Buying

For the past 12 months, the voices screaming ‘IT IS TIME TO BUY’ have been at their loudest…and during any 12 month period in the last 5 years, the voices had it pretty much right.  According to Case Shiller (the gospel when it comes to home prices), from April of 2012 to April of 2013, home prices in the 20 City Index rose over 12%.  That is the largest gain in home prices in a 12 month period since 2006, and in my opinion, perhaps the most reasonable gain in the history of home pricing since we moved out our caves.

Why do I say this?

Quite simply, we are correcting back to where we should have been in the first place had lending standards never been altered and Wall Street never hijacked the process.  Had we simply continued on the historic 3 – 5% per year appreciation track, we would be right about where we are now.

If you look at the appreciation discussion a bit differently, ask yourself the following question:

Are you better off because of when you bought or because of why you bought?

Imagine this scenario, you have no substantial down payment, a decent but unstable job and serviceable but weak credit.  You walk into Countrywide’s office in the mall and somehow decide that buying a home is a good idea…it is 2003.  By the end of the weekend, you are under contract to buy a newly constructed $485,000 home with 6 bedrooms, his and hers brass bidets, 14′ ceilings on a golf course…and 30 days later, you move in your new home.  By some miracle (the miracle was probably disguised as a job loss, but I digress), you end up selling it in 2007 and renting an apartment downtown.  How much money did you make?  A ton.

Lets say it 2007, you are 27 years old with a graduate degree, a stable job ($85k/year as an managerial consultant) and you have saved up $30k for a down payment.  You shop diligently each weekend for 6 months in numerous neighborhoods.  You decide on a reasonable 3 bedroom home with 1.5 baths in a decent school district.  Your back end DTI is less than 30% (very conservative) and you make an offer, get bid up a bit, and end up under contract and close 45 days later.  In 2012, your company closes down, you lose your job and take a dramatic pay cut on the new one meaning you have to sell and move into an apartment downtown.  How much money did you lose?  A ton.

Lets say it is April 2012 and you land your first job after college.  Your roommate, who works for a commercial contractor, says he will rent a room from you and if you give him 3 months free rent, he will help you paint it.  Your parents, as a gift for your graduation, stake you to a small loan, and you find a 4 bedroom colonial in a decent school district with a HOMEPATH rider on the for sale sign indicating a foreclosed home with incentives for first time buyers to buy.  The home was sold in 2006 for $385,000 and you bought it for $249,000 with a 3.35% 30 year mortgage and about $20,000 all in with closing costs and down payment.  45 days after you move in, the paint is complete, as are the new counter tops and the weeds are gradually being converted back to grass.   You have 2 room mates paying you $500/mo and you make up the difference…maybe $400/mo including taxes.  How much money do you stand to make?  Several tons…

The simple point is, since 2003, WHEN you bought has been far more important to the outcome than WHY, WHAT or WHERE.  This is rapidly changing back to the way it should be where WHY, WHAT and WHERE matter more than WHEN.

As noted earlier, prices went up 12% in the last 12 months and we are still about 20% below the tip top of the market.  However, if you look closely and draw a 3.5-4.5% yearly increase from 1995, do you realize where we are?  We are right about where we should be and I am ok with that.

Housing is not stock and it should not be treated as such.  Housing, while an asset, is the only real appreciating asset that you use on a daily basis.  You do not use your stock certificates as place mats nor do you use your mutual fund prospectus as anything other than a cure for insomnia.  The market gains from ’03-08 were false and driven by underwriting guidelines that were an embarrassment.  Likewise, the subsequent correction from ’08-12 were driven largely by the same idiotic factors (just reversed)…neither of which represented a normal market.

The new market, which will begin sometime in 2014 as the production of new houses catches back up and the Federal Reserve quits buying down our interest rates, will reward the astute buyer and the solid decision makers.  It will reward those who see housing as ‘buy and hold’ and not ‘buy and trade.’  It will reward those with an eye towards design and reward locations ripe with walkable amenities.  The last half of 2013 will prove to be the last 6 month period where it sort of didn’t matter what you bought…just THAT you bought…and the market will make you look like you made a good decision.

So it is a great time to buy and use mortgages to do so as pricing for both is still historically low.

In 6 months, that may no longer be the case.