It’s Time to Buy That House

The residential real estate market is just right for consumers looking for a single family home, condominium, or co-op. Pro or con?

Pro: Get Out Your Wallet

At this time in the economic cycle, one might think that venturing into the choppy waters of home buying is the last thing you should think about. But there are good reasons you should consider it.

Home prices have declined to a level that’s more in line with household incomes than at any time in the past several years. Residential real estate prices were artificially inflated because of wider access to easy-to-qualify loans that had features making affordability of payments, even if only for a year or two, seem attractive. So home buyers only looked at the payment, not the loan features or the price of the property. The idea was that home prices would continue to rise, and the borrowers would at some time refinance the loan or sell the house to recoup the equity and buy a different property. Times certainly have changed.

The latest Case-Shiller Home Price Index for a 20-city composite showed that prices recorded a 1% drop in August 2008 and were down 16.6% for the past 12 months. Miami had a 1.8% monthly drop and a 28.1% tumble over the past year; in San Francisco, it was -3.5% monthly and -27.3% for the year. In September 2008, existing home sales rose 5.5% nationally. Evidence shows that home sales by units have increased slightly and the bottom on prices is nearing.

What does this mean to you? First, if you have good credit and a modest down payment, your opportunities to buy a home for shelter (tax benefits and a roof) are better now. Don’t even think about flipping the house for a while; concentrate on the basics. In Los Angeles one year ago, the median home price was $582,450, according to the California Association of Realtors. This September, it was $376,790. The National Association of Realtors report on the metropolitan area median price of single-family homes indicates that we are back to the levels of 2005 and earlier in certain markets. The steep decline is not reflected everywhere, but you get the picture.

Mortgage rates for 30-year fixed-rate products, although slightly up, are still affordable at or near the 6% to 6.5% level. Given an average sales price of $200,000 in today’s market and a $40,000 down payment, your principal and interest on a 30-year fixed-rate loan this year would result in a $1,011.31 monthly payment. That same home would have cost you $221,000 early last year, you would have needed a $44,200 down payment, and the principal and interest alone would have equaled $1,117 per month.

Lower prices and access to quality mortgage products mean that this is the best time to buy.

Con: What’s the Rush?

There’s an old saying that "it’s not the fall that hurts, it’s the sudden stop." If you can see the bottom, that’s one thing. Instead, imagine falling in the dark with no idea when you will hit bottom. Such is the feeling of uncertainty in residential real estate. So is now a good time to go residential? I say no.

The August 2008 S&P Case-Shiller Index shows that house prices fell 17% over the last year with some areas declining as much as 30%. That’s a signal to buy, right? Well, there’s some risk and uncertainty that may cause house prices to fall even further. With overbuilding by more than 1.5 million units during the housing boom and a current absorption rate of about 1.6 million units per year, it is predicted that house prices will hit bottom in the last half of 2010.

Next, with about 10 million homeowners (about one in six) underwater, there is tremendous uncertainty regarding the performance of underlying mortgage loans. About $260 billion in high-interest-rate loans (mostly subprime) will have interest rate resets in both 2008 and 2009. The expectation is that the federal government will take some action to reduce the resulting foreclosures. The Treasury Dept. currently has a $40 billion plan to guarantee 3 million "at risk" mortgages. The argument is that unloading problem loans onto taxpayers will stop the decline and set a floor for prices. Some feel that any market interference creates an artificial floor and may produce a self-fulfilling prophesy of defaults. There’s also talk of bankruptcy-law changes allowing judges to rewrite mortgage terms. Lenders can already rewrite loans participating in the FHA Hope for Homeowners program.

Private institutions are also involved. To address foreclosure problems, JPMorgan Chase (JPM) and Bank of America (BAC) have instituted loan modification programs. There have been calls for a foreclosure moratorium and reductions in mortgage balances to reflect the home’s current value.

It is true that falling prices have increased affordability. The median house price for existing homes ($191,600) is the lowest since August 2004. But, with a choice, why buy now? Instead of rushing out to buy houses, I suggest that we all gather round and sing the chorus of Tom Petty’s Free Fallin’ .

