US HOUSING CRASH CONTINUES.
Republication.
www.Apodimos.com
In order to we were not forgotten for the international economic crisis we will present to Greek-American our Emigrant brothers certain information that concerns acquisition of residences. Information that it should him has our all Greek and Emigrant brothers because the prices of home will continue in most places because those prices are still dangerously high against the incomes and the rents. The banks say that a sure mortgage is biggest 3 times of annual income of purchaser. The householders say that a sure price is biggest 15 times of annual rent of lessee. Still in the coastal regions, and those two rules of safety are still forced. The purchasers are lented still 6 times their income and the salesmen ask still 30 times annual rent, even after the recent falls of prices. The renting is a enterprise of meters that portrays what the persons can really pay, no how many they can be lent. This information’s emanates from www.patrick.net.
US Housing Crash Continues
It's Still A Terrible Time To Buy
Falling House Prices Are the Solution, Not the Problem
By Patrick Killelea
1. House prices will keep falling in most places because those prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's yearly income. Landlords say a safe price is a maximum of 15 times the tenant's yearly rent. Yet in coastal areas, both those safety rules are still being violated. Buyers are still borrowing 6 times their income, and sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that reflects what people can really pay, not how much they can borrow. Salaries and rents prove that prices will keep falling for a long time. Anyone who bought a "bargain" this time last year is already sitting on a very painful loss.
2. It's still much cheaper to rent than to own the same thing. On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6%, so it costs twice as much to borrow money for a mortgage than it does to borrow (rent) the house itself. Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting. Buying a house is still a very bad deal for the buyer on the coasts, but it does make sense to buy in Michigan and some other places where prices have fallen into line with salaries and rents. Check whether you should rent or buy in your own area with this NY Times calculator.
The bottom will be here when buying a house to rent out clearly makes money. At that point it's justified to buy because rent can cover the mortgage and all expenses if necessary, eliminating much of the risk.
3. It's a terrible time to buy when interest rates are low, like now. Realtors just lie without shame about this fundamental fact. Prices fall as interest rates rise, because a given monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. To buy at a time of very low interest rates is a mistake.
Even if you get a long-term fixed rate mortgage, when rates go up the value of your property will go down. If it goes down enough that you're underwater, you will not be able to refinance, and won't be able to sell without a loss.
4. The US economy will not recover until house prices are allowed to fall to prices buyers can easily pay on a normal salary. The primary evil in the economy is housing "affordability" programs which encourage debt, making prices higher, not lower. True affordability is not more debt -- true affordability is lower prices. The government's false affordability programs have created more debt than can ever possibly be repaid. Credit rating agencies lied about the value of this debt, scaring off investors.
When house prices finally fall to affordable levels, and foolish lenders and foolish borrowers are finally allowed to fail, then the economy will work again: there will be investment based on real production instead of on financial speculation, jobs will be created, and money will be earned and spent. Currently, we have no investment because the government is punishing savers and investors with policies that waste their honestly earned money to cover the foolish gambling losses of others.
5. Prices disconnected from Gross Domestic Product. The value of housing in the US depends a lot on the value of what the US actually produces. Not only is the GDP decreasing, jobs are being lost in large numbers. It does not make sense to buy when more jobs will be lost and the price people can pay will decrease. Unemployment drives housing prices down. It also does not make sense to buy when your own job is in danger.
6. Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and Congress is taking a trillion dollars of your money to pay the mortgage investment losses for banks. The plan is to overpay the banks for bad mortgages, claiming that this will support the housing market. It will not work, since bank profits have nothing to do with housing prices.
We also have legal contracts being modified to stop even well-justified foreclosures. No one was forced to borrow money. It was a choice -- a very bad choice, but completely voluntary. Grownups should be responsible for their own actions. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price, not to mention what this does to faith in contract law. No one in government or the press will even mention that everyone in foreclosure trouble got themselves into that spot by voluntarily borrowing too much money. Debt is the cause of massive evil.
Should taxes be used to pay the debts of irresponsible borrowers, no matter how much they over-borrowed or overpaid for a house? Should savers be forced to pay the debts of people who cannot afford "their homes" no matter what price they paid or how far it is beyond their actual financial means? If so, go buy the most expensive house you can right now! Borrow as much as you possibly can and don't pay it back, knowing that Congress will force the real repayment obligation onto others, onto people who are living within their means.
Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the default risk onto Fannie Mae (taxpayers) or onto buyers of mortgage-backed bonds. Now that it has become clear that a trillion dollars in foolish mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage-backed bonds. This means that the money available for mortgages is falling, and house prices will keep falling, probably for another five years or more. This is not just a subprime problem. All mortgages will be harder to get.
A return to traditional lending standards means a return to traditional prices, which are far below current prices.
7. Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.
It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6% because of the realtor lobby's corruption of US legislators. On a $300,000 house, that's $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.
8. Shortage of first-time buyers. High house prices have been very unfair to new families, especially those with children. It is literally impossible for them to buy at current prices, yet government leaders never talk about how lower house prices are good for pretty much everyone, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. If you own a house and ever want to upgrade, you benefit from falling prices because you'll save more on your next house than you'll lose in selling your current house. Every "affordability" program drives prices higher by pushing buyers deeper into debt. To really help Americans, Fannie Mae and Freddie Mac should be completely eliminated, along with the mortgage-interest deduction. Canada has no mortgage-interest deduction at all, and has a more affordable and stable housing market because of that.
The government keeps house prices unaffordable high through programs that increase buyer debt, and then pretends to be interested in affordable housing. No one in government except Ron Paul ever talks about the obvious solution: less debt and lower house prices. The real result of every "affordability" program is to keep you in debt for the rest of your life so that you have to keep working. Lower house prices would liberate millions of people from decades of labor each. I never see anything in the press about the millions of people that were hurt and continue to be hurt by high house prices.
The government pretends to be interested in affordable housing, but now that housing is becoming affordable, they want to stop it? Their actions speak louder than their words.
9. Surplus of speculators. Nationally, 25% of houses bought the last few years were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that "Investor-driven price appreciation looms over some housing markets."
10. Deflation. There is fear of inflation, but it's not likely in the next few years. The actual amount of money created by the Fed lately is a trillion dollars, which sounds huge, but is small compared to the $10 trillion drop in housing "values" and another $10 trillion drop in stock market capitalization. The US government will not print extreme amounts of cash like Zimbabwe did, because significant inflation would mean that foreigners would no longer lend money to the US government unless interest rates were much higher to compensate them for inflation losses. Higher interest rates would push more people with adjustable mortgages over the edge. The most likely scenario is like Japan: low inflation and low interest rates, with falling house prices for years to come.
11. Fraud. It was common for speculators take out a loan for up to 50% more than the price of the house. The appraiser went along with the inflated price, or he did not ever get called back to do another appraisal. The speculator then paid the seller his asking price (much less than the loan amount), and used the extra money to make mortgage payments on the unreasonably large mortgage until he could find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn't work at all, unless the speculator simply skips town with the extra money.
12. Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 62. The only money they have is equity in a house, so they must sell.
13. Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse.
14. The best summary explanation, from Business Week: "Today's housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy's long-term prospects will get worse or rates will rise. In either scenario, housing will weaken."
http://patrick.net/housing/crash.html
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Who disagrees that house prices will continue to fall?
Real estate businesses disagree, because they don't make money if buyers do not buy. These businesses have a large financial interest in misleading the public about the foolishness of buying a house now. The NAR has harmed America far more than terrorism did.
1. Buyers' agents get nothing if there is no sale, so they want their clients to buy no matter how bad the deal is, which is the exact opposite of the buyer's best interest. Agents take $100 billion each year in commissions from buyers. Agents claim the seller pays the commission, but always fail to mention that the seller gets that money from the buyer. Think about it: who brings the money to the table - the seller or the buyer? All money comes from buyers. No buyer, no money.
If a stock broker were to charge 6% on the sale of stock, he would quickly go out of business. Real estate brokers don't do much more than stock brokers, so why should you give up nearly two years of your working life earning money to pay a realtor for the few hours they may put into helping you buy or sell a house? 6% of the 30 years it takes to pay off a house is 1.8 years of donating your working time to realtors.
There are good buyer's agents who really believe they are helping the buyer, but they're in denial about their conflict of interests. Author Upton Sinclair had a great explanation for this: "It is difficult to get a man to understand something when his salary depends on his not understanding it."
2. Mortgage brokers take a percentage of the loan, so they want buyers to take out the biggest loan possible. Even worse - mortgage brokers get paid according to how bad the deal is for the buyer. The worse the deal is (higher interest rate, points, fees, etc) the more the mortgage broker gets!
