State's largest private land owner predicts real estate bottom

St. Joe, the state's top corporate land baron with 638,000 acres spread mostly across the Florida Panhandle, suggests the real estate market, at least in its neck of the woods, might have bottomed.

“If we are in fact on the floor of the valley the question is, 'How wide is the valley?'’’ chief executive Peter Rummell said this morning in announcing the company made $32-million in profits the first three months of this year.

Helping its balance sheets in the first quarter of 2008, St. Joe sold 57,435 acres of its "non-strategic" rural land for $91-million. But its residential housing business has been in free fall. That side of the business brought in $30-million in early 2007 but only $9.8-million in early 2008.

Rummell said home and lots prices seem to have stabilized after deteriorating by 20- to 30 percent from their peaks in August 2005. The inventory of homes for sales has also stopped rising.

Rummell said the company's task is to "retrain buyers" that housing purchases can't be deferred forever.

"We have trained people to expect that price are going to be lower tomorrow than today if they just wait," he said. "So now people are going to have to learn that they’ve gotten to that point.”

Comments

[Grant]

In a state that has been paved over by developers who have worked hand in hand with an all too willing political machine, this company is king. The profit motives of this company over environmental and quality of life concerns are simply staggering. To take "now is the time to buy" advice from a company that has literally bought Florida and it's politicians is beyond me.

[Marisia]

THank you Grant.

[Sinbad]

I will obey the "GOD OF REAL ESTATE" and be a good little citizen and buy a home.Fat Cats, Land Barons and Corrupt Politicians in the year 2008. I thought we would have evolved into a higher form of life. Guess Not!

[k faye]

I think we ought to listen. St. Joe runs the state so who would know better?

[Frankie]

Why not create "Re-education Camps for homebuyers. After several weeks of mind control and maybe a little "waterboarding" for those not willing.

Repeat after me"NOW IS THE TIME TO BUY PROPERTY" again please{louder}'

There is no time like the present.

Buy now before prices go higher,you will be sorry if you don't/

WE KNOW WHAT IS BEST FOR YOU...TRUTH IS JUST A CONCEPT, BELIEVE IN YOURSELF AND ST JOE
FOLLOW THE YELLOW BRICK ROAD{PLEASE DON'T REMOVE BLINDFOLD TO WE ARRIVE AT
YOUR DESTINATION. thank you....

[brad]

The real estate bottom has at least two more years to bottom out and then it will be at least 10 years before we see 2006 prices for real estate in Florida .It is wishful thinking by St.Joe company .In Pinellas county it may be even further for the bottom to turn around .I would not want to be owning a condo in Florida at this point .

There is one thing that is true about markets - those investors who try to time them, usually lose.

Bottom line - if you want to buy a house and can afford the house you want to buy, buy it. It's still better then renting and in the long term will prove to be a great investment.

If you're not selling your house for another 3-4 years or longer - none of this matters.

[k]

These guys would have you wait forever in a rental for that "magic bottom".

If price is your only reasoning to buy a house, you will lose a great deal of selection when the market tightens up. It simply depends on your current needs and/or wants.

[Fuzzy Bear]

"Now people have to learn that they’ve gotten to that point.”

I disagree that we have hit bottom. The St. Joe company is in the business to buy and sell property and to improve their bottom line, they need to sell.

The economic factors are saying the opposite of the wishful thinking of those in the industry like St. Joe.

[Fuzzy Bear]

It's still better then renting and in the long term will prove to be a great investment.

Wishful thinking! Show me the numbers on a 30 year mortgage in todays market where this is a great investment. The interest paid on a 30 year loan would make it a poor investment alone, not including other costs.

Most are lucky just to break even after they deduct all costs of home ownership over the life of the loan.

[Fuzzy Bear]

Here is what Moodys has to say about the Tampa Bay market:

The problem is many of the markets that experienced steep 2007 price drops are still a long way from recovery.

