I've commented about the housing market previously and it seems it warrants another reminder to those that seem to be buying based on speculation rather than actual need. Since we have low housing inventory, huge buyer demand and prices are on the up-swing many are believing this is the bottom of the market. I hear comments all the time and read various articles that there is no better time to buy real estate, the market has hit bottom and housing is recovering so don't miss out as prices "can't go any lower!"
Be careful about what you hear and read these days. We are in unprecedented times and all I can say is the market cycles that our parents and all of us in the mid-point of our lifespans have experienced earlier on have no bearing on the realities of today. Just like your stockbroker provides disclosures on stocks that "historical performance" is no guarantee of future performance so needs to be said about housing, and those of us in the business as real estate professionals need to be upfront about this.
In the near-term, housing may seem like a "sure bet" for further price appreciation but what about after that. Interest rates will rise again and real wages will not likely keep pace nor be even close to the rising cost of credit. I actually believe real wages will continue to fall as more and more Americans are willing to work for less pay just to survive these difficult economic times. The debt load of this country alone means there is a huge burden yet to be reckoned with. Yes, even greater economic consequences lie ahead. This to me does not translate into a time to be speculating on housing. If interest rates go up and wages fall, I can assure you housing prices can go much lower.
Let's look at a simple mortgage loan calculation: A $100,000 loan fixed for 30 years at a 3.5% interest rate today yields a monthly payment of approximately $448 per month. When interest rates rise to 7% (most likely even higher), which they will once the full risks of this country are factored into our ability to repay our debt (at all levels), that same payment jumps to almost $659 per month or a 47% increase. It takes a 32% decrease in the original $100,000 loan amount to $68,000 to keep the payments steady at $448 per month. So, unless real wages can grow through economic prosperity rather than inflation prices could easily take another huge tumble from here. It's not unfathomable for that drop in housing to be another 50% from today's prices.
I'm not saying "don't buy." I'm just reminding everyone to know why you're buying and to not factor in anticipated future housing price gains into the equation. It would be better to factor in a further decline of 30% or more into your analysis before making such a decision. If you can stomach a "paper loss" of that magnitude knowing you have a lifestyle home you enjoy, are willing to stay put for the long haul, and can very comfortably afford the payments, then by all means buy. If not, renting and waiting for a better time to buy is not a bad thing. For real estate investors, rents can go down too especially if real wages decline thereby reducing your return on your investment property. Plus, with higher interest rates, if you had to sell, future investors would pay you much less for that property.
With all that said, I'm buying a home now but only for the exact reasons I've stated above. I can lock in a monthly mortgage payment that will definitely suit my needs for ten or more years at a payment that I could afford if I had to be a Wal-Mart greeter or a McDonald's drive-through attendant. Not that I'm planning a career change any time soon but I am considering possible worst case scenarios. Real estate may be my passion and livelihood today but it doesn't always mean there will be a market for me to which I can make a living!
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