3. Banks got origination fees and then sold most mortgages, so they did not care about the bankruptcy of borrowers. They would lend way beyond what buyers could afford because they thought they risked nothing if the buyer were to default. Banks sold most loans to the government agencies Fannie Mae or Freddie Mac. The conversion of low-quality housing debt into "high" quality Fannie Mae debt with the implicit backing of the federal government was the main support for the housing bubble. That is ending as Fannie Mae shrinks.
The other way for banks to dump the risk of loan default has been the Wall Street market for mortgage-backed securities. Now that mass foreclosures have eliminated the subprime portion of the loan-resale market, banks are under pressure to increase loan quality.
4. Appraisers are hired by mortgage brokers and banks, so they are going to give the appraisals that mortgage brokers and banks want to see, not the truth. Appraisers that kill a deal by telling the truth do not get called back to do other appraisals.
5. Newspapers earn money from advertising placed by realtors, lenders, and mortgage brokers, so papers are pressured by that money to publish the real estate industry's unrealistic forecasts. Worse, realtors have a near-monopoly on sale price information, and newspaper reporters never ask realtors hard questions like "how do we know you're not lying about those prices?" The result is an endless stream of stories reporting that the National Association of Realtors (NAR) says it's a good time to buy. Asking the NAR about housing is like walking into a used car dealership and asking the salesman if today would be a good day to buy a car.
6. Owners themselves do not want to believe they are going to lose huge amounts of money.
http://patrick.net/housing/crash2.html
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What are their arguments?
1. Houses always increase in value in the long run.
FALSE. House prices cannot increase more than incomes in the long run. This is obvious if you think about it. If house prices go up more than people can afford to pay, buying stops, like it has stopped now.
For example, prices in the Netherlands are about the same as they were 350 years ago, in terms of how many years of work it takes to buy a house. Warren Buffett and Charles Schwab have both pointed out that houses don't increase in intrinsic value. Unless there's a bubble or a crash, house prices simply reflect current salaries and interest rates. Consider a 100 year old house. Its value in sheltering you is exactly the same as it was 100 years ago. It did not increase in value at all. It did not spontaneously get bigger, or renovate itself. Quite the opposite - the house drained cash from its owners for 100 years of maintenance, taxes, and insurance - costs that always increase and never go away. The price of the house went up about as much as salaries went up.
My grandmother always used to complain about the cost of milk. "Why, when I was a girl, a gallon of milk cost a dime! Just look at how much people are overcharging for milk now." I asked her how much people got paid back then. "Oh, about $15 a week", came the reply. Hmmm, sounds very much like the reasoning people use now when they talk about how much their father's house appreciated "in the long run" without considering that inflation and salaries rose a proportional amount.
2. As a renter, you have no opportunity to build equity.
FALSE. Equity is just money. Renters are actually in a better position to build equity through investing in anything but housing. Renters can get rich much faster than owners, just by saving the money that owners are wasting on mortgages, taxes, and maintenance and investing it conservatively in anything that pays reliable interest or dividends.
a. Owners are losing every month by paying much more for interest than they would pay for rent. The tax deduction does not come close to making owing competitive with renting.
b. Owners are losing principal in a leveraged way as prices decline. A 14% decline completely wipes out all the equity of "owners" who actually own only 20% of their house. Remember that the agents will take 6%.
c. Owners must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.
d. Owners must insure a house, but not most other investments.
e. Owners must pay to repair a house, but not a stock or a bond.
3. Renting is just throwing money away.
FALSE, renting is now much cheaper per month than owning. If you don't rent, you either:
a. Have a mortgage, in which case you are throwing away money on interest, tax, insurance, and maintenance.
b. Own outright, in which case you are throwing away the extra income you could get by converting your house to cash, investing in bonds, and renting a similar place to live for much less money. This extra income could be 50% to 200% beyond rent costs forever, and for many is enough to retire right now.
Either way, owners lose much more money every month than renters and that's assuming prices stop falling! Currently, yearly rents in the San Francisco Bay Area are about 3% of the cost of buying an equivalent house. This means a house is returning about 3% minus expenses, which comes out to a negative return and is therefore a bad investment.
Landlords are loaning a house to their tenants at a 3% interest rate. This is a fantastic deal for renters. When it is possible to borrow a million dollar house for 3% yearly rent at the same time a loan of a million dollars in cash costs 6.5% interest, plus 1.3% property tax, plus 1% maintenance, something is clearly broken. Renters are enjoying an extreme discount.
