http://www.businessweek.com/magazine/content/06_45/b4008063.htm?chan=rss_topStories_ssi_5 How common is this boom-bust-boom pattern? Over the past three decades about 40% of housing busts in big metro areas have eventually been followed by strong recoveries. That's according to a BusinessWeek analysis of inflation-adjusted housing prices. In an additional 15% of markets, prices adjusted for inflation barely got back to their previous peaks after 15 years. In the remaining 45% or so of markets, prices adjusted for inflation were still down a decade and a half after their pre-bust peaks.
Whatever you do, dont catch a falling knife. Base your financial decisions on sound fundamentals. A house is a place to live, not a pathway to wealth. Too many people have bought into this belief and now will be paying the price. It is sad to watch these modern day snake oil salesman prey on the ignorant. If you are going to buy a house, look at all the facts. I know people who have bought houses and now are regretting their decisions. I tried to warn them, but they believed in the mantra that housing only goes up in value.
I wanted to revisit this idea a few months later. Here in Utah, the housing market has slowed down but is still very strong. In other parts of the country, prices have plummeted and continue to lose value, correct? Just curious if anybody here has any personal experience or thoughts with the current situation. Also of interest: mortgage rates and how they affect the market? Also the subprime lending hubbub lately. I haven't read a LOT about it, but does this mean there will be a sharp increase in foreclosures in the near future. Or has there been already? Sorry for the basic questions. I'm just starting to realize I actually like economics and I'd love to hear some personal opinions instead of just news reports.
FWIW, my aunt (a real estate agent in the Hartford area) owns a condo in the Roxbury section of Boston, near Northeastern, in supposedly a "urban renewal" area. Currently my older and younger cousins live at the condo, with my older cousin's girlfriend also with them. Older cousin has graduated and is paying rent, while my younger cousin does not, as he is a student at Northeastern and his parents are very generous. Younger cousin is moving out to an apartment by Fenway for his senior year, so my older cousin offered to buy the condo and maybe have some friends/renters live with them. Uncle said no, since after owning the property for 3 years at market value they would suffer a loss. In suburban Hartford, the prices for your more luxurious homes has come down quite a bit, and foreclosures are becoming more common.
Mortgage rates affect the market directly by essentially driving up the cost of buying a home. For example, at a 6% rate, you may be able to afford a $250,000 home. But at 6.5%, you may only be able to afford a $200,000 home. Both mortgages would have the same payment, but the amount that goes to interest is much higher at the higher rate. BTW, by any measure, mortgage rates are still incredibly low Mortgage rates are not really tied to the "prime rate" the papers talk about. They are more closely tied to the 10 year T-bill rate, which makes sense, because the prime rate is an overnight rate, while the 10 year T-bill rate is a long term rate. A large number of buyers had either subprime or exotic mortgages. Exotic mortages are different types of adjustable rate mortgages (ARMs), interest-only mortgages and some other even stranger ones. The reason why they have those mortgages is usually because their credit isn't strong enough for a 30 year fixed rate or a more convention ARM. The subprime/exotic mortgage debacle affects the market in three ways: 1. Those buyers who were in the market only because they could get a non-standard mortgage are effectively out of the market. Banks are reverting back to the more traditional mortgage rules. 2. Foreclosures drive up the supply of available housing, despressing prices overall. 3. Foreclosures can affect neighborhood resale values by skewing comprables, which is how appraisers price houses. Also, most foreclosures are poorly maintained to begin with and effect neighborhoods through blight.
I saw an article in the NY times a few weeks ago about how the foreclosures seem to be concentrated in a small number of neighborhoods. It was absolutely killing the property values in those neighborhoods since there were so many units available.
I'm thinking about refinancing right now and I watch the mortgage rates every day in hopes of seeing them go down a little more. The difference of .125 is approximately $20 for me, so it's not a big deal but I still want to make the best deal I can with something so long term. Also, we are considering selling our home in the near future, so we don't want to be saddled with a lot of upfront mortgage fees. So for us, we're looking for the rate to be reasonable at zero points. If we want 6.125% for example, right now the closing costs would be $1,600. If we are willing to go to 6.375% then we can get a no cost refi. However, if rates go down a bit we can get the 6.125% at no cost.. etc. Every morning that I don't lock in a rate is a gamble. (Went down last week a bit but went up again Friday. What will this morning bring?) This is interesting to me--I knew there were more foreclosues recently, but hadn't considered how that affected appraisals and neighborhood values. My brother used to be a real estate appraiser so I'm well aware of the importance of good comparables. Every time a nice, expensive home sells in my neighborhood I cheer. (My neighborhood is all new construction (as of 2003) and we were in phase one, so we didn't know how the rest of the neighborhood would pan out. Turns out that mostly the second phase homes are nicer and larger than phase one (and larger and nicer than required by the CCRs), which is good for us and the neighborhood as a whole.) Thanks for the real estate thoughts, all. I've become a bit obsessed with real estate lately and I'm thinking I might have to take an econ class before too long.
Don't refinance if you're considering selling. There's absolutely no need to go through all of that twice. If you need the cash, open a Home Equity Line of Credit (HELOC). It will be more expensive in terms of interest, but it's a lot more flexible. If you decide not to sell, you can close the HELOC and just pay it off over time. Also, having a HELOC is a prudent use of leverage, assuming you have some financial discipline. A HELOC, properly used, can provide a substantual cash cushion for large expenses, like when the HOA decides to assess you $10K to replace the flower beds. Sachin
$10K for flower beds... Ouch. Got some news today that makes it look more likely that we'll be staying put. So I'll probably lock a rate tomorrow if it stays even or drops another eighth. Thanks for the sound financial advice, though. I'll keep that simmering in the back of my mind for the future.