Sunday, August 30, 2009

WSJ - Better to Buy or Rent?

The full article is here.

The San Jose CPA is advising to base the rent vs buy decision on a simple formula of dividing the home price with the annual rent and then checking if the result is less than15

Indian housing has to deal with 2 other negative factors as opposed to the US. Mortgage rates are two times US rates and there is 40% black money angle to properties in Mumbai. Both these factors affect the affordability of housing for the salaried employee. Add to that the US has a tax credit of $8,000, if the house is bought before Dec 1st, 2009. 

On the NRI H-1b perspective immigration backlogs prevent anyone taking a house purchase risk as any layoff can kill the home ownership dream in a second.

All this goes to say that the US government does far greater things to facilitate an easier lifestyle for its citizens and permanent residents. Motivated people all over the world work equally hard but the US and western countries provide its citizens an affordable high quality of life which only citizens of developing countries can dream of.


With housing prices down significantly in many parts of the country and interest rates low, it may be an affordable time for twentysomethings to buy that first home.

In some instances, the price of owning can be comparable to renting in the long run. But a lot of uncertainty still remains about the housing market and the economy -- making the decision to buy more complicated.

Nicole Stivers, a 24-year-old who works in public relations in Contra Costa County, Calif., purchased her first home with her fiancé in February. They were able to capitalize on what she calls a "perfect storm" -- job stability, a desire to settle down, a surge in home foreclosures and the $8,000 tax credit for first-time buyers.

Still, the move was not without its concerns. "Would we be able to afford this if we both lost our jobs? Do we have enough for a down payment? Do I have enough for moving? It's really nerve-racking when you're first doing it," says Ms. Stivers.

Here are some questions to consider when deciding if buying or renting is the right choice for you:

How long do you plan to stay in your home? "There are high transaction costs associated with buying and selling" a house, says Dean Baker, co-director at the Center for Economic and Policy Research, so home buyers should plan to stay put for at least four to five years.

The reasoning? The costs for buying and then selling a home -- which can include a real-estate agent's fee, a transfer fee, closing costs, and inspector and surveyor fees -- could add up to about 10% of the sale price, or roughly 1½ years worth of rent. "If you average that over 10 years, it is not that big a deal," says Mr. Baker. "But if you average it over, say two years, you're paying an awful lot of money to own a house for a short period of time."

Can you handle the monthly expense? While a monthly mortgage payment may be comparable in some cases to a monthly rent, there are other expenses to consider.

To get a feel for the financial burden you'll be taking on -- and to see if you can handle it -- "practice" making payments. Each month, set aside projected mortgage and property-tax payments, maintenance costs, utilities and any other home-related expenses into a separate savings account, says Gary Smola, a certified financial planner with financial-educational firm Financial Finesse.

What's the price-to-rent ratio? Home prices have come down significantly in some areas of the country, but "nobody knows what tomorrow's going to bring in the housing market," says Daniel Morris, a certified public accountant in San Jose, Calif.

To determine whether it makes more financial sense to buy or rent in your area, compare home sales prices with the cost of renting a similar place.

Divide the price of the home by the total cost of rent for one year. If the result is more than 20, "I'd be very concerned that the price [of the home] might fall more," says Mr. Baker, and you should consider waiting to buy. If it's 15 or below, he says, "you're probably reasonably safe" with prices holding steady or growing.

What is your job and relationship status? Twentysomethings are still getting a grasp on their futures and a constantly changing lifestyle might require the flexibility of renting.

But "if your career stability is strong, you are comfortable doing what you're doing … and you are committed in some form to your lifestyle," Mr. Morris says, buying a home becomes a more attractive option.


shailesh said...

Posting again,

Ex-TCSer: You asked for why dynamics of Mumbai market are different,

I think the answer is in this article.

Unlearned Lessons from the Housing Bubble

There is a lot of misunderstanding about home prices. Many people all over the world seem to have thought that since we are running out of land in a rapidly growing world economy, the prices of houses and apartments should increase at huge rates.

That misunderstanding encouraged people to buy homes for their investment value - and thus was a major cause of the real estate bubbles around the world whose collapse fueled the current economic crisis.

But we do not really have a land shortage. Every major country of the world has abundant land in the form of farms and forests, much of which can be converted someday into urban land. Less than 1% of the earth's land area is densely urbanized, and even in the most populated major countries, the share is less than 10%.

There are often regulatory barriers to converting farmland into urban land, but these barriers tend to be thwarted in the long run if economic incentives to work around them become sufficiently powerful. It becomes increasingly difficult for governments to keep telling their citizens that they can't have an affordable home because of land restrictions.

