Tuesday, October 6, 2009

Trying to figure out reality

I don't mean to wax philosophic much but as a regular guy just watching the economy and real estate it is becoming tougher and tougher to define reality. I have many tools at my disposal at numbers I can run to see where the market is at any one point in time. But nagging in my mind is the massive government interference in the market dynamic of the housing market. How can any rational person enter the market with the interference in place? What happens when it goes away? What happens if it doesn't? How am I as joe six-pack supposed to deal with the decision of spending massive amounts of money on a home in context of this interference.

Rich Toscano over at Pigginton wrote an article the other day of a similar to Bill Gross of PIMCO article earlier this year basically saying don't fight the Fed/Government. Anyone saying the market is only this "good" right now because of government interference (as I have said here) is missing the point that the government interference isn't leaving anytime soon. That is fine over the short term (3-5 years) over the long term with a long term investment that a home is, its a different story, you have to look at what the market looks like with normal interest rates and normal debt to income ratios. This is a very large investment decision (the largest most people make in their lives) and one I personally think should be given much more weight than I see people giving even with all that is going on.

So here I am, a person who just wanted to buy a house in late 2005 and who is still waiting to see something that makes sense. It is depressing to think that that day might never come. The Fed and Government clearly are saying reality is different than what is has been the previous 50 years (housing/credit bubble not included). I can't fight them and I have no desire to join them. They own the printing press so they can win any war on savers.. but the cost to the nation for such things is great as well. So it is an interesting quandary... What is reality?

My reality is that I re-upped my lease. My housing consumption will remain minimial until I see value, if I never see value, so be it.


Mike said...

Were you channeling my thoughts? Seriously, it sounds like we are in exactly the same position. I am confused, frustrated, disheartened, and angry. Seems like the the old "right thing" to do... ya know, working, saving, and buying a house you can afford is only for suckers these days. I dont want to play this game anymore.

Anonymous said...

I am in the same spot, the only difference is I have a spousal unit that is putting huge pressure on me to buy.

Effective Demand said...

"Price stability" in the context of a massive asset bubble they did nothing to stop seems insane. If the Fed was around during the tulip bubble they would be propping up tulip bulb prices. If you aren't going to fight the bubbles on the way up then fighting them with everything you got on the way down is going to be particularly costly.


I'm lucky that my spousal unit and I agree 100%, friction would be high if that wasn't so. That said I do not think its a horrible time to buy, just not a very good time to buy. Anyone going in now has to realize they are going to be in their home a longer than historic norms for breakeven (imho).

Also people with down payments are at a disadvantage since money has become essentially meaningless outside of the initial FHA down payment. A saver will lose a bidding war with a spender since the spender is using other peoples money and there are few limitations on them spending more. A saver is limited by prudence, a spender is not. High consumption is being encouraged even though fixing your costs high is a long term losing strategy.

ToMK said...

AMEN! to all of this, exactly how i feel. FRUSTRATING

desi dude said...

I 'm in similar situation.
I live in TO and the number of listing is going down as per Ziprealty and prices are still in 500Ks.
I hear BOFA is planning a layoff list after OCt, every one is working extra hard to finish projects there.

Who is buying these homes, I wonder?

HelloKitty said...

You summed up my attitude X-act-ly also.

I'm going to wait and wait some more. Then if I DO buy I shall use a 3.5% FHA loan and if prices tank or I lose my job, get a divorce or whatever I'll walk away. If prices go up I win.

If you walk away then your 3.5% down payment you can recoup by living there rent free for 1+ years before the bank forecloses (if ever). They might even offer to rent it to you for under market rent OR give u a decent loan mod.

Social1sm is here, we are obviously confused how to deal with it.

Possibly the winning attitude to have in social1sm is to extract as much as possible from the goverment while inputing as little as possible (either work/time/or$).

If your attitude is to work hard and live frugally you are supporting the leeches and sleazes that get enourmous loans, then default (repeatedly).

Eventually this system will collapse (in theory) but that could be 80 years from now. Look how long the CCCP lasted. France is still going strong. Am I wrong here?

Rob Dawg said...

ED knows I "got lucky" and sit on a 1995 REO at a crushing 30% LTV (snark).

The thinking you all express is the same that got me where I am.

ED, should we buy those 40 ac on La Loma and sit on it?

Anonymous said...

Also in the same boat. Would be move up buyer from T.O. who started looking in 2004 and quickly gave up as bubble mania hit. So I've now kept my family in a too-small house for 5 extra years waiting for the bubble to collapse - with no end in sight.

So rather than whine about it, what are reasonable strategies? The "Alt-A Option-ARM Tsunami" we've been banking on for years may never arrive. Do we just suck it up and buy anyway? If the dollar devaluation sought by USG is successful that might actually work in nominal dollar terms.

Other options like living in the starter home I own or renting something larger for the remainder of my adult life seem rather unpalatable.

longhorn said...

When the bubble started to collapse I was somewhat relieved that prices would drop back down to reality.

Now after one government intervention after another to keep these values inflated beyond what "ordinary" people should be able to afford, I don't know what to think.

You are battling so much.

If you buy now you get a great interest rate but are likely going to be "stuck" when rates have to rise to combat inflation.

If you wait to buy and inflation hits your savings becomes much less powerful if wage inflation hits as well then prices could go up along with it. Then you don't have the mortgage as a hedge.


Also, properties where I am looking to buy are getting multiple offers on the first day, so I am having to compete with the spenders.

Effective Demand said...


It has been clear for quite some time the FHA "option" (and I mean that as a true option) is the best one for buyers. Buy cheap (low down payment) and if things go bad stop paying (actually, there is a great chance the gov't will just cut the price for you if you stop paying with the new guidelines out there).

The incentives in the system are insane. True madness and only something someone who owns the printing press could do.

Rob Dawg,

Buying cheap and going long is definitely the right move and the best of all worlds.

Effective Demand said...

Btw, those waiting for the tax credit to expire this November will be disapointed. Quite simply there is no way that will happen. The NAR is far too powerful to let that happen and they have a VERY receptive audience right now.

The only open question is if it will be expanded or not. An extension is a given.

ronald said...

I feel bad for the younger generation as they experience the current RE casino environment but life is risky and those that understand risk and take reasonable measures to protect themselves rather then follow the herd over the cliff may not necessarily win the game but at least are aware of the dangers and can position themselves accordingly.
Buying a home vs renting at the current inflated home prices is not a hard decision but if one wants to get emotional and feel they are entitled to a good house in the proper part of town at a price they are willing to pay the casino is open 24/7.

Effective Demand said...

p.s. Those who are against these policies should write their congressperson and the white house. The NAR is actively asks their members to do so, the only way to combat that is to write as well, it only takes a couple of minutes.

Anonymous said...

I wrote gallegly on Monday stating I am against any further tax credits, no response as of yet...