If You’re Going to Buy a House, Do it Now
By Martin Hutchinson
Contributing Editor
Money Morning
It looks like the U.S. housing sector has bottomed. In fact, if you’ve been thinking about buying a house, this may be the time to make your move.
Let me tell you why.
Congress and the Obama administration are considering whether to extend the $8,000 first-time-buyer tax credit for another year from Nov. 30, when it expires. With cheap money, housing may show strength in the short term, just as we’ve seen with other assets. But there is the potential for a market hiccup next year or in 2011.
When the National Association of Homebuilders released its NAHB Index for October last week, it showed a drop of one point in homebuilders’ view of the market, from 19 to 18.
The good news: The index is at double its level from last spring – when it bottomed out at nine – meaning homebuilders see an improving market.
The bad news: The index is based so that a reading of 50 is the “neutral market” view. That means there’s a long way to go, yet.
But even if Congress doesn’t opt to extend the $8,000 tax credit, 30-year mortgage rates are still down around 5.1% – close to their all-time low. But rates probably won’t remain that low for long: Building inflationary pressures and the huge U.S. budget deficit will combine to push interest rates higher.
In other words, even if housing prices are destined to drop by another 10% (except in the very worst areas, I wouldn’t expect you’d see anymore than that), you still may end up saving so much on financing costs by borrowing now that you’d be mad to wait any longer.
Housing arithmetic is always complicated but one thing I do know: 7% of $90,000 is more than 5.1% of $100,000!
The S&P/Case-Shiller composite home price index bounced nicely in July, with the 20-city index rising 1.5%, after a 1.3% jump the previous month. That’s a pretty good indication that the markets have bottomed out.
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What’s more, the $8,000 credit for first-time buyers was still in force for August and September transactions (you need to close to get the credit, so deals done before Sept. 30 should squeeze under the wire). Since interest rates remained low for those months, it’s likely we’ll see further price rises then, too.
That would mirror the market in Britain, where housing prices bottomed out last spring and have risen for the six months since. Indeed, the market in London for houses priced above 5 million pounds (about $7.5 million) is apparently exceptionally strong, because of the likely level of Goldman Sachs Group Inc. (NYSE: GS) bonuses!
For those of us who aren’t about to receive a Goldman Sachs bonus, or buy a house priced above $7.5 million, the short-term outlook is still pretty good. U.S. gross domestic product (GDP) almost certainly rose during the third quarter – probably by about 3% – and is expected to rise again in the fourth quarter.
That should translate into an abatement of the flood of job losses – perhaps from the 250,000-per-month rate of the last few months to around 100,000 per month. That’s still bad, but is indicative of a recovery ahead. At that point, the outlook for the housing market will depend on what region you live in.
In Florida, California and Nevada – where prices have dropped more than 40% – there may still be a large number of foreclosures and unoccupied new buildings left over from the bubble. In those markets, therefore, the excess supply may take time to absorb.
Similarly, even with the government bailout of the automobile industry, I probably wouldn’t invest heavily in Detroit, even though prices there are lower than they were in 1995. However, in such cities as Atlanta and Dallas, prices did not rise too much in the bubble – and haven’t dropped all that much since – so the market should rest on a firm foundation and we can expect it to advance.
Beyond 2009, the prognostication is still murky. On the one hand, even a slow economic recovery should induce consumers to more seriously consider home purchases. And with inflation apparently on the upswing, the prices of those houses can be expected to increase, as well.
On the other hand, if inflation really gets a grip, the U.S. Federal Reserve will have no alternative but to raise interest rates. Housing is the most-interest-rate sensitive sector of consumer spending. So if rates rise sharply, the housing market will inevitably suffer.
As for the $8,000 credit for first-time homebuyers, it doesn’t really matter. It’s like the “Cash-for-Clunkers” program. If Congress extends it, it will prop up the housing market a bit. But if Congress doesn’t, there will be no disaster – the market will simply fall back for a few months until demand catches up with supply.
