Good news for housing market?

November 20, 2007
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Fortune MagazineLocal homeowners tired of all the bad news about the housing market likely will be encouraged by data in a recent Fortune Magazine article. The magazine studied the correlation between property values and rent rates, typically a reliable guide to the value of homes. The comparison between home values and rent rates was knocked out of whack during the housing bubble, so the magazine predicted how much of a correction will be necessary to return the order. Out of more than 50 cities considered, Indianapolis was one of only seven that would see home values increase in the next five years. The magazine predicts a value increase of about 7 percent. What's your take?
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  • MariaNovember 20, 2007 11:41 PM
    Indy home prices didn't rise like they did out on the coasts. So, in the end, it will all even out.

    Also, is that a 7 percent total return over the next five years or an annualized return?
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  • cschoutenNovember 20, 2007 11:45 PM
    Good point, Maria. My understanding of the data is that it's total return for five years.
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  • crankyNovember 21, 2007 9:33 AM
    Forgive me for commenting before reading the article, but overall, I think the high water mark for home prices in the Indpls. MSA was hit in 2005. Going forward, I expect the recovery to be uneven. I'd love to hear where thoughts are on the first pockets to recover - Broad Ripple? maybe not, due to the property tax issue. My take on the last area to recover would be 46th & Post -- about half those new homes are in foreclosure.
    So, my point is, the market varies by street and neighborhood, which makes these gross amalgamations meaningless.
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  • Da HooeyNovember 21, 2007 10:10 AM
    It all comes down to quality, IMHO. You buy junk, its not gonna gain any value. Its all about Washington Township and toss in quality of life too. Wayne Township? Yee-haa! :)
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  • XLINovember 21, 2007 10:18 AM
    The Indy market is connected to more natural construction costs. When many other markets have such artifical markups or valuation you are going to see a massive dropoff when prices finally level or drop. In Indy there is not much room for a dropoff. I still can't understand though, how we can have the most affordable housing market and the most foreclosures at the same time.
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  • DRTNovember 21, 2007 11:35 AM
    XLI, it could be that because our housing market is so affordable more people buy thinking they can afford something they can't. This may lead to more foreclosures. That's my theory anyway. I agree about the Indy market though. We have much more normal housing cost structure that is not nearly as artificially inflated by government intervention and open space laws as other markets are.
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  • Frank M.November 21, 2007 11:43 AM
    XLI, regarding your comment: How can we have the most affordable housing market and tthe most foreclosures at the same time. I'm sure there are a number of reasons, but some of this is interrelated. One reason would be the significant employment reductions by some area manufacturing/aviation industries. Another reason could be since the prices of homes locally haven't increased significantly, individuals who have recently purchased homes and are financially pinched have little option but to foreclose. In metro areas where prices have increased significantly (until recently), it would be more feasible to sell, cash out on the equity and move on...rather than foreclose.
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  • The UrbanophileNovember 21, 2007 2:29 PM
    A previous poster hit the nail on the head. The price of housing in Indianapolis, to a much greater extent than elsewhere, is driven by the marginal cost of new construction. Baring significant inflation in land costs, construction costs, or a change in style of living, there is limited upside potential for prices in Indianapolis. Note how cities like Atlanta, Dallas, and Houston were able to remain affordable despite gigantic population increases. Indy has the same dynamic.

    As for how Indy can have so many foreclosures, its very affordability creates that. There are many homes that are so inexpensive (new construction from the $80's, for example), that it allows a large number of people to get into homes who would simply be unable to buy in a more expensive market. The more buyers with marginal finances, the more foreclosures. That's the downside. The upside is many more people who are able to own their own home.
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  • thundermuttNovember 21, 2007 4:03 PM
    Urbanophile, I generally agree but think there is one additional factor to add to marginal cost of new construction: a congestion variable.

    People's desired commute isn't necessarily fixed, but it's only variable within limits. Someone like me who doesn't want to drive more than 20 minutes to work near downtown simply won't buy a tract house at 196th & Boondocks Rd. no matter how good the value is. As construction northeast, south, and west increases (and brings with it increased congestion), congestion will become a bigger and bigger factor in people's location decisions.

    To all: think about this. A seven percent increase over five years is about a 1.35% annual compounded growth rate. Almost everyone in Marion County pays 3-4% per year in property taxes.

