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Posted by on Sep 17, 2010 in Markets, TG Roundup

Housing Market: Is it Time to Buy?

I received an e-mail today about housing market:

Please talk about your predictions about  housing market (both for buyers and sellers) ….

I said on the show that I will post an article that analyzed this better than I can ever do… Here it is.

This very reliable information comes to you via Caseay Research:

Should You Buy a House Now?

By David Galland, Managing Editor, The Casey Report
Recently, we have had a number of queries about real estate. And no wonder. For starters, real estate prices have come down. Plus, in an environment with next to zero interest rates, the idea of possibly picking up some income-producing property on the cheap holds a certain appeal to some. Then there’s the fact that real estate is very much a “tangible” – and so should hold up reasonably well, should the fiat currency system come undone, as we expect it will before this crisis is over.
The following, from reader and correspondent Ross, considers the issue of home buying from an interesting angle.

    My wife and I have been considering buying/building a house for a while now. After long months of searching, we have had to ask ourselves about the “value” of a home. I say this because my parents in 1972 purchased a 2, 000 sq/ft home for $20,000. That was almost exactly what my father made per year at his job at the time of purchase. Is this ratio one to consider as a prudent homebuyer not trying to live beyond his means? I make about $150,000 a year and can’t imagine purchasing a house here in Pittsburgh for that price and being happy with that purchase.
    My parents sold their home in 2001 for $180,000, which is obviously 9 times what they paid for it. We are looking at homes in the low 300s to purchase, and I can’t imagine the sales price in 30 years being 9 times that price, which would be $2.7 million! So do you see my line of thinking?
    Could hyperinflation cause the price to “appreciate” that same way over time? Is inflation what caused my parents home to return 9 times what they paid for it? The reason I wrote to you regarding this topic is that I thought maybe there was a future missive buried in this line of thinking. Maybe not, but if you have time I would love to hear your thoughts on home purchasing at this time.

In response, I have to point out the obvious, that all real estate markets are local. Simply, unless it’s a mobile home, you can’t pick your home up and move. So, for example, you could offer me a house in downtown Detroit for free, and I wouldn’t take it. But a house up the road from me just traded hands at over a million dollars (for the record, a 25% discount off the offering price). So where, and when, to buy will largely depend on local market conditions… and the value proposition of the real estate on offer.
That said, given the dismal outlook for the U.S. economy and housing in particular, if you’re going to buy today – you should only do it on your terms. Don’t let a real estate agent push you into a quick decision or into raising your bid. Someone might beat your offer, but with the large housing inventory, the odds are good another dream house is available just down the block.
Now, as to the inflation question. If you do the inflation calculation, then based strictly on the government’s debasement of the currency over the last 30 years, the $20,000 that Ross’s parents spent in 1972 is the equivalent of $107,000 today. That they sold the property in 2001 for $180,000 confirms that there was more than inflation going on.
As you can see in the chart just below, while they sold it early on in the housing bubble, by 2001 housing prices – encouraged by the Fed’s loose money policies and a collapse in lending standards – were already on their way to the stratosphere.

3 Comments

  1. It is really good article. Thanks to Mohan to post such article.

  2. National and state deficits are increasing means impending higher property and income taxes, budget cuts, higher interest rates.All this infers lesser disposal money with the family and leaves everything including housing less affordable. I think, housing will be in hibernation for a while.

  3. Prices, inflation, income levels etc have been increasing with population and civilization. I believe as the exponential growth of population becomes linear, the income levels, prices, inflation adjustments become linear and start to fall. Pricing of houses will remain towards the higher edge of a higher middle class income. Regardless of times these two factors will remain more or less proportionate. Hence I dont think housing prices will increase many times from their current levels in future.