Tuesday, April 8, 2008

Buying New Homes too early in California

Good morning. I found this article amusing. I have tried to warn everyone about buying too early as we try to find a bottom in housing.

The time to buy anything, whether it be stocks or homes, is when no one wants to buy them. Trying to set a bottom by buying when the effects of a credit crunch have not been fully priced in is a fools game in housing.

The bigger the bubble the longer it takes for them to unwind because bubbles are very psychological. If you look at history like the tech bubble, the mania and excitement of making easy money can be addictive and when a bubble pops, it takes months or even years for fundamentals to set in and bring prices back to the norm.

The fundamentals in housing are easy. On average, a house should cost about 3 times your income. Now I realize this seems impossible when you look at the MLS but this is where we are heading wether the sellers like it or not. The banks are broke and the old school lending standards of 20% down and excellent credit will be the rule going forward.

It might take some time but our banks are in deep trouble financially and they will be forced to go back to these lending standards.. The Bank of Japan is already calling for a US federal bailout of the US banks if the private sector cannot save them.

Dont be the buyers like these in Fresno. From Bloomberg:

"Rick Sibulboro pumped his fist in the air enthusiastically. He and his wife, Girlie Sibulboro, had just scored a brand-new home with three bedrooms and three baths next to a lake and waterfalls. The cost: $226,000 -- a far cry from the original price of $359,000.
"We were ready to go up to $250,000,"
said Rick Sibulboro, a retired Navy chief petty officer who lives in Davis. "See my notes? It says, 'To die for.' "

"Lisa Magee jumped up and down, squealing, after her father-in-law bought the home for $320,000. (Its original price was $484,000.)
"Oh, I'm shaking," she said afterward"

My final take:

Lisa may be "shaking" two years from now when the same house next door sells for $200,000 two years from now. Do not get involved with these auctions right now!! It is way too early.

You want to be buying when people are saying they will never buy another house again. They were bidding up these homes over the asking price at this auction. I can almost guarentee that most of these purchases will turn out to be bad decisions two years from now. Inflation pressures and higher interest rates are going to push home prices down further. Remember housing prices are falling at the fasest rate in history according to the Case-Shiller index!

PLEASE be patient. The auctions in '09 will be much cheaper. The whole housing ponzi game is over. If you don't believe me then just look at Bear Stearns who was the number two player in the housing game. Look at the stock prices of Countrywide and Washington Mutual. The business model of real estate is broken. Let housing prices reflect this before buying.

1 comment:

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