    Even with a Fed/State mortgage interest income-tax deduction and significant leverage, I think my house is slated to be a losing investment for the next five years. Plus it's a negative cash flow because I have to pay the real estate tax as due and I don't realize any of the increase in value unless and until I sell.
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  • berwickguyNovember 21, 2007 4:13 PM
    Thundermutt,

    Keep in mind that being financed for the shortest time possible within affordable limits creates quicker equity for you. And, with the rental option being forced to factor in the tax rates, you still should come out ahead in the buying option, all things considered.

    Certainly, it ain't as great as it used to be, however it still may beat your options.
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  • ZappatstaNovember 21, 2007 5:51 PM
    Does it matter though, when people won't be able to afford, or get approved to buy the home for what it is worth?

    Just wondering....
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  • sosNovember 21, 2007 11:39 PM
    The relatively affordable housing developments
    are tempting enough, but coupled with special
    mortgage sweeteners, they become impossible to
    resist for those at the margins dreaming of homeownership.

    These marginally qualified homeowners, coupled with economic
    turmoil, eventually leads to foreclosures and depressed
    prices, begetting more dreamers lured by low prices, etc. until the housing
    market tanks.

    Unless real economic development (not headline grabbing
    subsidized automobile plants, etc) occurs in this city,
    via synergistic growth by entrepreneurial migrants and
    locals, there will not be any real rise in home values.

    Of course, eventually, all will be forgotten, and another
    false economy will be created, collapse, ad infinitum.
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  • thundermuttNovember 22, 2007 9:35 AM
    Berwickguy, I've always assumed the same as you and over the long haul it probably works out. But even assuming 4:1 leverage, that projected 1.35% return only becomes a 5.4% annual ROE. Obviously the income tax implications are different for every taxpayer, but I think the investment gains and tax advantages are largely negated by the 4% per year that I pay in cash as property tax for the privilege of owning a home in Marion County.

    Don't forget the hidden costs of homeownership that aren't equity: homeowners insurance (far more expensive than renters'), and association fees for newer neighborhoods and condos. All I'm suggesting is that in this climate it might be smarter to dump extra money into an IRA or 401k to build equity, instead of stretching to buy a house.
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  • RickNovember 22, 2007 11:59 PM
    thundermutt, no doubt about it, in Marion County, owning a house is a money losing proposition.
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  • thundermuttNovember 23, 2007 1:49 PM
    Rick, I think I'd extend that general proposition to all of Central Indiana right now. The further out one gets, the closer to new construction one is and thus the harder it is to get an increase in value due to builder inventory.
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  • ezdaisyNovember 24, 2007 3:01 PM
    I was visiting family in the Indy area two years ago and was so impressed with what was happening in the downtown area that I bought a condo. I live in New York and was not expecting to see a sudden double digit returns I've experienced here. I do see, however, a long term appreciation because of the developing interest in lliving downtown and the careful planning processes that seem to be happening at the neighborhood level. I can see the possibility of spending more time in Indy because of the affordability and quality of life.
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  • Da HooeyNovember 24, 2007 5:50 PM
    Rick, you're nuts. My home in Wash Twnshp is kicking butt and I could sell it for way more money than I bought it for 4 years ago. Yes, add in major imporvements i've done, and I am still WAY ahead of the game.
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  • ShimmyNovember 25, 2007 5:20 AM
    7 percent over 5 years? WOW, what an investment!!
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  • indyfanNovember 26, 2007 10:06 AM
    A home as a primary residence, generally, is not meant to be a money making investment. As long as it holds value, it holds your money and lets you have someplace to live. I'd rather see a 7% gain in housing than pay rent over 5 yrs in an apartment/condo/etc. Pride comes with ownership, I enjoy being a part of the neighborhood and I like making improvements to my home-despite the expensive property taxes.
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  • CoryWNovember 26, 2007 11:56 AM
    I also own in Washington Twp and I could see me making a good amount of money on it when I go to sell!
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  • Da HooeyNovember 27, 2007 9:32 PM
    indyfan & CoryW are right. Besides - what's the friggin alternative? RENT! but Wash Twnshp is where its at peoples. We got it all - BRip!
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  • ShimmyNovember 28, 2007 12:01 AM
    The alternative is gettin out of this chain-ridden town, anti-urban!
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