That's based on a Moody's Economy.com report prepared for Forbes.com. It predicts that 2008 isn't going to be any gentler than last year on slumping markets like Los Angeles, Sacramento, Calif., Las Vegas and Tampa, Fla., where market weakness is expected to cause 10% to 25% drops over the next year.

[bdiddy]

Fuzzy Wuzzy- It is a proven fact that the wealth of homeowner is greater than that of a renter. It is still a wise investment and a tax write off. That being said, buying investment properties without cash flow is a bad investment. The renter will never save money as at least a homeowner is building equity.

[Hank]

Anyone who believes a press release from the biggest realestate hustlers since Perry Snell needs to buy some of St. Joe's "SummerCamp" lots. 1 mile from the water in the damnedest sand spur and palmettos propery that is 10 miles from the nearest grocery or gas. Only $495,000

[Joe]

It is a very good time to buy. Some homes now receiving multiple offers. I think the bottom is here or very near, but you know what? It really doesn't matter that you're exactly precise on timing the bottom. Whether it's stocks or houses, if anyone or everyone could predict the bottom perfectly, they'd be rich. So long as you play the real estate game reasonably consistent and conservatively, you basically can't lose. It's still the best investment out there (uh, yes, better than renting). The only investment I know of that pays you twice...once on the home's appreciation itself and twice when the tenant pays down your mortgage.

[voxy]

I must say that reading these comments gives me hope that Floridians will be able to take back their state.
ENOUGH STOLEN ELECTIONS, enough Republican thieving. Enough selective prosecution, education and arrests.
Enough selective code enforcement.
St. Joe must be a big proponent of gambling because they paid PLENTY to get Charlie Crist elected.

[St. Joe, or is that St. Joke?]

No dirtier player, both from a business ethics standpoint and an environmental standpoint, than the fine folks at St. Joe. Clearly, they have a vested interest in property values going up, but something tells me they are going to take a well-deserved hit this year and next.

It's embarrassing the way they have been such poor stewards for the land in Florida, but that's typical of the way Florida politicians have let them behave.

Taking "time to buy a home" advice from St. Joe's would be similar to taking lessons in morality from a lawyer.

[Tino]

Housing is not an investment. It is an expense. There are ways to minimize that expense, but in the long run it is costing you money to live there.

If you think otherwise, you need a refresher course in finance and/or you must be a Realtor.

[Tino]

(continued)

The whole problem with people going into foreclosure is this "investment" philosophy. Because they think that it is an investment, they overbuy and get themselves into a situation where the expenses crush them. With a 6% note, plus property taxes, insurance and upkeep, buyers have to expect that the market is going to accelerate at a 10+% rate annually to actually make money.

People who bought reasonably-priced homes and financed them with fixed-rate mortgages are not losing their homes. Those who gambled with homes they couldn't afford, financed with speculative variable-rate loans are those getting burned, because they thought that they were making an "investment".

[Ginger]

PLEASE FOLKS this is the time to buy a home or a lot. I am getting tired of doing table dances for a living and would like to return to being a realtor.
There is a difference I think?
Instead of multi O'S I would like to get back to multiple listings.
Thank You!

[J]

Sorry St. Joe... but the bottom is not here yet...

[Richard Nixon]

Where was the St Pete Times when I needed the print media to manipulate stories.

It is difficult to tell actual news from just another advertisement .

Will the last journalist please turn the lights off.

Please be objective or at least try!

[James Thorner]

If your house is your home and not a quick flipping opportunity, I see no problem with buying at the right price. Do some simple math. Rent a 4 BR house for $1,200 for 10 years. That's $120,000 out of pocket. Buy a $200,000 4-BR house for $1,200 a month. That's also $120,000 out of pocket. But at the end of the 10 years, assuming a modest 3 percent a year appreciation, your house is worth more than $260,000. Plus you keep your equity you've been accumulating by paying principal over 10 years, say another $25,000. The renter is out $120,000. The owner is out less than $35,000. And I didn't even count the mortgage/property tax deduction on federal taxes. The owner wins by more than $80,000. If you're buying houses solely as investments, that's a different story. It may be better to park your money elsewhere. So Fuzzy is right if we're talking investments, but Fuzzy's critics are right if we're talking places to live.

