Is now a good time to buy a house?

Before I give you an answer based on economic and common sense facts, I’ll give you my reasoning.

Today you can get a 30 year fixed rate loan at 3.91% interest rate; perhaps less with a point or two, and maybe a bit more depending on the type of loan you are getting. Inflation, based on reality as it was measured prior to 1980 according to John Williams (shadowstats.com), and not the contrived numbers put out by the government, is currently between 7% and 8%. Here’s John’s chart showing information through August (blue line is real inflation, red line is government manipulated numbers):

So anyone loaning money to a home buyer at less than 4% while inflation is double that rate would be losing 4% on the deal; great for the buyer, not so good for the lender; maybe not really so good for the buyer, as you'll see below.

Banks are lending money at that rate because the Federal Reserve (a private bank allowed to handle the country’s finances) is allowing its member banks to loan money by creating it, at a rate lower than any sensible lender would offer. Low rates keeps the game afloat quite well for home sellers, car companies and their dealers, and universities running all those young folks through their classes on student loans.

Almost all houses are bought with a loan, as a result, buyers don’t think in terms of the cost of a house, rather, they look at the monthly cost and buy based on that figure. If a couple can afford to pay $1,650/month for rent they’ll be looking to buy a home with that size payment.

In the DFW and Houston areas, a $1,650 payment will cover about $450 in property taxes and $200 for insurance; that leaves $1,000 for principal and interest payment on the loan (we'll skip mortgage insurance for simplicity sake). A 30 year loan at 3.91% and a payment of $1,000 will buy a $211,756 loan. Depending on the down payment, that will buy a house somewhere in the $230,000 price range. With the inflated cost of building materials and labor, that allows home builders to sell a nice house; it also allows sellers of existing houses in good condition to get pretty much what a similar new house sells for.

This is all great for everyone who has a hand in the real estate selling pie: Sellers, real estate agents, title companies, appraisers, lenders, surveyors, house inspectors, home warranty companies, attorneys, mortgage insurance companies (yes, even FHA, VA), and a plethora of other folks buyers won’t have the pleasure of interacting with directly.

Unfortunately, this is not good for buyers. Here’s the catch. Very low interest loans made by lenders, who simply create the money to loan, allow buyers to pay top dollar for houses. That would not be so bad if rates would stay at 3.91% forever; alas, they won’t. For a number of critical reasons, rates will go up again; I’ll go into that in a later blog. So why is that bad?

When (not if, and not in the distant future) rates go back up to 7%, the $1,000 payment for principal and interest will no longer buy a $211,756 loan; it will, in fact, only buy a $150,307 loan. Oops. What will happen to the value of the $230,000 house, since it will be, almost certainly, bought by someone who can only afford a $1,650 payment? You know the answer; the value will plummet, and if the sellers have to sell for whatever reason, there’s a good chance they’ll walk away from the house and the loan, because they won’t have the spare $50,000, plus selling expenses, to sell the house.

Is now a good time to buy a house? Probably not.