Let me begin by declaring that I am not a Realtor, government official, investor or another other expert in the housing market. However, I have spent several years working for a Real Estate and Mortgage company (and watched it go from a local powerhouse to a failed business) and I have watched the housing market for years. Here are a few of the things that I have learned:
Buy! Buy! Buy! Now is the Time to BUY!
In doing the marketing for a Real Estate company during both a boom and bust in the market, I can tell you with confidence that the realities of the market have absolutely no bearing on the use of the term: “now is the time to buy!” While the company was laying people off left and right, and agents who had done business for twenty and thirty years were falling by the wayside - their dying words were all about the housing market being strong as ever.
When things were going well, they cited the statistics on house prices rising to point out a great investment. When things started going upside-down, they cited the statistics on new homes available (actually an indicator of market instability, but gullible people don’t do research).
The Sheep Lifestyle Pattern
The problem with housing is that a basic lifestyle pattern has been hard-wired into American society. It goes something like this:
- Graduate High School
- Go to college
- Marry
- Have a Couple Kids
- Buy a Minivan/SUV
- Buy a House
People obey this pattern like sheep eating grass, although sometimes changing the order of the last three. They go to college, whether their career demands it or not (and get into debt). It boggles my mind that women especially do this, seeing as how many of them do not pursue work that requires a college degree and many want to raise their children. People then can go into more debt for their wedding. Their SUV/Minivan purchase is usually a newer vehicle (and incurs debt).
Lastly, regardless of where the market is, they take out another $150,000 - $300,000 in debt for a three bedroom, two bathroom house with hardwood floors, vaulted ceilings and a nice backyard. Despite housing being somewhat volatile (especially in the short-term), the largest purchase they make is usually made completely ignorant of the market.
I really cannot explain why people do this. I have always had small cars, they drive great, efficiently and I can fit all my guitars and stuff in them. If I need to move something, I borrow or rent a truck. I have always rented - I don’t have to pay for maintenance, it is cheap and I have complete freedom to find something better or cheaper on short-term notice.
A House is Always a Good Investment
This is not true at all. It is especially not true if your house is costing you over 25% of your income, you have little or no equity and you buy it anytime from 2006 to the next five years. One thing more unstable than housing is employment. Everyone almost certainly will go through periods where work is harder to come by. Being responsible for a high mortgage regardless of this fact will get you foreclosure after being unemployed only a few months. Your house will then be sold for less than you bought it and you will now be homeless, a debtor and have dependents who cannot be fed.
A good investment is something like mutual funds or even treasury bonds. A house can be a good investment, but not if the market is ignored.
Buying a house right now as part of the sheep-lifestyle, for example, (depending on local factors) is suicide. If (and I mean if) you can hold on to your house through the next five to ten years of depreciation and flat-prices (a predictable pattern based on equity, supply, interest rates, etc…), then you might make it out with only a few scratches and bruises. That is, if you hate your job now - learn to like it because, you cannot go without work for very long while trying to pay a mortgage. In fact, expect your general quality of living and free-time to evaporate as you break/fix things, worry about the bills, pay your debts, work a job you hate and forgo recreation and relaxation activities.
Why You Should Ruin Your Life
The most recent doomsday statistic for housing is this one: equity has now reached record lows below 50%. This means that there is a significant portion of the housing supply on the brink of being vacant. Why? Because the economy is on the brink of recession. Unstable employment, means unstable mortgage payments, which means foreclosures, which means lots of houses suddenly for sale. Lots of houses for sale in an economy where people cannot buy them either because they have no jobs or the interest rates rise (very likely) causes the price to plummet. I’m not making this up - this has happened before.
A normal housing cycle happens based on over-construction and malinvestment. More houses are built than demanded during the boom, sowing the seeds of a small bust in the future. We hit this last year. However, this can be compounded by market failures, lending failures and government failures (all of which are likely to hit in the next decade).
I admit that there is some selfish anticipation on my part about this upcoming market bust. When housing prices plummet and interest rates rise, I will not have participated in the debacle. I’ll have good credit (by not going bankrupt over my too-big-for-my-britches house) and have plenty of equity cash (from saving it and not buying said house). I look forward to buying about two or three houses, and selling them at the peak of the next boom to put my kids through college and buy the wife a new bedroom set.
Colin, your basic premise seems to be that renting is cheaper and more flexible than buying. I’m not sure that’s always true. Your mortgage and tax payments on a house you own will be less than what you’d pay to rent that same house.
Well, the renting situation is anecdotal. My main point is that buying a house isn’t something to jump into.
