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US Housing Crash Continues

It's Still A Terrible Time To Buy

Falling House Prices Are The Solution, Not The Problem

By Patrick Killelea, last updated Wed 24 Jun 2009

  1. House prices will keep falling in most places because those prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's yearly income. Landlords say a safe price is a maximum of 15 times the tenant's yearly rent. Yet in coastal areas, both those safety rules are still being violated. Buyers are still borrowing 6 times their income, and 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. 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. 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 (rent) the house itself. Worse, total owner costs including taxes, maintenance, and insurance come to 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.

    If you borrow a million dollars to buy a house, you will pay 6% or more in interest, plus property taxes and maintenance.

    If you borrow a million dollar house (renting it), you will pay only 3% in rent each year.

    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. For a rough indication of the wisdom of buying a house, look at the yearly-rent/price ratio for the model of house in question:

    3% = do not buy
    6% = borderline
    9% = ok to buy
    
  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.

    It is definitely 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.

    • First of all, your property taxes will be lower with a low purchase price.
    • Second, a low price gives you the ability to pay it all off instead of being a debt-slave forever.
    • Third, prices will definitely fall as interest rates rise -- so paying a high price may trap you "under water". Then you will not be able to refinance, and won't 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. A low price minimizes this possibility.
  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 housing "affordability" programs which encourage debt, making prices higher, not lower. True affordability is not more debt -- true affordability is lower prices. The government's false affordability programs have created more debt than can ever possibly be repaid. Credit rating agencies lied about the value of this debt, scaring off investors.

    When house prices finally fall to affordable levels, and foolish lenders and foolish borrowers are finally 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 no investment because the government is punishing savers and investors with policies that waste their honestly earned money to cover the foolish 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 other 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. 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."

    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 except bankers, 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. There is never 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. Failure to re-regulate finance. The Graham, Leach, Bliley Act did away with the depression-era safety constraints placed on banks. This paved the way for record profits in the finance industry and an effective takeover of the US government by large banks, which has not yet been reversed.
  15. 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?
Forum topic: Over 70% of American want Govt. run health care... yeah... right.
On 2009-07-10 01:08:53, justme said:

"Socialized Law"

That's a new one. Does it mean that that the law applies equally to everyone? If so, I'm for it.

Housing Crash News from Patrick.net (rss)

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Fri Jul 10 2009
Expect More House Price Declines Almost Everywhere (blogs.wsj.com)
Let's Treat Borrowers Like Adults (online.wsj.com)
Continuing Jobless Claims Hit Record, Auto Industry Supresses New Claims (cnbc.com)
Layoff fears keep buyers out of market (freep.com)
Manhattan Rents Decline as Unemployment Cuts Demand (bloomberg.com)
Mortgage Defaults: Many Are Intentional (time.com)
Former Asst Treasury Secretary comments on bailouts, dollar, Goldman Sachs (Mish)
Goldman Sachs Loses Grip on Its Doomsday Machine (bloomberg.com)
Is Trading Sabotage About To Destroy Goldman Sachs? (zerohedge.blogspot.com)
Debate about deflation (theautomaticearth.blogspot.com)
Next Shock Coming: Commercial Real Estate (voices.washingtonpost.com)
US Lawmakers Sound Alarm About Commercial Real Estate Market (nasdaq.com)
Property Taxes Fall in California (calculatedriskblog.com)
Undocumented income makes it hard to get a loan (sfgate.com)
Legalize Marijuana and Solve California's Budget Crisis (usnews.com)
Arnold Bucks (couragecampaign.org)

Thank You C. H. ($10), Russ and Sheila ($40), and Sunil M. ($10) for your kind donations.


