The Deadman Night Rider

A forum for evening students of the SMU Dedman School of Law and other outlaws..

Sunday, August 28, 2005

This will end badly...

Here's a link to an LA Times article via Yahoo about how the real estate market has changed the way people think about mortgage debt. The rot must have set in pretty good, because they even quote someone holding himself out to be the chief economist of the National Association of Realtors claiming that if you've paid off your mortgage, you just haven't been managing your finances efficiently. The CEO of takes it further, saying if you own your home free and clear, you're a fool.

I'm not so much of a fool that I'm shocked to see CEO's make self-serving, puerile remarks, but this is too much. Advising people to use their homes like credit cards and calling it good sense sounds alot like the "profitless" corporation that was supposed to become the new paradigm during the halcyon days of the boom. To borrow a term from my lefty buddies, this is simply unsustainable.

At this point, we don't even need the housing market to retreat to put alot of people in a world of hurt - just a significant slowdown in the pace of growth will put alot of them upside down. The National Association of Realtors estimates that maybe a quarter, one out of four, houses purchased last year were investment properties - how many of those do you think were interest-only buys? What happens when interest rates finally get high enough that investors stop buying houses? A 25% drop in sales volume? At that point, the useful idiot quoted in the article as saying that real estate is "a liquid asset" in today's market is going to find it setting up like Quik-crete PDQ.

I hate to say it, since I'm sitting on one I shouldn't have bought, but I'm afraid there's going to be an awful lot of cheap real estate on the market sooner rather than later.


Anonymous Anonymous said...

Without taking issue with the authorities you cite, you do little to substantiate your argument that it was a mistake to buy a house. Bottom line: homeownership make good financial sense.

2:31 PM  
Blogger rattlerd said...

A., you're right - home ownership is good financial sense, with the stress on ownership. Following the advice of LendingTree, et al. and continually borrowing against your house via reverse mortgages and home equity loans to finance consumer spending isn't really ownership - it's rent with market risk.

My own case is similar - I ignored the rule that the real benefits of buying a home don't kick in until you've been in it for five years. Up until that time (on a 30-year note), the amount of equity the buyer builds up is so tiny that it's not really fair to say that he 'owns' a substantial part of the house. The mortgage payments are almost all interest - rent paid to the bank instead of a lessor. The last several years have led us to believe that house prices are a one-way street pointing straight up, but I think that's going to change pretty soon. If the bubble pops, it will mean I bought high and will be left with no equity cushion when I'm looking to sell at the low end.

6:35 AM  
Anonymous Anonymous said...

I think it also depends on where you live. Some markets are so seriously overvalued that "owners" looking for a quick turn around are likely to find themselves upside down (i.e. California). Affordable housing on the other hand is more insulated from market corrections. This is especially true in larger cities. I assume you live in the metroplex. Last time I ran the numbers, parts of Dallas were already pushing the envelope (i.e., earnings to cost ratio suggested that average wage earners were seeing their market dry up). On the other hand, affordable housing still existed in San Antonio, Ft. Worth, and El Paso. Try finding affordable housing in tech cities like San Jose, Seattle, or Austin. If you are working class in those cities you are screwed.

As for your 5 year theory, I somewhat agree. You are entirely right about equity. However, you also have to factor in tax benefits and opportunity cost. In three years you may not have much equity but still may have the ability to sell for a slight markup which either puts you even or ahead. Once again, it all depends on where you live and if you really bought "affordable housing." If you bought what you believed was "affordable housing," say in Plano for $325k , I apologize. However, if you bought a house that is not falling down and is near a city (like Ft. Worth) I'd think you are sitting pretty.

I've lived in houses for two years in downward markets and walked away on top. As a rule of thumb, such houses are always the last to get hurt.

While I think what lenders like LendingTree are doing is a shame, smart money buys real estate and renters make smart people real money.

Good luck!

5:43 PM  

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