Well sure. It’s not to be taken lightly. If you assume a house is a great investment, you’ll be sorely disappointed. A house is an expense, not an investment vehicle.
In some ways, this reminds of the same logic that Al Gore uses about global warming. I’m not convinced that everything’s going to fall to pieces. I think that you do present some good advice (”don’t bite off more than you can chew” comes to mind), but in such a way that makes you come off as an “end of the world” nut job (all you need is the “so convert all of your assets to gold, build a cabin in the woods with a fallout shelter and wait for the worst” conclusion).
cchrisr said: (all you need is the “so convert all of your assets to gold,
buildrent a cabin in the woods with a fallout shelter and wait for the worst” conclusion).lol…
I will admit to this. However, my “advice” (if you will) is to those who are on the margins. And for those people, a house will most definitely be a doomsday scenario (again, depending on local factors). But for the broader segment of marginal buyers, I think my admittedly over-the-top fire-and-brimstone view shoul dbe considered.
I agree with cchrisr on this one (a sign of the apocalypse, I know). This article reads like a nut job wrote it. Home ownership is one of the keys in our society and significantly helps improve people’s sense of responsibility and ownership (just look at how rental homes are treated). Yes, plenty of people are stupid in how they approach it, but it is a much more worthy investment than throwing your money away on rent every month. Like Jew said, renting is barely cheaper than buying a house, and you’re actually getting something back (eventually) in return. My wife and I got sick of renting (which is basically paying for a hotel suite) while getting nothing in return besides a place to live, so we bought a little 1950 rambler that will be able to house us for at least 7-10 years (assuming we don’t have ever have triplets :)). I agree with you Colin, that people should live within their means. Many people were not wise in the housing market in the last decade, and they are now reaping the whirlwind. But your diatribe against home ownership is quite unfounded.
You may be surprised at how much we do agree on things.
It looks like most folks still have no idea how bad this housing bust is going to be…
Colin..there is some truth to your logic but their is also some flaw…for those that look to buy a “new” home in the vast area of resales…you can get a amazing deal…many builders are slashing prices, giving great incentives and so long as you stay within your budget..you can benefit by purchasing a home that 2 years ago may not have been within your means..
Also, real estate is local..although many people don’t want to hear that..where I live now the bubble did not make it…however where I left..in SFL..well that was a case study for bubble 101…There are areas of the country that one can purchase and stand a much lower risk of losing money..but I do agree if you plan to live in it less than 3 years renting maybe a better option…
Finally, for us, owning a home pre-bubble allowed us a appreciation we could never have dreamed of..we sold at the peak..(Poor soul who bought our house is $200K underwater)..and then BOUGHT a LESS expensive home than what we sold it for..1)we lowered our cost of living expenses by relocating out of the state 2)Because we moved to a lower cost area our housing dollars bought us a larger brand new home(which we built pre construction..and made it the lowest pre construction home in a the community…) 3)We improved our quality of life by doing so…4)owning a home is not always bad investment vehicle..5)Educate yourself on what your comfort level is in purchasing a home, don’t let others make that choice for YOU…
When I would go to a mortgage broker..I worked backwards..I always told them what I wanted my payment to be and then asking what they translated into for the purchasing price. I also would tell my realtor, NOT TO SHOW me homes out of my price range…
Jew - What planet do you live on?! Rent is half the cost of “owning” in any desirable area. If you live in backwoods Kentucky your argument may work.
Darius - You’re interest only loan means you own your home? I live in a place that would cost 8k per month to “own” with an interest only payment. You think the place looks poorly cared for?! I think you may be confusing the sh.tboxes you’ve obviously rented for the entire market.
Maria - You’re an agent masquerading as a consumer. “All RE is local”?!! Small problem with that is that the entire nations housing prices have down.
Welcome to Zeal for Truth, Mr. Troll. Here in Minnesota, our rent for an above-average 2 bed, 2 bath apartment was around $1200 a month, and that is pretty accurate for renting throughout the Twin Cities. My mortgage payment on our 3 bed, 1 bath 1950’s home is about $1300 a month. It is NOT interest-only (though close to it since we’re only into the 2nd year of the mortgage). As for the appearance of rental homes, I need only to look out my back window and see the home (recently abandoned and foreclosed on) that was a rental property for years. It is a HOLE. Fence falling down, inside flooring in shambles, pipes missing. It is basic human nature that one doesn’t generally take care of something that one doesn’t own. Anyone who is honest and has actually lived can see that in any neighborhood anywhere in the country. When a home in our neighborhood becomes a rental, the rest of the neighbors groan at what that is likely to do to the aesthetics and value of the property.