It makes only a modest short-term difference in activity, and probably only a 1% to 2% difference in the level of housing prices.
If you’ve got the money, go buy a house. You won’t find a better time to strike.
[Editor's Note: Throughout the global financial crisis, longtime market guru Martin Hutchinson has managed to call both sides of the market correctly. During the market rebound that started in early March, Hutchinson assembled high-yielding dividend stocks, profit plays on gold, and specially designated "Alpha-Bulldog" stocks into high-income/high-return portfolios for savvy investors.
But his market calls before the meltdown that started last year were just as important. His warnings about the dangers of credit-default swaps - issued half a year before those deadly derivatives ignited the worldwide financial firestorm - would have kept investors who heeded his caveats out of ruinous bank-stock investments. In fact, Hutchinson even issued a highly accurate prediction of when and where the U.S. stock market would bottom out (a feat that won him substantial public recognition).
Experts are taking notice. And so should you.
Hutchinson is now making those insights available to individual investors. His trading service, The Permanent Wealth Investor, combines high-yielding dividend stocks, gold and his "Alpha-Bulldog" stocks into winning portfolios. And the strategy is designed to work in any kind of market- bull, bear or neutral.
To find out more about the Alpha-Bulldog strategy - or Hutchinson's new service, The Permanent Wealth Investor - please just click here.]
News and Related Story Links:
- TheDeal.com:
Homebuilders Still Struggling. - Money Morning News Analysis:
Existing Home Sales Pop on Rush to Beat Tax Credit Deadline. - National Association of Homebuilders:
Official Web Site. - Money Morning News Analysis:
With His Flawed ‘Exit Strategy,’ Bernanke Has Set the Stage for Stagflation. - Money Morning News:
“Cash For Clunkers” Gets a Reprieve.
Comment by Dennis Norman on 27 October 2009:
I agree with Mr Hutchinson points however beneath the hype that housing has bottomed is an ugly little scenario: lending standards are still loose and the low-down payment, high-risk loans being guaranteed by government agencies are setting up the next giant wave of defaults and foreclosures…there is a complete analysis of this by Charles Hugh Smith in a post at:
http://realestateconsumernews.com/financing/setting-up-the-next-leg-down-in-housing/
Comment by Bill on 27 October 2009:
Martin,
I usually find your analysis spot on. I disagree with you here. People make housing decisions based on monthly payment. Purchase price is irrelevant.
It matters not whether rates are 5% or 10%, it’s the payment that matters. Purchase prices will adjust to whatever buyers can afford based on existing rates.
Assuming Congress doesn’t do something stupid like pass the $15k housing bill, housing most decidedly is going lower in the year or two ahead.
Cheers!
Comment by Eusebio on 27 October 2009:
Interesting article. There are a couple of points I’d like to comment on:
You seem to expect that any large declines left will occur only in the worst areas. Actually it may be the “best” areas declining. Vulnerable areas could be those that haven’t declined much yet, where banks are holding foreclosed homes off the market, gambling on a recovery
http://www.bing.com/search?q=banks+holding+foreclosed+homes+off+the+market
The second point is that because mortgages are usually refinanced, buying at the time of low interest rates may not be that advantageous. It is preferable to buy at a lower price and higher rate and then refinance when rates go down.
Comment by David Perry on 27 October 2009:
I disagree as well. With four mortgages in default for every one in foreclosure, with the banks building huge portfolios of unoccupied homes without foreclosing on them, with a flood of resets pending on Alt-A and Option ARMs, I cannot fathom how anyone could think the real estate market is near a bottom. Reality (fundamentals) will always trump technical analysis.
Comment by RICO HAMMER on 27 October 2009:
YOU’RE TOTALLY NUTS; BUY YOUR DAUGHTER A HOUSE & HELP THE ECONOMY OUT & WATCH THE HOUSE SINK ANOTHER 10 TO 20 % DEPENDING WHERE YOU BUY.THE 8K PALES IN COMPARISON TO HOW MUCH MORE HOME PRICES WILL SINK IN 2010 & 2011 AND MAYBE 2012 AS WELL….BANKS STILL HOLDING 100,000′S MORE HOMES ON THEIR TOXIC BOOKS CALLED SHADOW INVENTORY AT THE UPPER PRICE RANGE.NOBODY CAN GET JUMBO MORTGAGES, SO THESE HOUSES ARE SITTING VACANT UNTIL THE BANKS CAN GET THEIR BOOKS IN ORDER WHICH WILL BE YEARS DOWN THE LINE………
Comment by Richard Lefcourt on 27 October 2009:
Martin: It seems obvious that the housing market meltdown resulted from two key developments. Builders created an over-supply of homes in response to demand created by excessively loose credit; too many loans were made to unworthy borrowers. And supply has been exacerbated by foreclosures stemming from job loss.
Decades of cash have bled from our economy, mostly to China and OPEC and America has sustained massive structural damage. We can print paper money all we want, but our economy and our housing market won’t get healthy again until we reverse our horrendous foreign trade imbalance.
The two most obvious solutions lie in more domestic energy production and the restoration of domestic manufacturing. But given the behavior of our elected officials, it seems national bankruptcy and default on our debt seem more likely. I suspect that that’s what some of them have in mind. Buy gold, not houses.
Comment by Vic Sage on 27 October 2009:
Martin,
I think you discount too much the effect of ending the first time buyer tax credit. If it has been such a non-factor, why would Congress even be considering extending it? And why would it be a good idea for anyone to assume more debt right now? The technical recovery from recession is not going to be enough to jump start the US economy right now, especially as the recovery is primarily government created and does not represent a true recovery. We are not going recover from stimulus and we are not going back to the credit driven consumer economy, so what will the basis of the recovery be? Government spending? Watch for housing to drop off when the tax credit ends. In tandem with the newer mortgage crisis and housing is going lower. We are in a deflationary environment right now, worry about inflation in a couple of years.
Comment by Brian on 27 October 2009:
Well, 2010 and 2011 will be interesting with all the option arms coming due. With many people paying only 1 or 2% on those homes, even an interest rate of 5% will make payments balloon.
There is still a big hammer to drop. In CA, those prices have dropped, but not on the medium to big ticket homes… those homes have a ways to fall. And when they do, expect some banks to go under.
Comment by Charles on 27 October 2009:
There are several articles around recently touting the same idea. This housing recovery argument would ring more convincingly if the author at least attempted to address the issue of the coming wave of mortgage resets which, along with rising rates that the author himself predicts, would seemingly spell another round of declines next year. Inflation may or may not be a bailout as well. If the Fed hyperinflates my new house might well appreciate 12% per year as in the days of old but that is cold comfort if inflation is 15% at the same time. One way or another, prices must come back into a more normal alignment with incomes & rents. Until then, prices decline- either in nominal or real terms until mean reversion plays out. Today’s incredibly artificial low rates are the only thing the bulls have to hang their hats on in terms of affordability. The rebates are minor and just shift finite future demand into the present. Kick the can on down the road guys….
Comment by Paul Heron on 27 October 2009:
Reader comments are very astute and highlite the dark under-belly of the so-called bottom of the housing market. Thanks to all of you.
Comment by ex VRWC on 27 October 2009:
No, no, no.
Not only are prices not through dropping, not only is more shadow inventory now online but also you will overpay for the houses now, because excess liquidity is the only thing keeping the market afloat. In other words, you will be bidding against speculators brandishing cheap dollars. And you won’t get the best price or the true value.
Lock in a lease at dirt cheap rates. At the worst housing will bump along the bottom. More likely it goes down another 15-20% at least.
Comment by Jim White on 28 October 2009:
Sorry this is so long, hope it is worth it!
I noticed that several of you refer to the term “appreciates”. The lost value in housing, for the most part; was non-tangible. The reduced amount for which a home may be sold today is market driven, not value driven.