To add insult to "owners", their property is declining in value. Renters do not have to worry about the massive losses owners are experiencing. Here's a great quote from NPR: Underwater owner: "We would do it [pay the mortgage] if the equity was there, but in a case where we're already so behind... Imagine that for five years, say, we're gonna pay four grand a month and then we're just gonna be back up at what we bought the house for. We feel like we're throwing away money."
4. The government will create a "floor" under house prices.
FALSE. While Tim Geithner and Ben Bernanke are quite busy destroying your savings and increasing your taxes to bail out foolish borrowers, they cannot make people pay more for housing that they can actually afford. Prices will continue falling until people can afford houses. That means at least another 40% loss on housing in the coastal areas like California and New York.
5. There are great tax advantages to owning.
FALSE. Every married couple filing jointly automatically gets a $10,900 tax deduction, just for breathing. You have to have mortgage interest payments greater than $10,900 to get any advantage at all from the mortgage interest deduction. And even then, the tax advantage is not significant compared to the large monthly loss from owning.
Compare the cost of owning to renting.
Many people believe you can just reduce your income tax by the amount you pay in interest, but they are wrong. Buyers may not deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them on mortgage interest. You don't get rich spending a dollar to save 30 cents!
Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc. Since you can rent a house for 3% of its price, but have to pay 6% to borrow the equivalent amount of money, it is much cheaper to rent the house than to rent the money.
6. All real estate is local, so you cannot say anything about the national market.
FALSE. Lending is global. All loans are harder to get. This will drive prices down everywhere.
7. A rental house provides good income.
FALSE. Rental houses provide very poor income in bubble areas and certainly cannot cover mortgage payments. It's possible to overpay for anything, even for an income-producing asset.
Remember that it's pointless to do the work of being a landlord if you can make more money with no risk and no work by buying a CD or a bond.
That said, there are parts of the US where it does make sense to buy because mortgage payments are less than rents in those areas. They are generally rural areas away from the coasts, and have not seen the same bubble that the coasts have.
8. OK, owning is a loss in monthly cash flow, but appreciation will make up for it.
FALSE. Appreciation is negative. Prices are going down, which just adds insult to the monthly injury of crushing mortgage payments.
9. As soon as prices drop a little, the number of buyers on the sidelines willing to jump back in increases.
FALSE. There are very few buyers left, and those who do want to buy will be limited by increasing difficulty of borrowing.
No one has to buy, but there will be more and more people who have no choice but to sell as their payments rise. That will keep driving prices downward for a long time.
10. House prices never fall (in my city).
FALSE. San Francisco house prices dropped 11 percent between 1990 and 1994. Buyers in San Francisco in 1990 did not break even in dollar amounts until about 1998. So those buyers effectively loaned their money to the sellers for 8 years at no interest, losing all the while to inflation. With inflation, 1990 buyers truly broke even only about the year 2000, ten years after buying.
Los Angeles' average house plummeted 21 percent from 1991 to 1995, and of course there have been many similar crashes all around the US. The worst may have been after the oil bust in the 1980's, when Colorado condos lost 90% of the value they had at their peak.
Your city may be special, but it was just as special when it was half as expensive ten years ago, so being special does not account for the run up in prices, and will not protect it from falling back to what it was.
11. House prices don't fall to zero like stock prices, so it's safer to invest in real estate.
FALSE. It's true that house prices do not fall to zero (except in Detroit), but your equity in a house can easily fall to zero, and then way past zero into the red. Even a fall of only 4% completely wipes out everyone who has only 10% equity in their house because realtors will take 6%. This means that house price crashes are actually worse than stock crashes. Most people have most of their money in their house, and that money is highly leveraged.
12. We know it will be a soft landing, since it says so in the papers.
FALSE. Prices are falling off a cliff. No one knows exactly what will happen, but it looks like prices will continue to fall for several years. As Yale professor Robert Shiller has pointed out, this housing bubble is the biggest bubble in history, ever. Predictions of a "soft landing" are just more manipulation of buyer emotions, to get them to buy even while prices are falling.
Most newspaper articles on housing are not news at all. They are advertisements that are disguised to look like news. They quote heavily from people like realtors, whose income depends on separating you from your money. Their purpose is not to inform, but rather to get you to buy. When you see an statistic that says everything is fine, look at the source. Is it from someone who needs you to believe in the housing market so that they can take your money?
