Listening to the media, the government, the National Association of Realtors®, and so on one would think that the housing crisis was over. The problem with most of the information you get from these sources is that they have a vested interest in housing improving. Let’s see why the housing crisis is not over. 1. Employment. Face it most need to have a job to buy a home. Many with jobs that could buy a home are fearful of doing so because they don’t know how secure their job is and if they lost it they don’t know if they’d find anything else out there that would pay them anywhere near what they are making.
With unemployment at 9.5% and underemployment closer to 20% that puts a huge hurt on the pool of eligible buyers. A recent article shows that cities and counties are looking to cut another 500,000 jobs in the near future because their tax revenue and state aid is down. Hmm, about the only jobs that have been hiring have been government jobs and now that’s going to change. That does not bode well for housing going forward.
Until employment rebounds don’t look for housing to improve.
2. The lack of jobs has changed the pattern of household formation. With so many out of work they are moving in with family and friends, this means there are fewer households which also reduces demand for housing. If demand is down and supply is up that does not bode well for housing.
3. Foreclosures, short sales, distress sales, etc. All of these seem to be escalating and there are more to come with a new wave of exotic mortgage products that are resetting to levels that millions of current homeowners can’t possibly afford. Please understand that these are folks that have good jobs, money, a ton of equity (well they did when they bought or refinanced) bought houses they never in their wildest dreams could have ever afforded.
Being in Kansas City, Missouri many here wouldn’t understand this phenomenon. Picture a situation where the normal 3 bed 2 bath 2 car garage split entry starter home that is around $140,000 to $150,000 here was now $650,000. People were able to get a loan with a payment on $450,000 with taxes and insurance of around $2,200. They could handle that payment, but the problem is the payment should have been $3,400 to pay off in 30 years. It is likely that someone that could afford $2,200 would have a heck of a time ever affording a payment that was 55% higher.
Fast forward 5 years they now owe $495,000 and the house is worth $350,000. They can’t refinance and they can’t afford the payment that is now $3,900 (25 year loan, 6% on $495,000). Doesn’t that have foreclosure or short sale written all over it? This is happening on higher end homes in all areas too.
Did these folks buy extravagant homes? No they didn’t. They lived in areas where housing had been driven up artificially and were lured into buying by tricky loans that they probably never understood or if they did understand them they thought home values would always go up so they could sell it for a huge gain thus making the reward worth the risk. A bet they lost.
4. Credit is now super tight. During the go-go times of the 90’s and early 2000’s credit was waaaaay too loose. I was in the mortgage industry for that entire period of time and the crazy things I saw shocked me. I knew there would be a problem, I just didn’t realize how much of a problem this would be. Living in Kansas City I didn’t have any idea of the enormous scale of this crazy credit.
Basically, we have gone from crazy lending where anyone with a pulse could get a loan to a situation where millions of people that would be successful homeowners can’t get a sniff. Until credit gets back to a more normal tone even if the other areas holding housing back improve people will still not be able to get loans to buy homes.
5. Home prices will continue to fall. Since we now have to prove we make enough money to afford the house we are buying then house prices have to come back down to where people can actually afford them. I read a bit of telling info…since 1975 only 5% of the population has had their income keep up with the rising costs of housing. Think about that for a minute. Only 5% of the population has seen their income rise in line with the cost of housing.
Wouldn’t that mean it is extremely difficult for the rest of us to be able to really afford a house or that housing is still quite inflated. If housing is still too high for a majority of us to afford them then wouldn’t it make sense that housing prices will have to come down? One estimate said he thought average house prices would have to come down another 75% to make housing affordable.
I don’t know about that, but if you think about it this way…say your area’s median income is $50,000 and that median income could afford about a $150,000 house and your area’s median house price was $400,000-how many potential buyers for that $400,000 house would you have? Let me clarify…“median” means half are less and half are more. If half the houses are $400,000 or more and half the potential buyers earn more than $50,000 and you need about a $133,000 income to “AFFORD” a $400,000 house. Wouldn’t it make sense that housing would need to come back closer to a median price of $150,000 where the $50,000 median income could afford it?
What is the median income and median house price in your area? See it doesn’t matter if the median income is $50,000 and the median house price is $150,000 in Kansas City if you live in San Francisco where the median income might be $80,000 and your median house might be $450,000. See that $80,000 median income could only buy a $240,000 house so if that was the case the median house price would need to get down closer to $240,000 for San Francisco to be an affordable housing market. (I am just making up these numbers to show an example I don’t know what the situation is in San Francisco I just know that it was one of the highest cost areas a few years ago.)
All real estate is local.
This is just five factors that are keeping housing from rebounding. There are more and they will be covered in future installments.
Buying a house is the single biggest financial decision you will make in your lifetime and that is true EVERYTIME you buy or EVERYTIME you refinance. It doesn’t matter if you are financing 100% of the purchase price or paying cash for it, buying a house is the biggest financial decision you will make in your lifetime and you should treat it that way. If more people had treated it that way we wouldn’t be in the situation we are right now.
If you or anyone you know is thinking about buying a home whether it is tomorrow or years from now I have information that can change your life and if you don’t know this information you are leaving you and your family at significant financial risk. The same could be said if you already own a home, because the way you bought it and own it could be putting your family at significant financial risk.
If you currently own a home or are thinking about buying one in the future NOW is the time to make sure you are handling owning or buying a home in the smartest and safest way possible by implementing the best home buying and home ownership financial strategies we have available. When it comes to your home and your money if being smart and safe is important to you and your family call Kurt Jackson at 816.582.5532 or email kurt@kjfinancialonline.com RIGHT NOW and ask for our complimentary Comprehensive Homeowner or Homebuyer Financial Strategy Session.
This information is NOT to be thought of as me giving financial advice, tax advice, legal advice or any kind of personalized advice here. The investment examples are hypothetical and your experiences may differ. I am just trying to let you know that there might be other ways to accomplish your financial goals, other ways you should know about. Other ways you should be made aware of so you can do what is in YOUR best interest.
