If you're thinking about buying a house, read this!

[Riprorin]

Interesting interview with Sir John Templeton.

Judging by the number of large homes that are being built, I suspect that many are way overleveraged.

That doesn't bode well if the economy continues to go south.

I'm glad my little shack is paid for!

Bear Markets and Housing Prices

Bear markets and housing markets

Moving on to housing prices, Sir John comments: "Every previous major bear market has been accompanied by a bear market in home prices. . . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak." Sir John adds, "A home price decline of as little as 20% would put a lot of people in bankruptcy."

Sir John also had a few words about debt -- a four-letter word that folks seem not to care about: "Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more).

If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further." On that note, he has a word of advice: "After home prices go down to one-tenth of the highest price homeowners paid, then buy."

 

[cjchaps]

I'm actually looking to purchase my first home soon... I am a little worried about what will happen to the prices in a year or so 🙁

 

[Riprorin]

Originally posted by: cjchaps
I'm actually looking to purchase my first home soon... I am a little worried about what will happen to the prices in a year or so 🙁

If I were you, I'd hold off until things shake out.

You may want to read "Conquer the Crash" by Robert Prechter.

 

[BAMAVOO]

I have not seen houses go down ever. I bought a house and 2 years later made $14 thousand off of it. The house I am in now has not grown as fast, but I have gone up about $20 thousand in 5 years. A house is a very good investment, unlike a vehicle that drops dramatically.

 

[conjur]

In the larger, expensive cities (NYC, Seattle, San Fran, etc.) I could see that. Look at Houston after the oil bust. Housing is cheap down there from what I saw a few years ago.

 

[bcterps]

Originally posted by: BAMAVOO
I have not seen houses go down ever. I bought a house and 2 years later made $14 thousand off of it. The house I am in now has not grown as fast, but I have gone up about $20 thousand in 5 years. A house is a very good investment, unlike a vehicle that drops dramatically.

You obviously have not followed the housing market for very long. The housing market is cyclical, there will definitely be a time in the future when housing prices fall. Heck, it wasnt even 10 years ago when a lot of housing prices were low. Not all houses are good investments, you have to study the market in your area.

In general, the lower the value of your house, the less fluctuations you will have. It's the incredibly high priced homes that can fall in value quickly.

 

[DrPizza]

Originally posted by: BAMAVOO
I have not seen houses go down ever. I bought a house and 2 years later made $14 thousand off of it. The house I am in now has not grown as fast, but I have gone up about $20 thousand in 5 years. A house is a very good investment, unlike a vehicle that drops dramatically.

I agree... if I have x-amount of dollars to spend monthly between car and home financing, I'd put the largest possible amount towards the house, and as little as possible toward the car.... I spend no more than 30 minutes a day in the car, and it loses value over time, while the house goes up in value.

The advice given about the price of houses, I don't think is quite accurate. I think that applies more toward high end, specially built homes. I'm planning on building during the next few years, but I'm going to do 90%+ of the work myself. (I'm only contracting out the frame of the house, and possibly the excavation) Year 1: Purchase land (40 acres +/-) Year 2: foundation, some landscaping (pond) Year 3: framing, roof, exterior Year 4: interior, electrical, plumbing. It'll be nice to have a 2500 to 3000 sq foot home and have minimal financing (probably around 20k)

 

[kranky]

This danger is real. People are way too leveraged and the least little hiccup in their finances can cause them to default on the mortgage. Just because you might not have seen this happen before means nothing. Homeowners who are unemployed or underemployed can prop up their situation temporarily by refinancing but it seems many people who refinanced either took equity out or lengthened their term to lower the payments. Neither one of those does them any good. It seems like people don't think interest rates can ever go up again. They will - and when that happens the people who could buy a $300,000 home only because of the variable rate mortgage will find it difficult to find buyers.

Like many of you, I have friends who live way above their means by using debt to finance their extravagant purchases. All they care about is being able to make the monthly payment, because in their minds that means they are financially sound. If they are off work for six months due to illness, or their company outsources their work to India, or some other disaster happens, they are going to be sunk.

There's no good financial reason to do so, but if I had to I could pay off my mortgage today. Sure, a bigger house would be nice, but the one I have will not drop in value and will still be affordable to people if mortgage rates are 9%.

 

[leung324]

I have been telling my mom NOT to buy a house at this time in NYC. the prices are OUTRAGEOUS. I am telling her to wait till the price of house to fall, but she doesn't seem to believe the house price would ever fall.
A 2 small family house in here is around $500k. you can get a double size of this 2 family house as a single family house in jersey. mortgage rate is the lowest ever....so tempted

 

[Parrotheader]

Originally posted by: conjur
In the larger, expensive cities (NYC, Seattle, San Fran, etc.) I could see that. Look at Houston after the oil bust. Housing is cheap down there from what I saw a few years ago.

