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Is It Getting Time to Buy a House?

Posted by Larry Doyle on April 19, 2011 8:51 AM |

Given the recent experience in housing is real estate an asset that should be abandoned? Obviously not but that mentality has grown dramatically within many segments of our nation.

Can you blame people for never wanting to venture back into the real estate market? No. It is understandable but it is not the real estate’s fault. The fact is very regrettably far too many people did not fully understand and appreciate the dynamics at work in the real estate market nor did they appreciate the risks involved in the mortgage finance space. I empathise. That said, real estate ownership should not be abandoned.

Let’s take a glance below at a graph of New Home Sales over the last fifty years. Throughout the ’60s,’70s and ’80s, we can see significant support and resistance levels for New Home Sales between 400k and 800k per month. As this graph highlights, New Home Sales have clearly CRASHED over the last few years. The February reading of 250,000 was the lowest in many moons. Thus the question begs, is it time to buy?

New home sales in the United States are now down 80% from the peak in July 2005
New home sales in the United States are now down 80% from the peak in July 2005

If I were thinking of buying, I would be very actively looking. Why? Sentiment is growing that owning real estate as an asset is no longer wise. Bloomberg highlights this reality in writing, Americans Shun Cheapest Homes in 40 Years As Owning Loses Appeal,

“The magnitude of the housing crash caused permanent changes in the way some people view home ownership,” said Michael Lea, a finance professor at San Diego State University. “Even as the economy improves, there are some who will never buy a home because their confidence in real estate is gone.”

While this thought process may be understandable it is this type of thinking which is a strong indication to me that real estate is likely approaching a time to buy. That said, while some may want to speculate in real estate for a quick flip, I do not think we will see a sharp bounce in real estate. I envision a likely continued gradual mild erosion in prices after the crash that has occurred. From there, we will likely experience a market with flat to mild upticks in prices for a number of years as the excess housing supply is absorbed.

A leg down from current levels as forecasted by many would seem to me to be a good point of entry for buyers who are well positioned to make a solid down payment and live well within their means and ability of making monthly payments.

Never buy a home? Would you rather purchase equities at current levels? Not me.

My mildly positive inclination toward real estate currently is the first time I have expressed such sentiment since launching my literary pursuit in the fall of 2008. Homes once again need to be viewed not merely as an asset but as a place of value in which lives and relationships develop, careers can grow, and people prosper emotionally. These basic principles are core to a real appreciation and understanding of ‘sense on cents.’

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

Larry Doyle

  • coe

    I think you raise several timely points, LD..in today’s markets, the decision to buy a home, or trade up should not be about an imminent opportunity to flip, but rather a longer view value proposition..there may be some additional decline in residential real estate prices – clearly this is a function of the economy and of local market conditions, but it is never a prudent plan to believe one can call the bottom of a market, and, in fact, there is a chance that one could get the house one dreams of, in the location of choice, at a very fair price – that is, of course, if you can buy this house within your means in a very awkward mortgage lending environment..are there other uncertainties to weigh – sure – the mortgage interest tax deduction comes to mind, as does the fragility of the employment prospects…but for the long term, appx 60% of Americans both want to own and can afford to own their own homes – it is shelter as much as an investment, and it is the living of life that turns a house into a home..I know there is a tug of war between those that view the economy as turning/poised to recover, and those that are wary of more troubles ahead – figure out where you fall on that spectrum – as the old proverb says, “if you are a peg, endure the knocking, if you are a hammer, strike”

  • fred

    LD,

    There are any number of metrics you can look at, my favorite is unsold inventory. Based on recent reports I think inventory is coming in at close to 10%, the historic average is closer to 6%. there is also 1-2% stalled within the foreclosure and pent up supply pipelines (just waiting for the market to firm up a bit).

    I do agree, however, that prices are probably closer to a bottom than a top; but considering demograghics, mortgage interest expense (possible loss of the mtg int tax deduction), property taxes, maintenance, depreciation, heating costs, illiquidity issues and lack of availible financing, my mantra is still LESS is best.

    It is, however, a buyers market, so on a cash flow basis, residential properties in stable neighborhoods look interesting and on a total return basis, REITs will probably continue to perform well.

  • mountainaires

    Real estate is a good value, but only in limited situations: You’re retiring and plan to stay put; you are looking for investment property/rental property with a big downpayment and a short mortgage; you pay cash for a home.

    Anything else is risky. Maintaining mobility for employment is crucial in the “new normal.” Don’t want to be tied down to a location because you can’t sell.

    And, mortgages? Well, lets just say “don’t feed the beast.”

    Basically, I see a new world emerging. Home ownership as we have known it is over, at least until renting becomes prohibitively costly due to demand. But that will take a while, because the overhang of unsold homes will take time to work its way through the system.

    The next generation won’t believe in the “American Dream” of home ownership; they’ll see it as a burden and a gamble they can’t afford, and they will have to pony up 20% for a down payment anyway. In my view, they’re better off saving their money until they can pay cash for a home, if they can.

  • Tom

    great minds….just closed on March 17th…






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