Posted on 09/21/2007 10:49:53 PM PDT by Freedom_Is_Not_Free
I’ll repeat my answer for your benefit.
I agree with buying a small starter home, just not at this time.
Home prices are still falling.
Both the author of the work I posted, and I, believe that the time to buy the small starter home is a few years from now, but not right now.
Right now, most owners still think their homes are worth near their peak value. Many are reducing their home asking prices slowly over time. These homes are STILL not selling because they are STILL priced to high.
I agree. It is a good idea to buy a small starter home rather than rent. I believe it is a bad idea to buy a small starter home today while owners refuse to reduce their too-high asking prices. I believe it will be a good idea to buy a small starter home in 2-4 years, when owners are forced to get more realistic about the lower value their homes have than they currently think they have.
All of this ONLY pertains to the bubble areas that saw insane appreciation all out of whack with salary increases or inflation rates, and none of this pertains to areas that were passed over by the bubble.
The author single point is, in bubble areas homes are unaffordable and are much higher than salaries, so people who want to buy a home should wait a couple of years for them to come down in price.
The author is not saying to rent the rest of your life. The author is saying, to wait 2 or 3 years then buy that starter home for less than you would have to pay today.
If my tone is overly redundant in this post, it is because in addition to answering your question, I have also had a small parade of forum members who have replied in ways that make me wonder if they ever bothered to read the original article I posted. I have had quite a few members say “don’t rent, never rent, rent is for losers, buy buy buy, etc...”
They seem to be completely missing the point of the article which is not “rent for life” but “bubble homes are dropping in price so wait a year or two.”
I have gone beyond that in my responses to some of these posters, and have tried to make the theoretical case that if rent is really dirt cheap, or you live with mom and dad for free, and if homes are really expensive, then it would be economically advantageous to rent cheaply than to buy exorbitantly. This suggestion has left me flayed, drawn and quartered by those who read the word “rent” and mentally melt down on the spot, as if it is equivalent to child molestation or something...
I’m really frustrated with those members. Maybe they didn’t read the posted article or refuse to accept the fact that, if you believe home prices in bubble areas are still coming down, it would be smart to wait until they near bottom-ish (you can NEVER time the bottom), than to pay inflated asking prices now. Maybe they are current owners who refuse to accept the fact that the housing bubble burst and their homes are not still worth their peak, artificially-elevated, speculator-induced values.
I don’t know.
Again, a lot of my ranting in this post is directed towrd those members, not toward you.
The simple answer for you is...
Those who want to buy homes in bubble cities should wait a year or two to buy a home at a lower prices than the still-inflated prices sellers hope to get today.
You believe that, or you dont.
Renters are horrible people, un-American and un-Godly. They are low achievers who watch TV in their underwear and scratch at themselves incessantly. They eat tuna out of the can, then wear the cans on their heads like tiny hats.
I think that the liquidity crunch in housing is just the beginning of a sea change in the housing market. One of Minsky’s ideas was that financial innovations increase booms but also work in reverse to increase busts. This can bee seen in the housing market in that MBSs or CDOs (whatever you wish to call them) allowed banks to lend to much riskier borrowers. This obviously was a factor increasing the strength of the housing boom. How will it work in reverse? Quite simply, the act of selling mortgages into the market for CDOs means that banks and mortgage brokers lose the discretion they previously had over lending. In the good old days a bank could decide what interest rate to charge a borrower etc. Now the market is going to dictate to banks what interest rates they are going to change borrowers. This interest rate will be determined by the rate at which the market clears CDOs. The riskier buyers of CDOs view the mortgage market the higher rates on CDOs will be. In turn banks will not be able to make mortgage loans for rates less than the market rate on CDOs for obvious reasons (what bank would make loans at 6% only to sell them off at CDOs with rates of 7%0. Right now the market is focusing on the mortgage default rate as the factor that is undermining CDO prices. However there are other factors that may soon enter the picture. For example, falling house prices will lead to higher CDO rates as the security for 100% 95% or even 90% mortgages is undermined. One can see the implications of this for the ability of the Fed to stabilise the housing market through cuts in the discount rate. Basically, while the Fed may cut its rate, mortgage lending rates are likely to increase because of increased risk, this being dictated to banks by market rates on CDO. So the spread between the Fed Funds rate and mortgage lending rates is likely to increase. If this happens it would be a complete validation of Minsky’s theory about financial innovation.
Written by Alex Grey on 2007-08-24 16:14:44
http://www.rgemonitor.com/blog/roubini/211982/
This is the type of problem I was talking about when I asked if you could get 5% down loans today.
