You’ve seen the Wall Street Journal head line. What does this mean for Lansing, Michigan? Today’s email will answer these important questions; take the time to read through to the end.
- What is the S & P Case-Shiller 20 City Housing Index and what does it tell us?
- How is the information on the cover of the WSJ today relevant to us in Lansing MI?
- What are some helpful conclusions we should draw from this information?
CASE-SHILLER 20 CITY INDEX
Your city’s “Case-Shiller number” (index) is a measurement of the appreciation over time of home values as a percentage above or below the national inflation rate. Think about that sentence for a minute. How much more or less has the value of my home appreciated – than inflation? This is a good question, and if you live in one of these 20 cities, you can find out.
Very simply, if this month’s number for your city is 100, then the value of your home, since the index began in 1890, did not go up any more or less than inflation. (Inflation has on average been around 3% since that time.)
An index under 100 means that your home would sell today for an amount less than it would have IF the value had tracked right with the national inflation rate. Your home’s value has less than kept up with the inflation rate. According to the index, your home is under valued.
An index of 100 means that your home is worth exactly what it should be IF homes in fact appreciate right along with inflation. If you bought your home in 1890 and there had been no inflation since that year, then you would sell it for the same exact price you paid for it back then.
If the index is currently over 100 for your city, then your home is currently worth more than it would be if the home value tracked right with national inflation numbers since 1890. According to the index, your home is over valued. Detroit peaked in 2006 at 127.
Remember though, this is only a guide. Different areas of the country can track differently from inflation for decades, and in fact do.
The May 2009 number for Detroit is 70.47 and no index is tracked for Lansing. Let’s say that you could have purchased a home in Detroit for $5000 in 1890 (which you could have). Today, your home should be worth around $165,000 if the index was 100 – but because we are currently at only 70% of full value (GM, recession, etc), you can buy that home for $115,000. Remember though, if you had bought that home in 2006 when the index was 127 – you would have paid around $200,000 for it. So, if you paid $200,000 for a home in Detroit in February 2006, you could get $115,000 for it today. These numbers are pretty much right on with the Case-Shiller estimates (if you don’t believe me, forward this email to a Realtor in Detroit and they’ll tell you).
So, how is the information on the cover of the WSJ relevant to us in Lansing MI?
If you haven’t seen it. The WSJ posted gains in the last month in 13 out of 20 major cities – Including Detroit!!
We are, at the same time, both like and unlike Detroit. We likely “peaked” a few months later than Detroit, and our number likely did not get as high as Detroit’s so we are not JUST like Detroit. However, our turns have tracked along the automotive lines and our numbers show that we too are very likely well below our inflation index. Bottom line – we dropped like a rock in home values over the past two years just like Detroit did and just like Detroit, our average home values had only risen 20% – 40% during the 2000 to 2005 run up in prices rather than more than doubling in some of the worst off markets like South Florida, Southern Cal and Nevada.
From here on out it’s a still a jobs issue – because it’s always been a jobs issue. When more people go to work here, then more families buy homes here. When more families buy homes here, then the supply shrinks. We are already down to an 8 month supply of homes – once we get below a 5 months supply, we will see the prices go flat. At three months or less, the prices will rise.
It’s important to draw a distinction at this point between two types of home buyers: Speculator and Investors. Speculators are seeking a fast profit on the quick turn of an investment and need to see that happen in less than a year or two. An investor is seeking to realize a large gain over a long period of time by increasing total holdings.
If you are a speculator, this may or may not be the time for you. Be prepared to hold longer than you want to; jobs are coming back to Michigan, but may take some time.
If you are buying as an investor, you will do well if you buy now. You might do a little better next year, you might do a little worse next year, but if you buy now you will make very good money in the long run. Think about it – not only will you get the rate of inflation which is a 3% growth in the asset, you will also get to see the numbers rise faster than that at some point in the future to get to the 100 index again – 30% over inflation! And, you have to live somewhere.
What are some helpful conclusions we should draw from this information?
- Relative to the years 2000 through 2007, when the Detroit index number was over 100% topping out at 127% in February 2006, TODAY is a great time to buy a home in Michigan. The Detroit Case-Shiller index is 70%!
- If you want to move but have a home to sell. Consider renting your current home to a family who needs a good home to rent (many out there right now) and then buy another home. If you qualify for this and can take a little added hassle up front, you will enjoy a rising index on two homes rather than just one. Buying low (by moving up now) and selling high (by selling your home later) in Michigan has never been more of a reality!
- When you buy a home, make sure that you can afford it. The debt and income percentages set by FHA and Fannie Mae are still excessive in my opinion.
- If you have any other consumer debt (credit cards and car loans), consider paying it off before buying a home. If you do buy a home first, make a commitment to eliminating your consumer debt as fast as possible. You will be able to save more as a result. Your home will appreciate with inflation, and as you pay it off there will be a lot of equity in it when you sell it down the road. But, you won’t be able to retire on the equity in your home, so you need to make sure you can make your mortgage payment AND save money each month.
You can find new Case-Shiller information for yourself every last Tuesday of the month on the following site: