The Wall Street Journal published an interesting article last Saturday suggesting that now is the right time to purchase a house. Ruth Simon and Jessica Silver-Greenberg wrote the article, “Why it’s Time to Buy”. Although the article was well written and had some great points, I disagree with its conclusions. If they are able to get a great deal, I advise my friends and clients not to purchase a house or other property. Since many years I have been a mortgage buyer and keep an eye on the market and the economy.
Below are the facts provided by Ms. Simon, and Ms. Silver Greenberg. Below each point I have included my counter-arguments.
1. The mortgage rates have fallen to near 50 years ago and houses are now more affordable than ever relative to income.
Both of these points are true. But, low home prices don’t necessarily mean they can go lower. Would you purchase a stock because it has lost value? Or would you rather understand the reasons behind it and determine if it will continue down its current path? There are many other factors that can drive the stock’s value.
Real estate prices are more likely to fall than the reverse.
2. According to Moody’s Analytics, distressed sales will decline in 2013 and home values will rise thereafter.
Numerous economists and consulting firms predict that home values will reach their bottom in 2012 or 2013. It is important to note that many of these same economists and advisory firms have wrongly predicted a market bottom in the past few years. The unemployment rate is still high and most of the new jobs in the service sector are low-paying. This would leave few families with the resources to purchase and maintain a home.
3. Each year, there are more households created. This should help to reduce the housing glut.
First, no one knows the extent of the glut as banks have not shared the severity and number of properties in foreclosure. Second, there are many thousands of homes that are in various stages. As we have already said, creating a new household doesn’t mean you are a homeowner. The third factor is that FHA, Fannie and Freddie loan limits will decrease on October 1, 2011. This will limit the number buyers.
Correctly, the authors point out that home ownership offers the benefit of being able deduct mortgage interest, to paint walls any color you like, and to be able to live comfortably when the mortgage is paid off. While I support the principle of home ownership, I don’t recommend that you buy. I recommend that people wait a few years to buy a home, at most until the government solves the country’s problems.
The United States of America is in a financial bind that it doesn’t know how to get out. The debt is estimated to be many trillions of dollars if one adds future entitlement outlays. The current and previous administrations had no idea how to address the debts. The politicians won’t be able to adequately address the problem, so higher taxes and service cuts are likely. The country’s unemployment picture and deficits are causing such instability that there is little to suggest other than long periods of non-adaisical home price increases.