The value of your home is still there, if you don’t believe it check what it would cost to rebuild from a total loss. Look at your home insurance policy, the “insurance value” the insurance carrier requires you to purchase to be “insured to value”! Take a look at you property tax assessment, sure some have adjusted, can you sell your home for that amount, probably not. And banks, if you are concerned about buying post the housing bubble burst, do you think they question loaning in this market, of course they do.
The current problem is in a large part due to the method in which the housing industry conducts housing appraisals. In fact, that same system was part of the problem with runaway appreciation in areas where there had been excessive demand for available housing. I believe that with some minor but necessary fundamental changes in the methods used to appraise housing and a program backed by the Federal Government like TRIA for the Insurance Industry and FDIC for banking we can in a relatively short period pull out of this mess.
Keep in mind that the crazy “artificial stimulus” of the Fed’s is a short term band aid compared to getting the housing industry back on its feet. All else will correct itself, except of course the enormous budget deficit which will continue out of control with the pointless stimulus plan.
What we have experienced is in fact a paper loss. Why, you cannot pay a reasonable amount for a home if you want to because it will not appraise. By continually using weakened comparable sales (comps) which currently consist of more involuntary sales than voluntary, which are then formulated to determine the subject home property appraisal. Consequently, a street or neighborhood having a number of involuntary home sales (foreclosures, relo’s or auctions) will develop increasingly lowered appraisals for the voluntary sales (change of home due to need of larger or smaller home, retirement sale, etc.) as well. This is the direct opposite of what occurred to create the housing bubble. There are certainly other factors, but this is a large part of the cause of the reduced market value and inability to re-inflate the home market. Whats more it is something we can control and replace with a better valuation process.
I put together a paper titled “Home Equity Stabilization Plan” which covers these issues and more. The cost and implementation are little and short respectively. The cost to the government is reasonably little and it would all but stop foreclosures with exit strategies for those who need to “buy down” that is, sell for a lesser expensive home without loosing their equity! What’s more this plan benefits every American whether they purchased a home to benefit from the attractively low interest rates or not.
I tried to get this plan to Congress, in fact, after many failed attempts to get someone’s attention, I had a representative of Ohio Congressman Steve Lautauret (R) looking at it. He informed me before Congress re-convened last year in the Fall that there was great interest in the plan by someone on Barney Frank’s staff with certain questions as well. Later, in mid November I was told that since they were now in the minority that they would not be heard on this proposal. I was sick with disgust. I had invested months of my free time into this, OUR Country was going into financial turmoil and they were not able to get the floor on this proposal. May it had been that the Republican’s would prefer to see a Democrat House and Senate fail rather than to then introduce something that may, with adjustments, prevent a financial disaster.
To date, I have not seen anything better introduced!
Comment by Rick Osborne on 28 October 2009:
Being a Canadian I get to look at the American economy in a little bit of a different perspective. It may all be well and true that it looks like home sales are back on the rise. But I donèt believe that its Americans buying them. I know of friends and hear of many others that lots of Canadians are buying up homes in the US and taking advantage of the low costs. I also believe you could bet your coors that the Chinese and many other countrys are doing the same. Face it, the US is going to be bought out !
Comment by Robert on 28 October 2009:
Oh, people will find MUCH better times to buy a house, at a small fraction of the price in a few years. Anyone who goes into debt to buy a house now is buying around a secondary high, and will find himself owing hundreds of thousands of dollars more than the house declines to, and be wiped out. Those who raise cash now, and wait a few years, will be able to pick up incredible bargains when most of $52 trillion in credit has been wiped out. I’m talking about being able to buy the house you want for over 90% off today’s prices around 2013 or 2014.
Comment by sherry on 1 November 2009:
Buying a house now is the worst thing you can do.IT IS OVER RATED.
Comment by Martin Shaw on 8 November 2009:
Low rates, lower home prices. Don’t buy now and miss the boat for sure.