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.