Is it Time to Buy a House?

Last Saturday, The Wall Street Journal had an interesting article suggesting that this is a good time to buy a house.  The article was called “Why It’s Time to buy”, and was written by Ruth Simon and Jessica Silver-Greenberg.  While the  article was well-written and made some good points, I must disagree with their conclusions.  I counsel my clients and friends not to buy a house or any other type of property now unless they can get a fantastic deal.  As a mortgage note buyer for many years, I keep close tabs on the real estate market and the general economy.

The facts presented by Ms. Simon and Ms. Silver-Greenberg are below.  Under each point, I have presented my counter-arguments in italics.

1. Mortgage rates are near 50-year lows and homes are more affordable relative to income than they have been in years.

Both points are correct.  However, just because home prices are low doesn’t mean that they cannot go a whole lot lower.  Would you buy a stock just because it had lost value, or would you want to understand why it went down and whether it is likely to continue on its current trajectory?  To me, there are many more factors driving
down real estate prices than the reverse.

2. The authors note that Moody’s Analytics think that the number of distressed sales will fall in 2013, and that home values will then start rising.

A number of economists and advisory firms have predicted that home values will hit bottom in either 2012 or 2013.   However, it should be noted that many of the same people have predicted a market bottom for the past several years and been abysmally wrong.  Unemployment is still high, and many of the new jobs are in the low-paying service sector, which would produce few families with the means to buy and maintain a house.

3. There are many more households being created each year, which should take a bite out of the housing glut.

First, nobody knows the full extent of the glut, as the banks haven’t shared the severity of their shadow inventory and there are hundreds of thousands of homes in various stages of foreclosure.   Second, as noted above, the creation of a new household does not equate to being a potential homeowner.  Third, loan limits for FHA, Fannie, and Freddie will be coming down on October 1, 2011, which will further limit the number of buyers.

The authors correctly note that home ownership has the advantage of being able to deduct the mortgage interest, paint the walls whatever color that you want, and to live financially freely when the mortgage gets paid off.  I agree with the principle of home ownership, but just not to buy yet.  I’d recommend that most people hold off for a few more years, at least until we how/if the government addresses the country’s problems.

The U.S.A. is in a financial hole from which it does not know how to escape.  If one includes future entitlement outlays, the debt runs into many trillions of dollars.  Neither the current administration nor the previous one had any clue on how to deal with the debts.  The politicians probably won’t adequately address the problems, so service cuts and higher taxes are certainly coming.  With the country’s deficits and unemployment picture causing so much instability, there is little to suggest anything other than a long period of lackadaisical home prices.