[Fuzzy Bear]

Housing is not an investment. It is an expense.

Excellent point Tino! Owning a house is a liability.

All one needs to do is add up all of their costs such as insurance, maintenance, interest, improvements, etc. and deduct it from what they sold the property. Most people will be surprised that they ended up not making any money.

[James Thorner]

Dear Richard Nixon: St. Joe's comments in the story are inviting little but mockery from readers. Some "advertisement." Nothing wrong with printing what the company says, then letting the readers decide.

[voxy]

fuzzy bear,

Those are all recurring expenses much akin to buying groceries ...

You can't ratio the profit from selling a home at a premium to the expenses of what you pay in maintenance, insurance and quality of life.
That doesn't make a shred of accounting sense.
Also, even if it DID make sense we're talking lump sum cash in hand as compared to what you dribbled out ....
that's how it works.
Like you invest in savings bonds and while they're not a great investment at the end you have SOME money and it's all in one lump sum cashable.
What you pay to keep them safe in a safety deposit box is incidental.
Same difference.

[Fuzzy Bear]

It simply depends on your current needs and/or wants.

Good point K and I agree, it all boils down to an individuals financial situation.

However, with home values dropping, it may not be a good time to buy unless you buy a property who's value/price is in line with the long term trend rate for appreciation or lower.

[voxy]

ginger : good one and thanks for the confirmation that realtors have limited career choices outside the obvious thieving they normally do. (sorry to the decent realtors with a shred of integrity)

Whoever said st joke?? good one.

[Fuzzy Bear]

It is still a wise investment and a tax write off.

Myth! Why spend one dollar to write off 3 cents?

Like it or not St.Joe will do fine because they have the entitled property and ability to plan development capable of absorbing growth by those who are cash flow positive.

The fact is Florida is no longer hanging by a marketing thread of being the cheapest place to be. While the transition has and will continue to endure its challenges in the long run we will all better off.

Would you rather own a gulf or golf front condo or a 3 BR ranch in Dayton, OH.

Florida will be just fine.

[Tom]

The realators posting on here are soooooooooo easy to spot.

[Fuzzy Bear]

Those are all recurring expenses much akin to buying groceries ...

Voxy:

Those are reoccurring liabilities, not expenses. Expense are items such as food and clothing, both of which you can sharply reduce if necessary. Liabilities are often fixed costs for a given period of time.

From the accounting aspect it does make sense because the expenses of a home are liabilities which are much like owning a car. In other words, you still have to pay for insurance, interest, HOA fees and maintenance to keep the house up. If your expenses exceed the long term trend rate of say 3-4% you lose money.

Example: You buy a $216K house and finance it at 5.97% fixed for 30 years. The interest paid over the course of 30 years is $248,711.74. Now add in your reoccurring liabilities such as insurance, taxes, etc. minus the small percentage of interest you can write off, plus the 3-4 % trend rate of appreciation and you have your answer. The majority of people forget to add these things up and therefore they end up thinking they made a windfall profit.

In fact a study done by Case-Shiller clearly shows since 1950 that homes often break even.

[Fuzzy Bear]

ginger : good one and thanks for the confirmation that realtors have limited career choices outside the obvious thieving they normally do.

My suggestion is get a formal eduction in a degree that is maketable in the business world and that will help solve your dancing issues.

A realtors couse is about the same as 4 or 5 credit hours or one college course. A B.A. or B.S. in business administration is about 160 quarter hours.

