Rethinking Home Ownership / Buyers Get Picky

I may not be able to make a substantive post today, so here are a few national stories of interest that caught my attention in the last couple days.

David Wessel, Wall Street Journal: Rethinking Part of the American Dream

It’s time to have a serious conversation about the American approach to home ownership and mortgages. A system once celebrated for putting so many families into their own homes and for making mortgages so widely available has become, as one housing economist puts it, “a case study in failure.”

Beyond the complexities of securitization, the merits of home ownership tax breaks and the politics of Fannie Mae and Freddie Mac lurk two fundamental issues.

One, the U.S. has for decades overemphasized the virtues of home ownership.

Two, many Americans are addicted to a unique, and costly, strain of mortgage—a 30-year fixed-rate loan that can be paid off at any time without penalty.

The U.S. has long seen home ownership as an unquestioned virtue, dating to a 1918 government “Own Your Own Home” campaign. Herbert Hoover, Franklin Roosevelt, Bill Clinton and George W. Bush all talked as if owning a home was the only way to join the middle class. Not only did it promote social stability—recall Mr. Bush’s “ownership society”—and build well-maintained neighborhoods, home ownership became a hedge against inflation and a way to save for retirement. Until it didn’t.

Personally I think home ownership is great—as long as it is done right. That means buying a home you really want to live in, not one you think will make you a bunch of money. It means buying a home you can afford, even if a few unexpected expenses come up or you’re out of a job for a few months. And it means eventually paying off your mortgage, not trading houses every few years and re-starting yet another new 30-year interest cycle.

David Streitfeld, New York Times: Housing Market Slows as Buyers Get Picky

Before the recession, people simply looked for a house to buy. Later they got squeamish just thinking about buying. Now they are on a quest for perfection at the perfect price.

Exacting buyers are upending the battered real estate market, agents and other experts say, leading to last-minute demands for multiple concessions, bruised feelings on all sides and many more collapsed deals than usual.

It is a reversal of roles from the boom, when competing buyers were sometimes reduced to writing heartfelt letters saying how much they loved the house and how they promised to eternally worship the memory of the previous owners. These days, it is the buyers who are coldly seeking the absolute best deal while the sellers are left in emotional turmoil.

“We see buyers who must have learned their moves from the World Wrestling Federation,” said Glenn Kelman, chief executive of the online broker Redfin. “They think the final smack-down occurs at the inspection, where the seller will be reluctant to refuse any demand because the alternative is putting the house back on the market as damaged goods.”

Everyone expected the housing market to suffer at least a temporary hangover after the government’s $8,000 tax credit expired, but not necessarily this much. Preliminary data from around the country indicates that the housing market began swooning last month immediately after the credit was no longer available. In some places, sales dropped more than 20 percent from May 2009, when the worst of the financial crisis had subsided.

To me it makes perfect sense that buyers should be the ones in the driver’s seat. After all, they’re the ones coming to the table with a giant wad of (borrowed) cash. Why shouldn’t they be able to be picky?

And as far as the sudden drop in sales post-tax credit… Duh.

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

41 comments:

  1. 1
    hoary says:

    Good post The Tim. I agree that it’s OK to buy a home right now if your plan is to live in it.

    Real estate investing and greed (mostly greed) fucked the economy and it really pisses me off. I do buy into the notion that owning a chunk of land with hearth and home is part of the American dream. I’m sad it has been securitized.

  2. 2
    JChristoph says:

    People owning homes is great, and it IS a virtue, and many citizens owning homes IS what our country should set as a goal.
    But this is what happens when the government interferes with an otherwise free market.
    The irony, is that if the government had not interfered, MORE people would be able to own homes. It is the ease of which people can qualify, which generates artificial demand that would be there otherwise (the capability to purchase) and makes prices skyrocket. Thus making the citizens even moreso depend on government intervention. Bush was as bad as a democrat.
    This is the socialist agenda. Create handouts that aren’t sustainable, so that citizens perpetually depend on big daddy gov for money.
    Like a child that never had to work for anything, they will continually have to phone home to get another handout because they never learned work ethic and independence.

