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.

Back again

After a few years of posting only on my website, I'm back on my blog. Stay tuned.

The many anachronisms of house design, FHA and the two foot door

Since its inception, the Federal Housing Administration (FHA) has had a great influence on medium to modest priced housing on a number of fronts; for example, most people are not aware that FHA set many design standards for modest priced housing. When I was in college I studied the FHA minimum property standards (MPS) manual as a monk would study his Bible.

The MPS manual set minimums for things such as room sizes and the width of doors. A hallway could be no less than three feet wide. A room to be considered a bedroom had to be at least eight feet wide and ten feet long. If a builder constructed a three bedroom house and one of the bedrooms was seven feet by eleven feet he could not sell it as a three bedroom house to someone buying the house with an FHA loan; it would be appraised and valued as a two bedroom house; the seven by eleven bedroom would be considered a generous closet.

The MPS guidelines for doors gave minimum dimensions for width and height into different parts of the house. The front door had to be at least three feet wide, while the back door could be no less than two feet and eight inches wide. A bedroom door had to be at least two feet and six inches wide, and a bathroom door could be no less than two feet wide.

Well into this century a large number of modest houses were built for buyers who use easy qualifying FHA loans (FHA loans are today becoming more and more popular on modest and relatively upscale houses). In an effort to build competitively, and still have their houses meet MPS guidelines, most builders constructed to minimum sizes: bedrooms had doors that were two feet and six inches wide, and bathrooms had doors that were exactly two feet wide.

Many of those builders were also constructing upscale housing. A few of them would increase the width of a bedroom door by two inches; there is a discernible difference between two feet and six inches and two feet and eight inches. As a rule, the front and back doors remained three feet and two feet eight inches respectively, and bathroom doors almost always remained exactly two feet wide even on the upscale housing. To this day, many houses designed to sell even into the hundreds of thousands of dollars continue receiving rear entry doors which are too narrow at two feet eight inches (they should be three feet like the front door), and the biggest design flaw: bathroom doors that are only two feet wide.

Since we visit many builder model homes and spec houses each year, we get to compare the less expensive to those considerably more so. We have been to houses pushing the million dollar price range (in the Dallas area and other modest-priced areas, mind you, not in over-priced parts of California) that had bathrooms whose entrance doors are only two feet wide; that’s a serious sin by any design standard.

Measure the doors in your home's bathrooms; there's a very good chance they barely meet FHA's MPS standards. Try moving swiftly into a bathroom with a door that’s two feet wide without smacking your elbows against the door jamb unless you tuck in your arms or turn sideways as you enter.

The last house I designed had all doors three feet wide, and the front and rear doors were six inches wider; rarely did I have to increase the size of a room or a hallway to accommodate a wider door on that design. And the cost of a wide door is a miniscule part of the entire cost of today's houses. If you visit model homes, take along a tape measure. If a builder of upscale housing uses a door that's two feet for ANY room or closet, you might wonder how many other design shortcuts he took on the rest of the house.

Narrow door widths (on any size home) are a design anachronism; a nuisance for the home owner and a very minor money saver for the builder. But you might wonder about the biggest anachronism in home building: wood houses (Would any highway engineer in his right mind design a freeway bridge out of wood? Would Ford design a wood car?). Most modern houses in this country are built as they were built two hundred years ago: basically wood boxes wrapped in brick or wrapped in a modern plastic or composite siding. They can easily burn to the ground; thousands of people die each year in house fires. A large number of folks are lost when a strong wind blows them away along with their houses, or are crushed when the wind slams the house down on top of them. And finally, countless thousands of people poison the ground under their houses so bugs won't eat the wood structure.

Wood houses are economical to build, but concrete houses, although somewhat more expensive, last for many generations while providing extreme safety and energy efficiency for their owners. If you’re in the market for a new home, you might want to look into DomeBuilder.

New Homebuilding Thrives on Low Interest Rates

A large, national homebuilder opened a new subdivision of large homes several months ago. There were so many specs started that I wondered if they were going to have trouble moving their product. The Sales Manager at the project stated that they liked to start their subdivisions with 40 spec houses at one time.

At the time there were lots of "Available" signs, and very few "Sold" signs in front of completed and under-construction homes. I decided to keep an eye on the project because I thought they couldn't possibly sell all those houses as quickly as I was informed they would sell by the Sales Manager.

I returned a couple of days ago. I was more than surprised. They had finished a lot of homes, and they had started a whole lot more of them. Some homes were obviously occupied, and there were "Sold" signs in front of most of the completed and under-construction homes.

The Dallas/Fort Worth inventory of existing homes is over 47,000 units - more than twice as many as we had at this time in 2000. A lot of people are buying new homes. So what's up?

The answer is interest rates. When rates are in the 5%-6% range, new homes are affordable; and even if a new 3,000 s.f. home costs more than a 3,000 s.f. used home, the rates are so affordable that the difference in payments is a non-issue for many buyers. After all, most people would rather buy a brand new home than one that's 10 years old.