[Joe]

James, your 448pm post is good but even better when your tenant PAYS that mortgage for you! Again, not rocket science here. Real estate pays you twice. I'm sorry about the renting-is-better crowd who bought their houses in 04 and 05, but it simply isn't true.

There is simply no investment where you can invest 20 percent of the value, have 100 percent of that value grow for you, and have your tenant pay for it. It's called leverage.

[Southeast Hillsborough]

Sorry, Fuzzy Bear. I have a 3,000 SF house, and my payment is just over $1,000 including PITI. Where are you going to rent a 5BR house for that? Yes, I put down a lot of money but that was windfall from another market. So I have $80K inclusive of "my own" money in the house (the rest being the windfall money). In seven years or less, you'll have burned through 80K in rent.

[weird Al]

All these bad comments on realtors is deplorable.

Most agents are resonably honest compared to politicians and con men.

It is not true that we will do anything to sell a home,we will do almost anything,but not .......that

[Chris]

Latest St. Pete Times Headline: SNAKE OIL SALESMEN DECLARES SNAKE OIL CURES ALL ILLS.

Come on! There needs to be some objective reporting, otherwise the newspaper becomes little more than advertisements for large land owners. St. Joe Co. has a vested interest in convincing people that the sky is not falling. The newspaper SHOULD have a vested interest in determining whether the sky is truly falling or not. To not present this as an op-ed piece is irresponsible on the part of the St. Pete times is nothing short of irresponsible.

[DD]

Fuzzy you are my hero - keep telling it like it is! If only people had listened to you three years ago; particularly the more than 1,000 people in Hillsborough County alone who have lost a home to foreclosure in 2008. Let's ask them how home-ownership worked out!

[terry]

Lets see....$400K houses actually worth only $225K...buyers with $10 hour jobs..or no job...insurance and taxes that doubled going up but are staying put going down...Mort rates UP and availability DOWN...Yeah...I see the improvement! lol

[Snake Oil Salesman]

Fuzzy:

How much is your rent, what's your square footage and what part of town do you live in? If you're going to call others out, be prepared to get called out! And if you're going to act so smart, be prepared to PROVE IT!

If you rent for 10 years at $1,400 per month, you're out $168,000 -- with NOTHING to show for it. Yep, that's smart in my book!

[k]

FUZZY'S RIGHT. JAMES IS RIGHT.

You go put it all on a spreadsheet with assumptions of:

- Median house price
- Closing costs
- Fixed Interest
- 4% Historical Appreciation
- T&I with 3% annual inflation
- Maintenance and upgrades
- Fixture replacements

And you MAY break even, gain or even lose. It depends on the MARKET. Historically, you will average break-even.

BUT WHAT DOES THIS MEAN??

James is very correct to point it out that AS AN INVESTMENT, it is much better to find a more liquid and historically low-risk portfolio. (CD's bonds, etc.)

AS A NEST EGG, however, it has been and will likely always be a safe place to funnel your cash.

(disregarding lifestyle differences...)
You start renting at 30, retire at 60. What do you have at the end of the run? NOTHING! (well, maybe the fond memories of waiting on your landlord to fix a leaky toilet, or cutting your own grass because you were expecting guests)

You lost cash, and likely didn't save anything for opportunity investment. This is the phenomena when rental and ownership costs are equal on like properties. There are no red herrings here. You're money is simply gone. You paid for a service. Thanks! We hope you enjoyed your stay.

And, what do you have at the end of 30 years of owning?
AN ASSET worth hundreds of thousands of dollars.

Unlike renting, you don't LOSE the "investment" money and it can be liquidated for further investment (annuities and alike) to augment your retirement. Any finance professor worth their salt uses this very same practical example.

[k]

HOWARD JOHNSON IS RIGHT!

“Housing is not an investment. It is an expense.”
Tino – It’s both. And after 30 years, the average house owner is sitting on a pile of equity. The average house renter is left with nothing.