  3. 3
    JChristoph says:

    RE: JChristoph @ 2
    And my main point was that even those that do have hard work ethic get screwed because their hard work isn’t even enough! There is a relatively fixed supply. If the government starts interfering and artificially creates demand, hard work is no longer sufficient. Everybody has to start sucking on the government milk.

  4. 4

    The ironic thing is that few buyers want to buy when they can take the time be picky. When a lot of people want to buy the individual buyer has to be fast, lucky or settle.

  5. 5
    LA Relo says:

    Rich at piggington once proposed a concept I’ll never forget: imagine what home prices would be if you had to pay 100% cash up front.

    Imagine how much more disciplined our society would have to be in saving, how much more affordable housing would be, how much more controlled inflation would be, and how much freedom you would have after buying a home outright after saving, even 10 or 15 years.

    It sounds crazy, and there are immeasurable consequences, but it’s a captivating thought. And what difference is it you save even 20 years then buy a home outright, or pay a mortgage for 30?

    Sadly, we have turned into a nation where going into debt is easy, encouraged, and rewarded.

  6. 6
    RoflCatDown says:

    The problem with glutting the market with hundreds of homes that nobody is bidding on, and there are few buyers is the problem of choice. They’ve done study after study after study and the truth really is that the more choices you have, the harder it is to make a decision.

    I’ve looked at 10 different houses, of those I’ve considered 3 as a potential candidate to buy, 2 were eliminated for other reasons, and the remaining just has me twiddling my thumbs a bit because the market conditions, falling (still) house prices, and availability of short-sale/foreclosure homes is rising. People keep predicting a bottom, but truly we don’t know where it lies for this particular area yet. It’s all WAGs and SWAGs. So, the real question is… If you don’t need to buy a house right away for familial reasons why hurry to buy an asset that is actively still depreciating?

    Which, probably sounds like I’m looking at purchasing a home for investment purposes. I’m not, I just don’t want to be on the hook financially should something happen (Job loss, sickness, death, zombie outbreak) and I’m forced to sell at a loss or be foreclosed upon, AND have to pay the difference in value on the home still…

    So, given my choices, why hurry? The longer I wait, the stronger my position to buy becomes.

    Having some pressure (not high) to buy convinces a lot of people to get off the fence and actively and conscientiously consider their decisions without having to build shrines to honor the previous owner.

  7. 7

    RE: LA Relo @ 5 – If everything had to be done with cash, our economy would rival Afghanistan’s. ;-)

  8. 8
    RoflCatDown says:

    RE: Kary L. Krismer @ 7 – I thought they were still mostly using the barter system…

  9. 9
    Lake Hills Renter says:

    After all the ridiculous things I read during the boom — promise to feed the squirrels? really? — please excuse me if I don’t shed a tear for the hardship and “smack down” sellers are going through right now.

    As far as a problem of choice goes, I agree – I still can’t find a house worth buying that a single Microsoft income can afford within a reasonable commuting distance. My problem of choice is still that I have none, housing crash or not. Microsoft has created its own housing bubble.

  10. 10
    Scotsman says:

    It’s a great case study in how much influence government policy has on economics and the structure of society. Think of the change that would come from having only 15 year mortgages with 25% down, or a change in the permissible front-end/back-end ratios.

    Our current economic system with it’s fiat money and reliance of financing requires a certain rate of inflation or growth in order to function. That inflation has led to a whole set of assumptions about the best way to game or beat the system. For decades the answer has been leverage through home ownership- a tax sheltered, highly leveraged path to the “American Dream.” For a whole host of reasons too involved to explain here that process or pathway has now come to an end and won’t be returning anytime soon. It will be interesting to see what evolves to replace it, both in terms of economic impact and societal values.

  11. 11
    Ross Jordan says:

    By LA Relo @ 5:

    Rich at piggington once proposed a concept I’ll never forget: imagine what home prices would be if you had to pay 100% cash up front.

