Thursday, September 16, 2010

It's a renters market

Why aren't people buying houses? I was listening to a little news radio this morning(I know, it's a departure from my usual dose of Colin Cowherd, but I digress), and there was some so-called economics "expert" that was going on and on about the housing crisis and how he thought it was definately over, but just could not understand how there were almost 100,000 foreclosures on houses last month. He also just couldn't figure out why people weren't out buying houses when the interest rate is at as low as it has ever been(4.4%). Now I'll point out that the housing market is the capital reason for our economy tanking(and it hasn't hit bottom yet I don't care what the hairdo behind the desk on the news says), but I'll save that for a later date. For now, sadly, I'll point out some reasons why I shouldn't buy a house in this market.

Depending where you live in the U.S., the average house ranges from $150,000-$250,000. So using a mean of $200,000 and 5% loan, that brings out your mortgage to just under $1,100 a month. Add in required insurances another $150 a month. Add in taxes roughly $100 a month(lowballing). Add in maintenence costs and upkeep(A/C breaks down, its ALL you) MINIMUM another $250. Just using those base figures in hand(I'm not even counting ESCROW, closing costs, lawyers, or my personal favorite, HOAs,etc.), that brings your tally up to $1,600 a month on a basic 30 year plan. For those of you keeping score at home, and all expenses are fixed(which we all know will only go up), I'm paying $576,000 on a $200,000 house with $376,000 that has zero equity. Am I truly getting your money's worth?

Now if I take that same house/condo and just rent, I eliminate ALL those costs save rent, which replaces my mortgage to even say $800 a month in comparable rent for roughly the same space. It brings my thrown away money after 30 years to $288,000. That, and I have no headaches. Now aside from the theoretical appreciation a home gives that was the one single clear sound investment that everyone before us did to ensure a stable future, is there another reason to take such a risk?

Now of coarse, I'm using some VERY general figures, but when I did my budget for buying a house, this is what I came up with. I'm also basing these generalizations on an economy that has changed so drastically in the last fifteen years that we have amazingly de-valued every peice of property from the Atlantic to Pacific coasts in less than two decades. I just don't think people, or the banks, have accepted or admitted to it yet. Never mind, despite what these contradictory economists say, we haven't seen the bottom yet.


alli said...

You're right, we haven't seen the bottom of the housing market yet. But there's an even simpler explanation: nobody has any money.

Real wages have stagnated since the late sixties. Union jobs with good benefits and negotiated pay increases have vanished.

I can't insert a pie chart here, but picture a chart called "Distribution of new financial wealth, 1983-2001." The richest 1% got $10 trillion. The next richest 19% got $9 trillion. The bottom 80% got $1 trillion.

So from 83-01, the top quintile got 90% of the new financial wealth.

And we wonder why people couldn't afford houses at bubble prices.

Cousin Pat from Georgia said...

It also comes down to simple supply and demand. The more houses you build, the cheaper they should be. But the developers never took into account that they might run out of a market. People know a lot of these houses are still overvalued, and don't want to take out a loan on an investment almost guaranteed to depreciate in the short term.

Let us not forget that keeping your population tied down to their mortgage stifles innovation and dynamism in your workforce. Cheap credit and the myth of homeownership have nearly created a peasant class, where people are bound to their land.

DADvocate said...

Living in the country, the average price figure boggles my mind. Too many people who have houses are "house poor" for the reasons jerz describes. My sister owns modest houses in Tennessee and Alabama for which she paid less than $100,000 combined. Both are in nice neighbor hoods too.

I paid less than $100,000 six years ago. Unfortunately the value of my house is stagnant. Which is another reason people aren't buying houses. They can't sell the one they have for enough to get a down payment on a new one.

Two of my co-workers have been trying to sell their houses for 6-8 months with no luck. At. All. One of them is getting married soon. He's trying to sell his house and his fiance is trying to sell her condo. Good luck with that.