13. The bubble prices were driven by supply and demand.
FALSE. Prices were driven by low interest rates and risky loans. Supply is up, and the average family income fell 2.3% from 2001 to 2004, so prices are violating the most basic assumptions about supply and demand.
The www.census.gov site has data for Santa Clara County for the years 2000-2003 which shows that the number of housing units went up at the same time that the population decreased: year units people
a. 2000 580868 / 1686474 = 0.344 housing units per person
b. 2001 587013 / 1692299 = 0.346
c. 2002 592494 / 1677426 = 0.353
d. 2003 596526 / 1678421 = 0.355
So housing supply in Santa Clara County increased 3% per person during those years. There is an oversupply compared to a few years ago, when prices were lower.
At a national level, there is a similar story in the years 2000 to 2005:
e. 2000 115.9M / 281M = 0.412 housing units per person
f. 2005 124.6M / 295M = 0.422
At a national level, there is 2.4% more housing per person now than in 2000. So national prices should have fallen as well.
The truth is that prices can rise or fall without any change in supply or demand. The bubble was a mania of cheap and easy credit. Now the mania is over.
14. They aren't making any more land.
TRUE, but sales volume has fallen 40% in the last year alone. It seems they aren't making any more buyers, either.
Japan has a severe land shortage, but that hasn't stopped prices from falling for 14 years straight. Prices in Japan are now at the same level they were 23 years ago. If we really had a housing shortage, there would not be so many vacant rentals.
15. If you don't own, you'll live in a dump in a bad neighborhood.
FALSE. For the any given monthly payment, you can rent a much better house than you can buy. Renters live better, not worse. There are downsides to renting, such as being told to move at the end of your lease, or having your rent raised, but since there are thousands of vacant rentals, you can take your pick and be quite happy renting during the crash. There are similar but worse problems for owners anyway, such as being fired and losing your house, or having your interest rate and property taxes adjust upward. Remember, property taxes are forever.
Some people want the mobility that renting affords. Renters can usually get out of a lease and move anywhere they want within one month, with no real estate commission.
It is cheaper to rent a house in a good school district than to buy a house in the same place. In fact, children benefit in several significant ways from living in a rental. Aside from having a choice of school district, kids in a rental benefit from better parks in nicer neighborhoods, more living space, and less stress in their parents' voice -- all because it is still so much cheaper to rent than to own in bubble areas.
A fun trick to rent a good house cheap: go to an open house, take the real estate agent aside, and ask if the owner is interested in renting the place out. Often, desperate sellers will be happy to get a little rental cash coming in and give you a great deal. Sometimes they will rent to you for free ($0) as long as you keep the place up and pay the utilities.
The biggest upside is hardly ever mentioned: renters can choose a short commute by living very close to work or to the train line. An extra two hours every day of free time not wasted commuting is the best bonus you can ever get.
16. Owners can change their houses to suit their tastes.
FALSE. Even single family detached housing is often restricted by CC&Rs and House Owner's Associations (HOAs). Imagine having to get the approval of some picky neighbor on the "Architectural Review Board" every time you want to change the color of your trim. Yet that's how most houses are sold these days.
In California, the HOA can and will foreclose on your house without a judicial hearing. They can fine you $100/day for leaving your garage door open, and then take your house away if you refuse to pay. There's a good HOA blog here.
17. The house down the street sold for 25% over asking, and that proves the market is still hot.
FALSE. Realtors try to create the false impression of a hot market by deliberately "under pricing" a house. Say a seller's agent knows that house will probably go for $400,000. He places ads asking $300,000 instead. (Bait-and-switch is illegal when selling toasters, but apparently not when selling houses.) The goal is to first of all prevent buyers from knowing what a realistic price is, and secondly to get buyers to blindly bid against each other. There are four players in this game and three of them are against the buyer -- the seller, the seller's agent, and the buyer's agent. Yes, the buyer's own agent works against the buyer, because there is no commission if there is no sale. There's a saying in Las Vegas: "There's a patsy in every game, and if you don't know who the patsy is, you're it."
If you want to prove your agent is not on your side, ask to see houses "for sale by owner" or houses listed by discount brokers. If the agent cannot make a commission, you will not be told about the house.
There is a way around the conflict of interest inherent in being a buyer's agent: let the seller's agent be your agent too, just for that one house he's trying to sell. Then the seller's agent has a big motive to lower the price, because he will get double the commission if you buy it rather than some buyer with his own agent.