I'm no economist, but that was my quick impression too. And I hate to say it, but a MAJOR terrorist attack in an urban area could easily lead to that as people start to try to spread out to get away from major centers. There would obviously be a trickle down effect to housing in other areas of the country, but it's tough to know how much so.

I know here in Alabama, there's not much room for houses to fall at the level he's talking about. If that was the case a 2,000 sq ft home in a decent neighborhood would suddenly cost about the same as an economy car. 😕 Obviously prices COULD fall some, but I just don't see the level of adjustment that he's talking about taking place occurring here.

 

[Armitage]

Originally posted by: BAMAVOO
I have not seen houses go down ever. I bought a house and 2 years later made $14 thousand off of it. The house I am in now has not grown as fast, but I have gone up about $20 thousand in 5 years. A house is a very good investment, unlike a vehicle that drops dramatically.

My cousin was in a very bad position back in the early 90's in Thousand Oaks CA. IIRC He had a $300K home, the market fell, and he was upside down to the tune of about $100K for awhile. Luckily, he was able to ride it out until the boom years, but had to turn down some career opportunities because he couldn't sell his house and move. In that situation alot of people will literally abandon a property.

 

[djheater]

I have to admit I've considered this.

It is definately a possibility that I'll be fuX0r3d by a crashing market, however, I've got a few things going for me in my specific situation.

I'm doing a tear-down in a HIGHLY DESIRABLE neighborhood. 1950's 2 bedroom bungalows in this neighborhood are selling for $250,000. A new construction less than 4 blocks away sold for $799,000. We'll be spending $250,000 max (all we can afford, we already own the land).

I realize that a crash could take those values away, but I do believe that if we can hold out then we'll still end up making it back. A crash is not assured. They've been predicting it for five years and it hasn't happened yet.

Here's hoping. 😉 Which is all us suckers can do.

 

[dquan97]

I'm planning on buying a house within 2-3yrs from now...after we saved 6months worth of expenses. Hope that the bubble bursts before then.

 

[DrPizza]

Originally posted by: kranky
It seems like people don't think interest rates can ever go up again. They will - and when that happens the people who could buy a $300,000 home only because of the variable rate mortgage will find it difficult to find buyers.
.

You'd have to be a fool to get a variable rate mortgage at this time... Interest rates are at the lowest ever.

Or did you mean, the interest rates vary from time to time?

 

[rudder]

Originally posted by: BAMAVOO
I have not seen houses go down ever. I bought a house and 2 years later made $14 thousand off of it. The house I am in now has not grown as fast, but I have gone up about $20 thousand in 5 years. A house is a very good investment, unlike a vehicle that drops dramatically.

Move to the town where I live. I will be getting about $1000 less for my house than I paid for it. But the town has 12% unemployment and I am lucky to be getting rig of it. I also know of other area in the country where people houses are worth less than when they paid for them Its definetly a regional thing.

I am moving only an hour north and the housing market is alittle more sane. Although the person in the house I want to buy paid too much for the house when he bought it new 5 years ago and won't come down to what I want to pay for it. So I think I have decided to build. At least I will move into a house that I could probably make $10,000 right off the bat. Eases the pain a little.

 

[djheater]

Originally posted by: DrPizza

Originally posted by: kranky
It seems like people don't think interest rates can ever go up again. They will - and when that happens the people who could buy a $300,000 home only because of the variable rate mortgage will find it difficult to find buyers.
.

You'd have to be a fool to get a variable rate mortgage at this time... Interest rates are at the lowest ever.

Or did you mean, the interest rates vary from time to time?

You'd have to be a fool only if you plan on staying for more than five years.

There are plenty of guys I know getting ARM's at under 5% and they plan on moving. I agree you'd be a fool if you plan on living there for 20 years.

 

[wnied]

I'm planning on building during the next few years, but I'm going to do 90%+ of the work myself. (I'm only contracting out the frame of the house, and possibly the excavation) Year 1: Purchase land (40 acres +/-) Year 2: foundation, some landscaping (pond) Year 3: framing, roof, exterior Year 4: interior, electrical, plumbing. It'll be nice to have a 2500 to 3000 sq foot home and have minimal financing (probably around 20k)

If your going to do it this way you'd better have good insurance or your neighborhood better have good police protection. Around this way, if a house is built slowly, it runs the risk of kids or teens getting into it and trashing it or making it their new party spot, which essentially is the same as trashing it. A family a few miles down the road, had their house trashed by the contruction vehicles that were parked on their property, by kids who hotwired an earthmover...Hence why most houses around here go up within relatively a months time.


Just a thought to give your brain something to chew on.
~wnied~

 

[dullard]

I'm actually hoping it will bubble - just before I buy...

 

[fonzinator]

Originally posted by: dullard
I'm actually hoping it will bubble - just before I buy...

You and every other buyer out there. Every seller out there hopes for the exact opposite. I'm with you...looking to buy for the first time within the next 1-1.5 years.

