There has been a deluge of articles recently about the upticks in the housing data…[yet, while] I do not dispute the improvement in the data regarding home starts, permits, pending sales, etc.,… [see graph below] these data points are still mired at very depressed levels so the assumption is that if home building is stabilizing then it is only a function of time until home prices began to rise as well. Right? Not so fast.. [Let me explain.]

click to enlarge

The point I want to specifically address today is home prices. After the past few bloody years of price declines, and repeated calls of a housing bottom each year, 2012 proves to be no different with yet more calls for a bottom [- and] why shouldn’t there be? Home prices have declined, according to our NAR/Core Logic Composite Index…, by a whopping 36%. Interest rates are at their lowest levels ever and you can still get low down payment mortgage if you can qualify…[but]…

People Buy Payments – Not Houses

When the average American family sits down to discuss buying a house they do not discuss buying a $125,000 house…[but, rather,] what type of house they need (a three bedroom house with two baths, a two car garage, a yard, etc.) [and] that is the dream part. The reality of it smacks them in the face, however, when they start reconciling their monthly budget.

Here is a statement I have not heard discussed by the media. People do not buy houses – they buy a payment. The payment is ultimately what drives how much house they buy. Why is this important? Because it is all about interest rates.

Over the last 30 years a big driver of home prices has been the unabated decline of interest rates. When declining interest rates were combined with lax lending standards – home prices soared off the chart. No money down, ultra low interest rates and easy qualification gave individuals the ability to buy much more home for their money. The demand for home ownership, promulgated by the Fed, the finance and real estate industry, drove prices far beyond rational levels. Easy credit terms combined with a plethora of pshychological encouragement from home flipping and house decorating television to direct advertisment of the “dream of homeownership” enticed families to bite off way more than they could ever hope to chew.

In 1968 the average American family maintained a mortgage payment, as a percent of real disposable personal income (DPI), of about 7%. Back then, in order to buy a home, you were required to have skin in the game with a 20% downpayment. Today, assuming that an individual puts down 20% for a house, their mortgage payment would consume more than 15% of real DPI. In reality, since many of the mortgages done over the last decade required little or no money down, that number is actually substantially higher. You get the point. With real disposable incomes stagnant as inflationary pressures rise that 15% of the budget is becoming much harder to sustain.

The decline in home prices so far has largely been due to the intial process of the real estate bust and the deleveraging of the American household balance sheet. According to recent data as much as 2/3rds of the sales completed so far have been distressed in some form or fashion. However, the real potential for declines in price come when interest rates began to rise.

At some point in the future interest rates will begin to rise back towards the long term median of 8.9%. From the current 4% rate that is a substantial rise. However, before you guffaw the idea entirely, let me just remind you that 30-year interest rates were almost 7% in mid-2006. Therefore a rise to the long term median is not entirely out of the question – the only debate will be the timing and the trigger of the event.

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With this in mind let’s review how home buyers are affected. If we assume a stagnant purchase price of $125,000, as interest rates rise from 4% to 8%…, the cost of the monthly payment for that same priced house rises from $600 a month to more than $900 a month – a 50% increase. However, this is not just a solitary effect. Since home prices on the whole are affected by those actively willing to sell – the rise of interest rates lead to declines in home prices accross the board as sellers reduce prices to find buyers. Therefore, if the average American family living on $55,000 a year sees their monthly mortgage payment rise by 50% this is a VERY big issue…

See what I mean about interest rates? Since there are only a limited number of buyers in the pool at any given time the supply/demand curve is critcally affected by the variations in interest rates. This is why the Fed has been so adamant to suppress interest rates at very low levels and have injected trillions of dollars to acheive that goal. They understand the ramifications of rising interest rates, not only on home prices, but also on the $3 Trillion in debt they are currently carrying on their balance sheet.

There are basically two possible outcomes from here:

1. Ben Bernanke and gang artifically suppress interest rates for a very long period of time creating the “Japan Syndrome” in the U.S. which leads to rolling recessions and a general economic malaise or
2. interest rates rise back towards more normalized levels as the economy begins a real and lasting recovery.

I am really hoping for the latter. In either case there is a negative and sustained impact to housing going forward. The excesses that were created over the last 20 years will have to be absorbed into the system allowing prices to return to a more normalized and sustainable level.

