Thomas Phillips

Why There's No Such Thing As a Housing Bubble

Alex: thanks for pointing out the conflict of interest.

As someone who lives in an area that has not yet been effected seriously by the bubble-collapse, I was planning on buying this year. However for the last two months I've been looking at homes and talking to mortgage brokers, realtors, etc. and I've determined that I want to wait it out and see what happens. Both the mortgage brokers and realtors seem to be spouting happy-talk. The mortgage brokers that I've talked to have been more than willing to get me into a financial situation which would be very tight to say the least. And the realtors seem to be acting in concert with various brokers which again seems like a conflict of interest - often realtors will recommend mortage brokers which makes me think there is in some kind of collusion. Perhaps there needs to be some kind of wall of separation between the two groups?

The last time I bought a home was in 1990. Things seem to have changed a lot since then. Various mortgage lenders seem quite willing (and even encouraging) to let me get into a situation where 33% of my gross income goes for mortgage payments, property tax and insurance. They'll tell me that I can easily afford a home in the $330K range, but when I look into the details they're pushing ARMs, interest only and other exotic mortgages. If I do the traditional fixed 6% 30 year mortgage and use the traditional 25% limit for housing it looks more like the homes I can afford are in the $250K range - that's a big difference. I'm not finding any homes in the area where I want to buy that are in that range (and I think I make a pretty decent salary - definitely above the average for my area).

The other thing that bothers me about the current prices is that when I bought in 1990 the ratio of house price to my income was around 1.6. Now if I were to buy my same house again today that ratio would be more like 3. In the area of town where I'd like to buy now it would be more like 3.5. That's telling me that there are less buyers able to afford to buy a home at these levels. A 10 to 20% price decline would actually be very healthy for the housing market at this point: it would allow more buyers back into the market. Realtors should be the first people to realize this. Of course it means that the next year or so will be lean for them, but certainly most of them should have saved up during the boom years since there's no way those growth levels were sustainable (?)

Given that something like 18 subprime mortgage companies have gone under in the last couple of months I expect that qualification standards are (hopefully) tightening. That will weed some people out of the market (probably about 25-30% if we consider the levels of subprime lending in the last couple of years). I'm hoping that will lead to some moderation of prices over the next year or so.

Bottom Line: as a potential real estate buyer it seems to me that it pays to wait at this point and not to jump into a market that's been overheated by lax lending standards over the last few years. I want to wait for more of the corruption to be shaken out of the whole process. Given that less potential buyers will be available due to tightening standards and the rising foreclosure rate it seems to me that next year will be a much better time to buy. I'm in no hurry. Bring on a 20% correction (and I say that as a homeowner).