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

Why?

By Patrick Killelea, last updated Mon Jan 25 2010

1. Because house prices will keep falling in most places. Prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with 20% downpayment. Landlords say a safe price is a maximum of 15 times the house's annual rent. Yet on the coasts, both those safety rules are still being violated. Buyers are still borrowing 6 times their income and putting only 3% down, and sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that 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. Because it's still much cheaper to rent than to own the same size and quality house, in the same school district. On the coasts, annual rents are 3% of purchase price while mortgage rates are 6%, so it costs twice as much to borrow the money than it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting and wipes out any income tax benefit. Buying a house is still a very bad deal in the richer neighborhoods, but it does make sense to buy in some relatively poor neighborhoods where prices have already fallen into line with salaries and rents. Check whether you should rent or buy in your own area with this NY Times calculator.

   The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's safe to buy for yourself because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:

   annual rent / purchase price = 3% means do not buy
   annual rent / purchase price = 6% means borderline
   annual rent / purchase price = 9% means ok to buy
   

   So for example, it's borderline to pay $200,000 for a house that would cost you $1,000 per month to rent. That's $12,000 per year in rent. If you buy it with a 6% mortgage, that's $12,000 per year in interest instead, so it works out about the same. Owners can pay interest with pre-tax money, but that benefit gets wiped out by the eternal debts of repairs and property tax, equalizing things. It is foolish to pay $400,000 for that same house, because renting it would cost only half as much per year, and renters are completely safe from falling house prices.

3. Because it's a terrible time to buy when interest rates are low, like now. Realtors just lie without shame about this fundamental fact. House prices fall as interest rates rise, because a fixed 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. Then you get a low price, and you get capital appreciation caused by falling interest rates. To buy at a time of low interest rates and high prices like now is a mistake for both reasons.

   It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.

   • Your property taxes will be lower with a low purchase price.
   • A low price gives you the ability to pay it all off instead of being a debt-slave for the rest of your life.
   • As interest rates fall from high to low, house prices increase.
   • Paying a high price now may trap you "under water", meaning you'll have a mortgage larger than the value of the house. Then you will not be able to refinance because there you'll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.
4. Because buyers already borrowed too much money and cannot pay it back. They spent it on houses that are now worth less than the loan. This means most banks are actually bankrupt. But since the banks have friends in Washington, they get special treatment that you do not. The Federal Reserve prints up bales of money and lends it to banks at 0%, who then turn around and buy 2-year US Treasury bonds at 1%. Guess who pays that 1% interest on Treasuries? You do, as a taxpayer. Your taxes are forcibly taken from you and handed to banks as a federally guaranteed profit.

   Worse, the banks now feel no need to pay you any interest on your deposits, or to risk lending out money to businesses, or to acknowledge their own losses. As if that were not enough corruption, Congress authorized vast amounts of TARP bailout cash taken from taxpayers, to be loaned directly to the worst-run banks, those that already gambled on mortgages and lost. The Fed and Congress are letting the banks "extend and pretend" that their mortgage loans will get paid back.

   The banks have a guaranteed no-risk profit because of the Fed's lending to banks at 0% and the Treasury's borrowing from banks at 1%. So banks are not willing to lend anymore, because that would mean risk. House prices depend mostly on how much buyers can borrow, so less lending means lower house prices.

5. Because buyers used too much leverage. Leverage means using debt to amplify gain. Most people forget that debt amplifies losses 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 a mortgage rate adjustment, he lost 100% in the real world.

   Higher-end houses especially are now set up for a huge fall in prices, since there is no more fake paper equity from the sale of a previously overvalued property. Without that equity, most people don't have the money needed for a down payment on an expensive house. It takes a very long time indeed to save up for a 20% downpayment when you're still making mortgage payments on an underwater house.

   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.

6. Because the housing bubble was not driven by supply and demand. There is huge supply because of overbuilding, and there is less demand now that the baby boomers are retiring and selling. Prices in the bubble, even now, are entirely a function of how much the banks are willing to lend. Most people will borrow as much as they possibly can, amounts that are completely disconnected from their salaries or from the rental value of the property. Banks have been willing to accomodate crazy borrowers because banker control of the US government means that banks do not yet have to acknowledge their losses, or can push losses onto taxpayers through government housing agencies like the FHA.
7. Because there is a massive and growing backlog of latent foreclosures. Millions of owners have simply stopped paying their mortgages, and the banks are doing nothing about it, letting the owner live in the house for free. If a bank forecloses and takes possession of a house, that means the bank is responsible for property taxes and maintenance. Banks don't like those costs. If a bank then sells the foreclosure at current prices, the bank has to admit a loss on the loan. Banks like that cost even less. So there is a tsunami of foreclosures on the way that the banks are ignoring, for now. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. One day, those foreclosures will wash over the landscape, decimating prices, and benefitting millions of families which will be able to buy a house without a suicidal level of debt, and maybe without any debt at all! Why is it that news articles about foreclosure never mention the happy young families that can finally buy at a low price?
8. Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low. From The Herald: "We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize."

   House price inflation has been very unfair to new families, especially those with children. It is foolish for them to buy at current high prices, yet government leaders never talk about how lower house prices are good for American families, instead preferring to sacrifice the young and poor to benefit the old and rich, and to make sure bankers have plenty of debt to earn interest on. Every "affordability" program drives prices higher by pushing buyers deeper into debt. Increased debt is not affordability, it's just pushing the reckoning into the future. To really help Americans, Fannie Mae and Freddie Mac and the FHA 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 pretends to be interested in affordable housing, but now that housing is becoming truly affordable via falling prices, they want to stop it? Their actions speak louder than their words.

9. Because boomers are retiring. There are 70 million Americans born between 1945-1960. One-third have zero retirement savings. The oldest are 64. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more.
10. Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going. They need the money now. Builders have huge excess inventory that they cannot sell at current prices, and more houses are completed each day, making the housing slump worse.

Next Page: Who disagrees that house prices will continue to fall?

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Fri Mar 12 2010
Origin of Housing Bubble: The "National Homeownership Strategy" (theaffordablemortgagedepression.com)
Selling mansion? Expect to wait 3 years! (lansner.freedomblogging.com)
Central valley foreclosures increase by 6 percent in February (centralvalleybusinesstimes.com)
Defaulted loans may haunt seniors (finance.yahoo.com)
Weekly Unemployment Claims at 462,000 (Mish)
Unemployment rate hits record high in Southern California (pe.com)
Credit Card Excess Contracting for First Time in 40 Years (mybudget360.com)
A good deal on a bridge in Brooklyn (theautomaticearth.blogspot.com)
Politics, shaky economy create no rush to restructure Fannie and Freddie (washingtonpost.com)
GMAC bailout could cost taxpayers $6.3B (news.yahoo.com)
US budget deficit hits record $221bn (news.bbc.co.uk)
Greece's crisis could presage America's (news.yahoo.com)
Europe bars Wall Street banks from government bond sales (guardian.co.uk)
Goldman Sucks (youtube.com)
Buying A House (youtube.com)
Grayson introduces pay-as-you-go public option act (grayson.house.gov)

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More links from the past

Henry George and Land Bubbles (en.wikipedia.org)
Case-Shiller House Price Indices
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Real estate listing sites
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What should you pay for a house?
Sell or hold from landlord's point of view
Subprime Primer
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