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Should I Buy A House In 2015?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
No one can answer that question for anyone else, but it seems prudent to ask the question in the context of an Echo Bubble in valuations that appears to be deflating.
Readers often ask me if now is a good time to buy a house. This question has appeared in my inbox for the past nine years, as the Housing Bubble reached its climax, burst, and an Echo Bubble arose in its place.
It’s a tough question, as you know, for reasons that are inherent to buying and owning real estate, and to the uniqueness of every household's finances and needs. So I always start by saying I can't offer any advice or even suggestions, because everyone's situation is unique.
In many cases, readers are seeking reassurance that it's OK to buy a house for reasons other than financial: they're having another child, their parents need them close at hand, and so on.
This is the dual nature of housing: it is both an enormous financial commitment and home/shelter.
The problem with being an enormous financial commitment is two-fold:
1. The size of the financial commitment outweighs every other expense and risk of capital. Mortgage, property taxes and maintenance typically consume more of the household budget than any other item.
2. Housing is illiquid and the transaction costs are high. If I want to sell $200,000 of Apple shares, the cost is a trivial sum and the transactions is completed in a few seconds, as Apple stock, like most large corporate shares, is highly liquid.
If I want to sell a $200,000 house, the process typically takes months and costs between 7% and 10% of the asking price in commissions, closing costs and fees.
Should I buy a house in 2015? Rather than seek a yes/no answer, let's try to identify some key reference points to consider.
1. Length of occupancy. If somebody buys a house with a fixed-rate mortgage and has a realistic plan to live in the house for 20+ years, fluctuations in value and demand don't matter much.
2. The potential consequences of a decline in value if the Echo Bubble pops. If, on the other hand, somebody is buying a house that they plan to sell in a few years to fund their retirement, that's a very different set of risks.
If somebody buys a house for long-term shelter and location for $400,000, and it drops to $200,000 five years into their ownership, it hurts their net worth but has no real effect on their daily life. As long as they can continue to pay the mortgage, life goes on.
The person who has to sell to fund their retirement, on the other hand, is devastated by the decline from $400,000 to $200,000. Daily life is much harder after the loss of $200,000+ in irreplaceable capital.
3. What else could you do with the capital sunk into a house? One way to consider this question is to consider the relative value of housing in something other than dollars, for example, to price housing in alternative investment options such as gold and stocks.
The website Priced in Gold has some interesting charts reflecting the ratio of gold to housing, as measured by the Case-Shiller Index.
One way to think about this is to ask: how many ounces of gold does it take to buy the median-value home in my area?
As investors, we ideally want to buy assets at their relative bottom and sell them at their relative top, and switch out from fully valued assets into relatively cheap assets.
4. Can you pay all housing costs out of one paycheck? People naturally calculate their ability to pay on their present circumstances, but the possibility of global recession and financial instability should give us pause.
Rather than assume household income will remain stable or increase in the years ahead, it is prudent to consider the possibility that one earner loses their job and is unemployed for an extended period of time.
If the house cannot be paid for out of one income, the household is risking default and loss of all the invested capital should one wage earner lose their job.
This is the problem with the fixed costs of owning a house: the costs are inflexible. The county doesn't care that you lost your job; the property taxes must be paid or the county will pursue auctioning off your property to pay the tax liability.
Renters can move much more easily than home owners, so one cost in buying a house is a loss of flexibility and the burden of fixed costs.
5. How is housing priced in terms of median household income? Another way of assessing the relative value of housing is to measure the price in terms of median household income. Yes, low mortgage rates means mortgage payments are smaller than they were in previous eras, but income is still the foundation of debt, including mortgages.
Courtesy of Market Daily Briefing, here is a chart of the case-Shiller Index and median household income:
By this measure, housing has never been more expensive. The reason why: household income has stagnated or declined for years while the price of housing has surged:
Meanwhile, home values rose in an Echo Bubble, which is now rolling over:
Should I buy a house in 2015? No one can answer that question for anyone else, but it seems prudent to ask the question in the context of an Echo Bubble in valuations that appears to be deflating and household income that is potentially at risk of declining further in a global recession that eventually impacts the U.S. economy.
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Looks sustainable...
/s
Isn't mark to fantasy accounting wonderful?
In happy yearend news, Former President George H. W. Bush has been released from the hospital, alive.
Yay, I must BTFD in his honor.
I wish they'd carried Bill Clinton's butt buddy's body out in a body bag. Fuck George Bush, Fuck Little George Bush, and double fuck Jeb.
