Housing: Time To Buy

Today’s Courier Herald Column:

WSB and CNN Consumer reporter Clark Howard is advising those considering a new home and are able to go ahead and make the purchase.  For those in a position to consider buying, reassurance from one of the most risk-averse broadcast financial advisors has to be looked upon as favorable news for an industry that has lacked any for the past 4 years.

His reasoning is that “smart money” – large investment funds with Wall Street backing – are now looking at residential homes as a vehicle for medium term investments.  They will purchase the houses in bulk, manage them as rental properties, and liquidate them later when the market improves.  Howard reasons that if Wall Street money is chasing residential property for investment value, individuals on the sidelines can make a home purchase feeling better about the underlying value of the transaction.

There’s a certain logic to the argument beyond blindly following what Wall Street folks are doing.  Every market is a function of supply and demand.  Bulk purchases by investors will reduce the number of foreclosures being marketed at distressed prices.  This, in turn, should allow for price stabilization, while the reduced supply of homes available on the market could possibly even allow for price increases in healthier housing markets.

Though there are constant warnings about another wave of “shadow inventory” coming to the market as new foreclosures, there are signs that newer programs to allow people to refinance their homes who owe more than they are worth are successfully keeping some folks in their homes, while saving them money on monthly payments as well.

I’ve written here several times about my own difficulties in finding a seller who is able to sell their home in this market, as well as of friends trapped in homes that have declined enough in value where they owe almost three times what the home is worth in today’s market.  Anecdotally, I can say that I’ve seen the number of “quality” homes available on the market in Atlanta diminish rapidly.  I can also share that most of the friends I’ve written about have either been allowed to refinance under expanded federal programs or have come to terms with their need to short sale their property to orderly manage their way out of crushing housing debt.

The panic of 2008 and 2009 is gone from this housing market.  While still far from efficient and still very dependent on various government programs, the transition from the bubble days to reality has taken on a much more orderly flow.

The other reason that those sitting on the sidelines may wish to move now is less than cheery.  Many economists, including those at the Federal Reserve, are sending signals that today’s cheap interest rates are on borrowed time.  Most say interest rates will have to increase around the end of the year.  Conveniently, that’s just after the Presidential election.

Interest rates are at historic lows.  Those purchasing today can get 30 year mortgages for 4% interest or 15 year mortgages for under 3.5%.  As interest rates begin to increase, having mortgages below market rates act somewhat like owning a bond, but on the right side of that investment.  Even if home prices decline another 10 or 20 percent, locking a 30 year rate at 4% will more than make up for that price decline should a buyer wait for the lower price but have to finance the purchase at 6 or 7%, which are much closer to historically average rates.

In fact, a person locking in a 15 year payment at 3.5% would have roughly the same payment as one who locks in a 30 year loan at 7%.  One buying now can own their home free in clear in 15 years whereas waiting another year or two could result in paying for the same house twice as long if interest rates return to where they were just a few years ago.

There are no crystal balls with respect to housing prices or interest rates.  The days of buying as much house as you can afford for investment purposes only are likely over. But buying the house that you need in the days and months ahead looks like a prudent move today, and a good hedge against what is likely to come tomorrow.

5 comments

  1. View homeownership the same way you would view buying a reasonable car. Sure it’s an investment that you get benefit from – over time you will be compensated for your inflexibility of having to stay in the same place with reduced payments compared to what you would pay for rent.

    But don’t think homeownership is your path to wealth. I don’t know about you, but I can’t remember the last time a stock, bond or certificate of deposit required me to pay for a new appliance or to fix an air conditioner or to repair a roof. Sure other risks are there with alternate investments, and you certainly can’t live in your Vanguard Fund (although in theory the dividends it pays could pay your rent).

    To those who say homeownership is a forced savings plan, I guess there is some truth to that. But it’s also true that it’s forcing you to save much less than you think – the typical mortgage payer for the first 10 years or so is building up equity at the rate of about $250/month, which can easily be wiped out by the annual appliance repair or the every 10th year new roof. Make sure you’re also forcing yourself to diversify your holdings – whether that’s buying additional rental property or putting it into the stock market or investing in your own business, that’s how you truly get ahead. Not home ownership. Probably the best lesson that the housing crisis has taught a lot of people in our generation, one that came at a cost but I consider myself glad to have learned.

    Now – if you’re ready to settle down and you find a home in a good school district that you can afford, by all means it may make economic sense to lock in a long term price for your housing costs by buying. But just make sure you consider the larger picture – if you buy now, even a “great” deal, remember that the “greatness” of the deal could pale in comparison to the opportunities you might have to turn down later – whether those are living in a different part of town that you decide you like better or having the flexibility to move across country for school or a job to improve your fortunes.

  2. seenbetrdayz says:

    The panic of 2008 and 2009 is gone from this housing market. While still far from efficient and still very dependent on various government programs, the transition from the bubble days to reality has taken on a much more orderly flow.

    Given the number of bank consolidations which have occurred since 2008, I hope you’re right, but I’m not so sure. Whereas before we had a handful of major lenders that were “too big to fail”, since 2008 we’ve made them bigger, or worse, we made more lenders that are “TBTF.”

    If you are right, it’s all good. But if you aren’t right, God help us.

  3. saltycracker says:

    Charlie & Chris,

    Good points. A home is a long term decision on where/how you desire to live. They are an asset and lifestyle choice and with some exceptions, a poor investment strategy. Values are increasingly impacted by government activities, loans, interest, codes and taxation. Property taxes being one of the most subjective by not being based on the buyer/seller transaction but by a political opinion influenced by others financial manipulations.

    One additional point, a bad reason to buy is to have a tax break on the mortgage interest.
    It is front end loaded, encourages excess debt and plans to eliminate the deduction is or should be on many political agendas.

    For those that can sort it out like a Clark Howard, it is a great time to buy.

    • Most American homeowners receive only a marginal benefit from the mortgage interest deduction because so much of the mortgage interest is swallowed up by the standard deduction that you get anyway. Then there are friends of mine in New York who deduct tens of thousands in mortgage interest. Seems kind of wrong that taxpayers are subsidizing their home purchase at a much greater level than mine. I’m all for conversion into a credit.

  4. Cassandra says:

    Chris, why do you hate America, baseball, and apple pie? LOL

    “…But don’t think homeownership is your path to wealth…”

    Home ownership is a long term investment that is usually a good hedge on inflation, provides the owner decreasing debt and increasing equity. That we are at the end of a 30 year greed cycle doesn’t change those facts. In twenty years, the house you buy today will be worth more; in four years, maybe not.

    That said, anyone considering buying a house needs to look at their circumstances in light of what Salty mentions and also consider the costs beyond the mortgage, like lawncare, deferred maintenance and improvements.

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