I know you like to stereotype the average Realtor as a middle-aged part-time housewife or failed used car salesman with MAYBE an AA…and a little (100+ “hours” of pre, post, continuing and maybe a “specialization” or two) realtor edu. Amway and Mary Kay rejects, et al.
And...
You'd be correct!

As part of the job requirement, the Florida DBPR specifically requests rustlers, cut-throats, murderers, bounty hunters, desperadoes, mugs, pugs, thugs, nitwits, halfwits, dimwits, vipers, snipers, con-men, indian agents, Mexican bandits, muggers, buggerers, bushwhackers, hornswagglers, horse thieves, train robbers, bank robbers, azz-kickers, s**t-kickers and... METHODISTS.
And I didn't get a HARUMPH out of you!

[Grant]

A house should not be thought of as an "investment". That is the mentality that got us into the catastrophic mess that we are in. Sure, houses will appreciate (at a very nominal rate - which is just a hair above inflation). But it is naive to believe that a house is a security that can compete with the stock or bond markets. The GTAR has been touting just this kind of blasphemy lately. Realtors are not bad people, until they try to mislead the public into believeing that their homes are a wealth generation tool. In that case, then they are absolutely responsible for the short sales, foreclosures, and ruined lives that have been the result of that position.

“It’s been more than a year since Lereah left NAR, so I called this week to check in. His answer: not yet. ‘We’re not at the bottom,’ he says. ‘[People] want it to be near the bottom, but we’re not there yet. The leading indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low … There’s still supply out there in abundance … This thing is going to get worse before it gets better.’”

[Fuzzy Bear]

And you MAY break even, gain or even lose. It depends on the MARKET. Historically, you will average break-even.

You forgot to include yourself, K is right! The key point you made is "It depends on the market" and that is exactly the point. Single family homes should not be considered investments or piggy banks as you may end up being financially upside down and trapped.

As James pointed out, invest your monies in CD's, bonds, etc. and stay liquid, cash is king! If you are near retirement, pay off the mortgage.

[Fuzzy Bear]

Fuzzy:

How much is your rent, what's your square footage and what part of town do you live in? If you're going to call others out, be prepared to get called out! And if you're going to act so smart, be prepared to PROVE IT!

I answer this same question some time ago, but apparently you don't pay attention.

[Fuzzy Bear]

1. If you rent for 10 years at $1,400 per month, you're out $168,000 -- with NOTHING to show for it. Yep, that's smart in my book!

Snake oil salesman:

If that is your example, it rates poorly from a financial aspect. Fact is you are leaving out the declining values in todays market. You failed to mention investing monies into liquid investments such as CD, bonds, etc. instead of putting it all into a home that is declining in value. You failed to mention the cost of ownership during that ten years.

The list goes on and on, but you just still don't get it. Perhaps you should take some time and learn finance 101 or keep following the herd of sheeple!

[Fuzzy Bear]

Interesting comment by the CEO.

“‘With the U.S. and Florida economies battling rising home foreclosures, a tightening of credit and a significant inventory of unsold homes, predicting when residential real estate markets will return to health remains difficult,’ said CEO Peter S. Rummell.”

[Tino]

I'm sorry, but it appears as though James and others have fallen for the Realtor math again, since they are ignoring the opportunity cost of money.

All of the assumptions used in the examples call rent "throwing money away". If that is true, you have to call paying property taxes, interest and major repairs "throwing money away".

Housing is an expense. It is that simple.

If that renter takes the difference in what are paying for rent vs buying and invests it, much of the "throwing money away" argument disappears. Sure, we see people in his discussion who bought a home 30 years ago bragging about their equity. However, someone who took the difference and invested it in the stock market for the past 30 years is sitting very pretty as well. Plus, it is liquid.

What we are seeing in the market are "house poor" people wailing and gnashing their teeth because of increasing insurance rates and property taxes and interest rates resetting to higher levels. That renter with a big cash nest egg [who can now buy a foreclosed house at 50 cents on the dollar] is something to be admired, not mocked.

