Friday, July 10, 2009

Looking for Bottom?

It came up a couple of times in the past couple of weeks "this is the bottom of the housing market" or "Rebecca, do you think this is the bottom?"

the answer is, depends, probably on where you are. Here? No.
Here's the NUMBER ONE reason why: Unemployment is out of control.

Also consider: Delinquencies on mortgages are still growing, and in the previously "safe" Prime territory

If you're at all interested in economics, and have not yet added Mish's blog to your reader, you are really missing out on good stuff.

Also, where I live anyway, houses are still way too expensive to rent the money from the bank to "own" them.

Paul and I desperately want to move. Yesterday I saw a listing on craigslist that looked workable for a place we might want to live for two years or so (not longer-- it was too small for permanent roots) The rental listing is for $1700/month. Later the same day, I saw it listed on the MLS for a price of $499,000.
Everyone who's interested in housing and renting, bookmark this fun calculator.
I realize the calculator is an imperfect picture (also has lots of inputs for tax rates and whatnot, so I tried to use a best case scenario but your results will vary), but it does show that buying will not be better than renting at these prices ever, unless the house appreciates at 5%/year, and in that case it is better after 5 years. (I believe 5% inflation in house prices over the next 5 years is a fantasy scenario.) Without belaboring the specifics of this particular house:
  • This is a big IF: how many people have $100K sitting around for that downpayment on a tiny little house like that? (not to mention closing costs and cash reserve for repairs and what-ifs) If they do have $100K cash, are they a new family that will fit in such a small house? (2/1, with 790 square feet) Are they planning on staying there many years to break even?
  • Based on other homes prices in the area, my strong suspicion is that this has been priced "low" to generate bids upwards of the listed price so that will make these numbers even more ridiculous if I am right.
This sort of thing will probably hang on a little longer in the Bay Area, but it can't go forever. It's not possible to have a housing market where there are no entry-level homes that make any sense. Most importantly, job losses are not finished, and further job losses will hit homeowners with foreclosures, and will hit prospective homebuyers with less access to money and credit, creating further downward pressure. Deflation is a good thing in this case, as the current pricing levels are stretching people way too thin, and out of control inflation has caused terribly risky behavior.

What really matters
That being said, if you have found something and have the means to buy it and hold on to it, by all means, do it. Where you live is where you live-- it is not a financial vehicle.

If you can buy an iPhone the day before the new one comes out and the price of your model drops the next day, ask yourself: "yesterday, I decided this phone was worth X dollars to me, and I bought it. Does tomorrow's price drop mean I don't enjoy the phone at X dollars anymore?" If you can't live with that, don't buy. But there's no reason that tomorrow's price drop should change the fact that yesterday you said the phone was worth X dollars to you. Once you've made your decision, don't look back. Live in your home, love your phone, and move on. If you think your phone or your home is an investment, beware of your market right now.
And get ready to be stressed out all your life about things that are marginally outside of your control.

1 comment:

James Bong said...

Thanks for all the great information! I'm not sure I completely agree with Mish's analysis, but it's better to look at things from multiple directions. I'm definately showing Tara the calculator. She'll like to see we made the right choice renting.