In Mumbai, the main issue is Builder/Politician/Mafia nexus controlling Land and Urban infrastructure. The citizens are living under too much fear to revolt. But surely the supply side response is coming back. Only thing is it will take some time.

shailesh said...

I think these are really encouraging news. I know for folks in Chembur, that is heaven on earth and everyone there is millionaire, but this should help average Mumbaikars.

Mono Rail Project – Badlapur

Anonymous said...

Growing Poverty and Despair in America.
by Stephen Lendman Aug 30, 2009

The Economic Policy Institute's (EPI) State of Working America - 2008/2009

As the economy contracted in 2008, job losses and unemployment accelerated, but EPI's report missed the worst of it from early 2009 to the present. It cited:

-- wages losing ground to inflation;

-- high energy costs;

-- the burst housing bubble;

-- millions of defaults on home loans followed by foreclosures;

-- declining financial markets and frozen credit;

-- less health care coverage and fewer higher-paying jobs with good benefits; and

-- "for the first time since the mid-1940s, the real incomes of middle-class families are lower at the end of this business cycle than they were when it started;" as a result, "prosperity is eluding working families" as they fall further behind, now more than ever as depression takes hold.

EPI calls family income "the core building block of American living standards." Yet during the last business cycle, significant productivity growth was accompanied by stagnant or falling real incomes. "That has never happened before." The latest economic recovery bypassed the middle class and created greater income inequality.

Anonymous said...

Going by the formula - if rental is around 15,000 rs..

The house should cost = 12*15000*15
= 27,00,000.00

That sounds almost perfect. That's what I would pay for a condo in Mumbai or anywhere..

Mind you a house as described in the article means a yard, a porch and seperate house where you can build a deck or a pool as per your requirements..

In the case of Mumbai, normal 2 bhks should be around 25 Lacs for them to make any kind of sense...

In the previous post, we saw the stupidity of thinking of RE as a means of investment. Its a very high risk game. Most people should ideally be targeting a home for living and make their fortunes elsewhere..

Anonymous said...

The best time to buy anything has been when speculation is absent and prices are at distressed values (this is the philosophy of Buffett, Jim Rogers, Greenblatt, Pabrai, in general value investors). This applies for any asset/investment.

The question to ask simply is whether there are too many people who are buying for investing/speculation. If the answer is yes it is clearly not a value buy. You might still get appreciation but the risk/reward is not in your favor. Also, in that scenario you can make the same amount of money with commdities/equities while not taking the risk of having an illiquid investment with running costs.

Look, I don't know what real estate returns have been from 2003 to 2008 but Indian equities have returned 6x at their peak during those years. So, even if you want to speculate it is cheaper to speculate in equities as compared to real estate because transaction and running costs are low and ofcourse you are not stuck with an illiquid asset. Also, you don't necessarily have to take the risk of leverage.

So, you should not have the feeling of being left out - real estate is but one asset type. Other asset/investment types have the capability to give similar or even higher returns with greater liquidity, flexibility (in terms of getting in and out) and better risk/reward in certain cases.

The other case in which it would make sense to buy would be for living purposes and if its favorable as compared to rent expenses. Since the purpose is quite different and long term it should not bother you if prices came down even by 50%.

Keep it simple and evaluate your circumstances.

Personally, I continue to find stock market speculation (long and short) easier to do with similar returns - my rent is quite low so I have never felt like missing out over the last few years. I simply prefer the flexibility of the stock market in terms of getting in and out and don't want to take the risk of having an illiquid asset on my hands. I am also uneducated in real estate and don't want to spend the time understanding the nuances of various real estate locations. Real estate investment requires much more time investment in terms of research. If the knowledge is readily available to you, you can ofcourse better decide when prices seem like value.

Anonymous said...

anonymous@09:00 am

Thanks for an unusually lucid and crystal clear post. Your post is full of logic in it and makes eminent sense. Also, it resonates with my thinking.

I have some money with me and can buy a house easily. But it does not make sense to me at current prices. The market seems to be highly manipulative and speculative and full of BB types...

So, I prefer to stay away for the time being. No matter what the provocation, I intend to wait patiently till houses start looking like value buys. If it takes 10 years to get to that level and meanwhile the market doubles and triples from here and then comes back to these levels so much the better. By that time my savings would have made the buy so much easier at the same time it would have saved me all the hassle of worrying about lac plus emi...

At the same time if the market nosedives to 50% plus discount from this levels, I would be an interested buyer.