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

Venki

Do not buy yet. They will fall more in the next year. Loans are getting harder and foreclosures are getting more, so more homes on the market. Also add in factors such as retiring baby boomers and workers losing jobs who are trying to sell their homes in the next few years. This will create a lot of inventory. And a good chance to buy a home for many.

Travis

Foreclosures rise, prices fall, credit gets easier to relieve inventory and allow market to adjust -- bang, back in the same spot. Keep people in their homes, adjust principal all you want. Let's hit those people back on their taxes or some type of other low-interest bearing account to make them pay for it.

OC Slidewatcher

Just read one of the modification agreements Indymac borrowers are signing with the FDIC. Calls for 27 years of mortgage payments in the $2,000 range plus a balloon payment in 28 years of $250,000 (on an original loan balance of $495,000). Total of all payments approximately $898,000. If the loan is $494,000, the property is probably worth $350,000 so they need about $550,000 appreciation just to break even.

Better wait on that purchase, because once people get over the panic of facing potential foreclosure and realize what they signed up for, the modified loans won't be far behind on the foreclosure train.

Robert Laughing

In some markets, it is indeed a reasonably good time to buy, if one needs a home and has a secure job. Many places like Florida, Arizona, and Nevada--where huge numbers of condos and other homes sit empty, and no jobs are available--there is plenty of time. Wait. With too much inventory, so many jobs lost, and little if any chance of an upturn, one would be nuts to buy, especially in those vast empty neighborhoods, and places where condo towers look like a Hollywood version of Armageddon.

andy

What might seem like a good deal today may not be one tomorrow. I agree the worst is yet to come. There is no telling how bad it is going to get. Unless you have a ton of surplus cash, sit tight for now.

jcage

Not a good time to buy because you lose your house if you lose your job. This is common sense, that you have to save money and only spend what you need to survive the tough time. Housing prices still have a lot more to go down since good areas with good schools and neighborhoods are the first to go up during good economic times, and the last to go down.

wei2

Morons would buy today in such an uncertainty climate. A deep recession is very likely next year, and the worst is yet to come. The government action cannot manipulate the market, and the gambler has to pay the price. The price will fall more next year for sure. Just measure the public sentiment; this is the real market. It's wrong for the government to use taxpayer money to save those guys at the sacrifice of taxpayers like us with solid credit but excluded from the housing market because of its irrational prices. No way for us to pay for these guys' mistakes. In California, just too many people I know flip houses almost every other month to gamble, and too many people lie to get a house. It's totally wrong for us to pay these people mistakes. We are up against any such legislative moves and will hold those legislators accountable in elections.

Dollar Bill

Buying or not is dependent on your credit, if you have any money and job. Obviously all areas are not the same. In my area, unemployment is low, housing reasonable, and there are very few bank-owned or repo homes. With housing prices down, mortgage rates coming into the sub 5% range, if you have the money, desire, job, money, and are not speculating on either a big upturn or downturn, you will be okay. To all the folks with the "better next year" mind set, maybe you'll be at the airport when your ship comes in. Fact is many won't now qualify or even if the market drops 5% you still won't qualify. Enjoy your rental homes, for those of us who enjoy having our homes free and clear, now is becoming a great time to buy.

pd

I agree with Dollar Bill--in my metropolitan area, the unemployment rate is somewhat insulated and there are many middle- to upper-income renters with good credit who are taking advantage of falling prices.

The home prices in neighborhoods that may have been out of their reach at one point are now coming down. The key here is that many of these folks are planning on staying in the area for the long term and have relatively stable (e.g. government) jobs.

jcage

There are areas that have fallen 50% from the peak, and it seems as though it will keep on falling in the coming year, so there is not point in buying now if you can get the same or a similar property at 10% or even lower a year from now. If you own a house, then you can keep paying your mortgage, but if you don't, you should wait and save the down payment and wait until the economy turned around. The housing price still has long way to the bottom.

cj

I purchased in October, and the house sold for $216,000 in 2006. I picked it up for $80,000. I am planning on living there a long time. I'm in Las Vegas, and I have had a job at a small company for four years now. With such a low price for a home built in 2004, I put a $16,000 down payment of $435 a month. Hope I didn't make a mistake.

