Jan042017

Don’t worry about rising home prices and rising rates

Dodd-Frank should prevent house prices from rising so high that only fools and millionaires can afford them.

When house prices rise rapidly and mortgage rates go up, the cost of ownership rises even more rapidly, and realtors stoke fears with “buy now or be priced out forever.” Under these circumstances, it’s easy to get stressed out and worry about what’s outside of your control.

I didn’t buy an OC house at the bottom of the downturn. I knew it was a good time to buy, but for a variety of reasons, I was not in a position to buy when the market was ripe. Now that the cost of ownership is 50% higher, I am less motivated to buy a home, not more. Am I stressed about it? Not really. And you shouldn’t be either.

One of the blessings of Dodd-Frank nobody discusses is the way the legislation removes price volatility from the market. With a cap on debt-to-income ratios at 43%, house prices can’t get bid up to insane and unsustainable levels by people counting on home price appreciation to run a personal Ponzi scheme.

Dodd-Frank effectively caps prices at what people can really afford. When we have a shortage of supply, people may still be forced to substitute downward in quality to obtain housing, but house prices won’t be pushed out of reach by foolish Ponzis. Take comfort in that.

It’s Not Everyone’s Time to Buy a Home

By CARL RICHARDS — Published: July 22, 2013

My family and I are renters, and most of the time that feels fine. But last week I found myself in a state of temporary panic when I read this Twitter post from the financial journalist Felix Salmon: “John Paulson: if you rent, buy. If you own, buy a second home.”

When I read it, I immediately felt anxious. I recognized the feeling. It’s the feeling you get when you think you have to act on something right away or you’ll miss out. After all, if John Paulson, the guy who made “The Greatest Trade Ever,” was saying I should rush out and buy a house, I’d better get on it!

Don’t you get the same feeling when a realtor tells you you’d better buy now or be priced out forever? You’re supposed to. That’s the point. They want to create a sense of urgency and angst to motivate you to generate a commission for them.

After allowing myself to get all worked up about this, I did what I’ve done several times before. I pulled out a piece of paper and a pencil and worked through the emotions and the numbers. In the end, I was reminded of something incredibly important.

John Paulson doesn’t know me or my situation.

There is absolutely no reason I should be making decisions based on something he said. The same is true for any other “expert” who decides to share his guess about what he thinks will happen next in the housing market.

The same holds true for the other three people who just happened to express similar concerns to me about buying right now. Two were convinced that if they didn’t buy a house now, they’d be priced out of the market, and maybe they will be. But I heard that argument a lot in 2005-6.

Didn’t we all?

Then there was the third conversation I had.

It’s time for this person to downsize to a different home. The children have all moved out and the house just takes too much work. But even though it’s the right decision to sell now (given her individual situation) and buy a smaller home, a decision has been made to wait because the news, the forecasts and even the guesses are implying that the house could be worth substantially more sometime in the next 12 months.

This is madness!

Timing the housing market is important, but it shouldn’t be. We should not need to focus so much attention on real estate prices because of excessive volatility. It shouldn’t matter when you buy. If your income can afford a certain level of housing entitlement, it should always be able to provide the same. As people get periodic salary raises, the cost of resale housing should rise in direct proportion as others who received the same wage increases would also bid up the value of houses. Unfortunately, that’s not the world we live in.

Buying a home is one of the biggest financial decisions that most of us will make in our lifetimes. And yet it’s often a decision in which the person with the most knowledge about what makes the most sense gets overlooked: You.

There’s a simple way to fix this problem. As I was reminded last week, all it takes is a piece of paper, a pencil and some time. So if you’re struggling with this decision to buy (or sell), take a minute to think through these questions and write down the answers, because I suspect you’ll need to refer back to them the next time somebody decides to share what he thinks will happen with housing market. This list is not meant to be prescriptive. It is meant to get you thinking about something other than forecasts and guesses.

■ Can you afford it, and do you have enough saved for a down payment? Make sure you include the cost for things like property taxes, homeowner association fees and utilities.

Soon I will relaunch the custom IDX system that will show the cost of ownership for every property available on the MLS. Everyone who searches for a property here once the new system is launched will know the detailed cost of ownership of every property they look at.

■ Can you qualify for a loan? If the answer right now is no, then you can stop torturing yourself, because it doesn’t matter if the market is about to take off. You can’t buy a house.

This is the simple truth lost on many people who stress out over the recent rise in prices. If you can’t finance the property, and if you don’t have cash, what’s the point worrying about it?

■ How long do you plan to live in the home? There’s some debate about the minimum time you should live in a home for it to be worthwhile, but if it’s less than five years, forget about it.

Sound advice. I recently had an extended conversation with a gentleman considering buying a home in San Diego County. He thought there was a good chance he would move in two years, but he considered buying anyway because the house might appreciate 20%. It might, but it might not, and he might end up trapped in a house he can’t sell and get his down payment back out of. He ultimately decided it wasn’t worth the risk.

■ What guess are you making about housing prices? It is a painful reality that the one variable that makes a huge difference in this decision is unknowable. What is going to happen to housing prices in the short term is anyone’s guess. But for your own sanity, just assume that housing prices will continue to increase by about the long-term average of inflation, or 3 percent. You really can’t afford to buy a house if the decision depends solely on what the house might one day be worth.

Unfortunately, many buyers today are motivated solely on what they believe the house will be worth in the future.

The answers to all of these questions will depend on you and your individual situation. And that’s the point. Hopefully it’s clear now how ridiculous it is to buy a house based on some stranger’s advice.

Through this process, you may discover that buying and owning a house isn’t for you, and that’s O.K., too. But these questions can also help end your anxiety around what is probably the biggest financial decision you’ll make. Don’t you think that’s worth a piece of paper, a pencil and a little time?

That article has plenty of good advice. Think about it next time you get stressed about rising home prices.