Conclusion

[There is no doubt]…that home construction, sales, etc. can stabilize at these lower levels…[but] stabilization and a recovery, such as the media is currently hoping for, are two vastly different things. We are very early in the entire deleveraging process and until the excesses are removed from the system the real housing bottom may be more elusive than anyone expects.

*http://streettalklive.com/daily-x-change/646-why-home-prices-have-much-further-to-fall.html

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Related Articles:

1. American/Canadian Home Price Performance Comparisons by Major Cities

The following charts indicate relative performance of US home prices in Phoenix, Los Angeles, San Francisco, Chicago, Las Vegas, New York and Miami to Canadian home prices in Vancouver, Calgary, Toronto, and Montreal. US home prices are reflected in Canadian dollars for comparison purposes. Words: 240

2. Believe it or Not: Australia’s Housing Bubble is Worse Than That in the U.S.

The explosion of Australia’s mortgage debt is viewed by many economists and commentators as the key factor behind Australia’s unaffordable housing [and the primary] reason why Australia’s housing bubble is larger than that experienced in the United States in the mid-2000s. [Another factor is] the strangulation of fringe urban land supply via increasingly restrictive planning processes. [Let me substantiate that contention by comparing the two countries housing situation via a number of descriptive graphs. Words: 817

3. Unlike the U.S and U.K, Canada’s Home Prices Are STILL Rising!

Canada, France and Switzerland stood alone among nine markets measured in recording annual price gains, based on second-quarter data, with inflation-adjusted price increases of 5%, 5% and 4%, respectively, compared to declines of 6% in the U.S., the U.K. and Australia, 10% in Spain and 14% in Ireland. In fact, Canada’s home prices have escalated 44% since 2005 – with a high of 68% in Vancouver – and they are up 7.7% in the past 12 months! Words: 1244

4. Forecast for House Prices is Horrific! Here’s Why

As bad as the housing crisis has been over the past three years, it has only been a warm up to what we have headed our way… [In fact,] the forecast is horrific, to say the least!28% of US homeowners already owe more on their mortgage than their home is worth [and]… 27% of American homeowners are considering walking away from their mortgage…This is going to significantly drive home prices further down. [Let's look at the details.] Words: 657

5. Housing Crash Continues: Why Now Is NOT The Time To Buy!

The housing crash is still in process and here are 10 reasons why it is still a terrible time to buy. Words: 1670

6. House Prices to Decline Further With Forthcoming Dramatic Increase in Foreclosures

If you think home prices have hit bottom and are now headed back up for good, think again! Round two is about to begin. Words: 552

7. Ever Increasing Foreclosures Mean Low House Prices for Many More Years

Anyone who sees a rising pool of millions of delinquent mortgages as the foundation of a recovery in housing valuations isn’t considering the feedback loop which is now firmly in place. The foreclosure pipeline will be full for years to come precluding any “recovery” in housing valuations as supply will swamp demand. Words: 385

8. U.S. Real Estate? Fuhgeddaboudit for Another 5 Years!

Real estate has definitely not bottomed in the U.S., and probably not anywhere else either. You have to take a long-term view of this. At this point in time I am completely uninterested in speculating in U.S. real estate – and I don’t foresee being interested for at least five years. I reserve the right to change my mind, but I think it’ll be at least five years. Words: 1340

The following charts indicate relative performance of US home prices in Phoenix, Los Angeles, San Francisco, Chicago, Las Vegas, New York and Miami to Canadian home prices in Vancouver, Calgary, Toronto, and Montreal. US home prices are reflected in Canadian dollars for comparison purposes.

So say Pacifica Partners (www.pacificapartners.com) an Expanded Real Estate Chart Book report* consisting of 32 charts that summarize trends, key factors, and relative valuations of Canadian real estate in major Canadian centers. Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), presents below just 4 of the pertinent charts for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

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Below are the 4 charts related to US Housing Price Performance vs. Major Canadian Cities:

1. US Home Prices versus Vancouver Home Prices                       

Click Here to view a larger version of this chart.

2. US Home Prices versus Calgary Home Prices                       

Click Here to view a larger version of this chart.

3. US Home Prices versus Toronto Home Prices                       

Click Here to view a larger version of this chart.

4. US Home Prices versus Montreal Home Prices                       

Click Here to view a larger version of this chart.

*http://www.pacificapartners.com/blog/2011/10/24/1488/

Related Articles:

1. Believe it or Not: Australia’s Housing Bubble is Worse Than That in the U.S.

The explosion of Australia’s mortgage debt is viewed by many economists and commentators as the key factor behind Australia’s unaffordable housing [and the primary] reason why Australia’s housing bubble is larger than that experienced in the United States in the mid-2000s. [Another factor is] the strangulation of fringe urban land supply via increasingly restrictive planning processes. [Let me substantiate that contention by comparing the two countries housing situation via a number of descriptive graphs. Words: 817

Canada, France and Switzerland stood alone among nine markets measured in recording annual price gains in home prices, based on second-quarter data, with inflation-adjusted price increases of 5%, 5% and  4%, respectively, compared to declines of 6% in the U.S., the U.K. and Australia, 10% in Spain and 14% in Ireland. In fact, Canada’s home prices have escalated 44%, on average, since 2005 – and 68% in Vancouver – and they are up 7.7% in the past 12 months! Words: 1244

Reports by Canada’s Bank of Nova Scotia, National Bank (see here) and the Canadian Real Estate Association (see here) paint a rosy picture for the housing scene in Canada over the past decade with no declines foreseen, on average, in the near future. Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!) has amalgamated the findings of these three reports and comments on said reports as found in the Globe and Mail into this article to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. 

1. Senior economist Adrienne Warren of Canada’s Bank of Nova Scotia says in her report that:

Canada’s Home Prices (Major Cities) Went UP 5.27% in Last 12 Months

Scotiabank expects housing demand around around the world to remain moribund until the recovery picks up and, while Canada’s real estate market is notable for its resilience and longevity, Warren anticipates, on balance,  a modest slowdown in the volume of sales transactions heading into year-end, alongside relatively flat prices.

 

2. The latest Teranet-National Bank National Composite House Price Index reports that: 

Canadian Home Prices Have Jumped 44.27% Since 20o5

As the chart below shows Canada has not experienced a housing bubble with prices continuing an almost uninterrupted advance as seen in the chart below:

 

Since Teranet first started tracking prices in June 2005 with a base level of 100, home prices have jumped 44.27%. The Vancouver index leads the pack at 167.77, suggesting prices have gone up 67.77% since 2005. Toronto, meanwhile, has the lowest index rating at 131.26, meaning prices have accelerated “only” 31.26% in that time.

House Prices Went UP 1.3% in July in Canada’s Major Cities

Prices were up in five of the six major metropolitan markets surveyed in July:

• Calgary led the pack with a 2.3% increase (+0.9% y/y),
• Toronto was up 1.7% (+4.8% y/y), 
• Ottawa came in at +1.o% (+4.1% y/y),
• Vancouver was up 0.9% (+8.5% y/y), yes, 8.5%!,
• Montreal rose +0.5% (+6.0% y/y) and
• Halifax -0.9% (+3.3%y/y).

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3. The latest Canadian Real Estate Association reports that:

Canada’s National Average Home Price is $349,916 (Canadian dollars)

The national average price for homes sold in August stood at $349,916, down from $372,700 in June. Despite the slowdown, however, prices have nonetheless gained 7.7% in the past 12 months. This number is at odds with the Teranet-National Bank National Composite House Price Index number of 5.27% because that report tracks prices in only 6 of Canada’s largest metropolitan cities whereas the Canadian Real Estate Association (CREA) numbers reflect the sale price of homes in every community across the country regardless of population.

CREA’s chief economist Gregory Klump says,

Earlier this year, the national average price was being skewed upward by sales in some expensive Vancouver neighbourhoods, but this factor is now diminishing. Upward skewing of the national average price is also shrinking due to overall sales trends in Vancouver, and most recently in Toronto…Economic and financial market headwinds outside Canada are keeping interest rates lower for longer [and] those headwinds will likely persist until, and indeed after, fiscal quagmires in the U.S. and Europe are resolved. In the meantime, the Bank of Canada will have ample reason to delay raising interest rates further, which is supportive for the Canadian housing market.