Update: the under pricing game is now over. You are free to bid far lower than the asking price. You might be pleasantly surprised to find out how desperate the sellers are. Another good reason to start low: you can easily raise your offer, but it's awkward to lower it. A suggestion from a reader: have all your friends bid extremely low for the house before you, then your own low bid will seem more reasonable.
18. I was lucky that my realtor told me to increase my bid by $50,000. Otherwise I would have lost, because my realtor knew about a secret bid $40,000 above mine.
FALSE. Your agent gets paid nothing if you don't buy the house, and he gets more if you waste more money by bidding too high. Those are two big motives to invent false bids.
19. The MLS proves things are great.
FALSE. The MLS (Multiple Listing Service, a private database controlled by real estate agents) is a used-house sales tool designed to look "official" so you will believe it and then bid foolishly high. That is its purpose. It does not include most foreclosures, new houses by builders, houses for sale by owner, and any other case where the agent cannot make a commission. The MLS is not at all credible as a list of what's really out there.
All sorts of funny things happen in the MLS. For example, if a house just doesn't sell, realtors can remove its record in the MLS so that you cannot see that it failed to sell. Then the house comes back on the market at a lower price, and unsuspecting buyers think it's on the market for the first time. Their realtor can "prove" it's a new listing by showing the MLS record to the buyer: "See, here's the listing date, just came on the market. Better hurry and buy it, this one is hot."
There is nobody checking that the MLS shows true transaction prices. The MLS prices are often just wrong.
Furthermore, the MLS will not list any house for sale by owner or for sale through a discount broker, or bank-owned property, or extreme discounts from builders, or many other cases where you could save huge amounts of money. Those cheaper prices are just not in the system, because if you save money, they lose money. Even if some cheaper properties are listed, your agent is not likely to tell you about them if they require more work on his part, or get him a smaller commission.
20. Rich Chinese (or Europeans, or Arabs) are driving up housing prices.
FALSE. The percentage of US houses bought by rich foreigners is tiny. Furthermore, American housing is clearly a bad investment at this point. Foreigners can just wait and watch American housing continue to fall, and then buy for much less in a few years. Rich foreign investors are not dumb enough to buy into a badly overpriced market, but your broker is hoping that you are.
21. But housing was high when interest rates were 21%, so higher interest rates don't matter.
FALSE. Inflation was much higher then, so fixed debt was easier to pay off with increasing salaries. Now we have adjustible mortgages and stagnant salaries.
House price increases exactly mirror the increase in mortgage debt. According to the Washington Times: "Consumers have doubled their mortgage debt from $3.5 trillion to $7 trillion since 1996, borrowing and spending profusely on the assumption that house prices will keep rising." So the increase in house prices is not backed by assets. It's backed by debt. The debt in turn is backed by the houses. It's just smoke and mirrors.
22. Local incomes justify the high prices.
FALSE. Most bankers use a multiple of 3 as a "safe" price to income ratio. We are well beyond the danger zone, into the twilight zone. The price to income ratio is currently around 10.
23. You have to live somewhere.
TRUE, but that doesn't mean you should waste your life savings on a bad investment. You can live in a better house for much less money by renting during the crash. A renter could save hundreds of thousands of dollars, not only by paying less every month, but by avoiding the devastating loss of his down payment.
24. Newspaper articles prove prices are not falling in my neighborhood.
FALSE. The numbers in the papers are not complete and have murky origins. Those prices are "estimated" from the county transfer tax and making that tax public record is optional. A buyer who does not want you to see how little he paid has only to ask to put the transfer tax on the back of the deed and it will not show up on computer searches of the deed, which show only the front. Others voluntarily pay more tax than they have to, in order to inflate the apparent price to fool the next buyer. At a tax rate of about $1 per thousand of sale price, as in San Mateo county, you have to pay only $100 extra tax to make your purchase price look $100,000 higher.
Even though you can in theory go to your county building and get sale price information, in reality the county will give it to you in a painfully slow and inconvenient way. For example, in Redwood City's county building there are PC's where you can look at data for any particular house, but you cannot print, you cannot save to a floppy disk, you cannot email data out. All you can do is write things down manually, one at a time. And that's how real estate interests like it. Your elected representatives are serving realtors, not you.
Supposedly impartial sources like Dataquick are paid for entirely by people with a large financial interest in "proving" that prices are not falling, like realtors. This makes it unwise to take their numbers at face value.