'ol 'Bath House' Barry is the one with the butt buddy...or more like he's been A LOT of guy's butt buddy. Just ax Reggie
So so article.
What we really need are articles such as "Should I buy a 60,000 truck" or "Should I go 45,000 in debt for a degree in French Literature" or even "Should I enlist in the infantry for the Edumacational Bennies and the way sweet opportunity to waste brown skins for the Banksters, and Empire?"
Will you write the articles and answers we need, or should I?
naw. what you gotta do is become an illegal mexican. then all that shit's free.
however, mortgage debt dwarfs student and auto debt combined, and is the underlying instrument in tens of trillions of derivitives. Not to mention all the leverage.
I say hell ya buy a house if the mortgage(15 yr fixed)insurance and taxes(counting your down payment) is less than rent for a dive in the same area -
But a mcmansion? Forget it - buy the cheapest house you can find -
And if I was going bankrupt Id say Get A Court order to the banksters trying foreclose on me Show Me The Deed!
I stand by my prediction that we are going to see something similar to the mid-90's deflation in all but the stock market. FED is going to use all means necessary to keep stocks levitated while RE and energy tank. This will be their tool to get disposable income into consumers hands. Most of the 99% don't save so if you put a few extra hundred dollars in their hands a month it means more trips to the pizza parlor, more video games bought at Walmart, a new pair of kicks from Target, etc. Housing Bubble 2.0 popping should create some demand side pressures as mortgages and rents fall. Combine this with minimum wage increases that scale up through the food chain and I think you have the FEDs plan to increase consumer demand. Don't know if it will work, but I'm sure that's their plan.
We used to have a system where money was created by banks creating new loans based on reserves created by the CB. Banks are not lending any more so the money creation channel has shifted to stock markets, CBs buy stocks which makes them go up, people at the top feel richer so they spend, crumbs trickle down to the chump on the street. Chump listens to Fox News/CNN so he votes to perpetuate this syetem.
Any questions? I think I'll go for a swim (Australia)
I don't wanna buy a house or start a business. So will the banks loan me tons of fiat at near zero interest so that I can carry it over to their casino and let it all ride on Green 00 at the wheel of fortune stawks market???
Yeah, that's right...I didn't fucking think so either.
I think the FedRes plan was simpler.
The banks were screwed in 2008, and not in a position to bend everyone over in
a deflationary collapse. Their frauds carryed them away, or someone caught on too soon.
Fast forward to today.Who is sitting on vast cash reserves to pick assets for pennies on the dollar ?
If it wasn't for the BRIICTS machinations to dethrone king dollar, the crash would already probably
have happened.
The FedRes doesn't, and never has given a shit for anyone but the banks.
My thoughts exactly, with 7+ billion (and growing) all competing for a better quality of life, there is plenty of "demand" for real goods and services and all the energy and commodities that make a high standard of living possible.
Demand for useless paper promises and financial "products" of mass destruction? Not so much.
...there is plenty of "demand" for real goods and services and all the energy and commodities that make a high standard of living possible.
Yes. But there is no demand for it at the current valuations. Let's take energy out of the equation for just a moment (You can make a logical argument for peak oil destruction or Nuclear Fusion utopia IMHO) If everyone is seeking a growing standard you have demand and we have an abundance of factories to produce at low cost. that doesn't benefit the oligarchs. See the problems the current low cost of oil presents them.
While there are some very real issues facing global humanity as far as clean water, food, efficient energy, etc. The oligarchs face a unique dilemma. How do they maintain the class divide in a world where technology is crushing it. Outside of banker and Geo-political machinations, there is no reason that the continued surge in technology cannot raise everyone's living standard exponentially. And if not for the Catholic Church's stupidity infecting the third world (and Islam to a lesser extent) we would have already seen a leveling off of the global population
The banks were screwed in 2008, and not in a position to bend everyone over in a deflationary collapse. ...Fast forward to today.Who is sitting on vast cash reserves to pick assets for pennies on the dollar ?
Agreed. But my thesis on the other parts of their plan is no less valid. It seems the banksters give the masses s hot a winning the bottom of asset prices every decade, and that is essential to the confidence game that we are all participating in the "economy". The early 80s and the mid to late 90's were the last 2. As you said they overplayed their hand during the Housing Bubble and the 2010-2012 deflation in RE should have extended another 2-3 years, but that would have destroyed the banks. So they blow this echo bubble to make sure all that inventory went to private equity middle men who created the REITs and/or sold to the specuvestor knife catchers.
"should i buy a house in 2015..."
with what Charles????
Confidence?????
fucking stupid man...
