Saturday, December 13, 2008

It Was The Best of Times, It Was the Worst of Times

There was a week ago an article in the New York Times business section about the housing market. The author cheerily declared what a great time it was to buy. He even threw in a little old school scare tactics:

"Then, everyone who sat on their down payment savings accounts for a few years too long will kick themselves for not taking advantage of what may turn out to be the buying opportunity of a lifetime for those who can qualify for a mortgage."

It's worth reading the readers' comments. They rip the article to shreds.

There are people who will tell you that this is "the best time to buy". Don't listen to them, it's a lie. I had people telling me that last summer, and see how that worked out. The people who say it are either real estate agents, or average people who have no idea of the market, but heard it from others so they keep repeating it. Some home owners who want to believe that this is the bottom of the market and their homes won't lose any more value will repeat it as a chant. Some impatient would be buyers, chomping at the bits, want to believe it. It's not true.

I'm not saying it's not possible to make a good deal if you get lucky, and the stars align just right, but this is not yet the best time to buy. These are very turbulent times for the economy and people should exercise caution and solid judgment. I have a bad feeling that the economy is in worse shape that most people realize.

There is list of slogans that people who would want you to buy now like to use. Here they are, and my comments:

"This is the best time to buy!"

They have been saying for better part of the decade, and look where it got us. Just because people who look self assured and authoritative say something it doesn't make it true. Do your own research.

"Buying a home is the best investment."

Studies have shown that homes on the long run are not a very good investment, they pretty much just keep up with inflation. On short run they can be good if there is a bubble, but I would not count on a new housing bubble any time soon.

"Buying a home is not an investment, it's quality of life."

It is actually true, but only if you buy smart. Owning a home you don't have equity in is just renting with all the extra expenses, stress and responsibilities of ownership. If your mortgage payment is so large that you live month to month with no savings, have to worry about what if you lost your job, that is not a a great "quality" of life.

"It doesn't matter that your home will lose value."

If you are so rich that a few hundred thousand dollars here or there don't matter to you, then sure. Otherwise it matters a lot. If you buy a home and then it loses a large chunk of value in a year, that's money - plus interest - that you just threw out the window. Lot of things could happen. You could get a divorce, have to move for a job, have big medical bills, lose your job. Your family may outgrow your home and need to upgrade, or you may retire and need to downsize. In any of those case it matter if you have positive equity in your home that you can borrow against to get you out of a jam, or if you can recover your money when you sell. And it matters how big the actual profit it is when you sell.

"If you don't buy now you will regret it, you will be priced out forever."

Hogwash. The real estate snake oil salesmen were using this scare tactics for years. In normal markets home prices stay in step with inflation. Only in bubbles do they sprint ahead, and you should stay out of bubbles. Currently there is a huge supply of homes for sale, high foreclosure rates will continue for years.

"People who don't buy now are timid."

Oh, this one is just childish. What next, make chicken noises?

"Nobody can time the bottom of the market."

You don't have to. As a smart man said: "Housing markets don't bounce, they splat." When it hits the market it will be sitting there dazed and confused, and the eventual recovery will be slow and gradual. All the major elements that made the last bubble possible are gone. There will be no new bubble any time soon.

"The prices came down a lot from the peak."

That means absolutely nothing. The peak was so far removed from reality that you can't measure against it. You have to look at pre-bubble values. I fully expect prices come down to 2000. Maybe lower, because of the poor state of the economy. A deep recession could force home values significantly lower than they would normally be.

"Unless you have a crystal ball..."

Be wary of anyone who talks about crystal balls. It just means that they'll disregard all logical forecasts based on real data in favor arguments based on urban myth, anecdotal evidence and sentiment. There have been a handful of people who predicted the housing crash for years, in face of mass hysteria and public ridicule. Peter Schiff was the favorite whipping boy on Fox News. Paul Krugman was worried about a potential housing bubble since 2002. Check out YouTube for either of them. How did they do it? They looked at the numbers and did the math. There were no crystal balls involved.

I post this chart again, because it's incredibly important to be able to see the current situation form historical perspective.

Overall here at the end of 2008 we are on the cusp of very bad things. The situation will get worse before it gets better. Shrewd people can do make fortunes in bad times, but those who just think they are shrewd can be seriously burned. I would suggest to anyone who is wanting to buy a home to wait 6-12 months at least. By then you'll have a better picture of the economy and how it effects you. Prices won't be higher and inventory will be plenty big.

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