[k]

Fuzz, Tino - the misunderstanding between you, Snake and a few others is your assumption that a homeowner has excess liquid cash to invest in other places.
That math doesn't get any more simple than this:
You put $1400 a month into rent and you retain nothing.
You put $1400 a month into ownership and you have a leveragable asset.

..Even better if you put a renter's $1400 a month into YOUR leveragable asset.

Tino - "...you have to call paying property taxes, interest and major repairs 'throwing money away'".

Those *expenses* are accounted for in the cost of ownership calculations. In most cases, the rate of rent and the overhead of ownership are equal or better. Landlords are business people by necessity and they don't like shelling out a dime. Rental income should cover everything.

Fuzz, your arguments for declining values is valid, but only in a very short-term perspective...and that's IF the market declines further. Snake's ten-year example would be the historically accurate conventional wisdom.

If a renter or a homeowner has extra cash for opportunity investing, I'm sure they will find their way to the financial markets...or Vegas.

I don't think anyone is calling renters idiots here. For short-term (typically less than 5 years) cases, it's the smart thing to do.

[$200 a barrel]

Fuzzy,

If I pay $1,000 a month for a mortgage and you pay $1,400 a month or more in rent, how are you better off? And even if I'm paying $1,400 a month for a house I own and you pay $1,400 month in rent, how are you better off?

[Tino]

k, if the cost of owning and renting are the same, then YES! Buy the house! However, the buy-the-house-no-matter-what crowd conveniently forgets many of the costs included in buying a home, including the opportunity cost of capital.

I sold my rental condos last year when the monthly rent was hovering at $800 while the monthly costs escalated to $1500 a month (insurance, condo fees, prop taxes, financing). When I bought the property, it was slightly cash flow negative but there was the expectation that future prices might rise by a few percent a year, making the investment worthwhile. I sold the unit and prices have fallen another 20% below where I sold it.

In my neighborhood, you can rent a $300,000 condo for about $1,500 a month. Buying that condo will run you about $3,000 a month in ownership costs.

Either way, housing is an expense.

[Tino]

$200 a barrel,

please show me a property that can be rented for $1,400 a month with ownership costs that can be locked in for $1,000 a month. I will purchase this property today.

“Ameribank President David Hartman said Tuesday, ‘The whole concept that the price of real estate is going to constantly go up is a stupid idea.

Tino,

From your earlier comments, I think you want to be more clear. Investment vs expense is too vague. All investments have associated expenses. If I buy a stock, I have the expense of broker fees or commissions. So there is no clean distinction between these terms.

I call a house that one lives in a liability since it produces no income and costs money to own.

A rental property with cash flow is an asset.

A rental property with a recurring loss is a liability.

[Fuzzy Bear]

Questions: If I pay $1,000 a month for a mortgage and you pay $1,400 a month or more in rent, how are you better off?

In the first ten years of a 30 yr mortgage, most of your monies are going to interest. In essence, no matter if you rent or you own, you end up paying the bank one way or the other. Use a rent vs owning calculator and you can clearly see how long it takes just to break even by owning when rental costs are down as they currently are in this market. What you fail to include in your $1,000 mortgage are taxes, insurance, HOA fees and maintenance costs that renters don't pay.

On the other hand, if your paying $1,000 a month and I am paying $1,400 a month, but took the $200K from the sale of an existing home during the boom and put it in a CD at 4.75% or higher, my actual cost to rent become less than $600 a month based on the interest I am earning on the $200K in CD's.

Therefore I would be financially ahead of the person paying $1,000 a month.

Add in the declining property values and the savings becomes even higher than the person who purchased in 2007 or 2008.

The true answer to your question lies within your own financial situation. I just did some research on rental houses in the Tampa Bay area and I am finding that you can rent a home for much less than the $1,400 you mentioned. Most rentals are going for less than what the payments are for flipper properties. The Tampa Bay market is flooded with rental properties right now which is one reason rentals remain low.

