Why Buy a House?

Examining the reasons to buy a house today may give us some idea where the housing market is heading in the future.

There are three reasons to buy a house:

 

Reason 1 – Utility

A house (any dwelling) is a shelter.  It provides enjoyment, a home to raise one’s family, or just a place to watch that big screen TV.  Utility is not quantifiable and it differs from household to household.

Reason 2 – Savings

If financed, a mortgage is a way of saving something every month until the mortgage is paid in full.  If paid for, the savings come in the form of “owners’ equivalent rent”, which is what the census bureau uses to measure inflation in housing.

Reason 3 – Asset appreciation

At 5% appreciation per year, a $100k house today will be worth $412k in 30 years. Even a more modest 3% appreciation would result in better than a double.

 

house, modernHouse, modern.

Photo credit: Fairfax Media

 

Why Not to Buy a House

Based on the reasons above, it appears to be a slam dunk decision.  Why would anyone not want to buy a house?  There are three obstacles:

 

Obstacle 1 – Affordability

Housing, as a percentage of household income, is too expensive.  A decade of ill-conceived government intervention and Federal Reserve accommodations prevented natural economic forces from driving house prices to equilibrium.  As a result, not only is entry difficult, but many are struggling and are stuck in dire housing traps.  Corelogic estimated that as of the 1st quarter of 2015, 10.2% of mortgages are still under water while 9.7 million households have less than 20% equity.

Obstacle 2 – High Risk

Say you are young couple that purchased a home two years ago, using minimal down financing.  The wife is now pregnant and the husband has an excellent career opportunity in another city.  The couple has insufficient savings and the house has not appreciated enough to facilitate a sale, which results in negative equity after selling expenses.  The house can become a trap that diminishes a life time of income stream.

Obstacle 3 – “Dead zones”

Say you live in the middle of the country, in Kane County Illinois.  For the privilege of living there, you pay 3% in property taxes.  That is like adding 3% to a mortgage that never gets paid down.  Your property would have to appreciate 3% per year just to break even. By the way, “appreciation” is unheard of in Kane County, good times or bad.  There are many Kane Counties in the US.  Real estate in these counties should be named something else and should not be co-mingled with other housing statistics.  Employment is continuing to trend away from these areas.  What is going to happen to real estate in these markets?

 

courthouseLGThe Kane County court house: where real estate goes to vegetate

Photo credit: Sixteenth Judicial Curcuit

 

The factors listed above are nothing new.  They provide some perspective as to where are are heading.  Looking at each of the reasons and obstacles, they are all trending negatively.

The country is spending too much on housing, a luxury that is made possible by irresponsible Fed policies.  50% debt to income ratios are just insane and Ms. Yellen has the gall to call mortgage lending restrictive.  Can we not see what is happening to Greece?

 

Fed MBS holdingsMortgage backed securities held by the Federal Reserve System, a non-market central economic planning institution that is the chief instigator of house price inflation. Still growing, in spite of QE having officially ended – via Saint Louis Federal Reserve Research, click to enlarge.

 

Real estate is an investment that matures over time.  The first few years are the toughest, until equity can be built up.  With appreciation slowing, not to mention the possibility of depreciation, it is taking much longer to reach financial safety.  The current base is weak, with too high a percentage of low equity and no equity ownership.  The stress of a recession, or just a few years of a flat market, can impact the economy beyond expectations.  The risks that might have been negligible once upon a time are much higher today.  Many who purchased ten years ago are still living with the consequences of that ill-timed decision today.

By stepping back and looking at the big picture, we can see that real estate should be correcting and trending down.  The reasons why our grandparents bought their homes have changed.  Government intervention cannot last forever.  It will change from accommodation to devastation, when they finally run out of ideas.

 

Conclusion

In summary, my working life had its origins in real estate and I am not trying to bite the hand that fed me.  However, the reality is that the circumstances that prevailed when I entered the market are non-existent today.  I seriously doubt that I would chose real estate as a career, or as an investment avenue, if I were starting over.  As for buying a house, I would consider it more of a luxury as opposed to an investment, and one has to be prepared for the possibility of it being a depreciating asset, especially if one decides to move.

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “Should You Buy a House?”

  • rgosche20:

    It’s amazing that logical human beings – let alone real estate professionals – still believe that an assembled collection of wood, mud, plastics, and metal exposed to the elements has the ability to increase in value over time.

    The land on which it sits may become more or less desirable over time due to any number of factors. However, to have a significant increase in either direction is always the result of the proximity of ‘good’ or ‘bad’ neighbors coming and going (e.g. a new hospital or landfill).

    No one has ever seen the ‘value’ of a house increase over time (save the very rare ‘art’ houses). All anyone has witnessed since the beginning of the 20th century is the rampant devaluation of fiat currencies warping all prices.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • No results available

Support Acting Man

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

     
    Buy Silver Now!
     
    Buy Gold Now!