Bad time to buy a house, despite what the builders and realtors say

[alfreda89]

Darren C. Pollock is an equity analyst at Cheviot Value Management, Inc., (www.cheviotvalue.com) a money management firm in Santa Monica, California.

"Buying a home, if the price is right, is often the best investment most people could make. However, the recent spectacular rise in home prices may turn today’s home purchase into a speculation that will engender eventual losses.

National home prices, adjusted for inflation, have appreciated about 40% since 1995 and many areas are up more than 160% in that same time. “If you go back to the 1980s, during that cycle, adjusted for inflation, total price appreciation was 18%. In the prior boom in the 1970s, it was 15%,” cites David Stiff, an analyst with esteemed real estate research firm Fiserv CSW. He continues, “It’s alarming… I am surprised that it’s that high.”[i]"

http://www.prudentbear.com/archive_comm_article.asp?category=Guest+Commentary&content_idx=42667

The good news? The article ends with this:

"It is important to note that individuals will avoid adverse effects of a sizable downturn in home prices if they have no need or desire to sell, can afford their mortgage payments in any event and do not increase their debt by using their home equity to borrow for consumption purposes. We are not as optimistic for homeowners who are over-leveraged or for the many speculators in the housing market."

I still think letting out-of-state financial institutions convince Texans that they should be allowed to use the equity in their homes to pay off bills was the worst decision made in Texas in a generation. And many will lose their homes over it.

Comments

[kristine-smith.livejournal.com]

I think home equity lines of credit can be used responsibly. I have used mine to finance home repairs and improvements, and pay off a few bills that came up after Dad passed. I went with a conservative institution, and received a line of credit equal to about 80% of my equity--that 20% can serve as a buffer.

I'm not sure if the bubble will burst everywhere when it does go blooey. My community property values barely kept up with inflation over the years compared to surrounding areas, and I think (hope) that continued civic improvements will increase that appreciation even if things take a dip. I would worry if I lived in parts of California or other hothouse areas--I think they may see a big dip. That being said, I think the speculators may take the worst of the hit. Folks who simply bought and stayed put should be fine, as you said.

[alfreda89.livejournal.com]

I'm not worried about you or W--you are using your loan to improve the property, for the most part, and he doesn't do an improvement unless he has the cash in hand--but I do worry about others I know.

But we can't live their lives for them--we can only pass along information. We purposely bought in an older, established neighborhood, and did not get a mortgage with an accelerate. Because W did not roll the equity in his old house over into the new house, he has a small, 2nd note he's paying off faster. But the rent house pays for itself, and we hope will start making a small profit this year.

[hoosier-red.livejournal.com]

Well, our plan is to buy a house with a mortgage that can be supported by a single salary (mine, since it's smaller), and we don't even like using the credit cards so using a home equity line of credit is not on.

[alfreda89.livejournal.com]

Bravo! That's the way to do it. My Ex and I always did that, and because of it, we each had enough money to have a down payment on a new house after the split, if we'd wanted.

In more optimistic cases, you'll have much better play money and retirement if you save at that level... 8^)

(You should have seen the look on the realtor's face at closing, when she realized we could have qualified for twice the house. We would have parted ways with her, if she'd known that--no doubt...)