Free Money
Last week we talked about an article that was rather harsh in BusinessWeek. “If You Don’t Buy a House Now, You’re Stupid or Broke,” written by Marc Roth. And he did it, you know, to get attention. I mean, when you read the article, he’s not being mean or anything like that. It’s actually a very good article.
As we discussed last week, he talks about how interest rates are as low as they’re going to go. Okay, you might get another quarter point or half a point off, but it’s basically free money right now. They’re getting, you know, 5 percent, 4.75 percent interest rates right now to buy real estate.
It’s like free money. It’s crazy. Just appreciation alone—one of the worst reasons to buy real estate or one of the least effective and least safe reasons to buy real estate is appreciation. You’re turning it into a speculation instead of an investment.
Less Interest
In Texas it’s 4 to 7 percent rate of return every year. So just the appreciation knocks out your interest. Not to mention your principal is going down every year, so you’re actually reducing what you owe every year, which means you’re actually paying less interest. You’re paying 4 percent on a lower amount each year, but I won’t get into that.
I do want to get into the fact that what Marc Roth is saying over at BusinessWeek is: Now’s the time. How many green lights do you have to have before you leave the house? Get out there and get some real estate.
Well, he got a huge number of people to literally blast him out of the water for that article. And I’ve got to say I disagreed with every one of them. He wrote a follow-up article, and we’re going to discuss that today. There’s an old—I don’t even know what this would be called—a wives’ tale? What people think is that if interest rates go up property values will go down.
Property Values
It makes sense. Well, if people can only afford $1200 a month, then when the interest rate goes up and it jacks all the prices up, that means fewer people will be buying, which will drive down the sale price of the properties. So what will happen is property values will go down.
So this argument was made over and over and over again. There were some other arguments against his article, “If You Don’t Buy a House Right Now, You’re Stupid or Broke,” but the rest of them were really so ridiculous it was crazy. This was the one that I think needed to be addressed.
Because what he found — Marc Roth went out and did the research and found that the historic records show — are you ready for this—that home prices don’t drop when rates rise. The trend is quite the opposite.
Argument
He goes on — I’m going to read a little bit of his article, but you can find Marc Roth at BusinessWeek.com. I don’t want to spoil going there and reading these articles. You need to do this. Go to BusinessWeek.com and look up Marc Roth and just read two or three of his articles. They’re very interesting.
He says, “I wasn’t trying to start an argument. Honest. But that’s exactly what I did.” He says in his “last column, “If You Don’t Buy a House You’re Stupid or Broke” I suggested that prospective home buyers should pay more”—and I’m going to add in investors ‘cause that’s what we’re talking about. I actually disagree with this article. It works just as good for investors. Marc Roth, thank you. Works just as good for investors as it does for homebuyers.
Every quarter point change in interest rate is equivalent to approximately $6,000 for reach $100,000 borrowed over the course of a 30-year fixed mortgage. So if you decide to put $40,000 down and buy a $200,000/$240,000 home the typical home price, you could pay an additional $48,000 over the course of your loan. Borrow 500,000 as some people on either coast do and you’re out an extra $120,000.
Act Now
His conclusion: If you’re thinking of buying or trading up and you have a good job and good credit, act now. But then he goes on to talk about scores of people kept saying, “No, no, no. This is not the right time to buy.”
I mean, I can’t even say this seriously. Interest rates are low. Prices are low. If now’s not the time, when is? What are people waiting for? I just can’t—it’s just difficult to even answer that question. We’ll come back to this in a moment.
STEVE: Let’s go to Bryan, Texas and talk to Jeff. Jeff, thanks for holding on through the break. How are you today?
JEFF: I’m doing good, Steve.
STEVE: Excellent. How can I help?
JEFF: I am a Lifestyle’s member. Last quarter, November through December of last year, I bought three properties.
STEVE: Okay.
JEFF: And all of them in Houston. I’m up here in Bryan/College Station, so I’m remote from my properties. In lieu of me being there in town to manage my properties, I have gotten one property under property management by a real estate agent friend of mine. Two of the properties are being managed by someone who’s not a licensed real estate agent. I was warned by somebody based on some anecdotal stories they had that the property manager needs to be licensed. Is that true?
STEVE: You know I think it is true unless they’re an owner in the deal or an employee of yours. But you have to have like a management company. There’s something more complex to this, Jeff, than I can even answer here live. What I want you to do is call the office number, click the Houston office which is I believe number one. Ask for Natalie. She knows that, and if she doesn’t, Jeff Smith will.
I do think there’s some way to get around it by them being an employee of your company. But there has to be a company, and then otherwise they have to be licensed, yes.
JEFF: Very good. Okay. I’ll follow-up with Natalie. Just another follow-up: Real estate works. I picked up $113,000 in equity in three purchases.
STEVE: Oh, my gosh. Congratulations. Have you considered buying anything in Bryan/College Station?
JEFF: There are not a lot of foreclosures up here.
STEVE: Gotcha.
JEFF: So the economic opportunity is definitely better down in Houston.
STEVE: Gotcha. Well, I appreciate that insight.
{ 1 comment… read it below or add one }
So let me get this right. We all know that house prices will go up when interest rates fall. But you claim that they will also stay the same or go up when rates rise. So essentially housing prices are always going up or are stable. So why did the Fed waste all that money trying to keep interest rates low? They should have just listened to you and let rates go up…problem solved.