Vik has clearly and mathematically demonstrated the fallacies in the arguments propounded by the so called bears...I am thankful to this blog and you Sir for clearing up my thoughts so nicely.

Best of luck to you all :)

Anonymous said...

15 times annual rent? Are you kidding?

A nice house in south bay you can rent for $3000 per month.

But as per your formula, for 12*3000*10=360000 (360k), forget a house, you wont even get a condo, even in this economy.

Anonymous said...

Anon above:
Actually the historical formula is 10 years of rent which is 120X where X is the monthly rent. For a rent of $3000 is 360K. In your calculation above you should have mulitplied by 15.

Anyway, 360K is the right amount and will come to that level in a few years even in US. Just wait and watch the downfall. You'll not believe the downfall in prices by 2011 both in US and India.

Vik said...

The article says 15 times so its 3k x 12 x 15 = 540k

Bindas Bhai said...

Prices of Chembur Diamond garden has reached 11k from 8.5k five months back. Now by Diwali it will be atleast 12k.

This is much more faster then i expected.

Goldsmith has to sell even if the prices of gold are going up and thats what i am doing now. Cheers!!

Sorry guys wish you had taken my advice.

Take care, Bye,

Bindas Bhai

Anonymous said...

BB, sure the property at Diamond garden is at 11k, but no one is buying it. there are no buyers at these inflated levels, just because builder made money he is holding on like they used to do before.. now when it does not get sold for a long time he will sell off for a discount.
since prices are back at peak same situation is arising that was an year ago, buyers will stay away..

Bindas Bhai said...

I just sold at 11k, now there was one more party who was also interested but was taking time to decide and wanted to negotiate. This guy after hearing that the property has been sold wants me to call off the deal and he is ready to pay higher price.

Transactions are happening at this price for good property.


Bindas Bahi

Anonymous said...

then what explains the n number of unsold builder units at acropolis phase 1, they are also at 11k and pretty nice, but almost none seem to be moving

Bindas Bhai said...

Pls. check out the recent availability at Raheja. I was told he has only three flats left of 3BHK. I may be wrong, request you to check and post.

Bindas Bhai

Anonymous said...

I have checked this weekend itself, many 3bhks available at hgiher floors, almost more than 10.

anyway, what are the 'good' properties according to you. do you know any under construction property that may be good for investment ? since you are agent you many not want to tell that here, if you give your number I can contact you , and you can also get comission if i get good deal.

Bindas Bhai said...

Dear Anon:12:29

Thanks for your offer but regret to inform you that I am not a broker. I would suggest you to work atleast with three brokers and check out all properties before taking a call.

Investment has to done only on finished properties, hold for six month and then sell.

All the best.

Bindas Bhai

Anonymous said...

Residential prices creep up

With demand, especially in the affordable segment, picking up, developers are getting back to the customary practice of hiking the rates.

— Paul Noronha

In general, the prices are hiked after 50-60 per cent of the project gets sold out.

S. Shanker

Call it better home loan rates or just improved consumer confidence and market sentiment, demand in the residential category, particularly in the affordable segment, has picked up.

And, as bookings and enquiries pour in, developers, particularly in Mumbai, have gone back to the customary practice of hiking rates, which have risen 20-30 per cent since May and continue to go up by the day as bookings grow.
Sales improve

Of late, there has been a marked improvement in sales across metros. DLF reported bookings for 1,356 apartments, measuring 2 million sq.ft, for its project Capital Greens, on a single day.

Indiabulls Group, which launched an affordable home project in Gurgaon, has closed over 100 bookings of its launch of 200 in the first phase. The project is a cluster of 800 apartments.

In Mumbai, Kalpataru Group’s project in Thane saw 110 flats sold in 10 days at Rs 3,100 per sq.ft. Another of its project at LBS Marg logged a sale of 50 flats after the rate for a two-and-a-half BHK was reduced from Rs 98 lakh to Rs 82 lakh. At the distant western Mumbai suburb of Virar, a residential township project promoted by Rustomjee and Evershine on 217 acres registered sale of 174 apartments at Rs 1,700 a sq.ft.

“DB Realty project at Dahisar registered 1,400 bookings, even before construction began,” says Mr Suman Memani, Associate Vice-President, Religare Securities, who also points out that prices have since gone up, particularly in the Mumbai suburbs.
Prices go up

According to Mr Memani, HDIL’s Versova project launched at Rs 7,500 a sq.ft had since gone up to Rs 9,500. Similarly, DB Realty had raised prices at Dahisar to Rs 3,300, from Rs 2,700. The most recent instance is of the Harasiddhi Group, which launched its offering in Goregaon, near here, at Rs 10,000 a sq.ft (carpet area), raised the price to 10,300 a sq.ft.

