It’s a great time to buy!?
People always ask me, “Is it a good time to buy a house? Are we at the bottom?”
I typically say:
Well, if the lenders/banks are still sitting on 600,000 – 700,000 in REO properties, then certainly it’s not a good time to buy. Unless of course you don’t care about losing thousands of dollars in the near future.
But rates are so low! True. Then buy! If you want to buy a house, surely you have the right to do so. However, you still will pay much more than a renter these days.
Yes the price of a home is much cheaper than it was in the recent past. Much cheaper! But who wants to buy a home that is going down in value. Also, what happens when rates go up? It doesn’t take a genius to know that rates can’t go much lower. At some point (in the next few years) rates will go up dramatically to try to combat inflation. Yes, inflation will be a real problem in the near future. Guess what will happen when rates go up? Well, people will not be able to afford the same home for their money. When that happens, values will decrease and people will be underwater again on their mortgages. What about all the temporary loan modifications that were done? Balloons, 5-year short-term-fixed modified loans, millions of people losing their jobs, overstock of inventory…
A Million Too Many!
Nicholas Retsinas, Harvard Professor of housing studies, said to Bloomberg on March 24th that we built as much as a million too many homes. If you add that to the number of homes that are vacant and are in foreclosure you have a couple million too many. I personally know several people who are moving out of their homes and moving back in with their parents, and vice versa.
False Recovery?
Time Magazine reported on May 5, 2009:
Except for low home prices and very low mortgage rates, all of the elements for a recovery in housing are missing. Those two things should be enough, but balanced against them are shrinking access to credit, an inability of Americans to get higher wages, and crippling unemployment.
The April unemployment figures will be out later this week. Six hundred thousand people lost jobs last month, according to most estimates. Two and a half million people have lost work since the beginning of the year. A housing recovery cannot occur in the presence of the massive collapse in unemployment. The devastation of the potential home buying base is too great. Many of the people who lose jobs will also lose their houses and that increases the inventory of unsold homes.
Supply & Demand
Supply, supply, supply. There is simply too much of almost everything in America: never-ending “last weekend only” sales; a Starbucks in every shopping center. One of the biggest factors in determining price is supply and demand. I think of the scene out of Blood Diamond, where DiCaprio’s character Danny Archer is talking about the supply of diamonds and how many diamonds are kept in a vault to keep the supply down and create a “scarcity”.
As reported on CNN Money.com, “The only way to understand the magnitude of this shift is to grasp the degree of the company’s dominance. For most of the 20th century, De Beers (largest Diamond Co.) sold 85% to 90% of the diamonds mined worldwide. With this leverage, it could artificially keep diamond prices stable by matching its supply to world demand.”
The same goes for oil. When oil prices drop, the OPEC oil cartel announces that it’s cutting production by 1 million or so barrels of oil a day. Too much supply = lower prices. So why are we seeing housing prices go up in certain areas of the U.S.? Why are there multiple offers on properties right now? Why do people think that values are going to shoot back up when history tells us differently after a housing crash?
US News & World Report wrote:
Record 1 in 9 Homes Vacant, Census Bureau Says
April 10, 2009 12:43 PM ET
The Census Bureau reports that one in every nine American homes is currently vacant, according to USA Today:
More than 14 million housing units are vacant. That number does not include an estimated 4.8 million seasonal or vacation homes, most of which are occupied part of the year. The combined vacancy rate of almost 15% is higher than during previous recessions: 11% in 1991 and 9.4% in 1984.
There obviously is false information out there leading people to believe that they once again NEED to buy a home BEFORE the price goes up. It’s just like the cheesy furniture commercials: “Hurry! This sale will end soon so act NOW!” The illusion of scarcity = demand.
If you don’t need to buy a house, it just might make sense to wait till the lenders start unloading all their REO properties. Values may be going up right now in certain areas, but beware… it’s a false bottom.
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Its always a good time to buy if you talk to a Realtor. Might as well wait until you see a couple of gaining quarters so you know its worth it.
That’s the truth Charles… I heard all the same from all the CNBC “guru’s” as the stock market was tanking in late 2007 through late 2008… Yes, it was a great time to buy… if you don’t like your money very much!
“If you want to make a small fortune… start with a large fortune, and listen to the media!”
I don’t think the bottom has hit yet either. Realtors and the media are making everyone feel that the worst is over, but I feel the market will plateau or continue to decline for another year or so.
… and what about all the “shadow inventory”?? I walk by a home that has mail stacking up at the front door and had an odd sticker posted on the door. Turns out the home has been sitting since 2008 abandoned. No one knows. No for sale sign. Just a notice on the door posted from the lender telling people not to enter. The market has definitely not hit bottom.
I wouldnt be surprised if we as a national economy arent out of the weeds by 2011. Every sector of our economy has been infected by this recession and it is going to take a huge climb to get ourselves out of this pit.
