Economist: Housing shortage coming in 2011

[Jhhnn]

Bingo.

A nice house in the Philly area is roughly a $250k mortgage (depends on the down payment and other factors of course). Lets just take a $300k house with a $50k downpayment as an example, leaving a $250k mortgage. At 4.75% interest rates that we have now, that mortgage will cost Evident $1304/month + insurance + taxes.

What happens if that house drops 10% in price in the next year so that Evident can get a $220k mortgage ($300*.9 - $50k downpayment)? Well, if the interest rates rise, like they probably will, Evident is probably worse off. If interest rates rise to your 6.5% example, he'd have to pay $1391/month + insurance + taxes for the cheaper house!

Today's known fantastic interest rate is often a better deal than a POSSIBLE 10% price drop in the future.

Of course, we shouldn't look solely at the monthly payment, as the length of time he stays in the house will also impact the decision. But, monthly payments are a very important factor.

That sounds peachy and all, but the possibility of getting upside down on home value is still quite real, for a lot of reasons. Once that happens, you're basically in lockdown. For some people, it's not a problem, but it's important to realize that it limits your mobility.

Lose your job, the local economy goes to hell and you have opportunities elsewhere? You're screwed.

Offered a promotion, but you have to move cross country? Sorry, Charlie.

Your income went up and you can afford payments on a nicer house? Just as soon as you can come up with the cash to get out from under your current house, you can move...

Need cash for medical bills or a terrific business opportunity? No cashout refi for you, because you're underwater...

Lots of other very negative scenarios wrt being upside down, so, uhh, yeh- low rates aren't a substitute for the right price... Thinking that is how much of the country got chumped, and chumped us all into the current mess...

 

[Hacp]

That sounds peachy and all, but the possibility of getting upside down on home value is still quite real, for a lot of reasons. Once that happens, you're basically in lockdown. For some people, it's not a problem, but it's important to realize that it limits your mobility.

Lose your job, the local economy goes to hell and you have opportunities elsewhere? You're screwed.

Offered a promotion, but you have to move cross country? Sorry, Charlie.

Your income went up and you can afford payments on a nicer house? Just as soon as you can come up with the cash to get out from under your current house, you can move...

Need cash for medical bills or a terrific business opportunity? No cashout refi for you, because you're underwater...

Lots of other very negative scenarios wrt being upside down, so, uhh, yeh- low rates aren't a substitute for the right price... Thinking that is how much of the country got chumped, and chumped us all into the current mess...

Actually when the mortage rate was 4.5%, it was a VERY good time to buy a house.If you take into account that the CPI is around 2.5-3%, then factor in tax breaks and subtract rent, you will almost always be way ahead with the house. Even if the house ended up going down 25%, you were still ahead at the end of 30 years.

 

[piasabird]

In 2009 people were using houses as an investment. They were purchasing houses because they would increase in price. Since houses are no longer doing that at such a high rate, then they are no longer such a good investment. Still, some people are snatching up houses at these lower rates simply because they are such a great deal. Logic goes that the housing market will go back up like the stock market. However, banks are still a little tight with the money and things are not improving at such a fast pace as they once were. People are right to be a little cautious. What makes realtors any more trustworthy than they were two years ago?

If you are actually keeping an eye on what is happening in Europe maybe we should be even more cautious with our money.

Look at Spain for example. Their bond rating has been downgraded twice in the last year.

This all depends if you are a "Have" or a "Have not". If you Have money it is a good time to buy.

 

[WhipperSnapper]

Logic goes that the housing market will go back up like the stock market.

What will happen if the economy goes further into the tank and fewer and fewer people are able to make their mortgage payments and fewer and fewer people are able to purchase houses? I don't see any reason why housing prices cannot and will not continue to decrease.

 

[blackangst1]

What will happen if the economy goes further into the tank and fewer and fewer people are able to make their mortgage payments and fewer and fewer people are able to purchase houses? I don't see any reason why housing prices cannot and will not continue to decrease.

I agree. I also think we havent seen the bottom, due to the fact foreclosures havent slowed down significantly.

 

[IHateMyJob2004]

http://finance.yahoo.com/news/New-home-sales-hit-record-low-apf-2245141272.html?x=0&.v=1

New housing starts in January were the lowest on record.

As article stated, there is still an oversupply!

 

[bfdd]

Housing shortage? Where? Last I heard the banks have a surplus of inventory.

 

[soccerballtux]

Actually when the mortage rate was 4.5%, it was a VERY good time to buy a house.If you take into account that the CPI is around 2.5-3%, then factor in tax breaks and subtract rent, you will almost always be way ahead with the house. Even if the house ended up going down 25%, you were still ahead at the end of 30 years.

at the end of 30 years, 80m baby boomers are dead.

 

[Jhhnn]

In general, rents are still a lot cheaper than payments on comparable properties, and there's no reason other than fluffery to think that today's prices are actually maintainable. Inventory is huge and growing, not to mention a lot of shadow inventory, bank owned properties that aren't on the market, foreclosures that are stalled, whatever. Lots of people who are dying to get out of their McMansions because they're house poor but can't because they're underwater. Lots of unemployment, and growing under employment. The stock market? highly unstable, because there are too many dollars at the top chasing too few real assets.

Want to really come out ahead? figure out your maximum house payment. Now go rent a comparable or lesser place for a lot less. Bank the difference. Wait for the market to stabilize- it will, at a lower level than today. Then use your savings as a downpayment. Screw the interest rate. Opportunities to refinance at a lower rate will likely occur more than once over the following 20-30 years, and they'll only be available to people who aren't underwater...

And never, never, take a cashout refi unless you're in desperate straights... or special circumstances work to your advantage.

We bought our house in 1992- a beat up HUD property in a comeback south Denver neighborhood- conventional mortgage, 5% down, $57K purchase price, 30 year note, 8% interest rate. Several years later, rates fell substantially, and we could refinance at 6-1/8%, but only if we took an additional $10K, to make it worth the broker's time. We did. The new note was for 15 years at 6-1/8%, and the payment only went up $20/mo. We put the $10K against the principal, put some extra against the principal every month, paid off the note in 2005.

Special circumstances, which we'd positioned ourselves to exploit when the time was right.

Think about it. More people have screwed themselves with a bad case of housefever than ever screwed themselves with cocaine, gambling, you name it.