Posted on Thursday, December 9, 2010
One of the subjects Larry Kudlow and friends discussed on CNBC today was how rising mortgage loan interest rates, combined with anticipated further declines in home prices and, particularly in light of the recently announced $1.3 trillion home prices are said to have plummeted during 2010 alone, should impact folks decision to ‘buy or rent.’
As of the last real estate indicator release date, the new was note good; Existing Sales down 2.2%. New Sales down 8.1%. Prices down 1 to 3%. Estimated to go down 5 to 15% still. And defaults and foreclosure numbers looking up. The bottom line, still, is supply and demand is and will probably continue to be a problem. That’s not to say there are too many housing units verse folks to fill them, but more that the profile of folks needing housing still doesn’t line up with the types of housing available out there (for example there are more McMansions and Miami Beach condos than folks who want or can afford them). Add to that the fact that many can no longer qualify for a decent mortgage or are hesitant to buy and you can see that the demand portion of that age old equation is actually the more significant aide. The good news is that, even if prices go down another 5 to 15% as predicted, the worst is behind, not in front of us. It’s important to keep that in mind if we hope to avoid making the problem worse with bad press on housing.
Most of us so called experts are estimating an average of around 3 years to stability, 5 or more years to noticeable positive appreciation in housing as a whole again. Maybe it’s a coincidence, but that 3 year make has always been the ‘rule of thumb’ break even point for average real estate buyers. That’s about how long it has taken for every-day home buyers to recover closing costs and resell. It’s the length of time those of us in the industry have always told buyers they need to plan to stay put in their home to avoid losing money. Traditional rules of thumb like not paying more than 3 times your income or 15 times the price you could rent for and putting 20% down still work today too. Clearly if you can buy a home today and rent it out to a tenant for a comfortable profit, this is a good time to buy.
But the ‘good time to buy’ debate is further complicated by the fact that housing, unlike most other places you may park your cash, is for most folks part investment and part consumption. And everyone needs to live somewhere. We know that paying rent is not a ‘good investment.’ And I’m not sure that anyone knows of a ’sure thing’ where any investment is concerned today. But that may be moot since we also know that folks who rent historically tend to spend, not invest their extra cash (though it is notable that today’s renter may differ). The role of homeownership as a forced savings account for retirement, safety net for those expected ‘unexpected emergencies,’ and financial foothold to upward mobility for a our rapidly shrinking middle class is well documented and seriously at risk should this ‘rent not own’ mentality take hold. The point being, that any discussion or whether to buy or not must extend beyond mere ROI.
On the pro side, home prices are actually appreciating in 24% of the markets we measure. Homes around the country are being bought at below replacement cost.
Housing’s always been a long term play. And in the long terms, even beginning now and even with further reductions in prices over the next few years, for many folks in many regions of the country, homeownership is the way to go. Even in the hardest hit areas like Florida, for example, home prices are double what they were 10 years ago. No doubt interest rates will continue to rise. And credit itself may tighten-to the point that some buyers no longer qualify for an affordable mortgage and are out of the buying market altogether. Clearly for those folks now is the time to buy. The truth is most buyers didn’t qualify for those ‘historically low ‘ interest rates anyway.
Last, but not least, remember that much of the talk about of losses in housing related to the banks and mortgage backed securities taking huge haircuts to move homes out of there portfolios. Their losses are often home buyers' gains.