Thursday, July 7, 2011

Buying a Home - Things to Think About

Let's first get this out of the way, I don't recommend buying a home given the current economic conditions. The primary reasons for not buying are summarized below: 

  1. There are better assets that will yield a much better return (silver, gold, oil, agriculture etc.).
  2. There is still downside risk (i.e. prices may still fall 20% or more for various reasons). 
  3. The only direction interest rates can go is sideways or up. Sideways is what you want if you're buying. If they go up, home prices will have to come down. Rates can't go any lower thanks to the Fed. Overall, I expect rates to increase, and when they do, dramatically. Stay away from adjustable rates if you do choose to buy.
  4. High unemployment will force people to take jobs in various parts of the country. Home ownership thwarts mobility and it may be very difficult to sell if you need to move.
  5. The baby boomer generation isn't getting any younger, and as they age they will pass away or move to retirement communities, freeing up homes, and increasing  supply.
  6. Foreclosures are still occurring and shadow inventory continues to mount. This is producing a supply glut that the market isn't fully pricing in.
  7. Homes are a liability NOT an investment. They become an investment when they're producing cashflow through rent payments. This isn't '05.
  8. As commodity prices continue to increase maintenance costs will also rise.
Now the reasons for owning a home:
  1. Everyone needs a place to live. With that said, you have to compare prevailing rental rates to the the monthly mortgage, insurance, property tax, and maintenance costs associated with home ownership. Zillow offers a good calculator to find the 'inflection' point where home ownership may make sense. I'll elaborate on this in a subsequent post and detail how to manage your risk.
  2. Vacancy rates are declining and it's becoming more difficult to find a place to rent. The population is still increasing, but builders aren't building at a rate to sustain growth. This will cause rental rates to increase, likely reducing the home/rent ratio, and making home ownership more attractive.
  3. Interest rates are still historically low and financing is cheap, though hard to come by for some people. Just because rates are low doesn't mean you should buy, it just happens to be the case.
In a subsequent post I'll outline a strategy for buying that'll help you sort out costs and how to manage your risk. 


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  2. Excellent overview of the issues. You hit some of the stuff we have worked through as we have been exploring buying a home... and then some. Looking forward to the next post.

  3. Thanks, I'm working on the second iteration with more detail. Hopefully it ends up being useful.

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