For the obviously biased sources like the National Association of realtors, you can be sure that their sales price numbers do not include the effective price reductions from "incentives" like upgrades, vacations, cars, assumed mortgages and backroom cash rebates to buyers.
Finally, note that housing prices per square foot have been falling much longer and by a larger amount than "average house price".
25. My appraisal proves what my house is worth.
FALSE. "An appraisal in its typical residential real estate form is little more than a comparative analysis conducted by someone with no skin in the game offering confirmation that other lemmings are paying too much for their houses as well." -from an article on morningstar.com
Amazingly, government house price measures do not include houses with mortgages greater than $417,000. This excludes well over half of all houses in California. So the government can report a slight price rise, but fail to mention that prices actually fell for the other 60% of houses in California.
26. Foreclosures destroy neighborhoods, so we should stop foreclosures.
FALSE. Empty houses destroy neighborhoods. Houses remain empty only because the prices are too high. "Anti-foreclosure" programs just keep prices too high, and keep houses empty. In areas where there are jobs, if prices were allowed to fall enough so that salaries can easily cover the cost of owning, people would move in and take care of the houses. In areas without jobs, the first priority should be jobs.
27. It's not a house, it's a home.
FALSE. It's a house. Wherever one lives is home, be it apartment, condo, or house. Calling a house a "home" is a manipulation of your emotions for profit.
As a realtor said to me, "a house is a wooden box that sits out in the rain and slowly rots. No one would buy in this market if they really thought about how much pain it's going to cause them in the long run. That's why we have to sell them a home, not a house."
28. Property in the San Francisco Bay Area is a luxury good, and so will be less affected by economic downturns.
FALSE. Most San Francisco Bay Area mortgages are ARMs, and ARM loans are not taken out by the rich. People on the border of bankruptcy take out ARMs because they can't afford fixed rate loans. The rich don't have loans at all.
Many of these ARM loans have exceptionally deadly repayment terms, and so are known as "neutron mortgages". Like the neutron bomb, they destroy people, but leave buildings standing. They are also known as "suicide loans".
29. Housing will be permanently higher since down payments are now obsolete.
FALSE. The current wave of defaults is making down payments suddenly seem like a good idea again. Lending standards are already improving.
30. House ownership is at a record high, proving things are affordable.
FALSE. The percentage of their house that most Americans actually own is at a record low, not a high. We do have a record number of people who have title to a house because they have dangerous levels of mortgage debt, but that is no cause to celebrate.
31. Houses are worth whatever fools will pay for them.
FALSE. At interest rates of 6%, houses are worth at most 17 times what you can rent them out for per year. You can get 6% with no work and very little risk in the bond market, so why accept less than 6% return (called rent) on your capital in the very risky housing market?
Here is a page explaining how to value a house.
If yearly rents are less than 6% of the price of a house, watch out, because house prices are likely to fall.
32. Rents could shoot up, making it a better deal to buy.
FALSE. Rents are limited by the money people actually earn, not by how much they can borrow. Try walking into a bank and asking for a million dollar loan to pay rent with.
33. It would take another 911 terrorist attack or a major earthquake that wipes out this area in order for the price to fall by 50%.
FALSE. Even with a 50% decline in prices to $350,000 or so, the median price in the Bay Area will still be roughly double the median price in most of America, and the median Bay Area household income of about $70,000 will still not be sufficient to buy a house. So a 50% decline is well justified by the fundamentals.
You can easily verify for yourself that rents are less than half of long-term house ownership costs. Just look in the papers at sale prices, multiply by 6%, and divide by 12 to get the approximate monthly interest payment + property tax + repairs. Costs are actually about 8% with all that, but the income deduction brings it down to about 6%. Then look at the rental rates for equivalent houses. Which loss per month is larger?
34. You failed to factor in emotion. More houses are sold on emotion than will ever be sold based on perceived value. They buy all they can afford plus.
FALSE. Buyer emotion doesn't matter at all to the lenders, not on the way up or on the way down. Most people will borrow more than they can afford, but only if the lender goes along. The whole thing was a party of cheap and easy credit. When the credit machine gets sober again, millions of people are going to be ruined. Foreclosure rates are already going up exponentially.
35. It's unpatriotic to talk about mispriced houses. It might drive down prices.
FALSE. Lower prices are better for America, especially for new families. Aren't lower food and energy prices better for America? Housing prices are the same: lower is better. Most Americans directly benefit by a decrease in house prices. Only the banks benefit from increased mortgage debt.