Imagine, 2 million homes built that arent needed?
There are developments all over right now that are literally being DEMOLISHED because the nieghborhoods arent through building and the developer is out of money, well technically the banks own the development and see no end in sight so they are paying a demolition company to destroy the homes instead of finish building and sell.
These are brand new homes that have just been built!?!
WHAT DOES THAT TELL YOU?
We are looking at “fools gold” prices – the banks are holding on to too many properties that should be on the market. However, you can still get great buys through short sales that “pencil out”. I’m talking 40 to 50 cents on the dollar! Check out http://www.Shhortsale.com.
…And just think about all the people feeding into the media hype, running out to buy a house now while the prices are low. They are banking on the hope that things are turning around, that next year will be different – not only in the housing market but in the economy as a whole. What will happen to all those new home owners when they are hit with tax increases and inflation, their wages aren’t increasing, and they possibly even find themselves out of a job? The end to this housing crash is certainly not in the 2009 calendar!
Great stats in regards to the supply of homes.
And if that doesn’t crush the market the higher rates definitely will.
Ben Bernanke says we’ll see a bottom in real estate soon. He also said there was no bubble in 2005 and that housing prices at the bubble’s peak were justified by fundamentals like supply and demand. (See “Bernanke: There’s No Housing Bubble to Go Bust”, Washington Post, 10/27/05)
So I guess going by his track record of predicting the exact opposite of what will happen, we should expect housing to absolutely tank this year. Funny how the press seemingly has no idea of Bernanke’s terrible track record on housing. Guess none of them are trained in such advanced research techniques as conducting Google searches.
I want prices to drop just a little more and I’m in. A little more being 90%!!!
The foreclosure moratorium is the only thing that kept me from calling the market, damn near down to the dime, 14 months ago.
It is not good time to buy a house. The price will tank another 30-50 percent, and then it might be bottom out depends on the real employment situation.
I’ve been saying it now for weeks. This is textbook market manipulation. It fools the press and the idiot buyers, but it’s so glaringly obvious to the rest of us. 1) Low rates, 2) $8000 buyers bribe, 3) foreclosure moratorium, and 4) shadow inventory. Of course that will reignite the market short-term, all under a deceivingly false pretense that the bottom has passed us and you can get rich on RE again. Fools gold, buyer beware. Take any of those four temporary conditions I mentioned above and remove some or all from the equation and you have a continually deteriorating market. People buying now are just as big suckers as those that bought during the housing bubble.
Biden was right (though I didn’t vote for him), it’s about JOBS, so there’s still rough roads ahead. Also, houses (in some areas) that doubled in price are now down a mere 20-30%. It seems to me that there’s plenty of downside still in there. Good Luck All
Home values inflated by 100% over a 3 year period in many markets. Under normal conditions, home price would have increased around 6%. Millions of homeowners and investors who can make their payments owe more than their properties are worth. The rebound of the economy is contingent on the recovery of the housing market. Combining the reducing wage structure with the strictest underwriting standards ever placed on potential borrowers, the price of real estate will not be able to increase to the amount owed by homeowners who purchased or refinanced their homes from 2003 through 2008 for 18 or more years. The created home values (100% vs. 6%) will have to be removed from current home values. Government Agencies, Wall Street firms and Lenders defrauded homeowners and investors for short term profit. Every FNMA/FHLMC appraisal defines market value as the price not affected by undue stimulus and the price represents the normal consideration for the property sold unaffected by special or creative financing. Special or creative financing was provided by these entities and placed an undue stimulus on real estate sales. These entities knew the consequences of their loan products, had build in controls to protect their companies and the consumer, and yet ignored the consequences of their own policies for short term profit and excessive bonuses. We have experienced the equivalent of financial terrorism on Mom and Dad America and nothing is being done to protect and correct for the situation. An answer to correct for this fraud would be an interest free period until such time as the excess inflated value is removed from the loan balance. The People’s Fix.
Wake up folks you elect the wrong people every time. Right now the majority sold their souls and lives to the Democrats and their savior Obama. Flee Fools you are going to get a dicking.
You write:
“Yes, inflation will be a real problem in the near future. Guess what will happen when rates go up? Well, people will not be able to afford the same home for their money. When that happens, values will decrease and people will be underwater again on their mortgages.”
Which one is it? Inflation with dropping asset values? Last I remember it is called deflation.
dont worry ! jim cramer said housing will bottom on june 30 . CNBC is really pushing this as being a bottom as well . just a little more time and all is good ! wow ! what was i thinking !
Deflation: “Which one is it? Inflation with dropping asset values? Last I remember it is called deflation.”
You need to read more carefully. The risk of severe inflation means that there is a likelihood that rates will have to be raised to fight it. Higher rates will push affordability (hence values) much lower.