 *http://www.theglobeandmail.com/report-on-business/three-charts-to-start-your-week/article2188519/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Home&utm_content=2188519

Related Articles:

1.  We Can Now Rule Out Another Housing Collapse, Can’t We?

According to both the Case Shiller and RadarLogic indices housing prices have been essentially flat for the past 2 years after having fallen by a third from their 2006/7 highs. [That being said, surely we can now rule out another collapse, can't we? Words: 764

[Click all to enlarge]

 

This next chart shows the Case Shiller index of 10 major markets, with data going back to 1987 and adjusted for inflation. Here we see that prices have fallen some 38% from their 2006 highs and have lost a bit of ground in the past two years.

 

 

Considering that mortgage rates are now at all-time lows (down by about one-third from the levels that prevailed in 2006-07), the effective cost of buying a house in the nation’s large cities has plunged by almost 60% in the past five years.

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Taking into consideration that real median family incomes have been generally rising, while mortgage rates and housing prices have fallen significantly, houses have never been more affordable than they are today, as reflected in the chart below. (The most recent datapoint signifies that a family earning the median income has 176% of the amount needed to purchase a median-price resale home using conventional financing.)

 

 

The housing market has undergone the most painful and wrenching adjustment imaginable. Prices fell by an order of magnitude early in the crisis but have managed to hold relatively steady for two years. The excess inventory of housing is declining daily, since new home construction today is only a fraction of the levels that have prevailed for many decades, and less than what would be needed to keep pace with new household formations.

Perhaps the rebound in housing will take longer than many, including myself, have expected, but surely by now we can rule out another collapse, can’t we? The next surprise in the housing market is likely to be a growth and rising price story, rather than another tragedy.

*http://scottgrannis.blogspot.com/2011/08/housing-price-update-still.html

Related Articles:

1. Forecast for House Prices is Horrific! Here’s Why

As bad as the housing crisis has been over the past three years, it has only been a warm up to what we have headed our way… [In fact,] the forecast is horrific, to say the least!28% of US homeowners already owe more on their mortgage than their home is worth [and]… 27% of American homeowners are considering walking away from their mortgage…This is going to significantly drive home prices further down. [Let's look at the details.] Words: 657

 2. What Caused the Financial Crisis? 3% Down Mortgages or Wall Street Greed?

3%! Simply amazing. 3% isn’t even close to serious. If you are only able or willing to put down 3% you simply aren’t serious about homeownership. It’s laughable…yet by 2007 40% of all mortgages had less than 3% downpayments…Evidence is now pouring in…that the financial crisis of 2008 was nearly exclusively created by government’s misguided interventions and manipulations of the housing market. [Let me explain further.] Words: 671

 3. A Housing Boom is Coming! A Housing Boom is Coming! Here’s Why

Yes, you read that right; get ready for the next housing boom. You’re probably thinking, “How could that be with all the mortgage delinquencies and foreclosures going on, and the record levels of housing inventory? Well, it’s not going to happen soon – [probably] not for several more years – but it’s coming. [Let me explain to you why it is inevitable.] Words: 589

 4. Price:Rent Ratio Suggests House Prices Have Further to Fall

The rat-through-the-snake process of working down existing and prospective distressed properties is likely far from over, and how that process plays out will no doubt have an impact on how much housing prices will ultimately adjust. [Let's take a look at some differing points of view in that regard.] Words: 497

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

 

*http://daviddegraw.org/2011/07/this-is-what-a-collasping-ponzi-scheme-looks-like-housing-market-headed-off-a-cliff-as-a-shocking-10-8-million-mortgages-at-risk-of-default/

Related Articles:

