IS STILL TIME TO BUY?

US Housing Crash Continues
It's Still A Terrible Time To Buy
Falling House Prices Are The Solution, Not The Problem
By Patrick Killelea

1.House prices will keep falling because those prices are still too high compared to incomes and rents. A safe mortgage is a maximum of 3 times the buyer's yearly income, yet mortgages have been 5 to 10 times income in the last few years. A landlords' rule of thumb is that a house should cost a maximum of 15 times the annual rent it can bring in, yet in coastal areas, sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that reflects what people can really pay, not how much they can borrow. So prices will keep falling for a long time. Anyone who bought a "bargain" this time last year is already sitting on a very painful loss.

2.It's still much cheaper to rent than to own the same thing. On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6%, so it costs twice as much to borrow money for a mortgage than it does to borrow (ie, rent) the house itself. Worse, total owner costs including taxes, maintenance, and insurance are about 9% of purchase price, which is three times the cost of renting. Buying a house is still a very bad deal for the buyer on the coasts, but it does make sense to buy in Michigan and some other places where prices have fallen into line with salaries and rents. Check whether you should rent or buy in your own area with this NY Times calculator.
The bottom will be here when buying a house to rent out clearly makes money. At that point it's justified to buy because rent can cover the mortgage and all expenses if necessary, eliminating much of the risk.
3.It's a terrible time to buy when interest rates are low, like now. Realtors just lie without shame about this fundamental fact. Prices fall as interest rates rise, because a given monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. To buy at a time of very low interest rates is a mistake.
On the other hand, if you already have a mortgage, then refinancing at a lower rate does reduce interest payments, though refinancing does not reduce the principal.
4.The US economy will not recover until house prices are allowed to fall to prices buyers can easily pay on a normal salary. The primary evil in the economy is US housing "affordability" programs, which created more debt than can possibly be repaid. Credit rating agencies lied about the value of this debt, scaring off investors.
When house prices finally fall to affordble levels, and foolish lenders and borrowers are allowed to fail, then the economy will work again: there will be investment based on real production instead of on financial speculation, jobs will be created, and money will be earned and spent. Currently, we have none of that because the government is punishing savers and investors with policies that use their honestly earned money to cover the gambling losses of others.
5.Prices disconnected from Gross Domestic Product. The value of housing in the US depends a lot on the value of what the US actually produces. Not only is the GDP decreasing, jobs are being lost in large numbers. It does not make sense to buy when more jobs will be lost and the price people can pay will decrease. Unemployment drives housing prices down. It also does not make sense to buy when your own job is in danger.
6.Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and Congress is taking a trillion dollars of your money to pay the mortgage investment losses for banks. The plan is to overpay the banks for bad mortgages, claiming that this will support the housing market. It will not work, since bank profits have nothing to do with housing prices.
We also have legal contracts being modified to stop even well-justified foreclosures. No one was forced to borrow money. It was a choice -- a very bad choice, but completely voluntary. Grownups should be responsible for their own actions. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price, not to mention what this does to faith in contract law. No one in government or the press will even mention that everyone in foreclosure trouble got themselves into that spot by voluntarily borrowing too much money. Debt is the cause of massive evil.
Should taxes be used to pay the debts of irresponsible borrowers, no matter how much they over-borrowed or overpaid for a house? Should savers be forced to pay the debts of people who cannot afford "their homes" no matter what price they paid or how far it is beyond their actual financial means? If so, go buy the most expensive house you can right now! Borrow as much as you possibly can and don't pay it back, knowing that Congress will force the real repayment obligation onto others, onto people who are living within their means.
Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the default risk onto Fannie Mae (taxpayers) or onto buyers of mortgage-backed bonds. Now that it has become clear that a trillion dollars in foolish mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage-backed bonds. This means that the money available for mortgages is falling, and house prices will keep falling, probably for another five years or more. This is not just a subprime problem. All mortgages will be harder to get.
A return to traditional lending standards means a return to traditional prices, which are far below current prices.
7.Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.
It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6% because of the realtor lobby's corruption of US legislators. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.
8.Shortage of first-time buyers. High house prices have been very unfair to new families, especially those with children. It is literally impossible for them to buy at current prices, yet government leaders never talk about how lower house prices are good for pretty much everyone, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. If you own a house and ever want to upgrade, you benefit from falling prices because you'll save more on your next house than you'll lose in selling your current house. Every "affordability" program drives prices higher by pushing buyers deeper into debt. To really help Americans, Fannie Mae and Freddie Mac should be completely eliminated, along with the mortgage-interest deduction. Canada has no mortgage-interest deduction at all, and has a more affordable and stable housing market because of that.
The government keeps house prices unaffordably high through programs that increase buyer debt, and then pretends to be interested in affordable housing. No one in government except Ron Paul ever talks about the obvious solution: less debt and lower house prices. The real result of every "affordability" program is to keep you in debt for the rest of your life so that you have to keep working. Lower house prices would liberate millions of people from decades of labor each. I never see anything in the press about the millions of people that were hurt and continue to be hurt by high house prices.
The government pretends to be interested in affordable housing, but now that housing is becoming affordable, they want to stop it? Their actions speak louder than their words.
9.Surplus of speculators. Nationally, 25% of houses bought the last few years were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."
10.Deflation. There is fear of inflation, but it's not likely in the next few years. The actual amount of money created by the Fed lately is a trillion dollars, which sounds huge, but is small compared to the $10 trillion drop in housing "values" and another $10 trillion drop in stock market capitalization. The US government will not print extreme amounts of cash like Zimbabwe did, because significant inflation would mean that foreigners would no longer lend money to the US government unless interest rates were much higher to compensate them for inflation losses. Higher interest rates would push more people with adjustable mortgages over the edge. The most likely scenario is like Japan: low inflation and low interest rates, with falling house prices for years to come.
11.Fraud. It was common for speculators take out a loan for up to 50% more than the price of the house. The appraiser went along with the inflated price, or he did not ever get called back to do another appraisal. The speculator then paid the seller his asking price (much less than the loan amount), and used the extra money to make mortgage payments on the unreasonably large mortgage until he could find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn't work at all, unless the speculator simply skips town with the extra money.
12.Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 62. The only money they have is equity in a house, so they must sell.
13.Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse.
14.The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken." Next Page: Who disagrees that house prices will continue to fall?