Anticipation is mounting as this season’s real estate buying market approaches. Is now the time to jump in with both feet and buy the house of your dreams?
The housing market is very similar to every other market in one respect. It has a trading psychology of its own, and the wise trader should ignore the distraction of his emotions before pulling the trigger on any deal. Unfortunately, emotions play a heavier role in home buying. It is the culmination of a dream on the buyer’s side, while with the seller, his price expectation is swollen by his pride and several other factors too numerous to mention. With all of this being said, however, today’s housing market is definitely a special case and deserves a great deal of caution if you are truly considering a purchase in the next few months.
To begin with, the federal tax credits designed to revive the housing market expired last Friday, April 30th. That means there isn’t $8,000 available for new home buyers, or $6,500 for folks who already own homes. The big question is what happens now to the housing market. Critics of the tax credits say they only enticed people who would have bought anyway and essentially crowded those sales into a few months. Some analysts predict a dramatic market slowdown, noting the same effect happened with another federal effort to encourage purchases — Cash for Clunkers.
A recent survey produced by the U.S. Census Bureau indicated that 19.2 million homes, nearly 14.5% of all homes in America, are presently vacant. This figure includes rental property, homes for sale, and homes being held off the market for one reason or another. This figure is the highest in history and shows no signs of improvement in the near term. While there is presently a housing glut on the supply side of the equation, this over supply does not necessarily translate itself into a Buyers’ market. For a number of reasons, “Caveat Emptor” is the cautionary phrase that deserves respect now, more than ever before.
One reason is that housing prices are still dangerously high compared to the income levels of most Americans. Rents also remain at their high levels, and most industry pundits, though trying to remain optimistic, still believe that prices will keep falling in most areas. The facts that lead to the real estate bubble bursting a few years back have not changed to any measurable degree. People continue to buy a home that is six times their annual income when the rule-of-thumb is three, and renters follow suit renting homes valued at twice what pragmatic principles dictate. Income has remained flat for the last decade. Weekend forex trading at home is not the answer either. Lastly, interest rates can only go up from where they are today, which will add downward pressure to already depressed home values.
Supply and demand forces have not reached an equilibrium. If you were to purchase a home in today’s market, there is a high probability that you would see a material decline in its value in the next twelve months. There is an enormous backlog of homes awaiting foreclosure. Owners have stopped making mortgage payments, but banks are leery to take over these properties, recognize the true losses on their books, and then assume the payment obligations necessary to liquidate their interest. Builders, on the other hand, are also in a stuck place. Their lines of credit have not been renewed, and in order to stay alive, they must seriously discount the vacant homes in their inventory. Federal tax credits, designed to stimulate the market, may have decimated the available pool of buyers such that the demand necessary to bolster existing price levels is not present today or in the foreseeable future.
If this is not a buyer’s market, then it truly is a renter’s market. Reluctant homeowners have resorted to renting to buy time until better days. Negotiating a lower rent is much easier than a deep discount on a home purchase due to the prevailing mortgage on the property. Too many Americans over the past decade have continually borrowed on their homes via refinancing deals to pay off over indulgent credit card balances. Capacity, one of the “3 C’s” of credit, is nonexistent. Collateral and Character are also in question. Until a true bottom is reached in the housing market, available buyers would be best advised to take advantage of the rental market and bide their time.
The current housing market appears on the surface to be an ideal time to buy the home of your dreams. However, if you allow your emotions to override your logical business sense, then you, too, may be in for the nightmare that more and more homeowners are experiencing now on a daily basis.
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