In general, the price hike creeps in after 50-60 per cent of the project gets sold out. In some ways developers are testing the waters and gauging how much the market can absorb. In any case, after the major chunk is sold any developer can afford to wait for a better tiding, he says.

The price increase is only 5-8 per cent since May, says Mr Anand J. Gupta, General Secretary, Builders Association of India.

Justifying the increase, Mr Gupta says it is purely based on demand-supply dynamics. Builders, who were languishing for want of enquiries, now see a silver lining on the horizon, after they had lowered prices to the maximum to stimulate demand.

Mr Gupta points out that historically real estate had either gone up or come down. It had never been stagnant and in places where it had been constant, development was rather stunted such as in Baroda and Ahmedabad. For ages, the only reason for real estate remaining a choice asset class is because it appreciates, he says.

Anonymous said...

Mr Pawan Swamy, Managing Director - West India, Jones Lang LaSalle Meghraj, sees little justification for escalation in rates at this point in time. The corrections that have taken place in overheated locations of cities such as Mumbai were required, since developers had priced themselves out of the market.

The fact that the slowdown forced them to rationalise their rates has been working to the developers’ advantage, and one would have assumed that the recent market dynamics had delivered a clear and unequivocal message.

However, Mr Swamy feels that there has been a resurgence of demand for residential property in many markets that are not seeing much supply. In such locations, a number of developers who have successfully sold a sizable component of their existing projects are now attempting to see what kind of price escalations the market will be able to accommodate.

This is, to a significant extent, a gamble that can backfire if the developer in question misjudges market dynamics.

However, this is not happening across the board, but rather in high demand-low supply locations and only among developers who have sufficient capital clout. Nevertheless, much depends on the buyer community — if such price escalations are pandered to, we may be looking at price bubbles building up in such locations.

Last month, Mr Deepak Parekh, Chairman, HDFC, cautioned developers against raising prices, stating that such a move would stall recovery of the segment. He was also sceptical about the builder fraternity’s commitment to the affordable housing segment.

Anonymous said...

Bombay Dyeing shifts focus to develop residential property

Tags: Mumbai
Buzz up!vote now

Published by: Noor Khan
Published: Fri, 28 Aug 2009 at 21:52 IST
F Prev Next L
Mumbai, Aug 28 Nusli Wadia-controlled Bombay Dyeing and Manufacturing Company has shifted its focus to develop residential property from commercial property due to the current market environment, a top company official said.

"We have 64-acres of land-bank and are now developing 1-million square feet of residential property in Mumbai," Bombay Dyeing's Chairman, Nusli N Wadia, told shareholders at the company's annual general meeting here.

The company is developing approximately 4,50,000-square feet residential tower in Mumbai and another 4,50,000-square feet tower in the next phase, Wadia said.

Earlier the company had planned a mix of commercial and residential development.

"Because the commercial space market shrunk, there is a huge over-supply and therefore building a commercial property doesn't make sense," Wadia said.

The company's revenue from the real estate division was Rs 273-crore during FY 09 as compared to Rs 240-crore in the previous year.

During FY 09, the company sold a part of the commercial building under construction at the Worli site for a total consideration of Rs 235.02-crore to its wholly-owned subsidiary - a special purpose vehicle set for this limited purpose with a view to its subsequent disposal in the near future.

Anonymous said...

India property news: Mumbai property attracts investors

Country: India

28 August 2009

The city of Mubai is now the most popular place to buy property in India, while property in Chennai has replaced property in Bangalore as the most favoured place to buy real estate in the south, according to a new survey published on the India Real Estate Monitor.

The survey says that “trend in residential space across top cities in the current scenario” ranked Mumbai as the top destination to invest in property while in the south of India, Chennai is in the first place for property investments, overtaking Bangalore.

Cities like Patna, Nasik, Tiruchirapalli and Madurai have also become popular destinations to buy property in the country, the survey said.
Additional research from the survey shows that 60% of respondents – around 3,000 people took part in the questionnaire - believe that interest rates for mortgage loans had further to fall over the next few months.

Consim Info Founder and CEO Murugavel Janakiraman said: “Market sentiments are reviving and people are ready to invest. Based on our survey, more than 60% of customers are looking at buying residential properties in the next six months. They also have a hope that interest rates on home loans will soon come down.”