Good article, but “Deflation” raises a valid point. If housing/auto/retail prices are falling, where’s the inflation? Economic theory says that the wild govt spending like that taking place now should result in inflation, but Japan has artificially maintained interest rates at near zero percent for 20 years now with little or no inflation. Real estate prices in Japan are less than 1/3 of what they were back then despite low interest rates.
If the wilee coyote lived in real life… and he fell off a cliff… and he hit the bottom (eventually)… would there be a “recovery”? What would it look like?
Of course, in the cartoon there’s all those ACME gadgets… I guess if they can work in real life, then there could be a recovery. LOL.
Deflation, deflation, and more deflation. Why worry about the prices of bread and milk, when everybody knows the prices of homes will fall at least 30%?
If inflation were as simple as printing more bills, the central banks could precisely control their economies and create inflation/deflation any time they wanted. It’s vastly more complicated than simply printing/destroying bills. Inflation is the last thing we should be worrying about right now.
Some parts of the market are looking better than others from my view in South Florida
.
The condos in general are still years from absorbing. The weaker locations and buildings will never recover. The prime waterfront areas are showing
signs of stabilizing at the land cost level. We are four years into this and
land cost is off roughly 60%, so it has to be at least finding a range.
My guess is homes correct a little more or go sideways, and condos
continue the slide from gross overbuilding.
The paradox is that when we all know it is a good time to buy, the time to buy will be in the past. It is the best time to buy when the most believe that it is a bad time to buy. I think this point is passing now. I buy foreclosed houses and put them for rent for a little over the PITI. I get so many calls that I have to have an answering service screen them. Many are people who were living in a rental home that just sold. When employment stabilizes a bit I will raise rents and become even more selective on tenants. We are about to be awash in money. It will cause inflation, these means higher prices, not lower. I may be a sucker, I may be a fool, I won’t advise anyone to buy, but I can tell you that it feels good to be able to say “get off of my land”.
I usually would agree with your first statement Benis, however I think this time it’s going to be pretty obvious when we are at a bottom. It’s not like lenders are going to start doing stated income purchase loans at 100% of value again anytime soon. I don’t think values are going to jump back up to where people will say… “Gosh, I sure missed the bottom…” Too much inventory and not enough qualified people to buy. Also, many home sales are speculators thinking they can flip… which doesn’t change the inventory much.
As I remember, housing price is not part of CPI, i.e. inflation index. Instead, rental is. So, it is possible that the CPI goes up while house value goes down. That would be the reverse of what we had several years ago – house value went up and at the same time it didn’t affect the CPI because rental is less popular as people are owning houses.
Mook says:
Good article, but “Deflation” raises a valid point. If housing/auto/retail prices are falling, where’s the inflation?
- Actually, there is a term for that – it’s called stagflation. According to wikipedia:
“Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a period of time.”
“For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets; together, these factors can cause stagflation. Both types of explanations are offered in analyses of the global stagflation of the 1970s: it began with a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to counteract the resulting recession, causing a runaway wage-price spiral.”
Very well said and finally a chance for us as hard working individuals in our country to get a piece of the pie that Uncle Sam has seemed to have gobbled up. It is not our fault that the government decided to bail out these banks and put our country in such financial jeopardy in which we the people will be taxed on and are paying for. It was always my understanding that American Capitalism had a basic protocol that if you were to own a business and if it were to go under that was that. What I am seeing now disgusts me. These financial institutions have brought our economy to its knees while dragging honest hard working families with it. So now as quick as a blink of an eye our country is trillions of dollars in debt, middle class America is slowly becoming poor and seven out of ten people are having to live on unemployment. That said in a nut shell, yes, work the system while we can God knows the system has worked us into a hole that only seems to be getting deeper.
>>So now as quick as a blink of an eye our country is trillions of dollars in debt, middle class America is slowly becoming poor and seven out of ten people are having to live on unemployment.
LOL Whut? While the first two are true, I assume you’re referring to Zimbabwe on that third point.
Listen, in my experience, it’s NEVER a good time to buy. I bought a townhome in a fairly upscale neighborhood in the Los Angeles area in early 2004; right before the point prices started really spiraling upward. As it stands now, the property is still worth more than I bought it for (based on the comps) but it still probably stands to lose more value. But I don’t care that much because A) i can continue to afford the payments and B) i need a roof over my head. Don’t forget, the house market will continue to lurch forward because of these two principles. Sometimes people need to move, need to buy, they get a job (even in times like this) and they want to settle down- all valid reasons to buy, in spite of the raw economics of making such a purchase. I’m actually starting to look to buy a new place because my family is growing and I’m pretty well established here now. Certain neighborhoods in LA continue to hold their value exceptionally well because of their outstanding school districts- check out neighborhoods like Manhattan Beach and San Marino; they’ve actually sustained their (outrageous) prices.