Last month (August):
Years left: 3.5
P =$1,018.90, I =$195.50, Escrow =788.73
This month (September):
Years left: 3.25
P =$1,030.84, I =$183.56, Escrow =788.73
One month’s prepayment savings: $7.90
Disclaimer: We have ZERO desire to get into the landlording business. None. But #1 is tired of talking about her personal finances (as they relate to mortgages) for the nonce so you’re getting a post about housing instead. For newer readers, these housing posts on Mortgage day used to be more common before DH decided to quit his TT job, be unemployed, and get a new job. There will probably be more in the future as things get boring and settled again monetarily in the #1 household. But we’ll see, maybe we’ll actually do some home improvements some day (maybe by the time this posts, Home Depot will have found the vinyl flooring they ordered for us and it will actually get installed update:nope).
A recent working paper by Alex Chinco and Christopher Mayer suggests that investing in the market you live in is more profitable than swooping in from out of town to pick up “bargains” in another market.
Misinformed Speculators and Mispricing in the Housing Market
Abstract: This paper uses transactions-level deeds records to examine how out-of-town second house buyers contributed to mispricing in the housing market. We document that out-of-town second house buyers behaved like misinformed speculators and drove up both house price and implied-to-actual rent ratio (IAR) appreciation rates in cities like Phoenix, Las Vegas, and Miami in the mid 2000s. Our analysis has 3 parts. First, we give evidence that out-of-town second house buyers behaved like misinformed speculators. Compared to local second house buyers, out- of-town second house buyers had worse exit timing (i.e., were likely misinformed) and were also less able to consume the dividend from their purchase (i.e., were likely speculators). Second, we show that increases in out-of-town second house buyer demand predict increases in future house price appreciation rates and IAR appreciation rates. A 10%pt increase in the fraction of sales made to out-of-town second house buyers is associated with a 6%pt increase in house price appreciation rates and a 9%pt increase in IAR appreciation rates over the course of the next year in that city. Third, we address the issue of reverse causality using a novel econometric strategy. The key insight is that an increase in the fundamental value of owning a second house in Phoenix is a common shock to the investment opportunity set of all potential second house buyers. If changes to fundamentals were driving both price dynamics as well as out-of-town second house buyer demand, we would expect to see large jumps in house price and IAR appreciation rates preceded by increases in out-of-town second house buyer demand from across the country. The data do not display this symmetric response, and are thus inconsistent with reverse causality. We conclude by discussing both the economic magnitudes of out-of-town second house buyer flows and the broader applicability of our econometric approach.
In short: Out of town investors don’t know the market, so they make mistakes in purchasing and selling. Additionally, out-of-town investors drive up prices within a town. Bottom line– even though there’s diversification risk in one market, there are benefits to sticking with what you know.
What do you think about landlording/flipping houses locally vs. long-distance?