    Imagine how much more disciplined our society would have to be in saving, how much more affordable housing would be, how much more controlled inflation would be, and how much freedom you would have after buying a home outright after saving, even 10 or 15 years.

    It sounds crazy, and there are immeasurable consequences, but it’s a captivating thought. And what difference is it you save even 20 years then buy a home outright, or pay a mortgage for 30?

    Sadly, we have turned into a nation where going into debt is easy, encouraged, and rewarded.

    You’re sort of assuming that housing prices wouldn’t be lower if the home had to be bought for cash. In actuality, I think home prices would be at least 50% off where they are today (if not lower), and would probably only take 5-10 years of savings.

    -Ross

  12. 12
    wreckingbull says:

    RE: Ross Jordan @ 9 – I think you are about right. The same is true with higher education. If we did not have all the toxic, ‘free money’ available, college would cost 1/2 of what it costs today.

    I refuse to donate to the college I attended since their annual tuition increases are completely detached from reality. How can they keep boosting tuition 5-6% a year for decades on end? The government and GSEs just keep lending more money to their students.

    Now a graduate from a private college can easily have six figures of the most toxic form of debt. It is unethical at best, and criminal at worst. Meanwhile, the professors and administrators live the cushy life. I find it quite disgusting.

  13. 13
    CCG says:

    RE: JChristoph @ 2

    Couldn’t agree more, especially that government distortion of the market actually makes people poorer rather than richer.

  14. 14
    SummitSeeker says:

    By Ross Jordan @ 11:

    By LA Relo @ 5:

    Rich at piggington once proposed a concept I’ll never forget: imagine what home prices would be if you had to pay 100% cash up front.

    Imagine how much more disciplined our society would have to be in saving, how much more affordable housing would be, how much more controlled inflation would be, and how much freedom you would have after buying a home outright after saving, even 10 or 15 years.

    It sounds crazy, and there are immeasurable consequences, but it’s a captivating thought. And what difference is it you save even 20 years then buy a home outright, or pay a mortgage for 30?

    Sadly, we have turned into a nation where going into debt is easy, encouraged, and rewarded.

    You’re sort of assuming that housing prices wouldn’t be lower if the home had to be bought for cash. In actuality, I think home prices would be at least 50% off where they are today (if not lower), and would probably only take 5-10 years of savings.

    -Ross

    I don’t think you’d be able to get the same house for 50% less if cash was the only way to purchase. There is a certain cost to build a house that does not vary based on how the house is eventually financed by the buyer, and lack of financing will not decrease the price of housing below the cost to construct it for sustained periods of time. Most likely the quality and/or size of houses would be greatly decreased (I know, hard to believe by looking at the typical Seattle house) to allow a cash purchaser to afford it with ~10 years savings.

    It wouldn’t be some utopia where we all live in our current houses mortgage free. We’d live in shacks.

  15. 15
    RoflCatDown says:

    RE: SummitSeeker @ 14 – Oh I bet you would be able to… It’s just that instead of the Fed Govt subsidizing the mortgage market, they’d just subsidize the lumber industry or something.

  16. 16
    Scotsman says:

    RE: wreckingbull @ 12

    Agreed- the entire pricing model for higher education, especially at the upper levels, is whacked. Easy student loans are the culprit driving price increases, just like the housing bubble. That the loans are on par with tax liens in terms of the difficulty in ever having them discharged or forgiven is one of the greatest banking crimes of our era. What a great example of lobbying power. Lots of changes coming- a forced austerity will do much to help society sort out priorities.

  17. 17
    WaitingForever says:

    RE: Lake Hills Renter @ 9
    My situation exactly.

  18. 18
    The Tim says:

    By Lake Hills Renter @ 9:

    After all the ridiculous things I read during the boom — promise to feed the squirrels? really? — please excuse me if I don’t shed a tear for the hardship and “smack down” sellers are going through right now.

    That was basically my reaction too. Boo-frikkin’-hoo.

  19. 19
    HappyRenter says:

    May I ask a question?