Renting an apartment may be less than the cost of owning a home. But renting a house will often be more expensive than your payments would be on that same house. Why is that? Because the owner of the house is paying the mortgage and taxes, then marking up the price and charging you rent. If you’re renting, you’re basically paying the mortgage and tax plus some overhead and profit for the landlord.
Now, if the landlord has a great interest rate, and you have bad credit and would get a terrible interest rate, then maybe renting would end up being cheaper for you.
There are all kinds of non-monetary costs and benefits to owning/renting to consider as well - as well as direct monetary costs aside from rent/mortgage.
Whatthe…I knew SOMEONE was going to complain when I said real estate is local…
http://www.usatoday.com/money/economy/2008-03-04-local-differences_N.htm
This article demonstrates what I said…You can live in a state like I do that did not have a bubble nor is having one now..and the market is ok..minimal forclosures and affordable housing…or you can be in the market like I was before in South FLorida where some values have gone down as much as 40% since peak, top three foreclosure state and where in some cities as much as 50% of the loans that were made from 04-06 were foreclosures…so whether you like it our not..real estate is local, just like some economies are local…you can’t judge the entire USA based on a problem or positive happening for a few states…
Yes some prices have come down in housing but a 1% change state cannot be equal to a 40% change state…
Sorry I meant to say that loans from 04-06 were SUB PRIME.
Maria said, “When I would go to a mortgage broker..I worked backwards..I always told them what I wanted my payment to be and then asking what they translated into for the purchasing price. I also would tell my realtor, NOT TO SHOW me homes out of my price range…”
Smart woman.
Hmm, I’m no good at economics, so my comments will have to be only tangentially related.
Colin, as for your sheep lifestyle, I kind of like it (not that I personally actually fit that model)
. Except you forgot the part about get a job, which of course, is a big part of the picture too. Also, that lifestyle will work better if you don’t get divorced, which many of the sheep do–divorce is expensive and is the cause of many a bankruptcy.
Homeownership has something going for it in the marry-and-have-kids part of the scenario. I suppose it is true for men to some degree, but it is very true for pregnant women–they want a nest to put those chickadees in–a nest that is theirs, and they don’t want to have to move any time soon. The problem comes, as you point out, when families bite off way more than they can chew by buying a house too big and too fancy and too far away from where they work.
Some of the related blame for that goes to the developers who hardly make starter homes any more. In our area there are TONs of huge, ugly houses built six inches away from each other.
There is a family in our church who suffered the exact scenario you portray, and it was a bit of an awkward spot when those of us who wanted to help them financially on one hand, didn’t want to help them hold on to an over-sized and over-priced house on the other. We wanted to help them pay their electric bill, but not hold on to that money pit of a house.
I was glad to buy a home back in 2002, I don’t miss renting one single bit. I don’t miss the loud creepy neighbors, or the bugs that infested my apartment, nor sharing laundry, etc.
Good RE deals are still popping, you have to use your noggin and shop, shop, shop while you continue to save, save, save for your downpayment. A close family member of mine and wife thought hey lets buy a house, and they did. However they also bought anything else they wanted, maxed out their credit cards, and then took out a second loan on the house. Did they think they were going to win the lottery or something? Now they are preparing to embark on the next journey in life, the bad credit journey.
A huge part of the current foreclosure crisis was caused by stupid or dishonest homebuyers. I heard a housing expert on the radio the other week who said that studies showed that many of the foreclosures were because buyers lied about and mispresented their incomes in order to qualify for loans. Furthermore, they didn’t do basic research into what a sub-prime, ARM loan really is. For those people (who are the majority), they got what they deserved.
Maria,
You are correct that Real Estate is local. However, there are still market-wide direct and indirect effects that have a significant impact on local markets. A country-wide recession is going to affect Maine to Washington - differently, of course, but it will still bring problems. The entire lending industry is also generally uniformly affected by interest rates - which, when they finally are raised, will depress the market on the whole.
Darius, I couldn’t agree more with your last statement. People reap what they sow. While I would also add that there was a lot of malinvestment encouraged by artificially low interest rates - the “crisis” is merely people getting what they asked for by wallowing in debt for things they don’t need.
This is an interesting situation. I would actually be curious what people think is the right thing to do in this scenario.
I would say offer to help them out with groceries or what not, but also sit them down and tell them it straight that they are not being good stewards and as Christians, we are called to more. This can be done in a kind manner, but sometimes people need to be held accountable.
