US HOUSING CRASH: It's A Terrible Time To Buy

US Housing Crash Continues
It's A Terrible Time To Buy

By Patrick Killelea, Sun May 25 2008 (source: patrick.net)

Note: To view the full unabridged article (all twelve reasons with full supporting details) go to http://www.patrick.net/


1. It's still much cheaper to rent than to own the same thing. Yearly rents are less than 3% of purchase price. Mortgage rates are 6.5%, so it costs more than twice as much to borrow money to buy a house than it does to rent the same kind of house. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting. Buying a house is a very bad deal for the buyer. Put in the numbers for your own area here.

2. Salaries cannot cover current house prices. This means house prices must keep falling or salaries must rise much faster. You probably noticed that your salary is not rising much, and that inflation in food, energy, and medical care has been much higher than the government reports. This leaves less money available to pay for housing. A safe mortgage is a maximum of 3 times the buyer's yearly income, but most mortgages are well beyond that. Anyone who buys now will suffer losses immediately, and for the next several years at least, as prices keep falling.

3. 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.

4. Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and senators are talking about taking your money to pay for your neighbor's McMansion, even though no one in the US has been made homeless by foreclosure. 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.

5. Interest rates increases. When rates go from 5% to 7%, that's a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate. The housing bust still has a very long way to go. For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays for an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for an interest-only loan of only $171,428. Recent lower Fed inter-bank lending rates do not directly affect mortgages rates, nor do extra Fannie or FHA guarantees. The 30-year fixed mortgage rate actually went up after the Fed's rate cut, because rate cuts cause higher inflation. Also note that unlike the last few years, most lenders now require a 20% downpayment. That will eliminate many buyers from the market, driving down prices.

6. 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%. 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.

7. 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.

8. 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."

12. 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."

808housing's Key Point: I'll take a quote from someone who knows his stuff (Patrick K.), "Anyone who buys now will suffer losses immediately, and for the next several years at least, as prices keep falling."