Tag Archives: return on investment

From subprime mortgage issues to superprime mortgage issues

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The most recent financial uncertainty includes mortgages in a superprime era:

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This is quite the turnaround. After 2008, banking the rich was often touted as a far better model. Even the biggest banks began aiming more of their consumer lending and wealth management at relatively better-off customers, and they scaled back on serving subprime customers. Wealthy customers seldom default, they bring lots of cash and commercial banking business and pay big fees for investments and advice, the thinking went.

But when interest rates shot up last year, it exposed weaknesses in the strategy. It isn’t that the rich are defaulting on loans in droves. But the most flush depositors with excess cash last year started taking their cash and seeking out higher yields in online banks, money funds or Treasurys. On top of that, startups and other private businesses started burning more cash, leading to deposit outflows…

A major way that the better-off do borrow from banks is to buy homes, and often in the form of what are known as jumbo mortgages. Jumbos are for loan amounts over $726,200 in most places, and over $1,089,300 in high-cost cities such as New York or San Francisco. Jumbo mortgages bring wealthy customers with lots of cash. They also are typically more difficult to sell to the market, in part because they aren’t guaranteed by government-sponsored enterprises such as Fannie Mae or Freddie Mac. So banks often sit on them. But the value of these mortgages, many of which are fixed at low rates for the foreseeable future, have dropped as interest rates have risen.

To be sure, not all banks that focus on wealthier individual clients are under intense pressure. Shares of Morgan Stanley and Goldman Sachs, are down less than half as much this month as the nearly 30% decline for the KBW Nasdaq Bank index. But those banks are more diversified and focus more on the steadier, fee-generating parts of the wealth business, such as stock trading and asset management, than on mortgages or deposits.

I interpret this to mean that there is less money – or lower rates of return – to be made on big mortgages. Wealthy people will want to buy real estate, particularly because it is often assumed that the value of real estate will be good long-term, but the money does not generate the amount of money banks want.

If mortgages are too “boring” or do not generate enough money, could we be headed to an era where banks do not want to do mortgages? Money for mortgages could come from elsewhere.

The importance of statistics on college campuses

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Within a longer look at the fate of the humanities, one Harvard student suggests statistics dominates campus conversations:

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I asked Haimo whether there seemed to be a dominant vernacular at Harvard. (When I was a student there, people talked a lot about things being “reified.”) Haimo told me that there was: the language of statistics. One of the leading courses at Harvard now is introductory statistics, enrolling some seven hundred students a semester, up from ninety in 2005. “Even if I’m in the humanities, and giving my impression of something, somebody might point out to me, ‘Well, who was your sample? How are you gathering your data?’ ” he said. “I mean, statistics is everywhere. It’s part of any good critical analysis of things.”

It struck me that I knew at once what Haimo meant: on social media, and in the press that sends data visualizations skittering across it, statistics is now everywhere, our language for exchanging knowledge. Today, a quantitative idea of rigor underlies even a lot of arguments about the humanities’ special value. Last school year, Spencer Glassman, a history major, argued in a column for the student paper that Harvard’s humanities “need to be more rigorous,” because they set no standards comparable to the “tangible things that any student who completes Stat 110 or Physics 16 must know.” He told me, “One could easily walk away with an A or A-minus and not have learned anything. All the STEM concentrators have this attitude that humanities are a joke.”…

Haimo and I turned back toward Harvard Square. “I think the problem for the humanities is you can feel like you’re not really going anywhere, and that’s very scary,” he said. “You write one essay better than the other from one semester to the next. That’s not the same as, you know, being able to solve this economics problem, or code this thing, or do policy analysis.” This has always been true, but students now recognized less of the long-term value of writing better or thinking more deeply than they previously had. Last summer, Haimo worked at the HistoryMakers, an organization building an archive of African American oral history. He said, “When I was applying, I kept thinking, What qualifies me for this job? Sure, I can research, I can write things.” He leaned forward to check for passing traffic. “But those skills are very difficult to demonstrate, and it’s frankly not what the world at large seems in demand of.”

I suspect this level of authority is not just true on a college campus: numbers have a particular power in the world today. They convey proof. Patterns and trends. There can often be little space to ask where the numbers came from or what they mean.

Is this the only way to understand the world? No. We need to consider all sorts of data to understand and explain what is going on. Stories and narratives do not just exist to flesh out quantitative patterns; they can convey deep truths and raise important questions.

But what if we only care today about what is most efficient and most able to directly translate into money? If college students and others prioritize jobs over everything else, does this advantage numbers and their connections to STEM and certain occupations that are the only ways or perceived certain ways to wealth and a return on investment? From later in the article:

In a quantitative society for which optimization—getting the most output from your input—has become a self-evident good, universities prize actions that shift numbers, and pre-professionalism lends itself to traceable change.

If American society prizes money and a certain kind of success above all else, are these patterns that surprising?

When the values of homes quintuple over 5 decades by just being there

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I recently saw a house near me that was for sale. Checking the online property history, I found that the home is now worth roughly 5 times more than what it sold for in the early 1980s. By just being there for the last four decades, the home has quintupled in value.