Anonymous said...

sell after 6 months ? with what a 200 rs psqft price rise ?? one cant expect prices to rise more since they are already back at peak. granted intrest rates may reduce by a percent more, but that will bring in customers are current levels not at current+20% levels.

anyway, even if you are not an agent, could you please tell some 'good' properties according to you, i have been scouting as well but not too many options at the moment.

Anonymous said...

"Prices of Chembur Diamond garden has reached 11k from 8.5k five months back. Now by Diwali it will be atleast 12k."

BB, the best you are offering is 40% return in the last 5 months. Do you know how much the stock market has returned during the last 5 months? 100%

If you are looking for investing, please look at the full spectrum of options.

Cautionary note though: stock markets are more volatile than real estate so you still have to do your due diligence in picking your poison.

Anonymous said...

Give me your number will call and let you know.

Bindas Bhai

Anonymous said...

@Bindaas Bhai 11:11PM

In your post you, said you sold a flat at 11k in Chembur.

As per your posts, prices are set to go high as much as 50%. So then why did you sold your flat. If you had hold on to it, you could have made a killing of 50% more profit.

So the bottomline is, you are a leech, who asks others to buy and you yourself sell the property.

Anonymous said...

I cannnot give my number on public forum. But it would be nice if you could mail me on cushioncove at gmail dot com.

Anonymous said...

buy and go bankrupt in 2 years. BB is no more a tout then any of the lousy brokers. Bindas Bhai is trying to spread fear. Even if the market goes from 11k to 13k the payment towards interest will wipe out any gains. Unless folks have pots of black money there is no point. buy in Pune or Bangalore where rates are 3k. mumbai's fall will be worse then humpty dumpty's. With air-india's paycuts pilots will soon be make 20-30L a year from 50-70L , cabin crew 4L-6L from 10-12L. money is vanishing and soon the builders will have their bags empty. buy at your own peril

Anonymous said...

certainly , its anyones guess that its no investment at these levels, opfcourse for living if one likes the place and can afford anytime is a good time to buy, if not then have to just look around for deals.

Anonymous said...

The next bigger crisis is on the way.

Commercial Real Estate Lurks as Next Potential Mortgage Crisis
AUGUST 31, 2009

Federal Reserve and Treasury officials are scrambling to prevent the commercial-real-estate sector from delivering a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.

Their efforts could be undermined by a surge in foreclosures of commercial property carrying mortgages that were packaged and sold by Wall Street as bonds. Similar mortgage-backed securities created out of home loans played a big role in undoing that sector and triggering the global economic recession. Now the $700 billion of commercial-mortgage-backed securities outstanding are being tested for the first time by a massive downturn, and the outcome so far hasn't been pretty.

Banks' losses from commercial mortgages have the potential to mount sharply, and the high foreclosure rate in the CMBS market could play a role in this. Until now, banks have been able to keep a lid on commercial-real-estate losses by extending debt when it has matured as long as the underlying properties are generating enough cash to pay debt service. Banks have had a strong incentive to refinance because relaxed accounting standards have enabled them to avoid marking the value of the loans down.

Anonymous said...

Civil unrest starting India:

How will house prices sustain?
Major job layoffs are coming and salaries will be reduced by more than half. A lot of high paying idiots thought they were very smart.

Venkatesh Babu K R said...

People stop cribbing, stop speculating, stop frustrating ...

Home sellers - sell property when you find the selling is profitable for you (the profitability - u need to calculate very well by including the idle time of keeping your house vacant etc...) & don't have profit greeds of 300% - u'll never be able to sell and keep paying the loans at the end of the day

Home buyers - buy the houses only if it is affordable & rent u pay > loan EMI (Until then, buyers need not panic).

I'm sure the dynamics in this simple economy will ensure everybody gets a fair thing at the end of the day.

Anonymous said...

Its been known for some time that the way Market operators make money is by a mechanism known as pump and dump..

I am glad that BB has declared himself as a market operator. He has been saying all along several things -
1. Don't time!
2. Market will keep going up and in in the short to mid term you will make 50% or more.
3. If you really want to make money, buy and hold for a long time..the way to make money in RE is through rental income!!
4. Chembur is going to replace Tokyo and therefore prices in Chembur are going to go up in a major way.

After all this time what does BB do?

Market goes up from 9000 to 11000, BB sells!!

Ha Ha Ha Ha Ha Ha Ha Ha ...

I will never forget what a 10 second contradiction BB is...

BB now everyone knows that you are nothing but a greater fool con man...No one is going to listen to you anymore...

rajni sharma said...

Hey this is really very nice post...
Nd one of your best post...Thanks
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