Confession time: I have been looking at houses online. I salivate over the new listings every day.
We are settled into Portland enough that buying a house seemed like a reasonable option.
But, this topsy turvy market really means that the best bet is to stay on the sidelines. I won’t be buying a house any time soon. And you shouldn’t either.
There are lots of discussions online about whether you should rent or buy. I am not going to do any analysis of particular scenarios. Instead, I can tell you firsthand that there is a fundamental disconnect between housing costs and the value of the real estate.
Bottom line: buyers are absolutely crazy right now. And you just can’t compete with crazy.
Over the past six weeks of looking actively (and by actively, I mean culling through 100-200 houses per week, and going to see 5-10 in person each week), I can tell you that people are paying too much, taking on too big of “fixer” projects, and generally getting in way over their heads. Plus, they are in a declining market, so their “investment” is losing money the moment they purchase. If you are still interested in buying a house, despite this bizarre competition, consider the following:
In Portland, we have over 10% unemployment, and there is no reason to think that those numbers will go down soon. In fact, they continue to grow, albeit slowly. And, in this Alice in Wonderland, today-is-opposite-day economic climate, this is taken as good news at this point. You know straights are dire when a slowing increase in unemployment is a green shoot (I say that falling unemployment is a green shoot).
Also, we have tax credits from the government mucking up the true value of properties. For first-time buyers, that tax credit is their down payment and closing cost money. Typically they can get the seller to throw in 2.5-3% in seller-paid costs also. With FHA financing and 3.5% down, the buyer ends up getting a check cut at closing! That sounds like a no-money-down deal to me – the kind of deal that I thought went out the window in 2007.
And, we have some low-low-low interest rates right now because The Fed is hoovering up mortgages on the secondary market (therefore, banks only have to hold the risk for a few short days). But, they will stop buying these mortgages at the end of March. And that means that interest rates will rise, since banks evaluate credit worthiness and risk differently than The Fed.
The one-two punch of interest rate increases and disappearing tax credits means that housing values will definitely go down in Q2 and most likely in Q3 also. From the federal government’s standpoint, that’s fine. They don’t expect home values to stay steady. They just want a slow, predictable decline that won’t cause anyone to panic.
This is important: the goal of these government programs and support is to allow for a predictable unwinding of the market – NOT to maintain home values. This is the same process that the government uses when intervening in the stock market (e.g. buying GM). When there is the threat of unpredictable behavior, there is reason to intervene. But, no one wants the government to run GM – not even the government. They just want them to get smaller in a predictable way so workers and suppliers have enough time to get retrained.
So, keep building your nest egg for the rest of the year, and we’ll take stock once we see what’s happening with Alt-A and Option ARM mortgages (which will still be resetting in 2011 and 2012) and save yourself from another 10% price decline.
And, I know that there are non-financial factors in deciding to buy a house. Suze Orman, whose advice I admire, even admits that, discussing “the priceless emotional gain you get from owning your own.” But, economists tell us that we are rational. So, you have to look at those non-financial factors as trade-offs. How much is “pride of ownership” worth to you? $1,300/mo? Because that’s what it’ll cost you. Enough to go on four international trips per year. Or a new car every other year. Or enough for you and a friend to go to the TED conference (if you can snag an invite).
Update: Some new information out about how Alt-A mortgage D-Day is coming soon, and markets are freaking out.