Mixed Messages Flood Housing Market, Home Mortgage Borrowers

It’s a great time to buy.

So says the National Association of Realtors.

Alternatively, says NAR, existing home prices in February 2007 were down 1.3 percent when compared with a year earlier.

Unlike stock, there’s no such thing as real estate short-selling, making a sale profit when prices decline. So can this really be a great time to take out a mortgage loan if home values are falling?

The New York Times looked at this issue and concluded that “it’s now clear that people who chose renting over buying in the last two years made the right move. In much of the country, including large parts of the Northeast, California, Florida and the Southwest, recent home buyers have faced higher monthly costs than renters and have lost money on their investment in the meantime. It’s almost as if they have thrown money away, an insult once reserved for renters.”

Increased real estate ownership is a national goal, one that has produced helpful and useful national policies. For instance, we encourage homeownership by tilting the tax system to favor owners. As a property owner you can write off property taxes, you can deduct mortgage interest in most cases and when you sell you can shelter profits of up to $500,000 if married - and $250,000 if single from federal taxes.

We do these things because we believe that ownership gives people a greater stake in local communities and because owning a home affords individuals a certain ego, status and financial standing. We also encourage ownership for a very simple reason:

Money. In additional to all the good qualities associated with ownership, each real estate transaction generates substantial transfer taxes, brokerage commissions, home loan fees, insurance charges and legal fees.

As for renting, not so much. There are no transfer taxes to be paid when someone leases, no closings, no new mortgages, few if any legal fees and only small real estate commissions.

And yet as a society we need renters and we recognize that not everyone benefits from homeownership. Also, not everyone should buy, especially individuals who will be short-term residents in a given community; those with small, declining or uncertain incomes and, often, individuals who live in areas where both jobs and people are leaving.

NAR says it’s a great time to buy or sell because home loan rates are near historic lows, “prices overall have stabilized,” there’s a positive outlook according to Alan Greenspan and during the past decade real estate has been a great investment.

“The national median price of homes bought ten years ago has increased 88 percent. The number of US households is expected to increase 15 percent during the next decade, creating a continued high demand for housing,” says NAR.

The points made by NAR are all true - and each deserves to be examined with some care:

• Interest rates are near historic lows; that means borrowers should grab fixed-rate mortgages rather than elastic ARMs, a form of financing where rates can rise and the advantage of low monthly costs can be lost.

• To say that prices have “stabilized” is a good example of creative wordsmithing. This is a cute expression, but irrelevant. The important issue to check real estate trends with local mortgage brokers because some communities are seeing price increases, some are seeing declines and what happens nationwide may not reflect local market activity.

• Alan Greenspan, the former chairman of the Federal Reserve, is quoted by NAR as saying that “most of the negatives in [the housing market] are probably behind us. The fourth quarter should be reasonably good, certainly better than the third quarter.”

The thoughts of the Chairman Greenspan are no doubt interesting, but quarterly results are for Wall Street and not homeowners. The real question is where local values are headed in five or ten years, something unknown.Click here to continue reading this Real Estate Journal article.