The Housing Crisis is NOT Over 14 comments
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Yesterday’s Wall Street Journal features an op-ed by Cyril Moulle-Berteaux (“The Housing Crisis is Over”). The piece is a perfect example of what looks good on paper does not necessarily reflect reality.
Since home sales peaked in July 2005, new home sales have declined 63%. The author’s thinking is that since house prices have fallen 10-15% and mortgage rates are down 70 basis points, homes are as affordable now as during the 1990s. His final argument is that despite falling prices and high inventories, home sales will pick up “because they always do.”
Moulle-Berteaux disagrees with analysts who believe house prices must fall at least 30% further to be back in line to their historical inflation-adjusted average. His reasoning is that most buyers take out a mortgage to purchase real estate, and thus are only concerned with “how much of one’s income is required to be able to make the mortgage payments.” On that basis, today’s mortgage rates are a bargain compared to the high interest rates of the past.
There are so many factors the author left out of his analysis. Despite the decline, home prices are still at record levels historically. More importantly, all the costs associated with owning a home have skyrocketed: taxes, insurance, association fees, repair costs, and utilities. The 5.70% 30 year fixed mortgage cited seems like a low rate to purchase a home, but when all the factors are taken into consideration, how many buyers can make a 20% down payment as required under current lending standards? Additionally, lenders are blacklisting condo mortgages; mortgages issued are becoming “covenant heavy” (as opposed to the LBOs “covenant lite”).
The government and the real estate industrial complex do everything possible to encourage people to buy as much house as they can qualify for. As more and more homeowners are waking up to the folly of that notion, the smart buyer realizes that buying a home for the lowest price possible is the most important consideration. Always buy well below what the calculations determine you can “afford”. You never know what market factors will do, or how your circumstances might change. Carrying costs very rarely decline. As far as mortgage rates are concerned, it is better to have higher mortgage rates and lower housing prices than lower mortgage rates and higher housing prices. Besides benefiting the cash buyer, a high rate is a great motivator to pay off the loan, or refinance as rates decline. Just like buying a stock, it’s the price you pay that determines the profit or loss.
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This article has 14 comments:
Some areas are in Free Fall, going down more than 5% Per Month.
Ron
Interested to know what a starter home price point is in Phoenix. Here in Northern NV, starter homes are beginning to become available below $200,000, in reasonable neighborhoods. Now, the primary loan product for starter homes has traditionally been FHA financing. FHA loans are still plentiful for most people with reasonable credit (even though FHA says it's not a credit score driven program, it's unlikely poor credit risks could qualify). And since the program only requires 3% down in most cases, the cash out of pocket is something borrowers can afford.
The biggest restriction to FHA qualification is the maximum debt ratio, which in my mind is still 28/36. Many people who used conventional financing with a second loan to cover part of the down could qualify for products with a higher debt ratio, up to 50% in some cases. (Not that that's necessarily a good thing, because the current foreclosure rate is testament to what happens when high debt ratio borrowers get into homes.) As we all know, most of those high debt ratio piggyback products are now gone.
But the problem is, many people have vehicle loans, credit cards and other amortizing debt that disqualifies them for FHA financing, even if everything else is OK.
Wondering if, in your area, FHA loans are becoming a larger percentage of purchase loans, and whether the people getting them are the ones who would have used conventional financing in the past.
You can buy a newer home (post 2000 construction) say 1700 sq.ft. from the banks for around $125,000. You can go to my blog and navigate from there to the website and see some listings. Rents have held up well here, so these work well for first time home buyers or investors as they will cash flow nicely.
The FHA lenders in Phoenix are swamped. It's taking at least two weeks just to get a first pass on a loan file by the underwriter. I suspect a lot of the backlog is due to refinances but purchase transactions account for some as well.
So to sum up; in my opinion, adjusted for quality of life and based on historical prices, housing has a long way to drop in Phoenix.
One man's heaven is another man's hell. I'm not crazy about Phoenix either (I've lived a lot of other places) but I know a lot of people who wouldn't leave for all the money on earth. Go figure.
"I'd say we are almost at the bottom". "They are a very good value right now".
here you have your typical real estate professional ,telling lies,to benefit his own interests. Dont believe these real estate clowns. We are in a housing crisis that is going to continue to get worse. THE END IS NOT IN SIGHT.
The writer of this article obviouslly is not in real estate and doesn't know what he is talking about. He is misinforming the public that could greatly benefit from this market and start building REAL wealth again.
Don't buy this free advice. You get what you pay for.