In my opinion, the market will not pick up until the gap between the cost of renting vs owning a house becomes closer together.

[Fuzzy Bear]

Fuzz, your arguments for declining values is valid, but only in a very short-term perspective...and that's IF the market declines further. Snake's ten-year example would be the historically accurate conventional wisdom.

K, I agree onthe short term perspective in todays market. What drives the point is the current gap between rental costs and current housing prices that are still declining. However, you would be correct in a normal market where home prices are appreciating at 3-4% which is the long term trend rate.

Interesting debate K and Tino and I appreciate your comments! It opens the eyes of the readers from all angles.

[Fuzzy Bear]

I don't think anyone is calling renters idiots here. For short-term (typically less than 5 years) cases, it's the smart thing to do.

I would agree with you 100% K, especially in todays real estate market. Once that gap closes between housing costs and rental costs it will completely change the equation.

[Joe]

REAL ESTATE 101

Example 1: Mr. Landlord buys house in 2008 for $125K with $25K down. $25K is his investment, however $125K grows at 4%/yr avg. PITI is $900. Mr. Renter rents the house for $900 for ten years. Mr. Landlord makes $76K on his initial investment plus $16K from principle reduction, totaling $92K in profit. He made 15%/yr average.

Example 2: Mr. Landlord buys at height of market boom in 2005 for $125K. His house is worth $90K in 2008. In then appreciates at a nominal rate of of 4% for 7 years. All other data the same as Example #1. He makes $10K on his initial investment and $16K on principle reduction, totaling $26K in profit.

In either example, Mr. Tenant also had $25K, invested it conservatively in a CD and made 5% per year. His profit is $16K.

Unfortunately, Mr. Tenant also paid out $108K in rent all those years.

...and that doesn't include rising rents and multiple tax deductions, which easily cover occasional repairs.

Hope that clears things up. It's never going to be close when real estate give you the capapbility to have the home value grow, not just your money. It's called leverage.

[Tino]

Joe -

You have provided a perfect example of what I call Realtor Math.

The investment that Mr. Landlord made was $125k, not $25k. Just because he borrowed some of the money does not change the fact that he was personally responsible for the entire $125k purchase price. If he had problems getting a renter, he would still have to pay off that $100k loan.

Financial analysts use the $125k figure, while Realtors use the $25k figure. That is why I call it Realtor math.

In this first scenario, the financial analyst would calculate the compounded annual returns to be along the lines of 6%. Not bad, but he's taking on the responsibility of managing the house and keeping it occupied 100% of the time for 10 years to earn that return.

In the second scenario, his compounded annual return is negative.

Another example of Realtor Math:

- Buyer buys house for $100k with no money down, puts $25k into repairs, sells it a year later for $150k. Financing costs were $7,500 and round-trip closing costs were $9,000. What was the buyer's profit?

Realtor Math: 50% (yes, I've had Realtors brag to me about their "huge gains" fixing up houses using this reasoning)

Correct answer: 8.5%

[Joe]

The numbers are artificially conservative, slanted against the Landlord, to account for vacancy and also to reinforce the case even more. The numbers are real life, accuraely calculated, examples. At the end of the investment period, the investor truly will have made that profit in both examples and can cash out (not too much can do a 1031 exchange to avoid taxes if he chooses). I added the second example to exaggerate the case against the Landlord....and it still beats other investments.

A more simple, straightforward example: Imagine you wanted to borrow that $100K to invest $125K into a stock you're really keen on. Who ya gonna get to pay for that $100K? In real estate, the Tenant does.

I don't disagree with you on flipping. Flipping as a business is too risky....I am only talking rentals.

[Florida - Paradise Lost]

"I am getting tired of doing table dances for a living and would like to return to being a realtor."

Thanks, so much, Ginger. That made my day.

