Price Boom Distorts Supply And Demand
In times like these, it may be harder to make sense of statistics than it appears. For instance, is low availability of homes for sale a result of more buyers or less sellers. KCBS, "One real estate agent said low inventory contribute to the demand. 'There is "very, very low inventory.'"
But we have this from AZCentral, "Sellers are running into problems of their own when they try to find a new home to buy. 'If you own a home and want to sell it, you have to turn around and buy a home to replace it..It could be difficult to (find a replacement home), so some home buyers stay either out of desire or are forced to stay with the home they have because they can't replace it.'"
And then there's this factor to consider. "Anytime interest rates are at an upward moving mode, it creates a little bit of a frenzy, because people want to get in before the interest rate goes up." In that scenario today's high demand comes at the expense of tomorrow's sales.
12 Comments:
This is the whole fallacy of the game. If your house goes up in "value" your taxes go up, and when it's time to sell your real estate comission goes up. Meanwhile the house you'd like to "move up" to has gone up, and the seller of that house will have to pay a higher comission, and the new taxes are higher and your new mortgage will be higher .........
Unless you sell out and move to Mexico there is no benefit to having your housing costs go up.
Or unless you move to renting.
I don't know what our society has against renting. Its like everyone thinks it is the worst sin to be renting.
The system is stacked up against renters.
Homebuyers with a mortgage get to deduct interest payments, which in my area can be almost double or triple the standard deduction for a married couple.
Whereas renters cannot deduct the rent they pay even thuugh it is likely slighly more than the standard deduction. For example, my rent totals $15K/year...why should I not be able to deduct that, especially since my landlord pays income tax on that income.
More government BS.
"Homebuyers with a mortgage get to deduct interest payments, which in my area can be almost double or triple the standard deduction for a married couple."
Shake your head, man ! If people have an interest deduction that is 2 or 3x the standard deductions, can you imagine how much money they owe ?????
What is going to happen when interest rates move away from these historic lows and nobody, not even them, can afford that home ?
"Whereas renters cannot deduct the rent they pay even thuugh it is likely slighly more than the standard deduction. For example, my rent totals $15K/year...why should I not be able to deduct that, especially since my landlord pays income tax on that income."
I wouldn't worry about the tax advantages of being highly leveraged. In normal times, ie when people are not highly leveraged and when people are trying to pay down their mortgages, this won't be a factor.
"Homebuyers with a mortgage get to deduct interest payments, which in my area can be almost double or triple the standard deduction for a married couple."
Shake your head, man ! If people have an interest deduction that is 2 or 3x the standard deductions, can you imagine how much money they owe ?????
What is going to happen when interest rates move away from these historic lows and nobody, not even them, can afford that home ?
"Whereas renters cannot deduct the rent they pay even thuugh it is likely slighly more than the standard deduction. For example, my rent totals $15K/year...why should I not be able to deduct that, especially since my landlord pays income tax on that income."
I wouldn't worry about the tax advantages of being highly leveraged. In normal times, ie when people are not highly leveraged and when people are trying to pay down their mortgages, this won't be a factor.
Bubble or not ?
Folks claiming that a bubble exists:
Robert Shiller
Doug Kass
Dean Baker
Paul Krugman
Paul Volcker, Former Chairman, Federal Reserve
Folks claiming that no bubble exists:
Alan Greenspan, Chairman, Federal Reserve
David Lareah, Economist, National Association of Realtors
David Jones, Texas A& M Univeristy
The landlord of rental property can deduct not merely mortgage interest and property taxes, but also all the other expenses associated with property, such as maintenance, depreciation, insurance, utilities. In a free and competitive market, the landlord will be forced to pass on his savings to the tenant in the form of lower rents. So I don't think the government really favors homeownership over renting as much as is commonly thought.
The real question is why does the government favor debt over equity? Why are interest payments of any sort deductible? What is so important about interest expenses, as compared with food expenses, for example? Note that many of the recipients of interest income are bondholders in tax-advantaged pension or retirement account, so it isn't necessarily true that what the government gives in the form of deducting interest expense, it takes away in the form of taxing interest income.
Getting back to the original post, I have to disagree that the current real estate market has anything to do with the traditional concept of supply and demand. Using the Bay Area as an example, there has been flat population growth for years and counties like San Francisco have been losing residents for years.
Meanwhile, building continues and vacancy rates are high. Also, there are plenty of houses for sale at any given time. The "demand" for housing is nothing more than pure speculation by people that are leveraged to the hilt and are sometimes working on 2 or 3 houses simultaneously. This is false demand that isn't supported by fundamentals at all, and is a classic mania.
The CAR admits to 36% speculation so you know the number is probably closer to 70%. The second these people get a whiff of depreciation they will bail on the market and there won't be any more "demand".
Saw the article in SF Chron this morning that home prices here have vaulted over the $600K median value. Also, the last time the market was this frenzied in terms of sales was 1989.
Gee, why does that year ring a bell. Oh yeah, it was the top for the 80s boom. We saw a six-year bust after that, bringing home values down 20-30% in SoCal and about 15-20% down in NorCal. Even more in some of the hottest areas.
A decline like that (or worse) would be far more devastating this time. Why? Because buyers today are considerably more stretched than in 1989. 62% of all home loans in NorCal today are interest-only ARMs. So not only could monthly payments rise, no equity will be built. So higher monthly costs and no equity build. Everything is dependent on continued asset inflation.
What happens to someone who buys in now, finds their monthly costs increase, builds no equity, and then sees his new home decline 10-20% (or more) in value. Hard times.
Also, the Law of Large Numbers also comes into play. Back in '89, even at the top in Calif, the ratio b/w NorCal median home price and NorCal median household income was about 3. Today it's about 7.5. Once the bust commences, getting out will require sellers to bring a check to closing...not cash a check.
Quickie math: buy home for $600K today. Price falls 10% (very mild decline). Seller can't make newly-enlarged ARM payment. Seller has built no equity. Seller must sell home for $540K. Seller must bring a check for $87K to closing to get out of home (includes sales commish.)
If this coming bust mirrors 1990-1995, we will see the pain commence later this year and will pick up steam and peak by 2008-2009. If this bust is worse, who knows how bad it will get.
What is wrong with renting:
The unsettling feeling you get that is probably not too different from being in prison or some kind of camp. In Iowa, if your lucky, you have a city rental housing inspector go through your entire house on a yearly basis. Strangers walk wherever they please with an arrogance unmatched. If there is any kind of problem you can see them four times a year. I have. They require the landlord to repair a leaky ceiling, but never say fix the roof that leaks. wHAt perfect job security.
If your unlucky enough to rent in a complex, often the inspectors for the complex just walk right in unannounced. I have woken up in bed suprised to find them in my place.
Thats whats wrong with renting,no privacy or sense of security. But of course they are doing it for my own good. And they would never do this to encourage anyone to want to try and buy a house they cant afford... would they.
The easiest way to rent is to get face to face with a house owner that is trying to sell and can't. Make him an offer to rent. Tell him the market is just getting his legs and if he hangs on a bit longer, he'll get his appreciation. In the mean time, offer to rent his property.
"If your unlucky enough to rent in a complex, often the inspectors for the complex just walk right in unannounced. I have woken up in bed suprised to find them in my place."
You mean you're not even allowed to lock your doors in this complex place???
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