Thu Jul 9 2009
U.S. Housing Market Is Cursed by Brain Freeze (bloomberg.com)
"Shadow" Inventory In FL Keys Not Found On MLS (rocktrueblood.blogspot.com)
Large condo association bankruptcy (dailybusinessreview.com)
Apartment Vacancy at 22-Year High in U.S. (bloomberg.com)
Harlem's Real Estate Boom Becomes a Bust (nytimes.com)
The New Subprime (fool.com)
Comparing Job Losses and Investment Opportunities in Recessions (Mish)
Not Your Father's Recession (americanthinker.com)
Should You Bet Against the Dollar? (online.wsj.com)
US Continues to Experience Real Price Deflation (theaffordablemortgagedepression.com)
'Worst to come' warning as G8 leaders gather (google.com)
Appraisal claim is a tough sell (heraldtribune.com)
U.S. mortgage fraud 'rampant' and growing-FBI (reuters.com)
Michael Lewis on AIG (vanityfair.com)
Don't blame Bob Shiller for death of housing market (money.cnn.com)
America's life-settlement industry: From mortgages to mortality (economist.com)
Senate Leadership Blocks Federal Reserve Audit (ronpaul.com)
Conyers Health Reform Bill HR 676 (conyers.house.gov)
Market crash drives will to kill (business.watoday.com.au)
Gary: Landlord of the Flies (strangerthaneviction.tumblr.com)

Thank You Anonymous ($35) and Bruce B. ($10) for your kind donations.


Wed Jul 8 2009
U.S. House Prices to Fall Through 2011's First Quarter (bloomberg.com)
House foreclosures expected to surge in coming months (chicagotribune.com)
America's Fastest-Falling Neighborhoods (forbes.com)
Big box closures leave big blight across U.S. (msnbc.msn.com)
Delinquencies on U.S. House-Equity Loans Reach Record (bloomberg.com)
Consumer loan delinquencies continue to rise (news.yahoo.com)
Tell Wells Fargo, Bank of America, JP Morgan, and Citigroup to Go to Hell (Mish)
Banks let foreclosures rot, then complain about fines (signonsandiego.com)
Big Banks Don't Want California's IOUs (online.wsj.com)
California Credit Rating Cut Close to Junk After IOUs (bloomberg.com)
Fitch Downgrades State of California Credit Rating (businesswire.com)
U.S. House May Include Surtax on Wealthy in Health-Care Package (bloomberg.com)
Inflation, the least of your worries (theautomaticearth.blogspot.com)
Credit Expansion, Crisis, and the Myth of the Saving Glut (marketoracle.co.uk)
10 Things Your Real Estate Broker Won't Say (smartmoney.com)
Gamer steals from virtual world to pay real debts (independent.co.uk)

Thank You Michael N. ($10) for your kind donation.


Tue Jul 7 2009
Where is reward for hero class that never got into debt? (eyeonmiami.blogspot.com)
New Affordable FHFA Loan Program Sounds Like Predatory Lending (seekingalpha.com)
The unbearable mightiness of deflation (theautomaticearth.blogspot.com)
No Amount of Stimulus Will Work (Mish)
New Rule Lets Goldman Sachs Control Stock Prices Unmolested (alternet.org)
The Great American Bubble Machine (rollingstone.com)
Plenty More Downside In Real Estate (businessinsider.com)
Bad signs for commercial real estate (idahobusiness.net)
High-rises on hold: What to do with empty lots? (sfgate.com)
In California, mortgage scammers find easy pickings (latimes.com)
Bankruptcies low in states that don't seize wages (news.yahoo.com)
Banks avoid property taxes, capital loss by only pretending to foreclose (healdsburgbubble)
Honest appraisal rules irk Realtors (heraldtribune.com)
Realtor Sucks (realtorsucks.com)
Ruins of the Second Gilded Age (nytimes.com)
Universal health insurance should be eminently affordable (nytimes.com)
Rising U.S. debt may be next crisis (houmatoday.com)
Of Course We're Not Going To Pay Back The Chinese! (dailybail.com)

