Whenever I hear that sort of declaration, it tells me we are closer to the end of down cycle than the beginning. The psychology is reaching a negative extreme, and that means we are nearer to a capitulation.
Lets take a closer look at Jame’s thesis: I do not agree with much of what he states here — from buying the home builders (why?) to being a renter (maybe) to not owning a home (huh?) to homes being illiquid (exaggerated). And while there are many reasons to buy a house, as an investment is not really one of them.
Indeed, I find myself noting the following in response to Jim’s concerns:
• Home ownership allows you to live in one place for as long as you like, without worries that the property owner will not renew your lease.
• You get to select the school district you like for your kids’ education.
• Those of us who lived in a city know what its like to be subject to the capricious whims of a landlord. (no fun).
• When you own your home, you have the option of painting the walls whatever color you want, doing capital improvements, renovations, etc.
• Homes are less liquid than stocks, but price any home correctly and it will sell quickly.
• If you buy a home you can actually afford, there is no more stress about mortgage payments than paying your rent.
• For middle class Americans, the mortgage deduction is a huge tax savings.
There are lots of reasons to choose between Owning and Renting — it is a personal life choice — but since you have to live somewhere, its simple math to determine what the price differences are. Are the marginal cost differences worth the perceived advantages? That is your calculus.
Currently, our 3 metrics for measuring home prices show prices remain elevated by various degrees.
1. Median Income to Median Home Price — it is still about 10% too high nationally. This is the most reliable of our indicators, and it shows the most expensive home prices of the three.
2. Cost of Renting vs Cost of Ownership: This metric is now reasonable — rents have gone up, people are fearful of buying an asset whose price is falling — so it makes Ownership look more attractive, depending upon the region. But it is the most volatile and least reliable of the three, as it is easily influenced by risk aversion psychology and rising rent prices.
3. Housing Value as a % of GDP: It shows only a slightly over-valued housing market, but that is due to the weak economy. A more robust GDP makes housing look pricier.
Nationally, home prices remain somewhat elevated, but not absurdly so. The local region you are in, and the specific price you negotiate determine if you paid fair value or worse. Given the many variables, there are no broad declarations to be made that reflect every sale of every house. The answer to our title question (“Should You Buy a Home?”) is it really depends.
My biggest issue when it comes to Home prices is the lack of pendulum swing. All over-priced markets that crash typically swing to the downside until they not only achieve fair value but become cheap. Unfortunately, that has not been allowed to happen in the residential real estate market. The government’s HAMP/Mortgage Mods, the foreclosure abatement plans, the new purchaser tax credit, and even the Fed’s ZIRP have all conspired to prevent market forces from repricing homes.
If we want home prices to bottom, well then we must let them fall.