March 23, 2014

More Buyers Are Needed

A reader suggested a topic on first time house buyers. “What about ‘money on the sidelines’ and a generation of delayed first-time buyers who want in, but not at current prices? Is this a possible difference from the last collapse? Whereas buyers in Bubble 1.0 had never experienced home price declines, this next crop of buyers have witnessed both a market collapse and an unprecedented market rebound in a few short years. When prices start to fall, will these people be lining up to buy at slight discounts, with the probably unreasonable expectation that prices will shoot to the moon again in a few years?”

“And will these buyers, in trying to catch a falling knife, temporarily slow what should be dramatic price declines? Or will they get cold feet when faced with the reality of falling prices with no end in sight, especially in the face of increased economic instability and falling rents?”

The Hays Daily News in Kansas. “It is no secret that Hays has been in a real estate bubble for some time. Countless young individuals and families from Hays who have been forced to move to bigger cities because they simply cannot afford to live in or move to Hays considering income potential in relation to the cost of living. This trend is startlingly clear in the most recent U.S. Census, in which the city’s longstanding population boom ground to a screeching halt in the 2000s. Between 1980 and 2000, the city’s population grew by well more than 20 percent, whereas between 2000 and 2010, the city’s experienced essentially no population growth at all.”

“It should be no surprise that the price-to-income ratio for Hays indicates real estate is grossly overvalued. The average person in Hays earns just $24,000 a year (U.S. Census, 2010). Yet a typical new construction home in Hays will cost you well over $200,000. That math simply does not work. In addition, with asking prices that easily can exceed $1 million for a single prime commercial lot (just the vacant lot), it also should be no surprise that most businesses that consider coming to Hays don’t consider it for long.”

“Unfortunately, there is simply no economic foundation to support current real estate prices. In other words, Hays cannot continue to offer Johnson County cost of living with Ellis County jobs and wages. It’s that simple. Something eventually has got to give. It is not a matter of if the Hays real estate bubble bursts — it’s when, and that is not necessarily a bad thing.”

From Chicago Now. “When I heard about San Francisco’s Downpayment Assistance Loan Program yesterday morning I couldn’t believe it. The Mayor’s Office Of Housing And Community Development will begin ‘loaning’ up to $200,000 for down payment assistance to qualified first time homebuyers who don’t have to make any payments on the loan while they live in the home - up to 30 years.”

“In lieu of interest the loan is repaid upon transfer or leasing of the property with a share of the appreciation equal to the share of the purchase price financed through the Downpayment Assistance Loan Program - because housing prices only go up, right?”

“So let’s review San Francisco’s attempts to operate a command and control housing market. First, they restrict housing development so there’s a supply shortage. Then they impose rent control, which simultaneously creates a supply shortage and increases demand. Then they come up with this downpayment assistance loan program, which increases demand. How many ways can they come up with to screw with the market? And making it easy for people to buy homes without putting in enough of their own money…isn’t that how we got into the current mess we’re still digging out of? Ditto for assuming that there will be home price appreciation to help pay off the loans.”

“In reality this program seems to be more of a political ploy than anything - an opportunity for politicians to say that they are doing something about the San Francisco housing affordability ‘crisis.’”

The Globe and Mail. “When the Occupy movement hit the headlines in 2011, we heard about the 99 per cent, but when it comes to getting a mortgage there’s another group in Canada – the 9 per cent. These are the nearly one in 10 prospective home buyers who as recently as two years ago qualified for mortgages but no longer do so. What’s a buyer in the marginal category to do? ‘The short answer is to look to the bank of mom and dad,’ says Bill Johnston, director of the Canadian Real Estate Association.”

“Another option is to lower your expectations, says Trish Bongard Godfrey, a Toronto real estate agent. ‘If people can’t afford houses they can look at condos.’”

The Daily Ticker. “There are many well-known positives of being a homeowner, such as laying down roots in a neighborhood, customizing the property to your liking, and, in theory at least, investing in long-term price appreciation. But James Altucher, investor, author and entrepreneur, argues that owning a home could be one of the biggest financial mistakes to make: ‘It is never, ever a good idea to buy a house,’ he says.”

“What’s Altucher’s beef with owning a home? ‘The house is totally illiquid, homeowners are trapped in a location, it’s not easy to move and taxes and other fees go up faster than the price of inflation,’ he says. ‘There’s no law that you have to follow the ‘American Dream’.”

“There are plenty of people like Altucher who prefer the freedom and limited responsibilities that renters enjoy. Even after a grueling housing bust, however, owning a home retains a powerful allure, with potential buyers edging back into the market. More than 60% of all families still own the home they live in — close to the historical average. And more buyers are needed to get the housing market officially back on its feet.”

Bits Bucket for March 23, 2014

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