It's a Great Time to Buy a House....Really?

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buy a homeShawn Tully, the senior editor-at-large over at Fortune, has a post up in which he states that it's a great time to buy a house. That is pure awesome-sauce.

I know my friends and clients in the real estate industry are desperate for Mr. Tully to be right. And so am I, since my business depends in some degree on the industry being able to afford consultants.

Tully argues that the pipeline for new housing is really near empty. He quotes a MetroStudy report that shows that 78,000 homes are vacant and for sale or under construction in 2010, as opposed to 343,000 such units in 2006, at the height of the housing bubble.

I wonder why we wouldn't also want to look at homes that are not vacant and for sale -- as in owner-occupied housing, which is the lion's share of the homes for sale in pretty much any given market. Regardless, Tully goes on to argue that the two fundamentals that govern housing -- cost of ownership versus cost of renting, and the level of new construction -- have gone from pointing toward doooommm to pointing towards nirvana.
On cost of ownership, Tully cites a Deutsche Bank statistic showing that housing affordability is fantabulous. But the metric used -- share of income Americans are paying to own -- is a bit odd. You see, the study shows that in 2007, at the bubble's peak, Americans were paying 17.2 percent of their income in after-tax mortgage, tax, and insurance; in 2010, folks are paying 9.8 percent of their income. That's quite a drop. I wonder what accounts for it?

Note that the metric is that of people paying their mortgages. Homeowners in 2010, who are paying, are at 9.8 percent; homeowners in 2007 were at 17.2 percent. Did all homeowners get
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huge raises between 2007 and 2010? I don't think so. Government stats show that we actually went through a huge recession between 2007 and 2010 -- a recession that is still going on with official unemployment close to 10 percent. So that probably rules out income increases.

Did the mortgage rates plummet so that people are paying less today than they were in 2010? Well, no... especially since most mortgages are 30-year fixed rate instruments where the monthly payment would have been the same in 2007 as it is today.

The only other explanation is that the group we call "homeowners still paying their mortgages" changed. So many people stopped paying their mortgage altogether, through a combination of foreclosures, short sales, deeds in lieu, strategic default, and straight up extend-and-pretend games so that the ones who are still paying their mortgages are the ones who (a) are in better financial health, and (b) have significant amount of equity in their homes. Yay for affordability?

Curse my lack of Ph.D. in economics, but I just don't see how the fact that remaining homeowners are financially well-off is a measure of housing affordability for people who don't currently own a home.

The second metric, cost to own versus cost to rent, is a truly interesting stat. And it is true that in some markets -- such as Miami -- you are far better off buying than renting. That is, if you can make it safely through the financial proctology exam that the banks call the mortgage application process, and have the 20 to 30 percent down payment required for a bank to even talk to you.

And if we're talking about affordability, we probably should take a look at the fact that in 2010, nearly half of all residential mortgages were FHA loans, with their 3.5 percent down payment requirement.

So when Tully writes that rising rents will "encourage buyers to cross the street from an apartment to a home of their own," he's making enormous assumptions about the continued availability of mortgage financing.

Even with all of those questions, however, Tully is surely correct that as the economy slowly, ever so slowly, recovers despite high gas prices -- not being helped by all of the wars, oops, I mean time-limited, scope-limited kinetic military actions, going on in the Middle East -- and a Japan in shambles and record deficits at local, state, and Federal levels of government... housing should recover. At which point the shortage that he's pointing to will surely come into effect!

Except that the federal government has pretty much stated that the new housing policy going forward is one of "sustainable housing," and has been taking steps to make sure that we don't ever go back to the way things were. So, we have the FHA raising fees, and tightening standards (remember, FHA was almost half of all mortgages last year). We have the Treasury and HUD wanting to wind down Fannie Mae and Freddie Mac. We have the FDIC, OCC, and the Fed pushing for 20 percent down payments as the definition of a "qualified residential mortgage." We have serious people talking about limiting or eliminating the mortgage interest deduction.

And we have the Treasury/HUD defining housing policy as "rental options near good schools and good jobs."

This is what is meant by Renter Nation. We can't expect the market to behave as it once did in an era where Federal housing policy was firmly on the side of homeownership, when the government says the things it says and acts the way it acts. The market will adapt; we will still have housing; people will still buy and sell homes. But relying on stats about vacant and for sale homes? On percentage of income? Suggesting now is the time to buy because housing shortage will raise prices three, four years from now, despite all evidence that rentals will be the official answer to any housing demand question going forward?

Maybe.

Here's my overly pessimistic but perhaps absolutely on-target take. Now is a great time to buy if the cost to own is lower than the cost to rent in your area, and you have the cash or can get a 30-year fixed rate mortgage. Then I'd act now. Because the feds are doing pretty much everything they can to raise inflation, making your cash worth less, and to make houses harder to buy. Who knows how long that 30-year fixed-rate product will be available? Get it while you still can.

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