I'm glad I bought a house because I have 2 acres to do with pretty much as I please. There's almost no zoning where I live. But, it's not turning out to be much of an investment.

alli said...

Oh good lord. Top quintile got 95%. I'm too tired for this.

Dante said...

"Let us not forget that keeping your population tied down to their mortgage stifles innovation and dynamism in your workforce. Cheap credit and the myth of homeownership have nearly created a peasant class, where people are bound to their land."

Home ownership isn't a myth, but it's not the win-win it was touted to be during the 90's and early 2000's. You're never enslaved to a home. If anything you are enslaved to debt. That's not going to change whether it be a mortgage, car payment, or credit card bills. People who make poor money decisions will make them regardless of what they blow their money on. The unfortunate fact is that home ownership doesn't benefit everyone, but there are enough people who feel they should own a home that they'll jump in ready or not.

Home ownership can be a big win but you absolutely need one thing most Americans don't have: savings. You need to put enough money down that you can still walk away if your home's value goes in the crapper or if you need to move earlier than planned. You need to have money in the bank to handle things like AC (which I can tell you from recent experience is about a $7,000 bill when it goes kaput). You need to have money in case the local government jacks up your property taxes on you unexpectedly. You need money in the bank period.

Typically in a completely apples-to-apples comparison the total monthly cost of buying is equal to perhaps slightly higher than renting at first assuming you put 10%-20% down on the property. If don't expect to be somewhere for at least 5 years and/or don't have the savings to put 10%-20% down, then you should stop thinking about buying now. It's not for you.

The good news is that over time inflation goes up while your mortgage payment does not (unless you didn't fix your rate for at least as long as you planned to own the property). Ask someone 20 years into a 30 year fixed mortgage what their payment is these days. It's not much.

There are also alternate routes to home ownership that require less (not none, less) savings. Some people buy smaller "starter" homes and build some equity. Then they can sell or rent the starter home depending on the market. The good news is that when selling is hot, renting is cold and vice versa. You can always do one or the other.

Some people also buy foreclosures and distressed properties. No, you probably can't make a living flipping houses, but you can get into a home for great deal provided you're willing to do most of your own renovation work. Once again, it's not for everyone, but it may be for you.

Home ownership shouldn't be something you have to talk yourself into or rationalize in any way. If it's for you, it will be a slam dunk.

Dante said...
This comment has been removed by the author.
Cousin Pat from Georgia said...

You're never enslaved to a home. If anything you are enslaved to debt.

This is true, and reflects that being tied down in such circumstances represents a personal choice in our society. Even in the worst conditions, you can still walk away, which is a substantial level of freedom that slaves and pesants never had.

However, that "choice" comes with a variety of severe possible consequences either way. I think that for a lot of people, the choice wasn't really made clear.

I agree wholeheartedly about the savings being necessary for home ownership; and savings being necessary, period.

But the "myth" of homeownership of which I speak is the idea that anyone can go out an buy a home, and that, regardless of other factors, this will be a good decision for their lives and increase their wealth. I mean, that was and is the narrative sold to people in our society: if you don't own a home, you're listless.

Going into debt to buy a home can be a very good investment, but it can also be devestating. The "myth" part is that you never hear about the latter (or didn't until about 2006).

I put that one right up there with the other "American Dream" myths: everyone should go to college; everyone should get married; everyone should have children; everyone should own a home.

The problem for a while was that it was too easy to make the homeownership choice without thinking about it too seriously.

Dante said...

"Even in the worst conditions, you can still walk away, which is a substantial level of freedom that slaves and pesants never had"

Interesting you should mention this. One thing that completely broke risk assessment models at the low extreme was that conventional wisdom dictates buyers would keep their home at all costs. However, at-risk buyers have shown time and again they are willing to walk away from homes yet keep their toys (boats, second homes, etc.). I get what you're saying about how home ownership was pitched, but in my mind if you willingly put the yoke on your own neck, you're not enslaved. You're just an idiot.