Mon Jul 6 2009
America's Most Troubled Luxury Neighborhoods (abcnews.go.com)
Mid-to-High End Housing Capitulates in CA (fieldcheckgroup.com)
Upscale San Diego Neighborhoods See More Defaults (directoryofsandiego.com)
Fiscal crisis tarnishes Golden State's image (sfgate.com)
Eight reasons why CA budget's in bad shape (venturacountystar.com)
OK, Lets Talk Prop 13 (citywatchla.com)
Profiting from an Irvine bank failure (mortgage.freedomblogging.com)
Zero money down, not subprime loans, led to the mortgage meltdown (online.wsj.com)
Another wave of foreclosures is poised to strike (latimes.com)
So Many Foreclosures, So Little Logic (nytimes.com)
Vacancies give renters room to negotiate (latimes.com)
Washington Post digs their integrity grave a little deeper (slycapital.com)
In Case You Were Insufficiently Depressed About Job Numbers (voices.washingtonpost.com)
June Economic Summary in Graphs (calculatedriskblog.com)
Chinese drywall blamed for odors and corrosion in U.S. houses (latimes.com)
Glut of oil could push gasoline prices back down below $2 a gallon (latimes.com)
State of Florida aided suspect in huge swindle (miamiherald.com)
Tax appeals slam local governments (msnbc.msn.com)
The Housing-Bubble and the American Revolution (nytimes.com)
Stimulus Not Producing Fireworks (jsmineset.com)

Fri Jul 3 2009
California rolls out $3.36 billion in IOUs today (sfgate.com)
Reduce your California Withholding NOW! (watchingmarcitz.com)
San Francisco has recession's 1st distressed office sale (sfgate.com)
NY City apartment sales down over 50 percent (reuters.com)
Reports show Manhattan apartment prices tumble by double digits (sun-sentinel.com)
Washington Post cancels lobbyist event amid payoff uproar (politico.com)
House Prices Fall Again (noozhawk.com)
Bear Market in US Housing to Last Years (rosemanblog.sovereignsociety.com)
Housing market remains weak (dailyfinance.com)
Payrolls Fall More Than Forecast, Unemployment Rises (bloomberg.com)
Jobless picture leaves recovery on shakier ground (marketwatch.com)
10 Things We Know FOR-clo-SURE (blog.youwalkaway.com)
Oil prices tumble as Europe and the US shed jobs (finance.yahoo.com)
Sweden Cuts Deposit Rate to NEGATIVE .25% (Mish)
Bank Failure Thursday (blogs.reuters.com)
Shotgun Marriages Raise Risk of New Bank Blowups (bloomberg.com)
Hotel Loan Defaults Double as Recession Cuts Travel (bloomberg.com)
Foreclosure is a problem for celebrities too (msnbc.msn.com)
The Science of Economic Bubbles and Busts (scientificamerican.com)

Thank You Steven B. ($20) and Bill B. ($20) for your kind donations.


Thu Jul 2 2009
Updated: Case-Shiller 100-Year Chart (ritholtz.com)
San Diego house prices sliding at slower pace (signonsandiego.com)
Insured Mortgage Defaults Resume Upward Climb (cnbc.com)
Expensive Houses Languish (time.com)
Gloomy U.S. consumers clip housing recovery hopes (reuters.com)
US Mortgage Applications Fall 19% (bloomberg.com)
California Misses Deadline to Avoid Issuing Need IOUs (bloomberg.com)
Obama Administration Expands Future Forclosee Program (washingtonpost.com)
3 bad reasons to buy a house (articles.moneycentral.msn.com)
Has the "Hard Money" In Bonds Been Made? (Mish)
Another Citigroup Scandal As Usual (seekingalpha.com)
Eyesores next door take shine off dream houses (9news.com)
Hotel Loan Defaults Double as Recession Cuts Travel (bloomberg.com)
Government Stock Market Manipulation (sott.net)
No 'Club Fed' for Madoff (dailyfinance.com)
Bank Run Teaches Amish About the Risks of Modernity (online.wsj.com)
How to Steal Billions in Plain View (old but good - lewrockwell.com)
How to pick an agent (njrereport.com)

Thank You Robert D. ($10) and Richard U. ($7.77) for your kind donations.