    “Two, many Americans are addicted to a unique, and costly, strain of mortgage—a 30-year fixed-rate loan that can be paid off at any time without penalty.”

    Is David Wessel suggesting that a 15-year mortgage or APR is better?

  20. 20
    The Tim says:

    RE: HappyRenter @ 19 – He’s got a number of complaints about the 30-year mortgage. Read the article, he lays out the problems pretty succinctly. I’d never really thought about the downsides of the 30-year fixed, but I think he makes some good points.

  21. 21
    Pegasus says:

    Analysts believe loan mod redefaults could hit 70%. Ray is right. It is all coming back on the market. No hurry to buy. This could get a lot worse. Run! Run away!

    “Economists and analysts predict redefaults will severely plague loan modifications, including one projection that 70% of all modifications will fail.

    In a recent report projecting the level of shadow inventory in the housing market, Standard & Poor’s analysts noted that they assumed a 70% redefault rate on loan modifications in the study.

    Diane Westerback, S&P’s managing director of global surveillance analytics, told SNL that the previously reported 30% to 40% redefault rates typically only count borrowers after two or three months of payments. A year after the modification, Westerback expects redefaults to hit between 60% and 70%.”

    http://www.snl.com/Interactivex/article.aspx?CDID=A-11342755-13359

  22. 22
    wreckingbull says:

    RE: SummitSeeker @ 14 – I’m not so sure about that. You can still build a good home for $125-$150 square foot. What would suffer would not be quality, but land value. My guess is that it would keep many of the fly-by-night hucksters out of the game too, so I don’t think overall quality would be greatly affected.

  23. 23
    David Losh says:

    RE: The Tim @ 20

    He’s right about the refinance trap. One thing is that you can pay off a 30 year loan in 15 by making the extra payments.

    It’s amazing to me that this idea of paying off the Note has been lost since 1999, or possibly before, but not much before.

    I object to the new wave of Real Estate agents who never saw a down market. Come to think of it, the Loan Originators who are today hawking loans and refinances should be included in the clueless.

    Real Estate can go down in value, and is a liability as long as you owe money on it.

  24. 24
    Ron Nelson says:

    Mother Purchased a House in 1970 for 20,000.
    At that time is was 1/15 of her Boeing Machinist husbands take home..

    Doing the exact same job today that Exact same house would cost 1/2 the Income or take home of the Same Machinist job..

    My Grandfather built homes in Mukilteo in the 1950-1960s, View homes of the Water… It took him the Equivalent of 2 weeks worth of Labor’s Wages to buy a Property- it took a Whole 2 Weeks to start construction on that piece of property, he would round up a couple of friends draw the Plans on a napkin.. I know of about 10 of the Homes personally that he built that are standing today. In fact they nearly all are in the Top tier of the houses in Mukilteo.

    Today it takes about 1 year worth of Red Tape to start construction- in Texas it would take about 2- 3 months at the most, compare our costs to theres~!…. Most the Cost of housing is in my opinion linked to Government Regulation and Red Tape in Seattle…
    Home loans and Creative financing is the Other Half of the High Prices..

  25. 25
    OldGuy says:

    Anybody thinking of sending their children to colleges in other countries? Just wondering if “good” universities that are in other countries have costs are much lower than here in the states.

  26. 26
    JChristoph says:

    RE: Ron Nelson @ 24

    Wow.. The good old days. It’s almost as if everyone was so much richer back then right?
    Nowadays, we’re all just busting our asses, so that we can afford a house. That is essentially our ONLY expense. I earn around 6 figs and still can’t justify most of what’s on the market. I can get a shack, I mean a SHACK in W.Bellevue. Or we can go move where the quality of life is bad, in terms of crime and safety, and commute time.

  27. 27
    Ross Jordan says:

    By SummitSeeker @ 14:

    By Ross Jordan @ 11:

    By LA Relo @ 5:

    Rich at piggington once proposed a concept I’ll never forget: imagine what home prices would be if you had to pay 100% cash up front.