Like others, I’m not terribly impressed by the structure of the argument made by the article. Despite this, I do suspect a drop in the market is coming and wouldn’t be surprised to see a 20% drop. The 50% drop suggested by Colin’s graph seems unlikely though. The boom/bust cycle IS a documented phenomenon, and housing prices HAVE been held aloft by high mortgages and prospective investments. If I lived in an area where I could get into a home for around $100,000-150,000 I might buy anyway (I can afford to lose $30k in lost value), I would never buy in the current San Francisco market (where I live) at $600,000 for a small, run-down, one bedroom house. There is a great deal of research suggesting such a drop is coming, and any honest financial adviser will warn you of the possibility. The main questions are when and how much. For now (and most of the time), real estate is probably NOT a good short term investment (unless you really know what you’re doing).
Atanamis, I agree with much of what you say. There is generally a decent long-term investment in a house. But one has to do it right. They also have to be able to weather economic instability. This can only happen by wise budgeting and basic economic common sense.
I am quite alarmed by the rush of people my age who feel the need to buy a house, as though it’s on the checklist, the privilege of every American or even part of the American dream. I have been crunching the numbers over the past year, and I am developing what I think might be a better way of living - and it is almost entirely based on leasing/renting and non-ownership of property in principle. The housing market (especially currently) is one place where I think buying is highly overrated.
Your graph shows why this is the case though. Over the last 8 years, money put into real estate has in many cases doubled. This is the same period in which the stock market has come crashing down a couple times, and the period in which people our age first started hearing about financial investments in passing. OF COURSE they think they can get an interest only loan, and benefit from the value going up. Unfortunately, unless you have the financial resources to withstand hard times a home mortgage can be an anchor around you neck dragging you to the bottom.
Colin said, “This is an interesting situation. I would actually be curious what people think is the right thing to do in this scenario.”
I don’t actually know all the facts in the specific situation at our church, but I think what happened was quite like what Darius suggested. I believe the elders intended to talk to the couple about letting the house go, but I’m not sure what ended up happening with that.
I know at least one person in the church thought folks were being selfish and stingy by thinking the couple should give up the house. But others, mostly us older folks, thought they should get rid of the house.
Sadie and I talked about it over dinner. We agreed that the couple should give up the house, and the church would be there to provide support in that process - a basic place to live (if needed), food, etc… to transition them in downsizing their life.
I can’t believe you said “the wife”!
I can’t believe it’s not butter!
At least he didn’t say “the old lady”!
“I am quite alarmed by the rush of people my age who feel the need to buy a house, as though it’s on the checklist, the privilege of every American or even part of the American dream.”
Are you basing this on assumption? Or do “people your age” inform you that they feel they need to buy a home?
I can see the risk of owning a house, but honestly if you have a family (which probably most people your age are starting to) than the stability of owning a house far outweighs renting (Of course given that they are smart about it like other posters have pointed out). I would never want to raise my daughter in a place where if given notice from the landlord we could be suddenly uprooted and she would have to change school districts, where she may not be able to study because the noise from upstairs, where we may be forced to give up her cat because who knows if the next place will let us have it. (just for example)
So perhaps people are more interested in owning houses because it instills in them a sense of stability that they would not feel renting.
I presume you would favor your daughter being raised in a car or public housing when you lose your house and still have $50,000 in debt?
You can be in a great neighborhood, get a good contract and have pets in rentals. Now whose putting forward doomsday scenarios?
The “sense of stability” is false when it comes to buying a house - unless it is a wise purchase. There is nothing inherently better about a house - and in the short term, it is mathematically worse on aggregate and much riskier.
Honestly, this posting demonstrates a massive amount of ignorance. It is almost impossible (legally) for a landlord to evict a tenant who pays their bills on time. If you have a contract, they CAN’T evict you. Most landlords are more than happy to sign a new contract before the old expires, and most states have limits regarding how much they can increase the rent. I have lived in 5 apartments over the last 5 years, and I have NEVER lived in one where excessive noise was permitted. If you have, it was most likely a slum where the landlord simply didn’t care about their tenants. It is a TRIVIAL matter to check whether an apartment allows pets, and really isn’t that hard to find them.
There are CLEARLY benefits to owning over renting, and your complete inability to articulate a single one demonstrates extreme ignorance. I sincerely hope your spouse makes your families financial decision, because you lack the understanding of economics needed to make them.