Mick

I agree with the idea of "What's the rush?" Houses aren't going to skyrocket to the moon anytime soon. That herd has now retreated. I don't imagine that we are going to see that same kind of mania in an economy like this. Doesn't it make more sense to keep an eye on the economy and real estate market?

Jim Dougherty

Despite all the bad news in the real estate market and foreclosure activity, not all markets are as adversely harmed as some of the regional markets like Florida and California.

The good news is that we are in the best buyers market of the century, and it is an opportune time to buy in those area where foreclosure activity is low. Those markets are strong, yet prices have been lowered as a result of the overall market.

If you are really a savvy investor with capital, the markets with the high foreclosure are also a buying opportunity of a lifetime providing a substantial discount and based on your ability to wait out the market adjustment that will come.

random

I would say go ahead, shop around and buy but only if...

1. you have a very stable job and enough liquidity to afford the mortgage even if something happens down the road

2. your credit score is as close to perfect as possible, ideally over 740

3. you get the most conservative, fixed rate, basic mortgage there is

4. you have a good deal of cash for a down payment or you know that you can get money for a serious down payment from the sale of your home

You can definitely find a lot of great bargains over the next year or so in many markets. But if you have even a smidgen of doubt that you can afford your new house, don't do it. In a market this brutal, you have to be one hundred percent certain before you make a decision.

1st time buyer

Great advice for me to think about. I am a first-time buyer looking for a house that I thought I could never afford. I am seeing so many foreclosures, and the prices are great. I have put in about 7 offers, and I have been contacted by two banks so far asking price or above listing price. I think I will offer below asking price and see if I get a deal or just wait it out till next year for a better deal.

eugene

Why buy now? With a deteriorating economy, more people will be out of a job and a home. This means more homes on the market that have to be sold and further falling prices. Government stopgap measures are not going to help. What the people need are jobs to help pay for the homes. Until government policies make it feasible for businesses to make investment of capital, businesses will not expand or hire.

SWODude

Wei2 has hit it on the head. I lived in San Diego from 2004 through Jan 2006 (during the height of the boom). Like Wei2, I (and my wife) have solid credit. Our credit union, at the time, would have lent us about $200,000 (based on my income and car loan). If you lived in San Diego during the boom, you know that single bedroom condos as far north as Poway and Escondido were selling for more than $300,000. Of course, I spent quite a few evenings scratching my head about this. Eventually, I drew a parallel between the housing bubble and the 1920s stock bubble. In both cases, it was clear (to rational people like me) that the economic growth was simply not sustainable. Of course, stocks are liquidated more quickly than houses.

The 1920s behavior was similar to that of the housing bubble: Millions of Americans thought they could get rich quick and in most cases gambled by borrowing and passing along the risk. Of course, there were other factors as well (like certain academic beliefs about affording historically disadvantaged minorities the opportunity to finance their way out of the inner cities; basically a kind of "trickle-up" economy). But the underlying issue was the passing of risk.

As far as I'm concerned, there is no reason to trust the real estate industry or the state and municipal governments on this one. Some of the things that causes the bubble were:

- Millions of Americans want to get rich quickly

- Sellers want to get the most out of their homes

- Real estate agents, who earn commission, want sellers to command high prices

- Loan officers were getting higher commissions for the subprime loans (this has always been the case; think of finance officers at dealerships)

- The municipal and state governments want higher property values so they can tax them

- Real estate agents and lenders were pressuring appraisers to inflate home values

None of these problems went away when the bubble popped. Real estate agents and loan officers came to count on their income. Homeowners don't want to be upside down. Governments were planning their budgets around property taxation. The way ahead, if this goal is to be attained, is for home values to be propped up as long as possible. This is why the interest rates dropped to 4.5%. The feds only want to "help" "distressed" borrowers stay in their houses because the entire country came to count on irrationally high housing values. Remain wary. Low interest rates keep property values high because lenders structure mortagages around the monthly payment. For some reason, we are taught to never discuss monthly payments when buying a car, but it's okay when buying a house.

