At the risk of sounding arrogant I am going to request that you either tell people about this entry, read it to them, or heck, print a copy. This topic effects all of our lives and people are being lied to, misled, and simply misinformed concerning the housing market. I will try to summarize what is really going on.
I came up with the idea for this post while watching CNBC this morning. A reporter came on with the most recent home sales data for the month of January. Everyone on the desk was completely perplexed that home sales were down 12% last month alone. You would have sworn someone just informed them their new Rolex was a fake. They, along with nearly every other talking head, have been babbling about a housing recovery. We have all heard someone, usually the self proclaimed financial genius, talk about how he's buying properties now. Then there's the "the best time to buy is when the market is down" line. Buying beaten down assets is almost always a good idea. Not this time. Homes aren't stocks. Homes have always appreciated more in line with the inflation rate, not the S&P 500. In short, there is no housing recovery. We may see things normalize a bit more but we will most likely never again see a real estate market that comes close to resembling the market of the past ten years. Here's why
First, it wasn't a real housing boom built on real demand. The government passed new legislation in the late 90's that opened up lending to less qualified buyers. The loans were fed into the market via Fannie and Freddie, the much maligned and federally backed mortgage companies. They required no down payment and offered the interest only loans that we have all heard so much about. Over night, the feds practically doubled the amount of buyers in the market. That's where the surge in demand came from.
Second, interest rates were at historical lows. People don't buy houses, they buy payments. Think about it. When looking at houses, how many people do you know that actually pay cash for their home? Don't most people figure out the maximum payment they can afford and calculate what purchase price that correlates too? Well, higher interest rates mean a larger monthly payment. The base interest rate for our entire country is referred to as the Fed Funds rate. That rate is essentially zero. Now stay with me here because this is where it starts to get a bit sticky. The government cannot keep spending the way they are and keep rates this low. That would cause massive inflation and I will talk more about inflation in a future post. Anyway, the point is that interest rates WILL rise. That will make house payments more expensive thus limiting further the price that the average consumer can pay for a home. Higher interest rates= lower home prices.
Third, we have a huge inventory of homes on the market. A recent market survey found that 10% of homes in America are currently vacant! Can you believe that? That number does not include homes that are behind on payments or homes that are currently in foreclosure. Furthermore, rising interest rates will create even more foreclosurse for consumers that have interest only loans with adjustable rates. The point is simply that we currently have a huge supply of available homes, far more homes than buyers, and a boat load of homes that will be available in the near future. Foreclosures are going to be abnormally higher for years to come. More homes than buyers means lower home prices.
Fourth, every foreclosure means one less buyer. This is HUGE and I have heard no one address this. We all get that foreclosures mean another house on the market at a lower price. What no one is mentioning is that foreclosure kills credit scores. On average, a foreclosure will prevent someone from being able to qualify for a loan for 7 years. So, not only does the foreclosed house go on the market thus increasing the suppy, but we also lose another prospective buyer. This aspect of the housing debacle may prove to be the most menacing for the years to come.
I don't say this to bum you out or keep you up at night. We have very little control, if any, over this situation. Don't worry too much about being upside down in your home. Keep paying your payments and focus on paying down that principal. Also, if you have an interest only loan, refinance into a fixed rate AS SOON AS YOU CAN!!! As mentioned before, rates are going up. If you are upside down with an adjustable rate, there are programs available to get you refinanced. Shoot me an email and I can point you in the right direction. There are options out there but you have to act. Don't bury your head in the sand. Also, unless you come across an unbelievable deal, do NOT buy investment homes right now. Anyway, I will keep you posted on any changes in the housing market. Until then, don't count on housing prices rebounding any time soon.
All right! Now that I have completely rained on the housing parade, I'm going to call it a night. Again, relay this message to as many people as you can. There is a lot of misinformation out there and people need to know the truth.
Zach
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