If you own a house, lower prices have very little effect. If you want to sell and buy another house, higher prices mean you'll just have to pay more for the next house, while lower prices mean you will get a discount when you buy. If you want to buy a bigger house, you come out ahead with lower prices.
36. My wife will divorce me if I don't buy a house.
FALSE. She will divorce you if you do buy a house and go bankrupt trying to pay the mortgage. She won't divorce you if you rent a much nicer place than you can buy, and then take her to Paris for a month each spring, which you can do just by avoiding that suicidal mortgage.
If she's religious, you could also point out Proverbs 22:7: "The rich rule over the poor, and the borrower is servant to the lender."
37. My new baby needs a house.
FALSE. If you're expecting and desperately want to buy a house for your new child, that's a perfectly normal feeling called "nesting". It is also the leading avoidable cause of financial fatalities! You most definitely do not need a house for a baby. A baby is utterly unaware of whether it lives in a rental or not. Babies also don't need much space. Before they can crawl, they're quite happy in a crib or even a laundry basket (which has the advantage of handles for portability).
Your baby will do better if you're not stressed out about a mortgage. You have five years before school quality becomes an issue, and at that point you can more easily move into the best school district as a renter than as an owner. Avoid debt and save your money so your child has a better start in life.
38. I just want to own my own house.
TRUE, most people do and that's fine. Buyers will get their chance when housing costs half as much and they have saved a fortune by renting. House ownership is great - unless you ruin your life paying for it. If you can save even just 10% on the price of a house, you can retire several years earlier than you would otherwise. If you can save 50%, then you can easily take a ten year vacation and still come out ahead.
Most of the recent gains in housing equity and stocks were imaginary, kind of like musical chairs, where everything thinks they have a chair until the music stops. Then the truth becomes clear.
There are the same number of people in America with the same skills, the same land, buildings, etc. Nothing "real" has been lost. Only illusions have been lost. When the neighbor's house went "up in value", it really didn't. There was just too much debt around, pretending to be equity. One idiot buyer for pays a house with excessive debt, and then all the neighbors think their house is worth more. America will still probably do OK, just on the basis of land and people.
Housing is the biggest expense in nearly everyone's life, far more expensive than food, gas, energy, even more expensive than education or medicine. To reduce the time you spend working to pay for housing is to increase the time you have for everything else.
Cheap housing is good for us all! High housing costs take away from families' ability to save for retirement, fund their children's education, travel and lead a quality life.
How can we make lower house prices our official government policy? How can we completely eliminate the mortgage interest deduction which drives up housing costs and discriminates against renters? How can we wipe out Fannie Mae, Freddie Mac, the FHA, and other agencies whose job it is to enslave Americans to mortgage debt?
As reader Sean Olender put it: "Many people have forgotten that the number one restriction on their future freedom to do what they want, when they want, and to go where they want isn't the Iraqis, or Iranians, or North Koreans -- it's their mortgage lender."
*****
What should you do?
First of all, both sides should avoid using real estate agents. They suck money out of the deal, hide offers from the sellers, and hide properties from the buyers. Just find a property or buyer on your own, have the property inspected, and get a real estate lawyer to draw up or review the offer.
If you own, sell now so you can actually keep some of that funny money that appeared out of thin air. Otherwise, it will be painful to watch it vaporize back into thin air. Investors in mortgage-backed bonds subsidized the increase in the price of your house. Now they want their money back, and your challenge is to prevent them from getting it. The only way is to sell before your neighbors do. Time is not on your side.
If you can't sell without a loss, it's probably best to just walk away and free yourself from mortgage slavery. It depends on whether your loan was "recourse" or "non-recourse". In the latter case, the deal is simply that you can stop paying the loan and give back the house at any time. It's perfectly legal and moral according to the terms of the mortgage. Now that the government has temporarily stopped taxing forgiven debt, you can do it without owing anything! But talk to a lawyer and accountant first.
If you want to buy, look around and see that house prices are falling. Why hurry to buy into a falling market? Time is on your side. Save your cash and buy for much less in the future. The way to win the game is to have cash on hand when others cannot get a loan. You do not want to be bidding your hard-earned savings against people who are bankrupting themselves with debt. It will be time to buy when lenders once again demand a 20% down payment from everyone and get serious about checking ability to repay. We're not there yet, not even close. Find a nice cheap rental, invest your savings every month, and enjoy the show till then.
http://patrick.net/housing/crash3.html
