I read this article in the Real Estate section of the Boston Globe today. The piggishness of homeowners, demanding unreal rates of return on their homes, is astounding to me. Relevant portion:

Though in a different price zone, Stephen and Dianne Greenstein can relate to Reagan’s deflated spirits. The couple’s four-story waterfront home, on Nahant’s craggy coast, has been on the market for nearly a year. It boasts sweeping views of the Atlantic, several seaside decks, and three fireplaces. But for all of its amenities, the three-bedroom contemporary home has yet to sell — despite a drop of $326,000 in the asking price.

So in August the couple elected to sell the home at auction. They hired AllynAuction Co. Inc. of Nahant and paid roughly $8,000 in marketing costs for multiple newspaper ads, 5,000 postcards, and the postage needed to mail them to corporate big wigs, doctors, and lawyers in the area.

Three bidders submitted bank-certified checks of $25,000 and registered for the Sept. 24 auction. With hopes high, the Greensteins said a silent prayer as auctioneer Richard D. Allyn started the bidding at $1 million. No takers.

In the end, a single bid of $830,000 was offered, which the Greensteins rejected as too low.

The current list price for their home: $899,000, down from $1.25 million.

“I want to sell, but I’m not going to give the house away,” said Stephen Greenstein, noting that another Nahant home, a three-bedroom, sold through AllynAuction in July for $1,050,000. “I’d rather wait for the right offer.”

GIVE THE HOUSE AWAY, EH???

Well, let’s just see how much the Greenstein’s are “giving away”. It took all of two seconds to find the Greenstein’s house on Switchboard.com. You can view the listing on Coldwell Banker’s website here. And you can view the Zillow estimated price here.

The relevant facts are as follows: On September 24, 1997, barely over 9 years ago, the Greensteins closed on their waterfront home in Nahant for $449,000. Now Nahant is a nice community, but hasn’t changed appreciably in the past 9 years. In other words, it isn’t as if it was a run down neighborhood that had a renaissance or something. It’s basically the same seaside community that it was 9 years ago.

As a result, a home in Nahant should be expected to receive, over the long term, the same rate of return as a typical home receives over the long term, namely about 2% over the rate of inflation, which for the sake of expediency we’ll estimate at 5%. Actually, on a national basis, this is extremely generous:

Between 1975 and 1995, the authors note, real house prices in the United States increased an average of 0.5 percent per year. By contrast, from 1995 to 2004, national real house prices grew 3.6 percent per year, or nearly 40 percent in one decade. In some individual cities, such as Boston and San Francisco, real home prices grew about 75 percent from 1995 to 2004.

I heard a couple of analysts on CNN saying that historical national averages for real-estate appreciation was 5%, which seems reasonable given the risk involved: greater than zero, but still pretty low during the course of a lifetime. So let’s go with 5%.

If you compound the Greenstein’s house monthly (I’m being generous here) at an annual rate of 5%, then their house would be worth $703,514, well below the $899,000 they’re currently asking, well below the $1.25 million they were asking nearly one year ago, and most importantly, well below the $830,000 they were offered and turned down over the summer! Because that would be giving the house away, right?

Can you say “Oink” boys and girls?

So let’s take the Mythbuster’s approach here, and not just ask what the house should be priced at today, but what implied rate of return the house would have achieved had the house been sold at the various prices mentioned in the article. Were the house to be sold at the $899k price the Greenstein’s are asking today, the house would return an annual 7.739%, an extremely healthy showing. Even if the house sold for the $830,000 already offered, the Greensteins would have earned a respectable 6.846%. On the other hand, if the house sold today for the $1.25 million the Greensteins were originally asking, they would have earned an amazing 11.430%. And had the Greensteins sold their house for their original asking price when they had originally put it on the market one year ago (10/05), the Greensteins would have earned a whopping 12.867% annual rate of return (compounded monthly).

But apparently, anything less than 7.739% would constitute “giving the house away”.

To be fair to the Greensteins, we’ve had a bit of a bubble. And to be sure, they’re not the worst offenders out there. There are houses on the market for which the current owners are expecting to receive a 20% annual return. By contrast, a venture capital fund, designed to invest in the most risky of companies, expects a 20% annual return for its portfolio. For someone to expect that in their house, a relatively safe investment, is beyond absurd.

I’ve written before that I expected housing prices to drop by about 30%. The analyst I saw on CNN mirrored my estimate. I just wish that when journalists talk about the real estate market, they’d make at least a passing reference to the math. When people like the Greensteins make statements such as they did, they deserve to be rebuffed. Historically speaking, the Greensteins are making out like bandits, even if they sell their house for $830k. Certainly someone ought to call them on that.

This entry was posted on Sunday, October 8th, 2006 at 6:07 pm and is filed under News & Politics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.