I don't agree, and I will tell you why.
House prices remain obscene
Much to the dismay of current home owners and mortgage institutions, the price of houses remains obscene. How do I define that? According to classical banking doctrine, you never write a mortgage for more than 2.5 times the annual household income of the borrower. According to various estimates, Mode, Mean and Median household income in SoCal hovers between 76,000 and 85,000. That means that price on an average middle class home should $212,500. That should be the price because that is what the market should bare.
If you have conducted a study of housing prices in the San Fernando Valley of SoCal, you know that the price cap on a middle class home is nowhere near $212,500. 1,500 sqft will cost you $350,000. You can touch 2,000 sqft for the sum of $400,000, but you had better be prepared to do some repair work. In good hood, we're talking about a major fixer.
The consequence of this market structure is very simple: Most middle class people do not own homes. Most middle class people are renting. Those who bought are struggling like hell. Many of them are organizing short sales or being foreclosed. That's what's up in my neighborhood.
This brings us neatly to the question: Why lend no more than 2.5 times the household income? Who wrote that law? Why are we bound to this rule? Why not more?
The answer is pretty simple: We are currently living the consequences of ignoring this unwritten law that was pregnant with the wisdom of the elders. A youth group came up about 10 to 15 years ago that did not understand the reason why, they ignored the rules, we saw massive inflation in the price of housing, and now the mortgage industry is going bust as people cannot afford to pay what they owe.
The elders understood that 2.5X was the limit of what financially healthy people could afford to pay in terms of mortgages. Anymore and you begin to cut into their contingency funds, their health care payments, car repairs, etc. This is an unwise move for a banker to make. You can't cut the throat of the milk cow to bleed her from the neck. The cow becomes unhealthy if you do this, and you will loose your milk supply. Bad move.
Old bankers restricted mortgage loans to 2.5x to keep housing prices in-line with buyer means. Old bankers restricted mortgage loans to 2.5x to keep borrowers financially sane. Old bankers restricted mortgage loans to 2.5x to allow mortgage holders to have enough financial space for a decent life after the mortgage payment was made. This rule was best for all concerned.
Now look where the fuck we are. Houses are now unaffordable by the middle class. Most people I grew up with do not own homes, despite the fact that all our families owned homes. I am 43 and I have never owned a home. I have lived in apartments or a barracks for most of my adult life. There was an occasion when I rented a room in Mill Valley... Those who own homes cannot sell them at all, much less at a profit. Those who need to buy homes cannot afford them. The market is frozen. It is not liquid, vibrant, healthy, functional or alive. Prices have simply reached an untenable point.
The solution is simple: Those who wrote imprudent loans are going to take the ass-end of the coin they flipped when wrote the mortgage. They knew they were taking a risk, now the risk has come up snake-eyes. You lose. Of course they do not accept this! I know they are resisting this conclusion ferociously. They don't want to admit that they have a Forrest of bad paper on the books. Nevertheless, the fact is that they do.
The Market is going to get healthy... soon
Banks used the Bush/Obama bailouts to avoid foreclosing on the bad paper they hold. They only forestalled the inevitable. I believe that the foreclosure wave is coming in March 2010. It takes about 90 days to complete the process of foreclosure and put a naked house on the market. The buying season begins June 1, 2010. To be ready for this, I believe that the foreclosure notifications begin to fly in about 6-8 days. A ton of houses will be on the market June 1, 2010.
The prices will begin to fall at that point. Banks are hoping that putting foreclosures on the market at the hot-point will decrease the rate of decrease, but I think they understand that prices are going to fall. Let's hope it is a lot more than the $50K drop limit they are hoping for. A $50K drop will not restore the real estate market to health. To be frank with you, even a $100k drop will not restore the market to health. A drop from $400K to $300K is still well short of $212K. It is better than nothing, but the price is still steep for mode, mean and media people of SoCal. They really cannot afford $300K.
Uncle Sam would like my help
Of course, Uncle Sam is a wholly owned subsidiary of the Financial Houses on Wall Street. Ergo, Uncle Sam would very much like me to exercise my VA loan entitlement to buy an overpriced house and support the unhealthy market price structure right now.
This is the very best thing for Wall Street and for Uncle Sam. Interest rates are low. This means Uncle Sam won't have to give me much leverage in the mortgage interest tax deduction. This means I will ultimately pay more taxes. Also, if I buy at a high rate now, financial institutions will take a lower loss on the property they sell me from their current supply of bad paper. That's good for the financial institution because I will pay them more money.
I don't want to help
You will pardon me if I am a bid selfish, but I don't want to help. I want the market to get healthy from my perspective. I want to pay less taxes and pay less to Wall Street. I will buy after:
- The wave of foreclosures come
- The rate of interest increases, and my mortgage tax deduction increases.
- Prices go down
- I can buy $100k cheaper
