Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.forbes From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: FINANCIAL STRATEGY: MONEY & INVESTMENTS Date: Wed, 18 Nov 92 14:52:03 EST Message-ID: "Copyright 1992 Forbes, Inc. Any further reproduction or redistribution without the express written permission of Forbes and ACC is prohibited." FINANCIAL STRATEGY: MONEY & INVESTMENTS The party's over Whatever economic policies the next administration follows, your money will do better elsewhere than in housing. BY A. GARY SHILLING A. Gary Shilling is president of A. Gary Shilling & Co., economic consultants and investment advisers. His firm publishes Insight, a monthly newsletter covering the business outlook and investment strategy. THIRTY-YEAR single-family mort- gages are out and 15-year mortgages are in. Homeowners now believe that a house no longer combines an abode and a sure-fire investment. So rather than leverage their dream houses to the hilt, they view a mort- gage as just one more debt that they want to pay off as quickly as possible. Whatever the next tenant in the White House does, this is unlikely to change. People are finally catching on to the fact that a house is a home, not a speculative investment, and it's amaz- ing how slow they have been. I guess the long postwar climb in housing prices made it difficult for most to realize that the fun stopped in the early 1980s, and housing has been a lousy investment ever since. Sure, housing prices have risen in the meanwhile. The Census Bureau says that a new house with the same number of bathrooms, garage spaces, etc. rose 37% over the 1981-91 span. But that pretax appreciation was more than eaten up by the aftertax cost of mortgage interest plus the aftertax cost of the interest forgone on the average downpayment of about 25%. This is so despite the decline in mort- gage rates from 15% in 1981 to 9% in 1991. And it occurred in every year. Indeed, annual aftertax financing costs exceeded pretax appreciation by an average 4.1% during the last 11 years. You still may think that owning puts you ahead of renting because of low operating costs, but I'm sorry to disillusion you. Commerce Depart- ment data show that rents and costs were about equal in the late 1970s, but since then, rents have grown much more slowly than mainte- nance, depreciation, property taxes and other operating costs, even on a pretax basis. Last year the gap be- tween rents and pretax operating costs was about 12%. These trends will continue. As explained in my Feb. 19, 1990 col- umn, the four pillars that supported postwar housing prices have all crumbled. High inflation, that great friend of real estate, is long gone, and the trend is to lower inflation rates, if not deflation. Generous lenders are all broke and those that remain are so scarred that they will be adverse to real estate lending for a generation. The soft spot in govern- ment's heart for housing gets harder with each S&L bailout appropriation. And the postwar babies are all housed, while their followers, those in the prime home-buying age brackets for the next two decades, are few in number. Nothing that a Clinton presidency might do will change this much. How do you adapt to the present and future reality of weak housing prices? If you are a potential single- family home buyer, look on a house as a place to live, not as a super invest- ment. Wait until the kids are big enough so that you need that first house before you buy it. Don't pur- chase the next house with a ballroom and eight bedrooms, plus servants quarters, before you can fill it up. Should you join the stampede into a 15-year mortgage? Yes, if you have trouble saving money and need out- side commitments to do so. With a 15-year repayment period, you will pay off principal and build up capital much faster than with a 30-year commitment. Otherwise, opt for a longer mort- gage. You will have your cost fixed if inflation and mortgage rates jump later, and you can normally make ad hoc prepayments whenever you want without penalty. Better still, if you agree with me that inflation and mort- gage rates will fall further, take out a cheap variable rate mortgage and lock into a long-term instrument later at much lower costs. If you are older and don't like to cut the grass, unload your money pit and move into an apartment sooner rather than later. A rental apartment, that is. There is no point in waiting in the single-family house for appreciation that won't arrive. As an investor, give careful consid- eration to one of the few attractive real estate areas for the 1990s-rent- al apartments. Not very many are being built. And demand will catch up with the current supply glut as young families stay in apartments longer before buying single-family houses, and as empty nesters move out of houses and into rental apart- ments sooner. Also, think about manufactured housing stocks. Their low-cost prod- ucts will attract those who no longer want to invest in more house than they can use. The postwar boom in housing prices is over and homeowners finally realize it. It won't revive, and your money will do much better elsewhere in a Clinton Administration. "This information is the property of Forbes, Inc., ACC takes no responsibility for its content, or the actions of any individual or institution, predicated on the information herin. 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