David Crook is a writer for the Wall Street Journal and edits the Wall Street Journal’s Sunday edition. Mr. Crook writes with an emphasis on real estate, business, and finance. David is the author of The Wall Street Journal: Complete Homeowner’s Guidebook and the Wall Street Journal: Complete Real-Estate Investing Guidebook.
I am a big fan of David’s work, and he really caught my attention when I read his Complete Homeowner’s Guidebook. (note, I do not use affiliate links in this post). It is a great book that explains just about everything you need to know about purchasing a home or being a homeowner, while the whole time (in my opinion at least) being somewhat subversive about the act of purchasing a home in the first place. This book actually caused some friction in my marriage, as it changed my point of view on home ownership so much that after finishing the book I tried for weeks thereafter to talk Mrs. BP out of looking for a house. Later when I resumed I low-balled again and again, causing many potential deals to fall through.
Mr. Crook has written extensively about the dangers (and to be fair, also the joys) of home ownership, and I am so excited that he agreed to this interview with Broke Professionals, and to provide some perspective to all of us about the present real estate market. I always wanted to be a journalist, and majored in English/Journalism at college, but I ended up a lawyer. It is a great honor for our site to host a true journalist like Mr. Crook, who we cannot thank enough for agreeing to take the time out of his busy schedule to take part in this interview. Without further ado, here is the interview with Mr. Crook:
1) You were saying homes are not the investment people think they are well before the market crash of 2008 and the housing slump. What was it like to go from having what at the time was perhaps an outsiders point of view to now being considered someone who had a lot of foresight into an economic reality that even most experts did not pick up on until it was too late?
I experienced first hand two California housing boom-bust cycles, in the early 1980s and again in the late 1980s and early ’90s, so there was a very real sense of déjà vu for me as the mania of the 2000s took hold. But your question really gives me too much credit and other experts too little. You didn’t have to be a soothsayer to look at Robert Shiller’s famous home-price feverline graphic (In his book “Irrational Exuberance,” reproduced in my 2006 “WSJ Complete Real-Estate Investing Guidebook“) and see that the housing market was in a bubble as early as 2000. National housing prices actually peaked in the fourth quarter of 2005 / first quarter 2006, and by the time my Real-Estate book came out at the end of 2006, it was clear the party was over. I interviewed several small-property investors who were selling, not buying, as the mania was in full bloom. That’s as good of a sign of a market top as you will ever see.
Of course in the New York area, housing prices are very closely aligned with the stock market, so the housing bust came rather late here. The stock market started falling in the summer of 2007. When it finally crashed in the fall of 2008, it was more of an economy-wide capitulation. Corporate bonds tanked. Energy tanked. Commodities tanked. Falling home prices were just one more indicator of what even President Bush, no economic whiz, recognized as “the whole sucker going down.”
On a personal note, I have a mixed performance myself in the housing bust. I’m a real tightwad, so I usually get good prices when I buy a house. (Landlord’s adage: “I make my money when I buy a property, not when I sell it.”) I have an 18th century house in rural Connecticut that I bought in the late 1990s. Its market value is down 30% from its bubble high, but it’s still worth more than 30% over what I paid for it. I bought my New York apartment in late 2004 with bubble-inflated proceeds from selling a smaller place. In retrospect, I should have sold and rented for a while as, today, my co-op is worth only a little more than I paid for it. If I had waited to buy until after the stock-market crash, I probably could have gotten a bigger apartment for the same money … and my wife would have that extra bathroom she wants so much.
2) I am in my late twenties and I am getting a lot of pressure from people to buy a house. What are the three best arguments I could make to people to demonstrate that perhaps buying a home isn’t a great investment, and in many ways never was.
A) How’s your marriage? Whether you and your wife should buy a house is no more a subject of other people’s interest than whether you and your wife should have a baby. Buying a house is all about the state of your life. Is your job secure? Do you really want to move to Vermont and raise goats? Are you considering any big life changes in the coming five to seven years? Unless you plan on living in your house for along time, you should not buy it.