1. Financial Crisis Caused by “3% Down Mortgages” NOT “Wall Street Greed”  http://www.munknee.com/2011/07/financial-crisis-caused-by-3-down-mortgages-not-wall-street-greed/
2. Price:Rent Ratio Suggests House Prices Have Further to Fall  http://www.munknee.com/2011/05/pricerent-ratio-suggests-house-prices-have-further-to-fall/
3.  In Foreclosure? Don’t Worry! Your Bank Probably Can’t Prove They Own Your Mortgage!  http://www.munknee.com/2010/10/in-foreclosure-dont-worry-your-bank-probably-cant-prove-they-own-your-mortgage/
4. Housing Crash Continues: Why Now Is NOT The Time To Buy!  http://www.munknee.com/2010/09/housing-crash-continues-why-now-is-not-the-time-to-buy/
5.  Ever Increasing Foreclosures Mean Low House Prices for Many More Years  http://www.munknee.com/2010/04/ever-increasing-foreclosures-mean-even-lower-house-prices-for-many-years/
6. U.S. Real Estate? Fuhgeddaboudit for Another 5 Years!  http://www.munknee.com/2010/02/5-more-years-of-lower-real-estate-prices/

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

Yes, you read that right; get ready for the next housing boom. You’re probably thinking, “How could that be with all the mortgage delinquencies and foreclosures going on, and the record levels of housing inventory? Well, it’s not going to happen soon – [probably] not for several more years – but it’s coming. [Let me explain to you why it is inevitable.] Words: 589

So says Vahan Janjigian (http://janjigian.blogspot.com/)  in an article* which Lorimer Wilson, editor of www.munKNEE.com (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.  Janjigian goes on to say:

As society creates more households, society needs more houses but, right now, due to the poor economy and the dismal jobs market, household formation is on hold. This is one reason why the housing market continues to remain depressed. Nevertheless, despite all the problems we are seeing today, pent-up demand [for housing] will create the next housing boom…

A household is simply a residential unit. It refers to a person or persons living under one roof. Traditionally, a household has been thought of as a nuclear family. Boy meets girl, boy marries girl, boy and girl buy a house or rent an apartment. In this way, marriage creates more households and demand for more places to live. Divorce, too, creates more households and demand for more housing. People who get divorced do not want to continue living together under the same roof. Households are also formed when children grow up and move out. Most kids can’t wait to get their own place.

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However, much of this activity is currently on hold…Due to the poor economy, some people are postponing marriage. Others are postponing divorce and, as much as they would like to be independent, many grown children are staying put. Some can’t find jobs even after graduating from college, so they are choosing to live with mom and dad just a little longer. Even those lucky enough to be employed are moving in with their parents in order to cut expenses.

Believe it or not, this lack of household formation could be good news for housing in the long run. It means there is a lot of pent-up demand for housing, and chances are it is growing. Current household formation may be depressed, yet potential household demand is strong.

Once the economy begins to pick up steam and more people start to find jobs, household formation will surge. Once that happens, demand for houses and apartments will also surge…

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.

• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.

Housing

So says Chris Mack (www.tradeplacer.com) in a recent article* which Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, has reformatted into edited [...] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Mack goes on to say:

The issue is so serious that last week, Bank of America halted foreclosures in 23 states due to findings that it doesn’t have the necessary documentation to foreclose on owners and has been foreclosing on homes without proof of the note. JPM Chase and GMAC have also already halted foreclosures in a similar move. In order to successfully foreclose, the banks [have been] hiring legal firms to litigate and re-establish their legal right to collect the value of the mortgage. However, this could be time consuming, costly, and the debt may be shifted from being secured by the property to unsecured by judgment.

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Fraud based on Fraud based on Fraud
Whether you have a mortgage that can be enforced is now in question, and by default so are the derivatives based upon the mortgage. The financial engineering and success of mortgage backed securities (MBSs) was based on the idea that mortgages could be pooled and sold to investors. It is now estimated that between 1/3rd and 2/3rds of all MBSs are not backed by a physical mortgage. Banks are simply unable to tie their products to the underlying mortgages. The result is that pensions, banks and other investors of even “high quality” MBSs may be holding near worthless paper. The derivatives based upon non-backed mortgage securities – based upon quasi-enforceable mortgages – based upon fraudulent, undocumented, or lax-documented standards are theoretical at best. Interestingly, this is represented by U.S. dollar deposits.