 

[kranky]

Originally posted by: djheater

Originally posted by: DrPizza

Originally posted by: kranky
It seems like people don't think interest rates can ever go up again. They will - and when that happens the people who could buy a $300,000 home only because of the variable rate mortgage will find it difficult to find buyers.
.

You'd have to be a fool to get a variable rate mortgage at this time... Interest rates are at the lowest ever.

Or did you mean, the interest rates vary from time to time?

You'd have to be a fool only if you plan on staying for more than five years.

There are plenty of guys I know getting ARM's at under 5% and they plan on moving. I agree you'd be a fool if you plan on living there for 20 years.

The risk is related to being able to sell the home without losing money. The people I know who have ARMs have very expensive homes.

 

[DBL]

Originally posted by: Riprorin
Interesting interview with Sir John Templeton.

On that note, he has a word of advice: "After home prices go down to one-tenth of the highest price homeowners paid, then buy."

Well, this is certainly a doomsday scenario. Home prices could certainly drop, but to 10% of their highs? No way that's going to happen w/o some near apocalyptic disaster. There are people who have extreme views on either side of the debate but IMO, the truth probably lies somewhere in the middle.

Besides, buying a home is more than just an investment anyway. If you don't buy, then you must rent, so you cant just judge the value of the investment by appreciation/depreciation alone. I just bought a condo in February after signing a contract last August (title problems, estate, divorce situation all in one). It's possible that in 5 years the condo could depreciate, say 30%. Well, in the span of that time, had I not bought, I would have continued to pay my $900/month (assuming a stable rent) rent for a total of $54,000 down the drain. Well, the condo, which was 300k, is now worth 210k for a loss of 90k. So, under severe circumstances, I could be down 36k in 5 years, not the 90k it might appear. In addition, I get to live in a much nicer condo than my old rental apartment. Assuming, I choose to live for a longer time in the condo, I could easily ride out the downswing and be back where I started a few years later, meanwhile the person who refuses to buy is still throwing a rent check away every month and continues to struggle.

This is of course what I consider to be an extreme situation. When I signed my contract, I got the feeling some people thought I was crazy for paying the price I paid (never mind that after tax breaks, I only pay about $300 more than my old rental). In reality, my condo has already appreciated 17% (judging by other identical sales in my building) since I signed my contract last August, which means that even if I my condo were to lose 30% in the next five years, I would have spent $1k more than if I had rented the whole time. Not too bad, huh, considering that's the extreme end (unless you believe the doomsday scenario).

I realized I forgot to also include the principal that I would accumulate. In 5 years, it comes out to ~17k, decreasing my actual loss by almost half.

 

[JEDI]

Originally posted by: Riprorin
Interesting interview with Sir John Templeton.

Judging by the number of large homes that are being built, I suspect that many are way overleveraged.

That doesn't bode well if the economy continues to go south.

I'm glad my little shack is paid for!

Bear Markets and Housing Prices

Bear markets and housing markets

Moving on to housing prices, Sir John comments: "Every previous major bear market has been accompanied by a bear market in home prices. . . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak." Sir John adds, "A home price decline of as little as 20% would put a lot of people in bankruptcy."

Sir John also had a few words about debt -- a four-letter word that folks seem not to care about: "Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it's bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more).

If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further." On that note, he has a word of advice: "After home prices go down to one-tenth of the highest price homeowners paid, then buy."

why would they go bankrupt if the house prices fall? the banks wont re-assess house prices or demand all the morgage immediately.

 

[dullard]

Originally posted by: fonzinator
You and every other buyer out there. Every seller out there hopes for the exact opposite. I'm with you...looking to buy for the first time within the next 1-1.5 years.

Not every seller - only the sellers who are plan to go down in house value. For example suppose you own outright a $300,000 home and want to move into a $400,000 home. If you do it now it will cost you $100,000 (lets keep bank fees and real estate service fees out of the picture for simplicity). But if prices are suddenly cut by 25% - your house is now worth $225,000 and your desired house is worth $300,000. Thus it will only cost you $75,000 to move into that better house. Heck even take the ultimate extreme: prices plummet to $0. In that case you get a much better house for free.

The only sellers who are hurt by lowered house prices are:
1) those who sell the house and don't buy another (for example if you inherit a house or if you move into a retirement home), or
2) those people who downgrade and move into smaller, less expensive house. But this is usually a bad thing to do due to taxes.

Lower house prices are better for the majority of people. (This will change as the population ages though).

 

[DBL]

Originally posted by: JEDI

why would they go bankrupt if the house prices fall? the banks wont re-assess house prices or demand all the morgage immediately.

Yeah, I didn't really understand this either. I guess they assume people will also be losing their jobs at the same time and be unable to sell w/o owing a lot of money due to decreased value of the home.

 

[TranceNation]

stupid question but why would there be bankruptcies if home prices came down?