Bryan

I don't know where the author gets the information, but in Los Angeles, $200,000 is only good for a 2-bedroom, 1-bath condo and it's not even a good one. Also a 20% drop from the peak is nothing compared to a 300% increase from 1998 to 2006. I am a software engineer with a decent income and I can't even afford to buy a decent house in a nice community and I am talking about 3-bed 2-bath 1,600 to 1,800 square feet if not a big house. Clearly, it's not rocket science to figure out the price is still quite high relative to income.

holten

If I'm paying for my neighbor's swimming pool, shouldn't I get to use it? What about the Lexus and big screen TV being subsidized by taxpayers--shouldn't I get to use those as well?

NN

If you can afford it, buy it. "Afford" starts with the required down payment and then moves on to confidence of sustaining a cash flow to continue to maintain that asset (or liability).

Don't forget the other intangible factors like being relatively immobile, etc.

That said, there are several parameters that provide a certain level of statistical approximation as to when market (housing or stock or any market at all) might rebound, but again, it's just a statistics and no seer can claim accurate predictions on the bottom.

In essence, stop timing the market, figure out your priorities, financial status, and risk appetite, and make the decisions.

Dick J

You have to be careful with all this talk about waiting for a lower price. If we all wait to buy houses, cars, clothes, TVs, etc., that is called "deflationary psychology." Keep in mind that people can also "wait" for whatever is produced where you work. Ask the Japanese where that takes you.

Mr. Common Sense

While I agree prices will fall further next year and more properties will come on to the market that are bank owned, you are living in fantasy land if you think the lending restrictions will not continue to tighten. As much as the government and the banks want the housing market to flow, they won't permit anyone to attempt to accomplish this by making loans easier to get as one respondent suggested. High credit scores and solid down payments are here to stay.

FG

I just bought a house (bank owned) last month on the California coast, and what I learned from the experience is that right now is the time to buy, but you must have an experienced agent helping you. In several of the properties I made offers on, the seller got more than 10 offers the first day the property got listed; the point of the story is that investors are fighting over REO properties because you can actually rent the unit at a profit--tell me if this doesn't make sense!

Miles & Spencer

I wish that Professor FitzGibbon could have presented historical data (price/income and price/annual rental income ratios) for cities like Boston, Los Angeles, Miami, New York City, and San Diego to support his argument that "home prices have declined to a level that's more in line with household incomes than at any time in the past several years." The problem with the housing market is that the increase in prices that was witnessed during the period 2000 to 2005 is far greater than the recent decline in those prices. Given the current and expected state of the economy and current housing prices, housing affordability continues to be a problem even in the presence of the proposed ultra-low interest rates. For certain, this is not a good time to buy.

Steen the Dream

A couple of comments:

1) To those who think they live in areas that will not be affected by this economic downturn, I pray that your delusion will quickly pass and you will see that it will only be a matter of time before your economy crashes as well. Get a life, people, and see reality.

2) Don't buy a home right now. SWO Dude said it perfectly. I have been looking to buy a house for the past year. I recently found one, and the homeowner refuses to go down. He somehow thinks he will get what he is asking for. My real estate agent agrees that the price is fair. I'm on to their little scheme. Done using agents!

George Z

I moved to the States 11 years now, paying taxes since day one. And while working 10 to 12 hours a day in an above average paying job, I still could not afford a house. What I think is: Let the prices fall more so the honest working men and women can get a place in the sun, too.

Also holten is right, too. Wasting my youth working as a horse and not being given the chance for a better future, I wonder, is that Lexus partially mine?

How about increasing the pay scale instead of increasing the house market prices? Nobody in the government is complaining about that as I see.

