Tuesday, February 19, 2008

If You are Thinking of Buying a Home – Why Would You Do It?

The turmoil in the housing market is causing many buyers to just stand on the sidelines. And why wouldn’t you? Many of the mortgage apps are now failing because potential buyers can’t arrange financing. This is occurring because many potential buyers still think it is 2005 and not 2008. Also the people with money and good credit will not buy because they think they can get a better deal later. The real question that I have is how long does this need to go on before the American public realizes that a house is not an investment, but an asset. Then the issue becomes how much does it cost to carry the asset on your personal balance sheet? The issue of whether or not to buy a house is a cash flow issue and if you get appreciation on top of your purchase that is good luck. Text is bold is my emphasis. From the Reuters:

Home prices have plunged by 10 percent or more in some parts of the United States and interest rates on mortgages are at enticing levels, but many potential buyers are waiting for prices to fall further.

This psychology is helping prevent the hard-hit home market -- suffering one of its worst downturns in history -- from recovering, just as the spring, the peak home buying season, gets underway.

Rochelle Getzler, a housewife in Nassau County, outside New York city, and her husband, Abraham, have been on the fence for nearly a year, waiting for an opportune time to buy.
"I think it is too risky to buy right now," she said. "Yes, prices have come down, but they have come down from extremely high levels."

As is the case with a growing number of Americans, the Getzlers are also feeling the pinch of a weak U.S. economy: Abraham lost his job of over 20 years as a computer technician due to his company's efforts to cut costs. (If Abraham lost his job, why is he thinking of buying a house?)

Sharply higher gas and oil prices are also taking a toll on their monthly expenses.
"We have little wiggle room right now," she said.

"I think home prices are going to continue falling, so I see no compelling reason to buy a home right now when we can hold off and buy at a lower price later this year or early next year," she said.

Economists tend to agree. Housing markets in some parts of the country will suffer drops of more than 30 percent before the housing crisis is over, according to a report in December by Moody's Economy.com.

In Nassau county, where the Getzlers reside, and neighboring Suffolk county, prices peaked in February, 2006, should reach a trough in February, 2009, according to the report. In that time, they are expected to have fallen by 16.4 percent.

Punta Gorda in Florida and Stockton in California are the hardest-hit markets, with declines from peak-to-trough forecast at 35.3 percent and 31.6 percent, respectively, according to the report.

In 2008 alone, prices are forecast to drop from 1.2 percent to 7.7 percent, according to a report by Deutsche Bank.

The report forecast peak-to-trough declines of at least 9.8 percent, and perhaps as much as 29.5 percent, on average for 100 metropolitan areas in the United States.

Many regions succumbing to lower home prices were the biggest gainers during the housing market's heyday. Home builders overbuilt in these regions and speculators went on a buying frenzy, with lax lending standards stoking the flames.

Fast-forward to 2008 and the U.S. housing market is now in the midst of one of the worst slumps since World War II.

New home sales have fallen just over 50 percent from their peak in mid-2005. While that is above the 1987-to-1991 housing cycle downturn of 40 percent, it is slightly below the 1978-to-1981 drop of 56 percent, according to Citigroup.

The supply of new homes has grown to 9.6 months compared with a peak of 9.4 months in 1991 and 11.3 months in 1981. Existing home sales are currently at 1998 levels, down 30 percent from their peak, but the housing downturn lasting from 1978 to 1981 saw existing home sales fall just over 50 percent, Citigroup said recently.

"The economic fundamentals in housing are weak and I see no sign of a bottom," said Chris Mayer, director of the Paul Milstein Center for Real Estate at Columbia Business School in New York.

"People are also worried about their jobs and the economy, so there is also a psychological factor in play that has them in no rush to buy," he said.

Another major factor is that potential home buyers are finding it increasingly difficult to get a loan, he said.

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