正文
US Housing Crash Continues
Why It\'s A Terrible Time To Buy
By Patrick Killelea, Fri May 16 2008
1. It\'s still much cheaper to rent than to own the same thing. Yearly rents are less than 3% of purchase price. Mortgage rates are 6.5%, so it costs more than twice as much to borrow money to buy a house than it does to rent the same kind of house. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting. Buying a house is a very bad deal for the buyer. Put in the numbers for your own area here.
2. Salaries cannot cover current house prices. This means house prices must keep falling or salaries must rise much faster. You probably noticed that your salary is not rising much, and that inflation in food, energy, and medical care has been more than 20% per year. This leaves less money available to pay for housing. A safe mortgage is a maximum of 3 times the buyer\'s yearly income, but most mortgages are well beyond that. Anyone who buys now will suffer losses immediately, and for the next several years at least, as prices keep falling.
3. Prices disconnected from Gross Domestic Product. The value of housing in the US depends a lot on the value of what the US actually produces.
4. Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and senators are talking about taking your money to pay for your neighbor\'s McMansion, even though no one in the US has been made homeless by foreclosure. In fact, forclosed owners end up far better off: they go reap large savings every month, since it costs less than half as much money in rent as they were paying to own the very same thing.
Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the default risk onto Fannie Mae (taxpayers) or onto buyers of mortgage-backed bonds. Now that it has become clear that a trillion dollars in mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage-backed bonds. This means that the money available for mortgages is falling, and house prices will keep falling, probably for 5 years or more. This is not just a subprime problem. All mortgages will be harder to get.
A return to traditional lending standards means a return to traditional prices, which are far below current prices.
5. Interest rates increases. When rates go from 5% to 7%, that\'s a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate. The housing bust still has a very long way to go.
For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays for an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for an interest-only loan of only $171,428.
Recent lower Fed inter-bank lending rates do not directly affect mortgages rates, nor do extra Fannie or FHA guarantees. The 30-year fixed mortgage rate actually went up after the Fed\'s rate cut, because rate cuts cause higher inflation.
Also note that unlike the last few years, most lenders now require a 20% downpayment. That will eliminate many buyers from the market, driving down prices.
6. Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he\'s bankrupt in the real world.
It\'s worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6%. On a $300,000 house, that\'s $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.
7. Shortage of first-time buyers. High house prices have been very unfair to new families, especially those with children. It is literally impossible for them to buy at current prices, yet government leaders never talk about how lower house prices are good for pretty much everyone, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. If you own a house and ever want to upgrade, you benefit from falling prices because you\'ll save more on your next house than you\'ll lose in selling your current house. Every affordability program drives prices higher by creating more debt for buyers to use. To really help Americans, Fannie Mae and Freddie Mac should be completely eliminated, along with the mortgage interest deduction. Canada has no mortgage-interest deduction at all, and has a more affordable housing market because of that.
The government keeps prices unaffordable through programs that increase buyer debt, and then pretends to be interested in affordable housing. No one in government except Ron Paul ever talks about the obvious solution: less debt and lower house prices. The real result of every affordability program is to keep you in debt for the rest of your life so that you have to keep working. Lower house prices would liberate millions of people from decades of labor each.
8. Surplus of speculators. Nationally, 25% of houses bought the last few years were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that Investor-driven price appreciation looms over some housing markets.
9. Fraud. It has become common for speculators take out a loan for up to 50% more than the price of the house he intends to buy. The appraiser goes along with the inflated price, or he does not ever get called back to do another appraisal. The speculator then pays the seller his asking price (much less than the loan amount), and uses the extra money to make mortgage payments on the unreasonably large mortgage until he can find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn\'t work at all, unless the speculator simply skips town with the extra money.
10. Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 62. The only money they have is equity in a house, so they must sell.
11. Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse.
12. The best summary explanation, from Business Week: Today\'s housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy\'s long-term prospects will get worse or rates will rise. In either scenario, housing will weaken.