(My apologies to those in the profession who have to deal with this very real "low-barrier-to-entry" problem.)

Look out below!

[James Thorner]

Realtor math? All I know is that I paid $550 a month mortgage, including taxes and insurance, for 8 years in the Tampa 'burbs, and made 130K gain on my house. To rent the same 1,600 SF house would have cost me $800-$1,200 a month with nothing at the end of the 8 years. Obviously cost of ownership has gone up. But I don't see how renting makes sense long term ASSUMING you find a fairly priced home to buy in an attractive location. Tino and Fuzz's theory makes more sense if you could live in a trailer in the forest rent free. Or if you're content renting a room in a flop house for $350 a month. The savings are great, but the quality of life stinks.

[Fuzzy Bear]

Tino and Fuzz's theory makes more sense if you could live in a trailer in the forest rent free.

James, that example I provided is a real example of a person living in a rental house in Pasco County. The actual cost of their rent on a 1800sqft home is $1,100 per month and the home was built in 2005.

Now, how does that compare to living in a trailer in a forest rent free? In the meantime, property values keep dropping, which makes it even better for this person.

Then again, you could have bought in 2007 and end up being part of the 45% club being upside down. Does that make financial sense?

[Tino]

James -

I do not doubt that you made a decent return on your house (which, for some odd reason, was priced at 1/2 the prevailing rental rate).

However, your argument only supports the thesis that prices are nowhere near the bottom. That house that cost you $550 a month now probably costs at least $2,000 a month in interest/taxes/insurance/etc.

How can you call that a bottom?

[Fuzzy Bear]

Tampa, FL

12-month forecast: -17.1%
Median home price: $200,000
One year price change: -12.8%
Five year price change: 52.1%
Prices forecast to hit bottom: Jan.-Mar., 2010
Change in foreclosure rate: 281%

[Fred]

Fuzzy:

Price of my new house: $310,000.
Windfall from my old house (pure profit): $240,000
New loan: $93,000
Total interest paid over life of loan: $104,000.
Total cost of house to me: $197,000.
Value of house after 30 years: assume 1 percent increase per year: $403,000
My net gain after 30 years: $206,000.
Net percentage gain on my $197,000 investment: 104 percent, or about 3.4 percent per year.
Net mortgage payments (inlc. PITI): $1,080

You:
30 years of renting at $1,300/month (not even accounting for inflation or rent hikes): $468,000
Equity: $0
Income from investing the same amount as I put into my house (230K @4.75%): $837,000
Minus taxes: $125,550
Equals: $234,450

So, now we're both in our 60s or 70s. I have a place to live that costs me only taxes, wheras you're stuck with a large rent payment until the day you die.

The bottom line is that housing is an expense moreso than in investment. But if you're smart and savvy and it it for the long term like me, it'll come out OK. Renting is just throwing money away

[Joe]

Real Estate certainly does much better than 1% per yr avg over 30 years.

The real value of your $310K home 30 years from now is probably closer to $750K - $1.25M range.

Of course, in your example if you invested in a rental property as a comparison investment, your tenant paid the PITI as well.

[anthony]

I've lived in Florida 27 years I've seen real estate go up and go down from the summer of 2005 on the market was just plain nuts, totally over valued. Anyone who bought a home from 05 on got screwed end of story. Now however the market is clearly under valued anyone buying a home these days is getting a good deal. Renting is all most never a better situation fist as soon as you buy and homestead your house your taxes get locked in, my mother who bought her home in 83 pays around $400 & I pay around $3000 year after buying in 2003 Also every year you rent is another year older you'll be when you pay off your home, I know a novel idea.
One more thing everyone overlooks is inflation witch runs 3% a year which means that 1000 a month mortgage now is really 660 ten years from now, where as if you wait ten years to buy guess what you'll be paying for the home at the new price adjusted for inflation, meaning a 100k home today will cost 133k in ten years. About half my family rent half own, every one of the owner are better of than the renters.