About That Housing Market….
I know I’ve talked about this before, but let’s rehash, eh?
Let’s say you managed to bottom-tick the rate on a 30 year mortgage at about 3.5% a few months ago.
Let’s further say that you were buying a $200,000 house.
Your P&I (Principle and Interest) on that loan was $895.48 per month.
Now that same loan is about 4.5% — up roughly 100 basis points in the last couple months, or more than 25% higher.
How much house does your $895.48 buy?
The imputed loss of value in every home in the nation is 11.3%.
The reality is that the support for home prices over the last couple of years has been ridiculous. That alleged “value” never existed. Price diverged from value due to the machinations of banks and The Fed in their puerile (and ultimately futile) attempt to force a continuation of this trend:
Realize that value, when it comes to a home, is found in the number of beds, bathrooms and facilities (e.g. to cook, to wash clothes, etc) that the home provides. That value is invariant with interest rates; your home doesn’t suddenly become more (or less) useful in terms of the number of people it will house, the cuisine it makes easy (or difficult) to cook, or the view it has (or doesn’t) of the water, of mountain ranges, etc. Nor does the number of chickens or goats it will support, or the number of bushels of corn, quarts of strawberries or other crops change with the cost of financing.
If you are under contract now to buy a house you may feel rather smug having “locked” your rate before the most-recent spike. You shouldn’t be.
Your lender will probably try every trick in the book to repudiate the “deal” they offered you. You will probably fight like a rabid dog to force them to close.
You ought to think long and hard about it before you do, because you’re paying $200,000 for a house that in today’s market has a price of $177,395.72 when sold to someone of identical capacity and desire to borrow — that is, to service the mortgage — as you.
I have repeatedly said that I will know when we have returned to a rational financial marketplace and something resembling a free and reasonable market when a house is looked at a durable capital good, not an “investment” or “store of value.” When there is no more talk about how people count on their house as a retirement asset to be bled down as they live out their years and when “reverse mortgages” are no longer something that any financial institution would consider offering. In short, when you buy a house because you want a place to hang your hat, sleep, shower and **** — and are perfectly comfortable with the fact that it depreciates over time, when real estate taxes are a minuscule portion of the current value (or entirely absent) and where the only people looking at Real Estate as a means of “making money” are those who buy property to rent it out and it cash-flows against all operating costs, including maintenance, upkeep, taxes and funding, leaving a black number at the bottom of the cash flow statement.
We’re a hell of a long way from there but we’re going there folks, and if you’ve bought into the premise that we’re not — you’re wrong. If you’ve levered up into that premise, buying into the crap sold you by Bernanke and the “housing” folks this is you: