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TMFBent (99.85)

Why You're Paying Too Much for a House This Year (Still)

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14

June 10, 2009 – Comments (5)

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Schiller lays it out.

Key conclusion:

Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.

Neither that boom nor that recession were as extreme as what we had and where we're going. Schiller doesn't mention interest rates. The only reason home prices haven't gotten even worse (yes, it could have happened) is because Bernanke, Geithner, and Obama are mortgaging everyone's future by borrowing unholy amounts of money in order to manipulate the treasuries market to try and keep rates down.

That's recently stopped working. If rates go up, prices on those houses have to fall further, more quickly, in order for people to be able to make the same payments and get the same house.

Here's what different interest rates imply about the price of a home with the same monthly "affordability"

 

 

implied haircut from interest rate changes

5 Comments – Post Your Own

#1) On June 10, 2009 at 10:06 PM, TMFBent (99.85) wrote:

That first table assumes financing the entire purchase. This one incorporates a 20% down payment (and is based on the going price on some houses I saw around here in a recent search)

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As I will be explaining to my agent, between a couple of months ago (those 4% rates) and now (just above 5.5 around here), the same $550K house is worth 8% less based on a given level of affordability -- unless they figure they can sell it to someone who's got an all cash offer.

Yeah, not likely.

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#2) On June 11, 2009 at 9:23 AM, saunafool (98.40) wrote:

I don't know what you're talking about. House prices always go up.

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#3) On June 11, 2009 at 10:08 AM, hiddenflem (79.16) wrote:

 Nice post, I was just doing the math on this last night myself...thing is, if we rent for another year that's $30k that goes to someone else's mortgage, and god only knows what rates will look like next year.

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#4) On June 11, 2009 at 12:50 PM, saunafool (98.40) wrote:

I was just doing the math on this last night myself...thing is, if we rent for another year that's $30k that goes to someone else's mortgage, and god only knows what rates will look like next year.

The $30k is irrelevant. You are paying to live somewhere. The thing that is important is how the $30k stacks up against how much you'd have to pay to buy the property you are currently renting.

If you can buy the property you are renting for for $300k, then you are spending 10% of the value ($30k/$300k) every year on renting. If that were true, you could "own" the place for 8% (interest rate of 5.5%, taxes of 1.5%, and maintenance of 1%). If that were the case, you'd be better off buying.

If buying the place is $600k, then you are currently renting for 5% of the value when buying would be 8.5% of the value--renting is a better deal.

Furthermore, the $30k you put in to "someone else's mortgage" will likely just be going down the sink-hole of lost value. Who cares if you paid $30k of their mortgage if the value of their place drops by $50k?

In a lot of places, renting is still cheaper than buying, and in a deflationary environment, renting and sitting on the sidelines and saving money seems to be the rational thing to do.

Good luck.

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#5) On June 11, 2009 at 8:26 PM, hiddenflem (79.16) wrote:

Thanks saunafool--a lot of what you are saying are things that I've been thinking about, and I did play with this calculator which I think is very useful in making such decisions: http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?_r=1

The most difficult part about it for me though is projecting how much further property values are going to deteriorate. We are looking in areas with good schools, which have a strong history of retaining their value...but still when I run the analysis in the calculator above, unless we are in an environment where property values are appreciating, it seems as though renting is the smart thing to do...which is a real bummer since we have been dreaming about owning a house for 10 years but have had too mobile a lifetyle to settle down...anyway, I appreciate the thoughts you shared.

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