Good luck to all of us. By the way, I am starting house-hunting next year, too.

AM

I think, the debate is only insofar of interest as it still reflects the ideology of having a house as an object of speculation. I think the most important things to consider are simply the following questions: Do I need a house, and (if yes) can I afford it? If one question is answered with "no," simply rent. This is easy and without ideological twists. I think people have to become more pragmatic. I come from Germany, and there is no housing bubble, because people were pragmatic.

unisound1

I am considering paying cash for a $250,000 home in the Bay Area that sold for $750,000 at the peak in my area. It is being listed as a foreclosure for $375,000, and I am hoping my all cash offer would at least be looked at. I do plan on living in the house for many years to come with my family. The price I am offering is factoring in in my opinion of future depreciation as the house once sold for that same amount a few years before the peak. Any reason not to go this route?

Michael Cordoni

There's the possibility of a 10% to 15% wash if you purchase right now. Anyone one who says "why the rush" is either not ready to buy or sitting on a house worth horrifically less than they purchased it for. Fixed rates and tight lending standards are the trend for now. If you qualify during this "hangover" era, then be grateful...you've probably earned this moment.

datta

Unlike stock market, real estate prices do not move up and down. The current trend is still down. Wait till the price settles down; there is lot of time to watch and decide.

Art36

There is no basic value of homes until the market straightens itself out, which it has not done to date. With the ponzi schemes, the buyers who had no actual money in the houses, those who believed the lies about house values will always go up, the owners who listened to those lies and took out second mortgages to buy a new Mercedes or a trip to Australia, the government trying to keep people in houses who couldn't (and can't) make the payments to start with, and all of those who have not been foreclosed yet no one really knows what a house is really worth. And that is going to take at least most of 2009.

This mess was actually brought about by President Reagan, and I voted for him never thinking he would get the second term. He hated government employees and thought private employees could do everything better. The mortgage companies talked HUD (Reagan) into letting the mortgage companies make the mortgage commitments "because they could do it better." It was called direct endorsement. The mortgage companies didn't want to do the appraising but Reagan gave them that also.

I was a staff appraiser with FHA/HUD. We only answered to FHA/HUD, not a mortgage company. I went through several depressions and it hurt, but things worked themselves out in spite of the government's tries to make things better. The old FHA system (taken into by HUD so it could use the FHA money for HUD's give away projects) was the best system and trusted by almost all house buyers because it worked. And the FHA guarantee had teeth in it. But Reagan RIF'd (fired) all of the actual appraisers. They left a few review appraisers to review the private appraisers who then worked for the mortgage companies. And then by Reagan's directives the reviews were down to 5% of the appraisals. And if there was a contract that had a value on it, then the appraiser was induced to meet that value, or they'd get another appraiser that would.

I worked for another branch of HUD, and I saw what was happening. A mortgage company appraiser made at least 1,000 appraisals without actually seeing the houses, except by pictures. I saw about 80 octagon-plexes where all units (about 700) were appraised as individual houses and sold to speculators (except for the 350 I managed to stop being endorsed). None of these met the minimum standards as a house. (You couldn't get into them without trespassing.) I saw appraisals of townhouses that were valued properly, but the values were increased by $10,000 to $14,000 by an other branch's review appraisers, because they weren't used to a new-to them-type of housing.

So blame President Reagan actually for this disaster. And I don't know any way to correct it as it is now. There's an attempt to resurrect the old FHA system, but there aren't the people to do it with. (I was in training for two years learning about all phases of housing, and if that counted I have an IQ of 135.) All appraisals are based on the judgmental ability of the appraiser. Oh, I can't be an appraiser because to be an MAI (Made As Instructed) I don't have a college degree.

Frenk Stayl

There's the possibility of a 10% to 15% wash if you purchase right now. Anyone one who says "why the rush" is either not ready to buy or sitting on a house worth horrifically less than they purchased it for. Fixed rates and tight lending standards are the trend for now. If you qualify during this "hangover" era, then be grateful...you've probably earned this moment.

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