Serving the Pioneer Valley of Western Massachusetts
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Serving the Pioneer Valley of Western Massachusetts |
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| Letter to a Friend Buying on the Cape: Don't!
by DAVE HOPKINS Here's an excerpt from a letter I just wrote to a friend on the Cape (Cape Cod) who asked for advice on whether she should buy a house now: There are 170 single-family houses on the market in Yarmouth Port alone. This seems like a lot of inventory. Plus there is shadow inventory held off the market temporarily with foreclosure moratoria and sellers waiting for the market to improve, or sellers who have just given up trying to sell for the time being. Many folks too would like to move on with their lives but can't because they owe more on their house than it is worth and would have to come to the closing with a big check. Since that is not an option, they are resigning themselves to staying put. We have friends in Marston Mills who want to move out to Western Mass. and can't for this reason.
If the Obama team stops shoring up
the mortgage-backed security market, you could have a downward tailspin of
home prices, and interest rates could rise sharply. So there is a good
chance that prices could fall another 20 percent by the end of 2011. The
very worst-case scenario is that prices retrace all the way back to 1998
levels, when the real estate boom began. The government is trying to stave
this off by borrowing from the future to keep inflated property prices high.
So what to do with all this gloom
and doom? Follow your intuitions. In your shoes, with the knowledge I have,
I would wait 2 years to buy, as there will be firesales then and you will
get much more for your money. Interest rates may be higher, but I'd rather
take a $150K loan for 8 percent interest than borrow $300K at 5 percent.
Don't think of the monthly payment too much. Keep in mind that you have to
pay this money back, that the market has been going up for over a decade
because of financial gimmicks like mortgage-backed securities (bundling up
mortgages and selling them to investors around the world, taking the
latter's money and making new loans, and new bundles of mortgages). You
really don't want to be over your heads in debt if the general economy heads
south for a decade or more (as happened in Japan, where they did the same
thing the Obama team is doing---shoring up troubled banks, allowing these
banks to cover up toxic assets, buying these toxic assets with taxpayer
money, transferring corporate debt to government debt). Japan's property
market peaked in 1989 and has been going downhill every since (with about
nine "recoveries" en route). Unless the Obama team gets serious about
helping working Americans instead of the banks, this is bound to end in
tears.
And the Obama homebuyer tax credit,
in my opinion, is good for the banks, good for realtors, good for sellers,
but BAD for the very buyers who are getting it! Why? Well, they are being
suckered into the market just before it takes a nosedive. The $8K will look
like chump change if you lose $60K on your home value over the next two
years.
I know this probably doesn't jive
with everything you've read in the papers, and heard from your realtor, who
I'm sure means well but is as duped as most people are about the state of
the economy. I'm telling you the same thing I've been telling my buyers all
year, yet I have had an incredibly good year in sales---which tells you how
much my buyers listen to me!
.... But on balance, I would keep
renting if I were you. If you buy, you're not only "paying rent" to the bank
in interest, but you're also running the risk of losing equity for years
together, unable ever to catch up. There is no way you will build equity
here, even if you transform the house. Unlike California, in Mass. you can't
just hand the keys to the bank and tell them they can have the house, and go
down the street and rent a house for a fraction of your mortgage cost and be
free of debt. In Mass. and most other states, the bank can hound you for the
rest of your life for this debt. So don't mortgage the rest of your work
life to the bank without thinking hard and long about it! No house is worth
that!
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