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April 20, 2006
Gen Y Goes House-Shopping
Once upon a time, when Baby Boomers were really babies, people thought of houses as places to live. How quaint. The modern conviction is that houses are actually ... investments!
So we learn from a survey released today by Century 21 Real Estate LLC, the franchisor of the world's largest residential real estate sales organization. Century 21 interviewed just over 1,500 first-time buyers and first-time shoppers, split in thirds between boomers, Gen X'ers, and Gen Y'ers.
Yale economist Robert Shiller, author of "Irrational Exuberance," says that one earmark of a speculative bubble in housing is when people start talking about a house as an investment rather than just a place to live. If he's right, then younger people are more affected by a bubble mentality than boomers.
Forty-two percent of Gen X'ers and 39% of Gen Y'ers said they thought of a house purchase as an investment, vs. just 32% of boomers who felt that way. Boomers were more likely to think about buying a home because of a life event such as a job change or marriage.
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I personally have always thought of this as a much bigger problem. The main difference is if you buy a home with the thought of it being an "investment" you will watch prices much more. This is why Zillow home price trend charts will affect home prices significantly (think internet stock charts). Like with any amateur investors, they buy at the peak and if it goes down most will liquidate, unfortunately, in real estate that is not that easy. Supply builds and "investment" driving owners become more desperate to liquidate. This leads to bigger fluctuations in real estate prices than before (get ready for 20-40% swings). It does not help that now major brands like "Century 21" is getting into the “investment pitch” with some of its commercials, right at the peak of a cycle.
If you want a good historic example, just like at 30 year historic chart of the DOW: http://host.businessweek.com/businessweek/Corporate_Snapshot.html?Symbol=.DJI&Timespan=99999
Is it any coincidence that the real gains and big swings happen at the same time as when the general public finally had information about investing and stock prices… remember the movie “Wallstreet” and day-trading? For 50 years the DOW is less than 800 then starting in the mid 1980's goes from 1000 to 12000... why? The general public’s acceptance and dreams of the idea of "investing" and simple access to price information (Internet).
Real estate is just getting started with this same formula and just like the early days of day trading... many are going to get wiped out with real estate by taking chances with the mortgages they obtain. (See the reality of the incredibly popular sub-prime two year interest only loan with this calculator: http://www.forsalebyownercenter.com/tools/228adjustableratemortgagecalculator.aspx which replaced the more conservative HUD insured FHA loans as the home buyers loan of choice). This is also a reason for the turn-over volume of real estate over the last few years. Remember that in order to make an “Investment” you first “invest” = To commit (money or capital) in order to gain a financial return:
The problem, is that these new real estate investors are using mortgage loans where they cannot “commit” over the long term.
Posted by: Jessie B at April 25, 2006 01:02 PM
This is my late Gen-X, Early Gen-Y opinion/observations based on experience and cultural stereotypes of the urbanite.
My generation has seen;
---our friends go frm rags to riches and in many cases back to rags, with properties being seen as 'investments' we are generally disinclined to be so care-free with cash we don't have.
---choices of finding community instead of a cheap place
---choosing that community over marriage (and double income and mortgage qualifications that go with it.)
---learned that we pay for our houses 3 times over the course of a 6-7% mortgage, and that we never see a dime of 2/3rds of that... and we've never known a time when mortgages were at a higher percentage. So when they say interest rates are low, its a tough perspective to see.
---the reality that rent and saving is sometimes a better investment, until massive downpayments are possible.
---We're coming out of schools with massive debt, and stupid colligiate credit histories, and many do want to settle down, but settling down no longer mean wife, kids, and a house in the burbs. We've decided to make our own definitions of 'settling'
---We're not going to be as likely to be pushed out of our neighborhoods as we used to be... so we keep renting, because community and cultural capital means much more than equity to us.
---We often hold a special contempt for young proffesionals for trying to oust us out of our neighborhoods, while leaching off the 'cool factor' we put into the area. We're fighters... and we're running out of areas with good 'fung shui' for the kind of cultural areas we like putting our energy into. Since most of us will never-ever move to 'the burbs' we are upset with the burbification of our areas... and we'll fight it off by not purchasing the properties.
Anyway, those are my thoughts on this generation of househunters. As we move into Gen-Y, They will be the ones randomly throwing themselves back into house=family=tradition as a means to counteract the current trend towards singlehood, and such... the prices will go back up in 10 years, but in the meantime, they have to go down.
Posted by: Hapto at April 26, 2006 04:55 PM
Considering that 90% of middle-class net worth is tied up in their house, a home IS an investment.
Posted by: Marlow Harris at May 1, 2006 05:11 PM
I think that this latest round of real estate mania is simply "herd mentality".
The media, in the last few years, has been full of stories of people getting rich, seemingly overnight.
When this occurs the herd pays attention and starts to move in that direction. This is no different then the 90's when people where making silly investments in technology stocks. A few made money, but most got hurt.
Investing in anything is simple. Allocate a certain amount of money each month and then let time be your friend.
I am going to be 50 this year. For years we have saved no less than 10% of our income. Some of those dollars, as time went by, were allocated to real estate. Today about 2\3rds of my net worth is in cash and 1\3 is in real estate. Two years ago, real estate had a much higher allocation.
But here this...that is because I had the cash and the income to back it up. Where people get hurt in real estate is when they don't have a cash back up and the income to drive these types of investments. Real estate investing requires income to pay the expenses of carrying the real estate.
Looking back, real estate has been my best investments over time. However, I was able to do this because I had cash and income.
This round I believe people are going to get hurt because they bought real estate that they couldn't afford (and lenders gave it to them through "no income" loans, or negative amortizing loans).
It is my opinion that the hurd is going to move back to the stock market. I am positioning myself for that move. The key is, and always will be, to be in front of the herd.
In my humble opinion, a home should first be a home. As you progress through life, you get your kids raised, college behind you, THEN you can begin to look at the equity that you have in your home and ask yourself if you should re-allocate those dollars. My wife and I were fortunate that this "look" came at a time when the herd followed behind.
To the herd..I say thank you!
Young people...buy a home, save 10% of your income and let time be your friend. Once you have accumulated a large cash position..then you can begin to take the risk that is associated with real estate investing.
Posted by: David Porter at May 14, 2006 11:00 AM