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This is not a phenomena restricted to our suburban area. Recently following an Internet rabbit trail, I was looking up property values in Levittowns on the East Coast. I remember seeing that their values had at least tripled or quadrupled over a similar span. What were once cheap and simple suburban homes became homes with values significantly above the median value for owner-occupied homes.

Homeowners would likely say that the values have increased because of the maintenance and upgrades in the homes and properties. There has been change; the homes near us have been updated and added to over the last fifty years while the Levittown houses have been transformed in numerous ways over the decades.

But, those positive changes do not add up to such an increase in value. Much of the increase in value has come from just being there. Being in the right location. The owners who lived in such homes benefited financially from a positive return on investment and could roll that new found wealth into other homes, investments, or opportunities.

The long-term consequences for those benefiting from buying a home during a recession

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Thinking more about yesterday’s post on cooling home values in certain housing markets, how many people benefit from the lower prices? The typical emphasis in such economic times is to note the difficulty of buying a home when interest rates are higher and there is economic uncertainty.

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But, lower prices means some might be able to buy when they could not otherwise. The hottest markets in good economic times have high prices and lots of competition. Even as borrowing money is harder in a recession, prices can be lower and the competition might not be as stiff.

Some people are still buying and selling homes during economic downturns. This leads to a long-term question: are those who buy during a recession more or less likely to hold tightly to the idea of a home as an investment? Is buying at the height of the market – famously, such as right before the housing bubble burst in the late 2000s – tied to a deeper focus on property values and a strong return on investment? Or, because a home purchased during a recession might emphasize scarcity and economic uncertainty, might this lead to more concerns about property values?

Measuring the value of a housing investment in “2022’s best real-estate markets”

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WalletHub recently looked at the best real-estate markets. Here is how they described their rankings:

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Whether you’re joining the real-estate business or just looking for a place to call home, it’s important to get a handle on the housing markets you’re considering before investing in a property. This year, the housing market is skewed much more toward sellers, with mortgage rates having nearly doubled in the past year and home values having risen nearly 21% on average.

If you aim for long-term growth, equity and profit with your housing purchase, you’ll need to look beyond tangible factors like square footage and style. Those factors certainly drive up property values. From an investor’s standpoint, though, they hold less significance than historical market trends and the economic health of residents.

To determine the best local real-estate markets in the U.S., WalletHub compared 300 cities of varying sizes across 17 key indicators of housing-market attractiveness and economic strength. Our data set ranges from median home-price appreciation to job growth.

This is very different than Money’s best places to live or other rankings that consider communities. This is about rising property values and return on investment. This is about making money by purchasing property. This is about demand and sales.

What would be interesting to consider is where this consideration of return on investment, a growing concern among American homeowners, overlaps with quality of life or desirable communities. Homeowners often have options about which communities or neighborhoods to select, whether they are looking within a metropolitan region where there might be dozens or more options or if the COVID-19 work from home options now mean people do not necessarily have to live near work. Would a return on investment beat out good schools or proximity to work or affordability?

What children learn from HGTV #2: Houses pay off financially

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In watching HGTV with children and studying suburbs and housing, I have several ideas of what kids learn while watching the network’s programming.

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In addition to the upbeat emotions on HGTV, the network relentlessly suggests houses are worth the financial investment. Numerous shows discuss how much money is involved, whether that is in the purchase price or the profit or equity made in repairing a home or the costs to particular changes. These are often not small sums; budgets are usually in the tens of thousands or more and few characters discuss how they have such money to spend.

But, the big sums of money are worth it in the end because homes are an important investment. Sure, they are to be enjoyed – and the reveals at the end of many HGTV episodes are full of positivity – but the money may be even more important. Everyone has spent a lot of money on these homes and they are worth it because they will be worth even more in the future.

HGTV often embodies the shift in the United States from homes as important centers of family life to financial investments. The money to be gained by owning or renovating a home is never far away on HGTV.

Purchase your home to live in it…and consider its long-term investment potential

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In a story about how to buy a home amid a hot housing market, one expert offers this advice:

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Herbert recommended a different way of thinking about the timing of buying a house, one that I found much more comforting. “You ought to be making this as a housing decision and not an investment decision,” he said. If you’re buying a house, he advised, it should be because you want to live in it for at least five years, and ideally many more – which also will mean that even if prices fluctuate, you have a better chance of your investment appreciating over time. “The longer you stay in the house, the [less] your timing in this particular house-price cycle [will] matter,” he said.

This quote interested me for two reasons. First, Herbert says this is about buying a house and staying long term. Sure, the housing market might be crazy right now but a buyer should be thinking about living in the space for a while. But, then the advice pivots a bit to noting how this long-term view can pay off financially. The particular financial circumstances at purchase will fade away if the price of the home increases.

That financial considerations matter as people consider home purchases is certainly true. At the same time, the shift from seeing a home as a place for long-term living to primarily a financial investment is on display here. There are features about homeownership that Americans tend to like – you own the property, there is often some outdoor space, it is more private, it is a marker of success, and so on – that transcend financial conditions. Houses are more than just the dollar signs attached to them…right?