Why It\'s A Terrible Time To Buy
By Patrick Killelea, Fri May 16 2008
1. It\'s still much cheaper to rent than to own the same thing. Yearly rents are less than 3% of purchase price. Mortgage rates are 6.5%, so it costs more than twice as much to borrow money to buy a house than it does to rent the same kind of house. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting. Buying a house is a very bad deal for the buyer. Put in the numbers for your own area here.
2. Salaries cannot cover current house prices. This means house prices must keep falling or salaries must rise much faster. You probably noticed that your salary is not rising much, and that inflation in food, energy, and medical care has been more than 20% per year. This leaves less money available to pay for housing. A safe mortgage is a maximum of 3 times the buyer\'s yearly income, but most mortgages are well beyond that. Anyone who buys now will suffer losses immediately, and for the next several years at least, as prices keep falling.
3. Prices disconnected from Gross Domestic Product. The value of housing in the US depends a lot on the value of what the US actually produces.
4. Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and senators are talking about taking your money to pay for your neighbor\'s McMansion, even though no one in the US has been made homeless by foreclosure. In fact, forclosed owners end up far better off: they go reap large savings every month, since it costs less than half as much money in rent as they were paying to own the very same thing.
Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the default risk onto Fannie Mae (taxpayers) or onto buyers of mortgage-backed bonds. Now that it has become clear that a trillion dollars in mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage-backed bonds. This means that the money available for mortgages is falling, and house prices will keep falling, probably for 5 years or more. This is not just a subprime problem. All mortgages will be harder to get.
A return to traditional lending standards means a return to traditional prices, which are far below current prices.
5. Interest rates increases. When rates go from 5% to 7%, that\'s a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate. The housing bust still has a very long way to go.
For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays for an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for an interest-only loan of only $171,428.
Recent lower Fed inter-bank lending rates do not directly affect mortgages rates, nor do extra Fannie or FHA guarantees. The 30-year fixed mortgage rate actually went up after the Fed\'s rate cut, because rate cuts cause higher inflation.
Also note that unlike the last few years, most lenders now require a 20% downpayment. That will eliminate many buyers from the market, driving down prices.
6. Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he\'s bankrupt in the real world.
It\'s worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6%. On a $300,000 house, that\'s $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.
7. Shortage of first-time buyers. High house prices have been very unfair to new families, especially those with children. It is literally impossible for them to buy at current prices, yet government leaders never talk about how lower house prices are good for pretty much everyone, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. If you own a house and ever want to upgrade, you benefit from falling prices because you\'ll save more on your next house than you\'ll lose in selling your current house. Every affordability program drives prices higher by creating more debt for buyers to use. To really help Americans, Fannie Mae and Freddie Mac should be completely eliminated, along with the mortgage interest deduction. Canada has no mortgage-interest deduction at all, and has a more affordable housing market because of that.
The government keeps prices unaffordable through programs that increase buyer debt, and then pretends to be interested in affordable housing. No one in government except Ron Paul ever talks about the obvious solution: less debt and lower house prices. The real result of every affordability program is to keep you in debt for the rest of your life so that you have to keep working. Lower house prices would liberate millions of people from decades of labor each.
8. Surplus of speculators. Nationally, 25% of houses bought the last few years were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that Investor-driven price appreciation looms over some housing markets.
9. Fraud. It has become common for speculators take out a loan for up to 50% more than the price of the house he intends to buy. The appraiser goes along with the inflated price, or he does not ever get called back to do another appraisal. The speculator then pays the seller his asking price (much less than the loan amount), and uses the extra money to make mortgage payments on the unreasonably large mortgage until he can find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn\'t work at all, unless the speculator simply skips town with the extra money.
10. Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 62. The only money they have is equity in a house, so they must sell.
11. Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse.
12. The best summary explanation, from Business Week: Today\'s housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy\'s long-term prospects will get worse or rates will rise. In either scenario, housing will weaken.
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