Thinking of Buying a House?

Factors to consider before buying a house!

If you ever dreamed of buying a house and you have not done so yet, I am sure that the last 3 years have been very confusing. From one side you hear how real estate prices in the largest markets in the US have been coming down, from the other side you hear in the news and from your friends that it is almost impossible to qualify for a loan. So what do you do? Do you give up the dream to owning your own home? Do you wait for things to get better? What if prices start going up again the way they did in the last 10 years and you will miss the boat, again? Is it realistic to even think that you can possibly qualify for a real estate loan? Well, we are here to help. Over the next few weeks, we will look at these issues closely and try to provide some clarity in all of these issues. We do need to examine what went wrong so we make sure that we will not make the same mistake again.

What went wrong?

The real estate market has gone thru some tough times in the US in the last 3 years. I am referring to the majority of the larger markets. It has not been terrible everywhere. It has been terrible in areas that experienced unrealistic appreciation during the 5 or 6 years prior to 2007. During that period prices went unrealistically high without a real good economic reason. It was really easy to get a loan, people had jobs and making money and thought that would go on for ever. The debt load of the federal government and of all the citizens was at all time high.  Once the economy started slowing down, people  could not support that much debt. Debt that they had accumulated because they were trying to keep up with the Jones or because they felt that real estate prices would go up for ever. Since banks were practically giving away money without checking anything, people bought houses that they could not afford. Why would someone buy a house that they could not afford? Well banks made it affordable with these loans that allowed you to make very small payments every month. Such small payments that what you send in to the bank every month was not even enough to cover the interest. So what did the banks do? Add the interest shortfall to your balance. So if you started with a mortgage of $400,000 after a couple of years your balance might have been $420,000 although you were making payments every month. That’s is what they referred to as Negative Amortization Loans. The way people excused this behavior in their minds is that, I have to get these types of loans because this is the only way I can afford to buy a house. Since prices appreciate 20% to 30% a year, in a couple of years I can make $100,000 from the appreciation of the house. If the balance on my mortgage goes up by $20,000 or $30,000, big deal. I will still be ahead by $80,000.  To make things even worst, the strategy was to refinance every couple of years, so we can use the equity that we have built up to pay off our other debt. Debt like credit cards, car loans, boat loans. Once everything was paid off, and we felt great about what brilliant investors we are, it was time to go and buy few more toys on credit!

This is a great strategy as long as real estate prices keep increasing 20% to 30% a year. If prices, god forbid stay the same or go down, then disaster happens. If on top of that, the economy slows down and people start losing their jobs, then things really start going south because people cannot refinance any more to use their appreciation as cash. They have debt that they cannot afford. Banks started seeing that their existing clients cannot make payments so they start making it difficult to get a loan at this point. Problem is that it is too late for that. You have millions of people whose house will need to be foreclosed upon. Billions of losses in the banking sector. Such crisis that the federal government needs to step in because by now you have an avalanche coming right at you. Unless the federal government wants to have to deal with a depression in the same way it did in 1929, it better bail out the banks.

The result? Millions of brilliant investors were foreclosed upon, trillions of dollars lost from the economy, federal government goes into record breaking debt.

Where are we now?

Well, over the last 3 years real estate prices in the biggest markets have declined as much as 60%, and banks made it almost impossible for borrowers to qualify for any kind of loan. We went from one extreme to another! Currently there seem to be signs of things getting better. The federal government put over 2 trillion dollars in the economy and thru various programs tried to get things in the economy moving. All those efforts are starting to take effect. Unemployment is said to be slowly coming down from over 10% to barely under 10%, and real estate prices in some markets actually have started to go up. There are some markets in Southern California for example, one of the hardest hit areas, that have shown a lot of activity. Value of houses have gone down so much that now buyers are stepping in and buying houses. In some cases, in the lower segment of the market, let’s say under $400,000 range you have multiple offers being made for the same property. Many times these offers are above listing price. An event that took place during times of high appreciation. Will it continue? No one knows.

Is this a good time to buy a house?

Well, it might be depending on your situation! Prices are half priced from where they were 3 years ago. Rates are at historical lows. If you want to buy a house to live in for the long term chances are good that you will come out ahead in the long run. Assuming you will qualify to get a loan. In many cases now it is cheaper to buy a house then rent one. Once you take the tax advantages into consideration it really might be. If that is the case for you, then you should seriously consider being a house.

Does that mean that prices will not come down any further? They might or they might not. One thing seems probable, if they come down further they will probably not come down much more. On the other hand, it is more probable that the next big move will be a move where prices will go higher!