Advantages:
Your housing budget shifts into equity in a property
You can make any “improvements” you want
You don’t need to contract for things like pets, waterbeds, etc
Disadvantages:
If you get awful neighbors, you can’t as easily complain or move
All problems that happen come out of your pocket
You are committing a lot of money to one thing, that might lose value
You have to do all maintenance of everything yourself or contract for it
If you lose your job and need to relocate, it is very hard to do
If conditions of the neighborhood change, you can’t easily get out
The idea that owning a house is a clear advantage is simply false. There are many people who benefit from a house, and even if it economically doesn’t make sense the intangibles can still make it worthwhile. There have also been enough people that get houses they can’t afford to cause a financial crisis that has the nation’s biggest banks selling ownership shares at massive discounts for operating cash. Too many people have gotten the stupid idea that a house is worth it at any cost, and we are all now paying the price.
This is a fascinating discussion & I’ve learned a lot. It seems to me that, so long as you buy well within your means & have savings to get you through rough patches, and so long as you’re not buying a home with the sole intention of making money off it within the next few years, that buying a house can be a fine option.
The market where you live can dictate a lot, too. My husband & I wouldn’t even be considering buying if a rental could inexpensively meet our needs. But in the town we live in, rentals are extremely rare & very highly priced. We need a larger home than we have now but finding a rental to meet that is unrealistic to our budget, buying a home is not. We want a home to live in, not make tons of equity on.
Samwise, I think you have a solid grasp on the issue. The problem is not level headed people like yourself who consider the risks and decide owning a home is worth it, the problem are the vast majority of young buyers who have grown up with the assumption that the market can only go up. I talk daily to people my age who cannot imagine that a home could lose 20% of its value and only slowly regain it. They think interest only loans are a good idea, because once they are in the market the increasing value of the home will raise their equity automatically. All of this is true only while the values are increasing. If one does not have a home well within their means and savings to help with rough patches, a large mortgage can be deadly.
Housing prices from the late 1800’s until about 2002 have at best slightly beaten inflation. What happened in 2000-2001? The dot com bubble burst. Where did all the money go? Into housing. Then it was multiplied (maybe even an exponent) several times by historically unprecedented, incredibly cheap credit. What is it called when a relatively stable commodity explodes in price? A bubble. All bubbles burst. It’s never different this time.
It’s still a long way to the bottom. The credit and liquidity crisis is far, far from over. Why? Cash reserves. Lenders only need a small cash reserve to lend. This is great as long as cash reserves are growing. Cash reserves grow by a dollar and 10 can be lent. However if cash reserves are shrinking lenders have to collect 10 dollars back for every dollar reserves are reduced by. This was not a financial system threatening problem until mortgage lenders got the brilliant idea of selling their mortgages on the investment market instead of servicing them in house the old fashioned way. Suddenly (and it was almost overnight) instead of making solid loans that the lender would live or die with for 15 to 30 years, lenders are turning and burning any loan they can as fast as possible since they now make money on the origination, not the servicing of a loan.
I am personally renting a $450,000 condo with $5000 a year in taxes for $1400 a month. That is financially insane for the owners but it’s what the market will bear. I wouldn’t even consider purchasing in my market at this time, even though I could. I have nothing against home ownership at all. I own several houses (in several different states), all with a 15 year mortgage, and am renting them all out with a positive cash flow.
All that being said, for many people buying a house is a good idea for many of the reasons already stated in this blog already, EXCEPT to make money. However, the only way buying makes any sense at all is if you:
1. Be very sure (as sure as anyone can) you will be there reasonably long term. Anything less than 5 (preferably 10) years will eat you alive with with fees. Remortgaging is a suckers game up there with 3 card monte.
2. Don’t consider it an investment. Odds are, based on history, a house will appreciate little more than the inflation rate. Housing traditionally has been more an enforced savings plan than an investment.
3. Put down a real downpayment, preferably 20% to avoid pmi. Pmi is also a suckers game. You also need to be very careful you won’t get sucked back into pmi if the house value should fall. This kind of downpayment gives you a lot of leverage going to lenders.
4. Don’t even consider a house you can’t afford with fixed a 15 year mortgage. You will pay about 80-90% of the loan amount in interest with a 15 year, 200%-300% of the loan amount with a 30 year. The payments aren’t that much higher. Can you really afford and extra $200,000 on a $200,000 house? That’s 4 years tuition to an ivy league college. Or 20 years rent. Think about it.
That being said the people who would follow this advice aren’t the one’s in trouble anyway. Remember that a bear market is when stocks return to their rightful owners.
Bob, that is some pretty sound advice!