Perhaps it would take an extended period of a cooler housing market and other positive economic stability for houses to not just be financial investments. Or, the costs of homeownership in many places are already at a point where homes can only be viewed as financial objects.

Amenities, ROI on housing, and social class

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A recent piece linking amenities to higher return on investment for housing left unnamed a key factor: social class.

It turns out that if Trader Joe’s is nearby, your house might be worth more than if it were close to other grocery chains. The average return on investment, or ROI, for Trader Joe’s-adjacent homes is 51 percent, 10 percentage points more than the runner-up, Whole Foods (41 percent), and almost 20 percentage points more than Aldi (34 percent)…

“When we overlay points of interest (like transit, shopping, and amenities) on top of prices, we see trends in the distance to these features,” Marshall says. “In urban areas, ClearAVM has found that access to public transit has a large correlation with higher property prices. We have found the same with access to restaurants, coffee shops and groceries in urban and suburban areas.”…

Some of the positive location amenities that can impact home values and equity include high-ranking schools, hospitals, shopping centers, green spaces and being near the waterfront (think oceans and lakes), as well as access to highways and main thoroughfares.

Negative location markers include things like high-traffic and high-noise areas, crowded commercial properties, high-tension power lines or other utility easements, a poorly maintained home or neighborhood, and not being near the appealing attractions mentioned earlier, Hunt says.

While I don’t doubt these factors do influence housing values, there is a common factor that helps join them all together: the social class of residents. Grocery stores, like many other businesses, figure out where to locate at least in part on looking at the residents who live nearby. Whole Food’s is generally not going to move to a community where residents do not have the resources to pay their prices. Aldi, in contrast, appeals to a different market. Going further, think of the differences in locations between Walmart and Target, McDonald’s and Chipotle, Dollar Stores versus chain drug stores, and more.

A number of the items on the list of “positive location amenities” are also closely connected to social class. High-ranking schools tend to be in wealthier communities. The same is true of shopping centers and higher property values mean only certain kinds of residents can afford homes on the waterfront.

This does not mean that there is not more affordable housing in these areas with positive amenities. There may be. But, I would guess the zip codes connected to the higher-class grocery stores tend to be wealthier and more educated zip codes overall. The habitus of social class extends even to what grocery stores people prefer, the desired appearance of nearby homes, and close amenities that help reinforce their social class, practices, and tastes.

Beware of buying a 1×100 plot of land between villas at a real estate auction

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One man was surprised to find out what he actually purchased in a Florida real estate auction:

Kerville Holness thought he’d done a great job snapping up a $177,000 Tamarac villa for only $9,100.

He got a 1-foot-wide, 100-foot-long strip of land on Northwest 100th Way — valued at $50.

It starts at the curb where two mailboxes have been installed, goes under the wall separating the garages of two adjoining Spring Lake villas, then extends out to the back of the lot…

The message from county officials and real estate experts is that auction participants need to do their homework and make sure they’ve checked for all possible problems a property might have…

Real estate is a hot investment option these days. Add the interest people across the United and world may have in property in southern Florida plus the ability to purchase online and you could get more situations like this. How many people would be willing to purchase a property without ever seeing it?

Perhaps the answer going forward is that a lot of people would be willing to do this. If you can buy a car without driving it first, then more and more properties and units could go this way. In hot markets where properties go fast and the competition is fierce, it probably already happens at higher rates.

I wonder if at some point there could be a local backlash about Internet property sales. Just the idea that someone from anywhere could purchase land or buildings might make some nervous. Takes places like Vancouver or southern California where outsiders are making a lot of purchases. Or, perhaps the backlash from angry buyers who did not get what they thought they would (such as in the story above) could change Internet property sales. What format or what details are needed to truly make physical property a salable commodity to Internet buyers all over?

Reporting on the return of investment for house flippers

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Selling flipped homes is up while the average return on investment for flipping a home is down:

Homes that were resold within 12 months after being purchased made up 7.2 per cent of all transactions in the first quarter, the biggest share since the start of 2010, Attom Data Solutions reported Thursday. Meanwhile, the average return on investment, not including renovations and other expenses, dropped to 39 per cent, an almost eight-year low…

“Investors may be getting out while the getting is good,” Todd Teta, chief product officer at Attom Data Solutions, said in the report. “If investors are seeing profit margins drop, they may be acting now and selling before price increases drop even more.”

Three quick thoughts:

  1. The return on investment for flipping a home is down. Changes in the real estate market mean there are fewer homes with large return potential. I wonder how much of the lack of such homes is due to fewer homes on the market versus sellers getting better at pricing their homes versus multiple kinds of investors driving up prices at the lower price points.
  2. The return of investment of 39% sounds high…until you factor in “renovations and other expenses” which are not part of the figure. So what is the actual average return on investment once factoring in everything? 5%? 15%? This initial figure then helps make sense of the need of flippers to reduce expenses and make cost-effect renovations because those decisions directly connect to profits.
  3. Thinking of the money in house flipping, I have seen little about the accuracy of HGTV shows and other shows that often provide a purchase price, expenses summary, and then give a profit at the end. Are those figures normal? Do they represent unusual housing markets and/or unusual advantages to being part of a TV crew doing house flipping?