Kevin wrote a post yesterday where he expressed his opinion that Housing Isn’t Going to Rebound. It goes without saying that the housing market sucks and that pretty much everybody that owns a home (including me) has seen the value of their home plunge.
So, I agree with Kevin on that point. I also agree that we will not again see ‘values shoot through the roof’ again in our lifetime. In fact, I think that’s a good thing because now that we’ve seen what happens when they do, that type of explosion does more harm than good.
Since, as you can probably surmise from the title of Kevin’s post, he feels the picture on housing is bleak, I thought I’d take a look and see if there’s reason for a little more optimistic view.
I think that there is.
Let me start off by saying that in order to judge housing and whether it’s worth getting into at any time, you have to reset your expectations. If your measuring stick is the gains we saw in the last decade, or even that housing will be a big moneymaker, then I’ll agree that there’s no hope in housing for you. Why? Because those expectations are out the window.
But, if you’ve reset your expectations a bit, here’s a few reasons why I think there’s hope:
- Not everybody wants to rent – There are people who don’t look at just the financial numbers associated with buying a house, but they look at the fact that they don’t want to be renters or be around renters for their entire lives. I’ve lived in apartments in the past, and while I had some great times there, I realized that it wasn’t the lifestyle I wanted to live in, especially as I looked ahead to when I might have a family (which I now do). For some, renting is great, and if that’s you, I commend you. However, there’s a big portion of the population that wants to be in something that they call their own and who want to be around others with the same mindset. For this portion of the population, home ownership will have an appeal.
- There’s a built in incentive to owning a home - Inflation, in the long term, actually provides an incentive for home ownership. How so? It’s simple. Right now, if you’re looking at the opportunity to buy vs. rent, your monthly payment is probably a big factor in making that decision. There is certainly the down payment element to, which I’ll get to in a minute, but focusing on the monthly payment for a second, here’s what you might find. The buyer might be faced with a payment of $1,000 where the renter gets a similar place for $800. So, renting is clearly favorable, right? Well, for now it is. But, assuming the buyer got a thirty year mortgage, what that means is that their loan payment will be $1,000 for the next thirty years. But, renters typically only lock in for a year. So, if inflation goes up, that rental might cost $825 next year, $850 the year after, $900 the year after. At a certain point, the person paying rent will actually start paying more than the renter, where inflation is ‘protecting’, if you will, the payment of the buyer.
- We’re starting to save more – People are finally getting the hint that holding lots and lots of debt with nothing to show for it is not a good financial strategy. As such, people are paying down debt and trying to put money away. Since we’re still in the middle of a recession, this isn’t going as well as it could, but I’m optimistic that even baby steps will help. When this happens, eventually people will have money to afford a down payment. As (hopefully) more and more people shed credit card debt and instead build a pool of money, this could open the door for more and more people to purchase homes. Actually, this isn’t a new idea, because until the 1980′s or 1990′s, saving up a down payment on a house was the way it was done.
I know that there will be people that remain pessimistic. I also know that some people will probably say my possibilities are unrealistic. That’s all fine and good if you do, but I’m just putting out there some possibilities that I see that I feel are realistic and, if they happened to play out, would lead to some cautious optimism in regards to the housing market prospects.
I will be the first to admit that things do look bleak, but I also hold in mind the old saying that it’s often darkest just before dawn.
What do you think?
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Money Beagle Great post.
Back in 1965 we were living in a mining community. My father happened to have a pension from WW2 and we were farmers so the mine closing did not affect us at all except for the fact my father was able to expand his land holdings for a song. Since the mine was the only major employers for 50 miles home values plunged. It is an experience as investor I shall never forget. I remember being still in school and having 200 dollars from my egg sales. I was going to buy a city block. My dad would actually have to buy it since I was under age 18. My mother put her foot down and insisted my Dad and I not do this. A ski hill went up soon after. I could have sold one home and doubled my money in 18 months. Had I sold out upon reaching the age of 21 I would have had over 100,000.
The lesson I shall never forget is to buy when everyone is crying things will never get better.
Totally agree with you.
Never really thought about:
"At a certain point, the person paying rent will actually start paying more than…"
Good stuff!
The inflation on housing costs is huge.
When I bought our house fifteen years ago, my neighbor asked me how I could afford the extra $400 per month. I told him, "what do you think your rent will cost in five years?" Their rent is now a lot higher than my mortgage, which will be paid off in five more years.
A house's value may go up and down, but having a fixed mortgage cost is invaluable.