From this link...
http://www.dailynews.com/business/ci_6972508
Mortgage malaise
Lending changes trip up homeowners
By Barbara Correa Staff Writer
Article Last Updated: 09/23/2007 12:08:19 AM PDT
Just last month, Patti Hutchinson and her husband were in escrow on a $675,000 home in Torrance. They had prequalified for a traditional 30-year loan, had a strong income and agreed to a 5 percent down payment.
But then a series of volatile swings hit the stock market as fear about the subprime mortgage market spread. Suddenly, the Hutchinsons’ slightly less-than-perfect credit scores turned them into a liability. Their lender said they’d have to up the down payment to 15 percent, and then he raised the interest rate on the loan to double digits.
Adios escrow
The Hutchinsons bailed out of escrow, and they plan to stay in their rental house until next year.
“We were very disappointed,” said Patti Hutchinson, who works at Honda’s U.S. headquarters in Torrance. “We took all the right steps to get into something and got prequalified and provided everything possible. I don’t know what else I can do.”
Battered by a hemorrhaging mortgage industry, weak credit markets and Alan Greenspan’s prediction of double-digit interest rates and recession, prospective homebuyers are watching the rules change overnight.
The article called them “subprime” and “slightly less than perfect” credit.
Honestly, I’d have to look at that file to see what they’d qualify for.
Being over Fannie Mae and Freddie Mac’s $417,000 max loan size makes it a lot harder.
Gotcha.
Thank you for repeating your comments for me. I read the article above but did not go to the link.
I have a close family member in Real Estate in the Austin, Texas area. Very expensive homes and they have been dropping the prices for some time but still are very high.
Prices depend a lot on the area of the country you live in, state and city. A beautiful home in some southern states would be double the price in the northeast.
If my comments seemed emphatic it may be because I watched a couple of families live in rentals all their lives and then be left with nothing. Naturally that affected my viewpoint.
Good luck and hope you find a good one when the time comes!
Your welcome.
I hope we can all agree that if you rent and don’t invest a penny of what you save over buying, you are going to end up with cat food and stale bread atop the menu. If you don’t save, you won’t have anything saved.
I’ve never seen anybody that foolish, but I have limited experience in that regard. All of the older people I know saved something as they went along in life.
What I could never get a straight answer on was the affordabilty equation that used to be thrown around. That is, when buying a new home, it should not be more than 2.5 to 3 times your annual gross salary. Is this still relevant?
And is the above based on the home price or the loan? If it’s home price, seems faulty - one guy puts 5% down, another 10% and another 20% - all for a 220K home. So all 3 are different in the loan amount. So is the 2.5 x salary based on home price or loan?
“In ‘03 I looked at a nice condo in Santa Clarita for $175K. Four years later the same thing goes for $450K. Something is wrong. And my money says no.”
Well, either something is very wrong, or you missed a huge opporunity by not buying it then at that price. I don’t pretend to know which, but it doesn’t really make sense to me that the value of that home increased by over 150% in 4 years.
I thought the rule of thumb is, affordability is 3 times gross salary. So affordability for someone earning $80,000 a year is a home price of $240,000.
But in California, $240,000 is so far below the median, it is almost laughable. You can find basket cases in downtrodden neighborhoods for $100,000. You can find old fixers in questionable neighborhoods for $150,000. But ANY house worth a darn in a really cheap city will cost over $225,000 which means the CHEAPEST homes are within reach of people earning the median salary.
This is why Californians buy mostly ARMS and Jumbo loans.
I don’t use 3 times salary. I don’t care what I can “afford”. I am more interested in how the cost compares to rents. So I use the “300 x monthly rent” rule.
If I can rent a home for $1200 a month, I am not going to come out ahead financially buying a home that costs more than $360,000.
Moreover, as a single man who can rent an apartment for $800 per month, I am not going to come out ahead financially on any home that costs more than $240,000.
I actually calculated this out and I believe I wouldn’t come out ahead financially on any home over $225,000.
But my understanding of the house affordability formula is 3x gross annual income.
If you are familiar with where you want to live, get your own house inspectors to lower that price more. And a lawyer. And a P.I. to check out the neighborhood; they know cops. Offer a big down payment if it is what you want to live in. That's how to reduce the asking price beyond what you spend on the services. But wait a few more months for the firesales to start from the banks.
That's what I was saying. He must not have read clearly. And I pointed out that in some parts of the country you can live in a pretty nice house for the $500 a month number he mentioned.
I've never been one to invest in the stock market. Probably my loss, I know.
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