patrick.net

I was amused to find this thread where someone from out of town asked if now was a good time to buy a house in Oakland. 18 of 19 comments were from Real Estate Agents or Loan Brokers, all of whom said it was just the peachiest time ever to buy. I wrote:

Notice that everyone who said "buy now" has a financial interest in your doing so. It's an age old mantra of RE agents and loan brokers "buy now" or lose out.

The truth is that it's a way better time to buy now than, for example, in 2007, but don't think that makes it the right time. It's far cheaper to rent now, even considering the amazing interest rates and mortgage interest deductions. Also, here are a few facts to keep in mind concerning the market:

1. Even nationally, prices have not yet returned to the historical trend line. (I.e. have not recovered from the absurd run-up that started in 2000). See this reference. As you may know, historically, in a post bubble crash, prices tend to overshoot on the low side. High end houses have even further to fall, as there is a great latency in the price response to changing market conditions.

2. Interest rates are artificially low. Housing prices are typically based on affordability, so this means that prices are far higher than they will be when interest rates get back to normal. If you buy now, when interest rates are low, when they return to normal, house prices will go down (all other things being equal :)) and you're under water with your mortgage. On the other hand, if you buy when interest rates are higher, you get the house for less, and if interest rates go down, you can refinance at the lower rate and you end up with a win/win.

3. Baby boomers are retiring. 50% of baby boomers have 0 savings for retirement, and many of the rest haven't saved enough to continue with their current lifestyle. Add to this that their kids have left home (well, some of them ;)) and they typically have more house than they need. For many of these folks, their only savings is the equity in their homes and their survival strategy will be to sell their houses in expensive areas like the Oakland hills and move somewhere cheaper to live.

4. The shadow inventory is huge. I don't know what the current stats are, but last I looked, for every house on the market there were two others that were either: Bank owned, but the bank is keeping it off the market or the owners have stopped paying on the mortgage and foreclosure hasn't happened yet (I think the stats I saw talked about homes where the owners were 90 days or more behind on their mortgage.) As you drive down the street and see "for sale" signs, just imagine that between every two you see, there are two other homes that are part of the shadow inventory. This source (shadow inventory) says estimates range from 1.6 million homes to over 10 million homes. I tried to get a number for what the current number of Single Family Home listings is for the USA, but couldn't find it.

Basically, I would look for sources of information from sources other than real estate agents and loan brokers. Even if they have managed to convince themselves that they are right about this, the underlying fact is that they have a significant (I'd even say existential) incentive to believe that now is the right time to buy. They could be right, (because no-one has a crystal ball), but since the NAR (National Association of Realtors) and their brethren have been saying that since they came into existence, it probably shouldn't be taken as authority.

Anyway, good luck on this. My opinion: if you're on the fence, sit it out even if we're close to a bottom. I've heard (even from some agents) that when we do hit a bottom, it's likely to stay there for a while. Be patient, and I think you'll be rewarded.

So what arguments did I miss, and what are good arguments against this? I keep pushing out my target date for buying (at one point, I was saying 2011). How do we know when the higher end market has fallen enough to counteract these trends?

#housing