B) How are your finances? Retirement fund? College fund? School debt paid off? You almost certainly have other, far-more important financial issues to take care of than buying a house. As I say in the home-owning book, owning your own home is the reward for a well-managed financial life, not the means to get there.
C) Do you have sufficient savings? The no-down mortgage is gone, and low-down mortgages are becoming rarer. Freddie Mac and Fannie Mae are almost certain to be shut down or restructured unrecognizably, effectively ending the federal government’s role in the housing market. Without the government guaranteeing the housing industry, private lenders will require higher down payments, shorter loan terms and higher interests. On top of all that, it’s just good personal finance to have more money to put down.
3) At what point does buying a home actually become a solid business decision, if perhaps not a spectacular investment?
If you buy an income-producing property, either a two-family, a four-family or a small apartment house that pays for itself. If you live in one unit, you will eventually have no out-of-pocket housing costs as your tenants will cover all the costs of ownership. Any investment worthy of the name should provide the investor income, price appreciation or, best of all, both. No single-family home can do that today.
4) You have written several books about home ownership and the home buying process. However, at the same time, in your writing, whether it be your books or the Wall Street Journal, you have almost always been bearish about home ownership as an investment. How many houses did you visit before settling on your own home? Did you drive your realtor crazy?
It’s not real-estate agents who go crazy. It’s my wife. I look at A LOT of places before I buy a house or apartment. I don’t think there is any other way. Everyone is different, of course, but how many people do you know who will drive an extra 20 minutes to save 5-cents on a gallon of gasoline but will spend hundreds of thousands of dollars on a home after spending just an afternoon or two visiting open houses? It’s crazy. How can anyone know anything about what’s available at what price by looking at just five or six places?
Since I got serious about real estate in my mid-30s, I don’t think I’ve spent less than two years looking at properties. My wife won’t come with me until I’ve narrowed down the list to two or three places. Then the price negotiations begin. If I can’t get the price I want, I won’t buy.
By the way, as as buyer, I almost never use a real-estate agent. With multiple-listing services and the internet and just driving around a lot, I don’t need an agent to find places for me, just someone who will sell to me. No agent on my end gives me a 3% negotiating window as the selling agent (called the “listing” agent in the jargon) is planning on only half of the standard commission. We closed the deal on my current apartment, which I bought during the mania when New York buyers were feverishly bidding against each other for places, with money actually contributed by the seller’s agent. It was a significant amount, too, five figures.
5) When my wife and I were looking at homes, a lot of the sellers were people who bought in at the peak in 2004-2006 and couldn’t sell their homes because they either could not afford to take the true market value due to a lack of equity or wanted someone else to subsidize their mistake. How long do you think it will take before sellers become more realistic of the present market conditions?
That’s hard to say. There are probably people who are holding internet stocks they bought in 1999, waiting for the price to come back. I tend to think people will hold on to properties until they HAVE to sell them. Then they sell them for what they can get. It’s very difficult for people to accept the fact that home values are lower today than they were six years ago; it runs counter to everything American have been told for decades.
6) Can the housing market ever fully recover considering that with the baby boomers aging there may never again in our life-time be as great a need for housing as before?
There are an awful lot of Gen Yers out there. And people still come from all over the world to live in the United States. Population and income trends–the systematic destruction of the middle class–do not suggest that home prices will go up, up, up like they did for most of the 60 years prior to 2005. But people have to live somewhere. Housing demand and housing supply will meet at some price–which, I think, will be lower than the price that prevailed at the peak of the bubble. Prices will vary market to market, neighborhood to neighborhood, but I suspect that generally prices will settle out at about where they were in 2000-2001. That’s just my guess.
7) With all the transaction costs, interest, and maintenance fees, who if anybody, might still be a “winner” if they purchased a home today?
