Thursday, September 2, 2010

At some point, Housing becomes a compelling bargain

- by New Deal democrat

Via Economist's View, here is commentary by Karl Case in the New York Times:
Four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of about 6.6 percent was $1,533. Today that $300,000 house would sell for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. In addition, the down payment would be $42,600 instead of $60,000....
[H]ousing has perhaps never been a better bargain, and sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again.
I suspect that as to sales, housing is bottoming right now (could we get lower sales figures during the winter, sure). As to prices, it probably has a couple more years to go on a nationwide basis, as the price to income ratio is still above its long-term norm.

But Case is right. In some local markets, most notably those that were the most infested bubbilicious areas of half a decade ago, housing is already almost a steal.

For example, take Phoenix AZ. According to Housing Tracker, in April 2006, the median asking price for a property in the Phoenix area was $333,800 (and that was after the peak). As of this week, it is $149,000. That's a 55% decline. A search this morning for a 1800+ square foot single family home built less than 20 years ago generated 100s of results, including this house:

the asking price for which is $75,000. A 20% down payment is $15,000. A 30 year mortgage at 4.2% requires a monthly payment of $293.41.

A young couple just starting out might have to borrow some from their parents or affluent Uncle Bob for help with the down payment for this house, but at under $300 a month, they are practically giving it away. Even if the price of this house were to fall another 20%, the couple still wouldn't be underwater, and would have a home of their own in the meantime. If they lived there for 10 years, there is an excellent chance they would break even or better.

Five years ago, that young couple - if they were financially responsible at all - would have been completely priced out by a mortgage that, at 6.6%, and increased proportionately to the April 2006 price level, would have run $1064.43 a month!

The housing bubble and ensuing bust has been a disaster. But there are plenty of people who were frugal and did not fall for the bubble. There are also millions of young people who were 18-25 years old at the height of the bubble and too young to participate, who are now 23-30 years old and if they have jobs, can easily afford housing in some of the formerly "hot" housing markets.

At some point, housing becomes a compelling bargain. As prices fall further nationwide, that will become the case in more and more areas and for more and more people. That is when the housing bust will end.