    Imagine how much more disciplined our society would have to be in saving, how much more affordable housing would be, how much more controlled inflation would be, and how much freedom you would have after buying a home outright after saving, even 10 or 15 years.

    It sounds crazy, and there are immeasurable consequences, but it’s a captivating thought. And what difference is it you save even 20 years then buy a home outright, or pay a mortgage for 30?

    Sadly, we have turned into a nation where going into debt is easy, encouraged, and rewarded.

    You’re sort of assuming that housing prices wouldn’t be lower if the home had to be bought for cash. In actuality, I think home prices would be at least 50% off where they are today (if not lower), and would probably only take 5-10 years of savings.

    -Ross

    I don’t think you’d be able to get the same house for 50% less if cash was the only way to purchase. There is a certain cost to build a house that does not vary based on how the house is eventually financed by the buyer, and lack of financing will not decrease the price of housing below the cost to construct it for sustained periods of time. Most likely the quality and/or size of houses would be greatly decreased (I know, hard to believe by looking at the typical Seattle house) to allow a cash purchaser to afford it with ~10 years savings.

    It wouldn’t be some utopia where we all live in our current houses mortgage free. We’d live in shacks.

    Prices tend to inflate to what the market will bear. As someone else mentioned, there’s tons of bureaucratic red tape around the permitting and application process. Some of that red tape would not have built up without the ability for buyer’s to pay. Similarly, the US government has protectionist rules preventing the import of cheaper lumber from Canada. If the cost of wood really made a difference to the affordability of homes, there would be a lot more pressure to remove the protectionist import duties on foreign raw materials (for example). Someone else mentioned land, and this is truly an example of something that is voted up to what the market will bear. If people had to pay cash, there would be far less money on the table and land costs would be way lower (perhaps proportionally close to the inverse of the 5x leverage that buyers have with their down payment).

  28. 28
    Scotsman says:

    RE: OldGuy @ 25

    Looked at some in England and Scotland- a bit cheaper, but not what one would expect.

  29. 29
    ray pepper says:

    RE: Pegasus @ 21

    Pegasus..People will only remain stupid for so long….The Loan Mods are a sham unless they severely reduce principle. They are ALL coming back over the next decade through foreclosure, deed in lieu, and short sales.

    Not a matter of if……Just how long it will take.

    The Pride of Homeownership has been severely harmed for a very long time.

    However, I will say it again. Watch the Fed in the coming years continue to stimulate homeownership and try to curtail people from walking. There will be programs rolled out to keep people in their homes on a wide scale which will anger millions.

  30. 30
    anon says:

    RE: OldGuy @ 25

    You can actually get much better education than even first rate institutions in the US supply in Europe (Germany, which used to be entirely free and now costs almost nothing comes to mind). Better postgraduate research is done in the US, though, and you’ll have to deal with the language barrier.

  31. 31

    Overall the view that buyers have today is much different than the buyers of the subprime era, and I’m thankful for that. Today’s buyer (in general) tends to put more thought into the process and ask more questions than many of those from 2002-2007.

  32. 32
    Pegasus says:

    Rhonda @ 31 Do they ask questions like “Is it true that they aren’t making anymore land?” or “Is it true that housing prices go up forever?” or “If I don’t buy today I will be priced out forever?”.

  33. 33
    HappyRenter says:

    By anon @ 30:

    RE: OldGuy @ 25

    You can actually get much better education than even first rate institutions in the US supply in Europe (Germany, which used to be entirely free and now costs almost nothing comes to mind). Better postgraduate research is done in the US, though, and you’ll have to deal with the language barrier.

    Switzerland has pretty good postgraduate research and you don’t need to learn the language because most (if not all) graduate courses have been switched to English. They also pay a higher salary than in the US, enough to live there and explore the Alps (the Swiss know how to enjoy their free time). I know a faculty at the UW who moved straight from his postdoc in Switzerland to a faculty position here.

  34. 34
    LA Relo says:

    RE: Ross Jordan @ 11

    Actually you’re right one. Prices would be lower. In theory everything probably cost less, but incomes would be lower too. Debt is by nature inflationary. A society with no debt would grow slowly but it wouldn’t have the financial problems we have.

