Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a “mind scar” just as the Great Depression did. But he argues that housing remains unique.
“You have to live somewhere,” he said. “In three or four years, people will resume a normal course, and home values will continue to increase.”
Notice who this firm is – one of those who profits when you flip your mortgage, whether you go bankrupt doing it or not.
Home values will continue to increase? You have to live somewhere?
Well, the second is true.
The first?
Look, the laws of economics on this are simple: Home prices cannot ascend, over long periods of time, faster than real wages. That is, you cannot afford more house unless you make and bring home more money, in terms of dollars.
Further, with interest rates now at extreme low levels, the “payment buyer” (that’s nearly everyone) is buying at a secular high in affordability as measured by payment.
The $200,000 loan at 4.5% interest for 30 years carries a P&I (principal and interest) payment of $1,009.58. The same loan at 6% carries a P&I of $1,193.14.
Put a different way that same $200,000 loan is only a $169,232 loan when – not if – rates go from 4.5% to 6%.
You don’t buy things on long-term amortization schedules unless you intend to run the clock on the schedule when rates are very low. You buy them when rates are high, because then affordability of those payments is at its worst and is likely to get better.
In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundreds of new owners in four communities — Alameda County near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee — once again said they believed prices would rise about 10 percent a year for the next decade.
These people are on drugs, and that drug is being put on the table in front of them by Real Estate “professionals”, who just like all other salesmen and women have never seen a crappy time to buy whatever they’re selling.
Well, I’ll say it if they won’t – it’s a crappy time to buy a house.
The only way you “win” when rates are those low is if they go even lower. But the only way that rates will continue to sink to new lows is if the economy likewise sinks further and further into Depression. In that case rates will indeed continue to decline, but if nobody has a job who’s going to buy your house from you?
If you believe that the economy is actually recovering (I do not) then rates have one one direction to go – higher. As such what your mortgage payment buys today in terms of principle amount is at the high point you will see in your lifetime.
Indeed, if rates just go back to 6% your home’s value, as determined by what a given payment will buy, will depreciate by 15% instantly.
Homes are still overvalued by 50% or more in most of the country, and that’s a fact.
Don’t be a fool.