If by “winner” you mean can you go deeply into to debt to buy a house, pay for it for 30 years, replace the roof, remodel, add on, live in it and then sell if for more than all the money you spent and then buy a new place to live and still have a “profit,”money left over, then: No. And you probably couldn’t do it before the housing bust either outside of a few highly desirable markets. If by “winner” you mean can you buy a house that you can afford, manage your borrowing costs and limit renovating, love your wife or husband, raise a happy, loving family and live securely and comfortably in your old age. .. You bet!
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{ 12 comments… read them below or add one }
Excellent BP! I haven’t read the book, but I find the advice very valuable, having bought a house recently!
In my opinion, one should save up to at least 20% before buying a home. I think this might become a requirement in future with the Freddie and Fannie losing relevance.
MC,
Thanks for commenting. We are definitely very lucky Mr. Crook was willing to share his knowledge with us, this is definitely helpful to most if not all our readers. Thanks for noticing.
Great Questions! I enjoyed the interview because he touched on the business side of real estate acquisition and how the various market conditions. Real estate may not be the greatest investment, but it is one of the few that you can enter using leverage at a relatively low interest rate. In addition, the IRS subsidizes your loan by allowing an interest deduction and $250,000 tax free gain per person (if married). I don’t think you can evaluate this on a normal investment basis!
Great article! The only thing I disagree with David is on the future of the housing market…
I think it will take years to stabilize but then at that point it will go back to normal like it did in the early 90s after a brief dip…
First off, I really enjoy the sunday edition of the WSJ. Actually, it’s the best part of the entire Sunday paper!
Home is on the market now, will be buying out west soon and found this article filled with tremendous insight. This is probably my 10th or 11th (or more) real estate transaction, and it is always a challenge!
Really great interview! I especially liked his comments on buying a small 2 or 4 unit apartment house that will pay for itself through tenants. I had never thought of that, but I definitely will when I’m looking to buy my first home.
LaTisha, that advice gave me a little bit of a pause. I think Mr. Crook was a little sketchier in his discussion of being a landlord than he might be if it was the focus of the entire interview.
Being a landlord is not an easy way to make money. You have to commit to a part time job managing your apartment while many people think it’s just about collecting rent.
Most homeowners are careless about maintenance in their own homes but they can’t be in an apartment they own. So read up on landlord responsibilities before considering this seriously so you know what you’re getting into.
I think this was a great interview. Thanks for publishing it.
I agree that real estate is not a good investment for most people. I think folks use financial language to justify wanting a house for other, more personal reasons.
But, I don’t think we have to make every decision based on what makes the most financial sense. Having children isn’t a good financial decision either but most people don’t refrain from procreating just because they’ll never get their money back out of their kids when they grow up.
Excellent work, BP! I really liked this interview. Frankly, it might also be because I agree with much of it, but it was insightful. Good quality stuff here.
Homes are not liquid assets like they were in the early 2000′s, and the reality that sales are very sluggish despite such rock-bottom low interest rates is very telling in my opinion. What happens if rates increase? Do prices drop correspondingly, to ensure that borrowers’ “payments” remain steady?
Personally, I think a home purchase these days needs to be a very, very well researched long-term decision.
Dear Mr. and Mrs. BP:
Thanks for the opportunity to talk to your readers and your very gracious introduction. I also appreciate the comments.
If anyone has any further questions, feel free to contact me.
Cheers,
DC
David,
Please see my comments below. I feel that owning a home is spectacular discount on having a place to live over a long-spanning time period. As long as you can afford to front the payments.
I did enjoy your book though…
I read David’s book, and I couldn’t disagree more. He does show how owning a home as an investment probably produces negative cash-flow in the long run. But he leaves out the fact that after all is done, you will have had a place to live for 15 years for a total cost of $80,000. That is opposed to a rental where you might not have a place. Therefore, I say it is a spectacular investment to own a home. Don’t let numbers confuse you…you will have somewhere to live a quarter of your life for an overall expense of under $100,000!!!
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