The Lawsuits Have Just Begun
Banks will sue homeowners for defaulting, homeowners will sue banks for deception, and investors in the mortgage backed securities will also sue for fraud. Pension holders will in turn sue the investment companies holding the worthless paper. The lawsuits have just begun but there may not be enough lawyers, judges, and courts in the world to ever untangle the chain of fraudulent derivatives based on other fraudulent derivatives. Ambac recently filed a $16.7 billion lawsuit against Bank of America, claiming that 97 percent of its securitized mortgages didn’t conform to lending underwriting guidelines.

The Mortgage Market is Now at Risk
With roughly $14 trillion in mortgages outstanding in the U.S., and more than $8 trillion in mortgage securities, a large amount of capital is now at risk – especially if those MBSs are considered leverageable deposits. The consequence could be a halt in mortgage processing for several months, and shutting of title insurance companies which would effectively close the mortgage market. The most likely outcome will be the complete monetization of the industry.

Conclusion
The lesson is clear; if you don’t own real assets then you don’t really own anything. The stampede into gold and silver will continue as investors seek protection from the largest distribution of wealth in history.

*http://tradeplacer.com/blog/2010/10/05/1286303640000.html (Chris Mack is President of Trade Placer (tradeplacer.com) which brings the “Power of Wallstreet on Mainstreet” to its readers. He can be contacted at info@tradeplacer.com.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our FREE Weekly Newsletter.

So says Patrick Killelea (http://patrick.net/housing/crash.html).. Lorimer Wilson, editor of www.munKNEE.com, presents below further edited [..] excerpts from the original article* for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Killelea goes on to say:

1. House prices are still dangerously high compared to incomes and rents
[On one hand] banks say a safe mortgage is a maximum of 3 times the buyer’s annual income with 20% downpayment [and on the other] landlords say a safe price is a maximum of 15 times the house’s annual rent. On the coasts, [however] both those safety rules are still being violated. Buyers are still borrowing 6 times their income and putting only 3% down, and sellers are still asking 30 times annual rent, even after recent price declines.

Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that prices will keep falling for a long time. Anyone who bought a “bargain” this time last year is already sitting on a very painful loss.

2. It’s still much cheaper to rent than to own the same size and quality house, in the same school district
On the coasts, annual rents are 3% of purchase price while mortgage rates are 6%, so it costs twice as much to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting and wipes out any income tax benefit. Buying a house is still a very bad deal in the richer neighborhoods, but it does make sense to buy in some relatively poor neighborhoods where prices have already fallen into line with salaries and rents.

The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you’ll know it’s safe to buy for yourself because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house. If the calculation comes out to 3% or less then do not buy; if it is 9% or better then, [everything else considered,] it is OK to consider buying; anything in between [suggests that any purchase decision] is borderline.

It’s borderline, for example, to pay $200,000 for a house that would cost you $1,000 per month to rent because that’s $12,000 per year in rent while if you buy it with a 6% mortgage, that’s $12,000 per year in interest instead, so it works out about the same. Owners can pay interest with pre-tax money, but that benefit gets wiped out by the eternal debts of repairs and property tax, equalizing things. It is foolish to pay $400,000 for that same house, because renting it would cost only half as much per year, and renters are completely safe from falling house prices.

3. [Upcoming higher interest rates will cause house prices to decline]
House prices rose as interest rates fell, and house prices will fall as interest rates rise, because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. Then you get a low price, and you get capital appreciation caused by future interest rate declines.

To buy at a time of low interest rates and high prices like now is a mistake. It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way because:
1. A low price gives lets you pay it all off instead of being a debt-slave for the rest of your life.
2. As interest rates rise, house prices must fall.
3. Your property taxes will be lower with a low purchase price.
4. Paying a high price now may trap you “under water”, meaning you’ll have a mortgage debt larger than the value of the house and then you will not be able to refinance because then you’ll have no equity, and will not be able to sell without a loss.

4. Leveraged housing appreciation cannot be counted on, and can just as easily work against a buyer, in this environment
Leverage, usually presented as the “secret” to wealth, is the danger that got current buyers into trouble because buyers used too much leverage. Leverage means using debt to amplify gain but most people forget that debt amplifies losses as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.

5. [Market too weak to compensate for selling costs]
House prices do not even have to fall to cause big losses. The cost of selling a house is 6% and on a $300,000 house, that’s $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.