When rates go up, as they eventually must - for many reasons, but mostly because of the Fed and its propensity to overprint dollars - builders with huge inventories could face tough times.

Want to find out about great deals on new homes? Call us; we know where they are, and how to get them. Your new home won't cost you any more; therefore, why would you buy it without FREE expert help?

A Worldwide Housing Bubble

The Daily Reckoning says that, "The real Estate bubble is a world-wide phenomenon. This is the tech-bubble of the late 1990s, transferred to real estate. Post tech-crash, the folks who run the world did not want to take the well-deserved recession, rebalance the financial books & portfolios, and get the macro-financial house in order. Bad for politics. Couple that with the post-9/11 goosing of the money supply to keep people going to Disneyland and buying big SUVs, and this is the Titanic hitting the iceberg and backing up and moving forward again a couple of times, just for good measure."

Some areas of the country are going to get clobbered. There will be lots of foreclosures. The Dallas area might be a little different, but it still looks like we might have a good increase in foreclosures that will allow some buyers to get great deals. We have several houses on contract right now that will be bought at a huge discount from actual value.

Call us if you want to know where to find great deals.

Beware the Refinance Wolves

I try to look at two or three for-sale houses each day of the week. I have to do so since we buy houses with our investment companies in addition to listing homes. I've been in housing for 40 years; I've never seen such an overabundance of wolves preying on unsuspecting homeowners. What some of these lenders are doing is not only unconscionable, but it's against the finance laws of the State of Texas.

Here's an example I saw recently (one of too many like it). A couple bought a house in a Dallas/Fort Worth suburb in 1994. The house is currently worth between $115,000 and $120,000. According to Texas law, the maximum amount of money that the homeowners could borrow on their property is 80% of value; currently they would only be able to borrow about $96,000. A year ago an appraiser valued the property at $146,000 and they borrowed 80% of that; $116,000. They pulled $18,000 of equity out of the refinance, and the cost of the refinance was in excess of $8,000. Here is the worst part: they went from an interest rate of 7 1/2 percent up to a new interest rate of 10%. Now they can't afford the payments.

If the house is not worth now what it appraised for a year ago, then the house must've been worth a lot less when the refinance was done. This is predatory lending in its most refined form. Please be very careful about a refinance; most of the time refinances do not make sense, because too often people sell their property not long after they do the refinance. You must live in a house long enough to make up the cost of the refinance with cheaper payments, and this is not the case with the majority of homeowners.

Homes and the Dollar

Too many people are not aware that the dollar has lost over 95% of its purchasing power since the Federal Reserve was created in 1913. What does that mean? Simply that the dollar is just a six inch piece of paper. At first it was (supposedly) backed by gold. U.S. coins were even gold and silver. Wars and political abuse (political promises of freebies for votes) eventually caused the government to print more and more paper. Richard Nixon finally took the dollar off the gold standard so he could print more and more to pay for the Vietnam war.

Things haven't changed. George Bush has his war and there is not enough money to pay for it. So what does the government do? Simply print more dollars. News came this past week that the budget deficit for February came in at $113.9 billion; that is a whole lot of money. The government is spending money like a drunk sailor; to pay for the deficit the only recourse is to print more money.

What does that have to do with homes? Nothing if you don't care about the value of your home or your investment properties; most people don't need to care. If value in terms of dollars matters to you, then you might be interested. That's because the more dollars that are printed, the less each dollar is worth; a function of supply and demand. Many folks think they're getting richer because their houses are worth more; in fact, their houses are worth the same, but the dollar is worth less.

The Dallas/Fort Worth area has had an increase in values pretty much on par with the decrease in the value of the dollar. I don't think we face a huge bubble real estate market here. In other areas of the country, the air is quickly coming out of some of those very large bubbles.

If you are buying highly-leveraged investment properties in this local market, you stand a good chance of coming out ahead; assuming your rents cover your payments. In other parts of the country it is almost a certainty that there will be "blood in the streets."

In the mid 1960's I was working for a builder in San Antonio while I attended college. Our houses (3-2-2 homes with brick fronts) were going for an average of $10,000 each. They were nice houses, though not as large or as loaded with amenities as modern new homes. Those are $100,000 houses today. The question is: Have those houses gone up in value? The answer is a resounding NO. I bought a new Volkswagen in 1968 for $1,800, you'd pay $18,000 today. You could buy a new Cessna two-seat airplane in 1966 for $15,000, you'd pay $150,000 for that same airplane today.

What's happened? The dollar has been decimated by overprinting. When looking at real estate one should not necessarily look at appreciation; more often than not it's all a matter of dollar depreciation.

The lesson here is that real estate is a great hedge on inflation. If you want to hold the value of your money, and keep the politicians from taking you to the cleaners with their "hidden" tax (overprinting of money), your home is a good weapon; and the right investment properties are even better.