When news of U.S. Treasury Secretary Tim Geithner’s housing troubles came out, typers jumped on the story as a “symbol” of what’s wrong with the housing market. (Geithner tried to sell his Westchester home this past spring, failed to get his price of $1.6 million, and rented it for $7,500 a month.) For example, there’s not one, but two stories on financial wonk blog Seeking Alpha — “Geithner’s Real Estate Headaches Microcosm of U.S. Market Ills” reads one; “High End Home Market Still Has Further to Fall,” reads another.
Both these pieces (the former by Bruce Krasting, the latter by Jason Tillberg) seem to argue that Geithner’s inabilty to get a better rental income is a sign that real estate is going to heck in a handbasket. Tillberg argues that home values will come into line with a better price-to-rent ratio, thus causing high-end house prices to fall by some 30 percent. (By the way, he’s short Toll Brothers, a major U.S. homebuilder. Just in case you were wondering.)
Krasting, who is himself trying to sell a house in Westchester County, at least zeroes in on the freeze in the high-end mortgage markets. (It’s been tough to get financing for a million-dollar home for approximately 18 months now.) However, he says “[H]e [Geithner] is renting it for $7,500. The rent is 25% less than what a real purchaser would be forced to pay. No wonder he is having trouble selling it.”
First of all, any real estate agent anywhere in the country will tell you that pulling a house off the market after less than four months does not count as “having trouble selling it.” If anything, the ability to pull a listing that quickly and carry it as a rental is pretty atypical, a luxury that rich people alone have. Or as the Westchester Board of Realtors put it in their first quarter report: “The wild card that defeats ordinary supply and demand analysis in Westchester continues to be the ability of potential sellers to time their listing activity to market conditions.”
But more importantly, you don’t need to get a home to rent for what you would pay for it in order to be “even.” Did you hear me, price-to-rent-ratio cultists? When you rent a home, you pay your rent in after-tax dollars, which are not tax-deductible. When you buy a home, the first one million dollars of mortgage interest, and all of your property tax payments, are tax-deductible. So the monthly payments that you make to carry your home purchase might be higher than the equivalent rent, and it could still be a smart consumer decision to buy.
Conversely, if you’re trying to carry a pre-existing purchase with your tenant’s rent money, you might have to make up the difference out of pocket — but suddenly repairs on the property are tax-deductible. So the fact that Secretary Geithner isn’t pulling in enough rent to make what the typers are speculating his mortgage costs are doesn’t make him an idiot — he is simply generating losses that he can use to offset taxes on his income. (Which, due to increased public scrutiny, he probably has to pay on time.)
And at the end of the day, or the year, or whenever he comes home from Washington, he still has a five-bedroom house that he can put a sofa in. I hate looking at homes as “investments” — I agree with the Robert Kiyosaki theory that they are “consumption” — but they do have a worth above and beyond their volatile, marked-to-market financial price. You can’t cook a lasagna in your shareholdings — or your shorts — of Toll Brothers.
Unlike a stock whose price is sliding, where you as a holder might be tempted to bail before you get more deeply hurt, it’s okay to hold real estate through a dip, because it’s still a usable asset.
