Wednesday, September 28, 2011

Buyer's Market; Best Deals in a Generation?

Bloomberg has an interesting article today arguing that the current property market may be the best opportunity in a generation:

People like the Matthewses who are able to survive the scrutiny of mortgage lenders are getting the best deals of the five-year U.S. housing bust, and perhaps the best deals of a generation, after a 31 percent decline in home prices since 2006. It’s the bright side of an otherwise bleak real estate market: Good houses at cheap prices are plentiful, while loan rates are hovering at record lows.

How about this bold prediction:

“It’s hard to see the possibility of losing on a home purchase right now, with these mortgage rates,” said Dean Baker, an economist who in 2005 predicted a decline in the government’s home-price index that now is within two percentage points of his forecast. “Prices may go lower, but not by much. Even if they do, you’re still getting a good deal.”

Great time to buy - sure, but a no-lose situation?
There certainly are a lot of reasons why buying might be a sound decision right now, including rates and depressed prices.  But let's not get going down the path of five years ago where everyday people were buying several homes with the expectation that they would flip them in a few years.

The economy is in the tank, and I predict it will get worse before it gets better.  If your employer has been laying off workers, is it a good time for you to take on hundreds of thousands of dollars in debt?  

The weak economy and layoffs also reinforce the foreclosure cycle.  Layoffs lead to missed mortgage payments which lead to a foreclosure.  That foreclosure can lower the value of other homes in the neighborhood and multiple foreclosures in the neighborhood can cause real problems.  Mortgage holders who are current start to ask themselves if it is worth it to continue to pay a $500,000 mortgage when their house is only worth $350,000.  This can lead to "strategic defaults" wherein a homeowner can afford to pay his/her mortgage, but chooses not to.

Where are we in the cycle?
Mike Shedlock at Global Economic Analysis updated the pictorial below in late August.  The graph compares the US housing market's bubble and bust cycle to the cycle Japan experienced a decade ago.  His most recent commentary was in response to a reader's question on when to buy and how far are we from the bottom:

As you can see, the housing bubble in the US (red text) follows a similar trend to the bubble experienced in Japan (blue text matching the prices on the left and dates at the bottom).

In his opinion, there are still many sellers who are at the edge.  A slight push and they'll "Sell Before It's Too Late" which will compound the housing bust.  I don't completely agree with this, although I am fearful that if we do enter a full-fledged recession soon, we may see this.  My current expectation is for government support to keep the economy and housing market from collapsing, although I would not be surprised if we do technically re-enter a recession.  My caveat is that if the Super Committee gets bogged down by political ideologies, the markets will tumble and uncertainty will abound.  This will quickly reach the economy and the housing market.

Please note that in the above pictorial, the blue text highlights the psychology of home buyers and sellers.  When the market is at its worst, participants believe "It's Better to Rent", while on the upswing, they believe buying is the best option.  As I discussed previously, excluding potential appreciation of a home's value, I think the renting versus buying markets are priced quite similarly.

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