Wed Jul 1 2009
House prices post 18.1 percent annual drop in April (finance.yahoo.com)
Case Shiller April Shows Slight Moderation In Rate Of Decline (businessinsider.com)
Next Segment of Housing Market to Crash: $1 Million McMansions (finance.yahoo.com)
Loan Delinquencies Double on Prime Loans (Mish)
Delinquencies Double on Least-Risky Loans, US Says (bloomberg.com)
House Sales Didn't Soar in San Diego: Realtor Data Had "Errors" (online.wsj.com)
Consumer Confidence in U.S. Slipped in June (bloomberg.com)
No recovery for US property markets until 2017 (reuters.com)
How maths killed Lehman Brothers (plus.maths.org)
Can a Market Crash Save Us from Hyperinflation? (seekingalpha.com)
States brace for shutdowns (latimes.com)
20 Million Vacant Houses and Squattertown, USA (Charles Hugh Smith)
Well so much for that grand idea (richudell.com)

Thank You Michael M. ($10) for your kind donation.


Tue Jun 30 2009
Realty fervor takes aim at reality (articles.moneycentral.msn.com)
Sellers Hallucinate About Future Prices (businessinsider.com)
Waiting for Godot in the Real Estate Market (financialarmageddon.com)
Loan Mod Vs Walking away (housing-kaboom.blogspot.com)
Why We Need Deflation (seekingalpha.com)
BofA wording may cause more foreclosures (bizjournals.com)
Buffett, Soros Resisted Temptation as Housing Lust Raged (bloomberg.com)
Madoff gets 150 years, Picower quietly keeps all the loot (latimes.com)
'Pretty Boy' Paulson and the Goldman Gang Rob America (marketwatch.com)
Paper Avalanche Buries Plan to Stem Foreclosures (nytimes.com)
Attorneys advise clients to stay in their houses without paying (heraldtribune.com)
The Medical Cost Conundrum (newyorker.com)
Insurance Companies' Schemes To Deny Coverage (nytimes.com)
Appraisers attack requirement for honesty (orlandosentinel.com)
How Many Houses for Sale In Pacifica Really? (pacificariptide.com)
Empty Houses for the Homeless? (pbs.org)
Personal bankruptcies surge in Southern California (latimes.com)
Mounting jobless claims force states to borrow (reuters.com)
Fiscal crisis puts Prop. 13 up for discussion (sfgate.com)
Sears to Let Jobless Stop Payments, Still Keep Fridge (bloomberg.com)

Mon Jun 29 2009
For Sale, Still: Grand Houses In Gracious Neighborhoods (washingtonpost.com)
FDIC's Bair Cancels Listing After Cutting House Price (online.wsj.com)
Tishman Speyer May Lose Silicon Valley Land After Default (bloomberg.com)
Developer defaults leave potholes behind (charlotteobserver.com)
Mortgage defaults in America: Can pay, won't pay (economist.com)
Uh-Oh, Here We Go Again? (fool.com)
New TV show gives houseowners the cold truth (sfgate.com)
Temporary Bailouts Tend To Become Permanent (blogs.reuters.com)
Embrace Deflation - It's The Cure, Not The Problem (Mish)
Unemployment Soaring (theautomaticearth.blogspot.com)
California Income Gaps Continue To Widen (PDF - cbp.org)
Recovery When? How About If? (americanthinker.com)
Bringing Transparency to the Federal Reserve (cato.org)
Billions to Banks - The AIG Insurance Bailout (gimmiethescoop.com)
Jeffrey Picower benefitted from Madoff scam more than Madoff (msnbc.msn.com)
Canadian housing market still on very shaky ground (macleans.ca)
There Is No Market In Health Care (patrick.net)
Reviving Do-It-Yourself Building (newgeography.com)
Credit Card Hell (click to enlarge - mint.com)
I should buy your house for next to nothing (dilbert.com)

Thank You Gnanadeep K. ($10) for your kind donation.


Essential reading:

Case-Shiller House Price Indices
Other housing crash blogs
Real estate listing sites
Sites linking to patrick.net
What should you pay for a house?
Sell or hold from landlord's point of view
Subprime Primer
The famous mortgage-reset chart
San Francisco Tenants Union
Tenants and Foreclosure
This page in Russian
This page in Spanish

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