...... yea, no lie.... thanks to the liar in chief fudgepacker and the corrupt ruling political elite democrap and republicant turds, the average US citiizen tax payer gets to pay higher taxes, higher and higher obamacare deductibles and premiums which along with stealth inflation underreported by the gubmint bureacrats as well as stagnant if not declining wages/salaries.... buy a house???? Really????
Kind of like asking "Should I buy Enron stock?" when it was at it's peak.
If and when the FED does raise rates there will be a brief buying panic of perhaps 6 months, then the prices will plummet. If you want to sell do it this Spring/Summer.
Even if they never raise rates prices will come down as they have been inflated by now ended QE.
The Eron people are amateurs compared to the Federal Reserve PhDs.
1. The Fed cannot raise rates.
2. The Fed will resume QE right after Japan
implodes and that could be any day now.
<< If I want to sell a $200,000 house, the process typically takes months and costs between 7% and 10% of the asking price in commissions, closing costs and fees. >>
That's the essence.
Selling a house [except maybe in Cali Disnyeland] is one of the most painful, time-consuming experiences known to an amerikan. The fees, commissions and other BS are incredible. Oh yeah, how about all those too-many-to-count price reductions just to get a warm body to walk in the door. Add that to this depressed economy and selling a house will soon be the #1 cause of Divborce, Suicide and other maladjustments in the usa. As oil drops and unemployment of even moar private sector Middle Class people ripples out, house buying won't even be a consideration anymore for years to come for 90% of merikans.
jmho
Backwards.
"...and selling a house will soon be the #1 cause of Divborce..."
The Federal Reserve has to keep the debt to infinity going. Regardless of the income.
Your making money in the financials by forcing more debt. Yellen says get wealthy if you aren't. Too bad if your the 99%.
This is not a good time to buy a house said no realtor ever.
Its all good. No matter what happens the debt gets bailed out.
Now your formerly 500,000 dollar house is now a formerly 250,000 dollar house.
it's all upside down now. any deadbeat who can fog a mirror can get a $750K mortgage while responsible people rent from overlevered speculators.
I just want to let you know that I signed in just to commend you on the use of "deadbeat who can fog a mirror" in place of "mouthbreather".
Hilarious, and will be used in the future.
Thats not true. You have to meet really specific criteria to get a mortgage these days. I'm not claiming the criteria are logical or accurately measure default risk on an individual basis, but it is downright impossible for many. Banks are creating any mortgage they can if they can legally package it and resell it but won't look at people that don't fit the mold.
not until the average house price has dropped by about 50%. Go F yourselves, NAR, FED, Morgage Lenders and other associated vermin.
"As investors, we ideally want to buy assets at their relative bottom and sell them at their relative top, and switch out from fully valued assets into relatively cheap assets."
I finally get it......Wait ...I'm a little confused. Now let me get this straight buy assets at their relative bottom and sell at the their relative top
Does Chuck mean I should buy assets for my uncle and sell to my aunt? Or for my brother and sister?
Chuck you weren't very clear. This investing stuff is really hard.
It's a tough call. If prices start to drop, the fed could step in and start buying MBSs again. Like everything financial currently, it all comes down to whether you think the fed can hold it together or not. Everything derives from that one bet.
They've been doing a bangup job lately.
From urban dictionary.
Synonymous with "Good Job."
"The boys did a bangup job on the heist."If you don't have all the cash to 'buy' the house, you don't buy the house. You borrow a HUGE amount of money and the bank owns it while you have to pay all the bills and upkeep on it. At the end of your life you MAY then own the house. But then if you die the government will steal some of it if it is over the inheritance threshold. By keep reported inflation figure lower than actual and by not increasing the allowance they get to steal more and more of it.
Or perchance you live and need to go into a care home, they will steal your home to pay for your care. On the other hand, if you had no home or assets they would pay for you.
The Great Con, of getting on the housing LADDER and owning your own property
You own nothing and never will.
Even your life is forfeit; taxes take your labor, your labor is your time, your time is your life.
Come, and join me, living in a Honda Element, down by the crick.
excellent article! asks the right questions - i get this all the time too from young people wanting to start a family and such. you can't answer them from just the perspective of prices and interest rates. intertemporal preferences matter - life goals and what not. income. job tenure. all of it relevant. love the piece on median house price over HH income. certainly, can't ignore that.
is yellen going to finance it?
From a earlier thread..
If this price isn't a bubble bath....
Houston and Lafayette La should be on that list of overpriced cheap labor built housing that meets minimum code
http://www.forsalebyowner.com/listing/2-bed-Single-Family-home-for-sale-...
