do get snapped up ....saw one at $153 a square foot go pending (not sure if it was a new listing or a price reduction). New homes also make for a sizable portion of the homes pending.

How bout a raise?

Hmmmm...another expert predicting things to flatten out in 6 months.

Unless Bernake plans to give us all a hefty raise, say double our current salary, I don't see how demand will return to stabilize the housing market. Yes homes aren't as expensive as they were 1 year ago.....but still, the went up between 50%-100% over the last 5 or so years, and they have only come down 10%-20%....

With all the non-traditional loan products, more or less, off the table, it will take some seriously low interest rates to make these homes fit within people's budget.

I am really starting to lose my faith in Bernake.....seems to shill for corporate America these days, not a champion of the U.S. economy.

Rolling Back the Clock?

Anyone who regularly reads the HBBs has seen the projections in terms of what the "right" price level is for the Sacramento housing market. In fact this was the subject of one of my first posts. (I've learned a lot since then.) Many studies have been done (see my favorite here).....but we all have our own idea. Some feel its as early as 1997, and others think it is 2004 (more or less where we are at now).

While this is a nice overall guideline, it doesn't provide much guidance on a personal level. If someone sees a home at $125 a square foot, it that a good deal? Hard to say...it really depends on the location and the condition of the home.

This is why I continually go back to my rent versus buy spreadsheet (which I have promised some of you...but haven't gotten around to sprucing up yet). This spreadsheet tells me, on a very specific level, if it makes sense to take on the monthly costs of ownership. This is not an investment approach, but a cash flow approach. It also helps answer questions like....How much less house can I afford if my monthly HOA is $150? Of course this assumes you know how much the rent is for a comparable home.

If you want an investment approach....the e-loan calculator is rather comprehensive, but some of their default assumptions need some serious revision....below are my suggestions:

Income Tax Rate: Way too high for most of us.....however they do have a guide: Not sure?
Annual Home Maintenance: This depends on age & condition of the house and should be adjusted since it can have a big impact.
Monthly Renter Insurance: I consider this a bit of a wash, since you have to pay homeowners (although I am basing this off my insurance rates from when I lived in D.C.)
Annual Rental Increases: Of course this depends on your personal situation, but I would say 1-2% for places here in Sacrament (if that)
Yearly Appreciation on the Home: Depends on your actual zip...but I would say zero over the next 7 years (7 years is their default time horizon)
Your Savings or Investment Rate: 5.5% (based on earlier comments)

Caveat: Their spreadsheet doesn't really include a separate section for HOA (add in the home maintenance section) and Mello-Roos (add in the properly tax section).

MelissaData

According to MelissaData, both zip codes saw a 45% decrease in sales (year over year) for October.

Price drops are a bit more erratic, but seem to be moving in the right direction lately. Once again, I think the Folsom average sale price data looks more realistic because their larger sample size helps to stabilize the data (averages can be easily influenced by outliers).

The Facade is Ending

Took my camera on a leisurely stroll around the "prestigious" gated community of Serrano where we currently rent. Countrywide is offering a free appraisal and credit report on the second one. Talk about incentives. Saving $400 on a $429,000 house (that's a whopping .1% savings). Across the street is another for sale (but I wanted to make sure I got the side-by-side bank owned clearly in focus).

Looks the perfectly manicured facade is starting to crack in beautiful El Dorado Hills.

Supporting My Habit

We joined the gym in September. It was the same month we renewed our lease. I figured it would be much more constructive way to spend our weekend, as opposed to driving around and looking at houses.

Funny thing happened on the way to the gym. Mr. Buying Time (he refuses to be called Mr. Average), who always drives, takes a detour. We end up in some previoulsy unexplored neighborhoods where he recently saw some homes listed.

Its very hard to kick a habit when your spouse is a contributing factor.

Expert Advise

From this week's Dear Miki column Folsom & El Dorado Hills Telegraph:

"Last night our real estate agent came over to the house and showed us a comparative market analysis (CMA). After much discussion on the value of our home, "Marge" suggested that we wait until the market is on the upswing. Although Roy and I don't have to sell, we told her we wanted to give it a try. I almost fell out of my chair when "Marge", our agent for the past 20 years and the recipient of our referrals, refused to list our house. What kind of service is this? I'm so burned up that I am calling all our friends and telling them not to use her because she is just too lazy to work harder."

Response:

"A CMA is designed to give facts which can be qualified and quantified, by giving number of bedrooms and baths, approximate square footage, size of major rooms, amenities, home's age, property taxes, homes' currently for sale list price and those sale price of those that have closed escrow. Basically, it tells you in black and white how your home stacks up with the competition."

Ensuing random discussion about whether CAR telling people not to test the waters is legal issue.....then last paragraph.....

"Give her a break! She has no time to coddle your curiosity by spending money on marketing your home, when she must feed family and pay a mortgage. Who knows, she might even be working part-time at a department store to pay the bills."

November Good Buys & Offers to Sellers/Builders

Okay courtesy of Mike's suggestion, please also post any offers you know of that were accepted, especially to builders. It will help give others negotiating leverage when they are ready to buy. Even just letting people know what type of builder incentives they can expect would be helpful since its hard to tell if they give everyone the same incentives.

Pieces of data to include: Zip, MLS or Development Name, List Price, Incentives, Offer (if any), house details (sq ft, garage size, lots size etc).

Its Not Nice to Tease

A house came on the market last week that hubby and I were keenly interested in. Its listed for $439k currently and according to ZipRealty had sold on 5/28/04 for $338,500.

The only words in the description are "Bring all offers!!!"

So here hubby and I figured this gave us a license to put in a reasonable offer at around $350,000 (our estimate after a drive by). We had our agent call to get the scoop and see if it had been updated. I wanted to see if my hunch was correct, that it was bought cheap and fixed up.

The seller's agent informs our agent that they aren't considering any offers below $400k! I think they should revise their description.

The Weekly Screen Scrape - Beneath the Surface

Thought I would give a bit more details on the weekly screen scrape. While the totals I report on (for sale, pending and price per square foot) have not changed much recently, they mask the fact that there is actually quite a bit of activity under the surface.

For example this week, the total listings (107 total, 24 of which are under contract, 3 with a release clause) only dropped by one. 4 homes expired or were removed, and 6 closed escrow. 9 new listings showed up (2 of which were relists), and 6 new contracts were entered. All this activity only amounted to a net loss of one listing (total contract numbers stayed the same).

So its not like the market has completely collapsed.....there is quite a bit going on. Granted, this week saw a bit more activity than usual, but from what I have seen the last week of each month tends to see an uptick in activity, especially escrow closings.