The simple fact is that the renter – if willing and able to save his money – can buy a house outright in half the time that a conventional buyer can pay off a mortgage. Interest generally accounts for more than half of the cost of a house. The saver/renter not only pays no interest, he also gets interest on his savings, even if just a little.

6. [House prices are still not based on] supply and demand
Prices are entirely a function of how much the banks are willing and able to lend… [and the extent to which they are prepared] to acknowledge their losses, or can push their losses onto taxpayers through government housing agencies like the FHA. [As such, to date, the banks are doing their best to avoid give the impression that there are less houses available for sale than is actually the case. When this facade collapses house prices will drop even further in recognition of the true state of the market - over supply and little (or reduced) demand.]

7. Massive and growing backlog of latent foreclosures [will keep real estate market depressed for some time to come]
Millions of owners have simply stopped paying their mortgages, and the banks are doing nothing about it, letting the owner live in the house for free. If a bank forecloses and takes possession of a house, that means the bank is responsible for property taxes and maintenance. Banks don’t like those costs. If a bank then sells the foreclosure at current prices, the bank has to admit a loss on the loan. Banks like that cost even less. So there is a tsunami of foreclosures on the way that the banks are ignoring, for now. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. One day, those foreclosures will wash over the landscape, decimating prices, and benefitting millions of families which will be able to buy a house without a suicidal level of debt, and maybe without any debt at all!

8. [House prices have to come down further for young and lower income people to afford them]
Houses price increases don’t produce wealth, they merely transfer it from the young to the old – from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize. House price inflation has been very unfair to new families, especially those with children. It is foolish for them to buy at current high prices.

9. Retiring boomers will depress house prices further
70 million Americans, born between 1945-1960, are beginning to retire and yet one-third have zero retirement savings. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more.

10. Huge glut of empty new houses will force builders to drop prices even faster than owners
Builders must sell to keep their business going and they need the money now. Builders have huge excess inventory that they cannot sell at current prices, and more houses are completed each day, making the housing slump worse. [That can not be good for the price of houses be they resale or new!]

Conclusion
It is still a terrible time to buy and the only true sign [that the house you are interested in is of good value] is if it is at a price low enough so that you could rent it out and make a profit. Then you’ll know it’s probably time to buy because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk.

[Editors note: Do your own calculations and, based on the above guidelines and rationale, I think you will agree that house/condo prices have much further to go DOWN in price before it makes economic sense to buy.]

*http://patrick.net/housing/crash.html

- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
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In further edited excerpts from the original article* Jeff Nielson (www.bullionbullscanada.com) goes on to say:

With more than one in ten U.S. mortgages (of all categories) already in default, the biggest wave of “adjustable-rate mortgage” re-sets does not begin until next year – and then will remain at that peak level for at least one full year.

While the U.S. government and their media-parrots originally tried to deceive people into believing this was a “subprime crisis” the reality is that all categories of U.S. mortgages (including “prime”) are at the highest default rates in history and it is over the next two years that defaults are guaranteed to get really bad, really really bad.

Do not confuse what I’m saying as meaning that the U.S. housing market will “bottom” in 2011. That is NOT what these numbers say at all. What the numbers say is that the U.S. real estate collapse will stop accelerating some time around, or a little before, then.

After that the U.S. market will have to slowly work through the largest inventory of unsold homes in history – ANYWHERE! Currently, there are over 20 million empty homes in the U.S. Many of these homes have been severely vandalized (or even burned to the ground), but these “assets” sit on the balance sheets of U.S. banksters – at valuations far above what they could ever possibly hope to receive.

Millions of these homes will simply have to be bulldozed to the ground, because there will never be enough buyers for all of them.

After the U.S. housing collapse stops accelerating downward, some time around 2011, the collapse will gradually slow down (over a period of several additional years). At that point, after the U.S. economy has lost over $30 TRILLION of “paper wealth”, and at least 30 MILLION jobs, the U.S. housing market will almost certainly remain depressed for several additional years.

Be well advised: buying a U.S. house today, even with prices already down roughly 30%, would still be one of the worst investments in history. Think about that the next time a U.S. propagandist spouts the word “bottom”!

*http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=430:us-mortgage-crisis-to-get-much-worse-in-2010-11&catid=51:commentary&Itemid=99

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.