Zillow which to me is crap shows price lowered week of Christmas from $265 a foot...not waterfront, no beach , no park or woods to speak of, no mountains...nothing ...Fuck that. Not even worth half that price...0r a quarter of the price...and you want a bath tub....nope! not in this beaut!! Hey it's even got white appliances and cabinets!!!!!! alot shit packed in 1500 sq ft fo sho!
http://www.zillow.com/homedetails/107-Beaulac-Ln-Lafayette-LA-70508/1142...
Must have smoked,snorted too much oil or something.....
Everyone should "just go shopping"....to fight terrorism. Buy two or three houses, a few cars, a bakers dozen of large screen Tee Vees too.
With any chump change left over buy a cop or a politician, maybe pool some money together and buy some government regulators.
Your tax dollarz at work, for job security of course.
http://www.veteranstoday.com/2014/12/30/press-tv-isil-militants-equipped...
I've told my college age kids to stay away fro buying a house right now. While I live it that my long paid for house is worth a crap load more, it sucks for the next generation of want to be home owners. They get out of college(that I paid for) with a useless degree and can only find hourly part-time work. rent is sky high but house prices are too. Eventually this has got to correct itself. You know as they say, the cure for high prices is high prices.....
Rent is tied directly to the cost of housing. House prices go through the roof... Landlords raise the rent to keep up with what they paid for the place, and/or b/c no one can afford to buy the place.
This will correct itself. First: the FED can't levitate the economy forever. And it's in shambles. This bitch will collapse. Second: just wait for all the baby boomers to start dying off. Lots of places will be coming on the market and that will help drive down costs. Right now the FED is doing all it can to defend the Mark to Make Believe houses that are on all the balance sheets. Hell, just about every bank would be bankrupt if they had to report their real values.
The Illegals will buy the homes the boomers are selling with loans backed by the Fed
No way any illegal is getting a mortgage my way. I'm a Realtor, and I live in NJ. Contractor/landscaping job yes, mortgage, not a chance. I don't even give them my cards.
Southern latitudes are better than northern latitudes but it is better to wait for the reset, the end of WWIII and the resurfacing of underground survivors.
FWIW...http://mhanson.com/archives/1674
The next downward leg of the housing market is just getting underway. Buy a house in 2015? Not a good idea...
http://www.globaldeflationnews.com/inflation-vs-deflation-part-3how-the-...
"How to Buy a $450,000 Home for Only $750,000"....
I love the article!
new Parkinson's drug
https://www.tradingview.com/x/GC1DHsDQ/
with zirp, safe to say buy. think of monthly payment, roi, condition and length of duration before job lose to robot...
It's often cheaper to buy a home in South Jersey than rent. If you can score a VA, or USDA loan the closing costs are almost the same as getting into a rental. Not to mention any seller concessons you may receive.
Just recently I moved someone from a 2,300 rental to a 1,071 VA loan. No PMI. Small downside in neighborhood but nothing too significant. It's the house they are going to die in. I hear that a lot. Not a lot of keeping up with the Jone's around here. Just serious people looking for a nice place to live, and die.
The problem with housing where I live is they are all over valued.
I know a few people who recently took their houses off the market after x amount of months, plenty of interest shown but no one is a cash buyer and all offers were well and truely under the asking price.
It has really slowed down here, not much is moving apart from the high end and commercial property leasing.
Looks like the C down begins. If 1990 was the 3 and 2005 the 5, C could go back to under 80, but at least back to 110 (A=C).
I live in a retarded fucking bubble out here in Sonoma, Ca. When a house in this area goes up for sale bidders come in and fight over it, bidding the fucker higher and higher, and many with shitloads of cash made either from trusts or stocks. It's a fucking joke!!!
Anything priced in gold returns a graph that is manipulated - I'm not saying that it's wrong to reference gold but it does produce a manipulated graph.
That said....buy fucking gold!
Sadly, so does anything price in dollars.... You're screwed either way...
Buying a house? No, you should rent and make your landlord richer and pay his mortage.
Yes - but only if you are buying a home to live in for decades and the purchase price is equal-to or less than 10x the annual rental value - and preferably acquiring such with all cash. Otherwise - NO... Goes for 2015 and any other year one may fancy...
"Yes - but only if you are buying a home to live in for decades and the purchase price is equal-to or less than 10x the annual rental value - and preferably acquiring such with all cash. "
The majority of my customers.
I do have my investors that I flip for. Love getting both sides :)
Come to Melbourne Australia and buy a house......lol!