  35. 35
    Tsuru says:

    You know, I still don’t understand the problem that people have with renting. If you’re worried about losing your money – and if you ask me it’s a perfectly valid concern – you lose nothing by waiting until the economy as a whole shows some signs of stabilizing. The economy basically exploded and the chunks of debris are still raining down all around us – why not for the chunks to get a little smaller and a little less frequent before dropping your substantial hard-earned savings on what you know will be a depreciating asset. I think the fact that the poster felt the need to rationalize the knowledge that he would lose his savings with some fantasy that his sweaty equity will somehow make up for it speaks volumes here. No amount of granite countertops or shrub trimming is going to bring back lost equity.

  36. 36
    HappyRenter says:

    Which countries put the highest percentage of their GDP into R&D?

    http://en.wikipedia.org/wiki/Research_and_development:

    1) Israel (4.53%)
    2) Sweden (3.73%)
    3) Finland (3.45%)
    4) Japan (3.39%)
    5) South Korea (3.23%)
    6) Switzerland (2.9%)
    7) Iceland (2.78%)
    8) United States (2.62%)

    Embarrassingly, the United States with by far the most expensive college education in the world is at spot number 8. The US is among the best places for doing research but to claim that it is the best is pure arrogance.

  37. 37

    RE: Pegasus @ 32 – a common question that I’m asked now is if I think prices have bottomed out… which it’s hard for me to say. I think we’re bumping along the bottom. They ask about rates and what’s available for loan programs now knowing that they’re still continuing to tighten guidelines.

    My business has changed quite a bit since I’ve started blogging (2006) too which could also be a part of why there’s a difference with my clients.

    Before the menatality (in general) was I don’t care what it takes it buy that house. People were buying much nicer starter homes than I would have ever dreamed of. I would try to tell them to picture if one of them were to lose their jobs–would they be comfortable making the payment, etc. RE Agents would often tell me this wasn’t my job–my job was to find a loan and if I had an available loan, it was not for me to provide advice. (I don’t work with those agents anymore since we didn’t see eye to eye).

    Everyone once in a while I’ll still have someone who wants to be a home buyer surprise me because they don’t qualify and shouldn’t buy…it’s can be a like a flash back to that era.

  38. 38
    Pegasus says:

    Rhonda You do realize that was an attempt at humor by reciting all of the tired stereotyped real estate agent clichés?

  39. 39

    I think those days just drove me nuts so it’s hard to laugh at… thanks for clearing that up :)

  40. 40
    mking says:

    By Tsuru @ 35:

    You know, I still don’t understand the problem that people have with renting. .

    from a personal perspective, its becasue finding a nice, well priced rental is challenging. i found one 3 years ago, and the owner is being foreclosed on in 3 weeks. we know we can stay for 3 months, after that we are not sure where we will land. we look at homes both to buy and to rent. the rentals we see in renton/kent are either long term rentals that are not all that well kept, or sellers of newer homes hoping to hang on till the market turns by renting property they would rather sell. if i cant find a house i am willing to buy b4 we are forced to move, i will rent again. having been both a homeowner and a renter, i prefer the stability of owning, but decided 3 years ago to defer buying. in the area we are looking to rent, the price differential between aggressively priced sale properties (foreclosures) and the majoritiy of rentals is very small, well below traditional guidelines indicating buying is better than renting. not sure those traditional standards apply to the current market.

  41. 41

    RE: mking @ 40 – There are some sweet deals out there renting. You often have to know the right person, or get lucky, etc. Or perhaps even fix the place up on your own dime. They certainly are not the norm.

    Sweet deals can also screw you. That property I wrote about earlier today where the agent listed a 2 bedroom as a 4 bedroom, that was rented on a very sweet deal. Then the owner died. The tenant was VA qualified. If he had bought instead we would have been much better off, given the extreme leverage a VA loan offers. But that’s with 20/20 hindsight. Buying using VA in 2007/2008 (when he left) would have been just the opposite.

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