Submitted by Ramsey Su via Acting-Man.com,
Why Buy a House?
Examining the reasons to buy a house today may give us some idea where the housing market is heading in the future.
There are three reasons to buy a house:
Reason 1 – Utility
A house (any dwelling) is a shelter. It provides enjoyment, a home to raise one’s family, or just a place to watch that big screen TV. Utility is not quantifiable and it differs from household to household.
Reason 2 – Savings
If financed, a mortgage is a way of saving something every month until the mortgage is paid in full. If paid for, the savings come in the form of “owners’ equivalent rent”, which is what the census bureau uses to measure inflation in housing.
Reason 3 – Asset appreciation
At 5% appreciation per year, a $100k house today will be worth $412k in 30 years. Even a more modest 3% appreciation would result in better than a double.
Why Not to Buy a House
Based on the reasons above, it appears to be a slam dunk decision. Why would anyone not want to buy a house? There are three obstacles:
Obstacle 1 – Affordability
Housing, as a percentage of household income, is too expensive. A decade of ill-conceived government intervention and Federal Reserve accommodations prevented natural economic forces from driving house prices to equilibrium. As a result, not only is entry difficult, but many are struggling and are stuck in dire housing traps. Corelogic estimated that as of the 1st quarter of 2015, 10.2% of mortgages are still under water while 9.7 million households have less than 20% equity.
Obstacle 2 – High Risk
Say you are young couple that purchased a home two years ago, using minimal down financing. The wife is now pregnant and the husband has an excellent career opportunity in another city. The couple has insufficient savings and the house has not appreciated enough to facilitate a sale, which results in negative equity after selling expenses. The house can become a trap that diminishes a life time of income stream.
Obstacle 3 – “Dead zones”
Say you live in the middle of the country, in Kane County Illinois. For the privilege of living there, you pay 3% in property taxes. That is like adding 3% to a mortgage that never gets paid down. Your property would have to appreciate 3% per year just to break even. By the way, “appreciation” is unheard of in Kane County, good times or bad. There are many Kane Counties in the US. Real estate in these counties should be named something else and should not be co-mingled with other housing statistics. Employment is continuing to trend away from these areas. What is going to happen to real estate in these markets?
The Kane County court house: where real estate goes to vegetate
The factors listed above are nothing new. They provide some perspective as to where are are heading. Looking at each of the reasons and obstacles, they are all trending negatively.
The country is spending too much on housing, a luxury that is made possible by irresponsible Fed policies. 50% debt to income ratios are just insane and Ms. Yellen has the gall to call mortgage lending restrictive. Can we not see what is happening to Greece?
Mortgage backed securities held by the Federal Reserve System, a non-market central economic planning institution that is the chief instigator of house price inflation. Still growing, in spite of QE having officially ended – via Saint Louis Federal Reserve Research, click to enlarge.
Real estate is an investment that matures over time. The first few years are the toughest, until equity can be built up. With appreciation slowing, not to mention the possibility of depreciation, it is taking much longer to reach financial safety. The current base is weak, with too high a percentage of low equity and no equity ownership. The stress of a recession, or just a few years of a flat market, can impact the economy beyond expectations. The risks that might have been negligible once upon a time are much higher today. Many who purchased ten years ago are still living with the consequences of that ill-timed decision today.
By stepping back and looking at the big picture, we can see that real estate should be correcting and trending down. The reasons why our grandparents bought their homes have changed. Government intervention cannot last forever. It will change from accommodation to devastation, when they finally run out of ideas.
Conclusion
In summary, my working life had its origins in real estate and I am not trying to bite the hand that fed me. However, the reality is that the circumstances that prevailed when I entered the market are non-existent today. I seriously doubt that I would chose real estate as a career, or as an investment avenue, if I were starting over. As for buying a house, I would consider it more of a luxury as opposed to an investment, and one has to be prepared for the possibility of it being a depreciating asset, especially if one decides to move.
I did not buy a house as an investment. I purchased a house to live in. As long as I make my mortgage payments, (which can never increase), and my “rent” to the county (property taxes) I can pretty much do whatever I want….
Buy something you can pay off in 5-10 years and then you never have to make a monthly payment for rent or a mortgage again.
But: Buy where property taxes are low, because you’ll always be stuck with those.
Another thing to consider: If you follow the above philosophy, you’ll probably live in a place surrounded by people who make a lot less money than you do.
I recently put a rental house up for sale. I put a fire sale price on it and over a dozen people were interested in it. I wanted to cash out thinking a big squeeze is a coming. The problem was no one could get financed or even come up with a down. Several people wanted me to carry it but I can net way more just renting it out. Now I hear (yesterday) from one of my kids how they have been hearing from their friends (on line friends) that even the unaware people are talking about leaving CA. The gamble now is -do I fear what is approaching this fall credit wise or expect a mass of people leaving CA to boost up RE? Decisions decisions.
Places where property taxes are low are usually also places where income is low as well, and employment opportunities are limited.
To all fellow posters: I read this over at ZH. I scrolled throught the comments which were quite long and came across this golden nugget about a discussion/visit to Lennar new homes open house and the crap house /development they were selling. The poster was suggested to a leave an “upper decker ” in the model house as his calling card. The next poster goes on to say he looked up said phrase on Urban Dicitionary. Look it up your selves, you will be crying from laughing so hard. Cheers!
@anarchyst: If your lender demands an impound account to cover taxes, insurance, etc. don’t be surprised if your payment spikes. Mine did. Quicken Loans fucked up the amount necessary to pay for everything, then Chase took over servicing and demanded I pay almost $1,000 more per month for the next year. No negotiation, not even a return phone call. AND they then had the audacity to demand an extra $300 a month for the balance of the loan (after the extra $1,000 a month for a year). BTW this WAS a fixed-rate loan.
The only way I would buy a house again would be on a simple sales contract with seller financing and no impound account.
Houses will have some intrinsic value when TSHTF.
But I would suggest only buying a house in the country with land. Being hit by white flight, ghettos, etc., will be minimized, plus with land you can always grow things.
Pay cash if possible.
Buy a nice size RV, buy a small car to tow or none. Most people’s houses in the USA are filled with extra junk, so an RV has enough space for a couple.
I read many boomers ditched their houses for RVs because no property tax. What U’d pay in prop tax can be applied to maintenance, gas, etc. & U are not tied down by an anchor whose price will revert to the mean eventually. When housing prices deflate, almost everyone will be under water. Jingle mail’s return will drive prices even lower. If people stay in a nice climate, the lesser space encourages being outdoors. For couples, single people, or very small families, this is something I encourage before the economy collapses.
Also, the ability to move to an area with jobs where rent/home purchase becomes too high to afford. I read about a young guy who interviewed for a tech job in San Fran where a tent was in the news renting for $900+. The guy bought a decent RV, drove out, lives in it, works. Smart.
I’m confident that housing prices will be down nationwide over the next 5-20 years. If I didn’t already have a house I’d wait to buy.
I’m interested to see how things play out on the clouded MERS titles. That alone requires some serious looking into before buying anything. I’d love to hear what Mary Malone thinks.
Like others, my home is a way to reduce my future living expenses. I can’t do much about rising or falling prices but my paid for home will always equal a paid for home of similar size in this market and I have no intention of leaving so I’m good with that.