For six months in a row, prices have fallen. Last year there were a million foreclosures. This year there will be at least a million more. Many homes are worth less than their mortgages and that number is growing fast. Meanwhile, the U.S. has 20 million people who are unemployed, underemployed or are no longer counted because they have been out of work for over 99 weeks. Also, high food and gas prices are pinching budgets. Why should you buy?
Speaking to you as 35 year real estate investor, my advice to you is to rent, not buy. Few people can afford to buy in this terrible economy and prices will keep tumbling. But if you have the money and want to buy, please do so only if you can afford to stay in your new home for at least 3 years and preferably 5. I'll explain:
The U.S. government tried to stabilize home prices by offering big tax benefits to buy homes and is still offering incredibly low mortgage interest rates. They nationalized the mortgage market under government owned Fannie Mae and Freddie Mac and by having Fannie and Freddie keep foreclosures off the market they hoped prices would rise. Instead, these programs are failures and have grossly distorted a marketplace that would have cleansed itself had the government allowed it to do so. Last year the major foreclosure sales actively began and the pace will increase this year and probably next year as well which will pressure prices downward.
But if you want to buy there is some good news. Although prices keep falling, you have many homes to choose from, including foreclosed homes and short sales, meaning the lender will forgive the seller part of the mortgage amount to allow a discounted sale. In many areas, more than half the sales are foreclosures and short sales. You may be able to afford a home that used to be well out of your price range.
If your credit is strong, you can also get a 30 year fixed rate mortgage in the 5% range, something that will become virtually impossible once inflation really kicks in and when the Fed stops manipulating interest rates down to artificially low levels. But even that is bad news for as interest rates rise, even fewer people will be able to afford to buy homes, unless sales prices continue to fall.
In any case, if you want to buy, please proceed with caution doing very careful market analysis with your local real estate professional.
Dick
2 comments:
I agree with your analysis of the market. While the governments extreme borrowing to push borrowing rates down and to try to jump start the economy may work for the short term, unfortunately it will likely just push the full cleansing down the road for a time in the future. There are many houses for sale and many more owned by lenders who do not want to "dump" them on to the market for fear of a massive price decline.
The danger in buying a house right now is looking only at what you are paying in comparison to what it was worth at the peak. In real estate circles, it is often described as "buying by the pound." The belief is that the correction has occurred and we will see the pricing come back and money will be made in appreciation.
I would advise analyzing a potential purchase as a business in and of itself. Will it cash flow (after expenses, including vacancy, mortgage, taxes, insurance, maintenance along with budgeting for a new paint job every ten years)? If the answer is yes, will it cash flow if the rent went down 10% (a month free on a 12 month lease is an 8% discount)? If so, then you are on the right track.
Location (preferably somewhere that has solid growth possibilities) and management are hugely important too. I'm not trying to talk anyone out of buying, only out of an impulsive buy based on nothing more than speculation.
Like you, I would encourage people to look seriously into trading their paper green backs into a tangible asset that unlike precious metals, can yield a cash return during the investment. It is certainly a hedge against inflation that people should consider.
Thank you for sharing your opinion and your experience!
Dear Reader,
beachft is my son Kyle who is a successful real estate syndicator and property manager. Please carefully consider his advice before buying a home or investing in real estate. Thank you.
Dick
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