Tuesday, March 25, 2008

Housing Market

Glenn Reynolds has an interesting post regarding some of the reasons for the housing market. One reader e-mailed the following:

I seriously believe the glut of real estate-oriented shows on HGTV and TLC is partially to blame. Those networks run endless programs about young couples who build or buy houses, do a few basic upgrades, and then turn around and sell them for unbelievable profits in just a year or two. I think people watch these shows and truly project themselves into them, believing that anybody can make money off any house, at any time and in any housing market. There have been many times where I've seen a house priced way above market value and thought, "That person's seen one too many episodes of 'My House is Worth WHAT?'."

I watch "My house is Worth WHAT?" And I remember one couple who had just bought a new home in the Southwest(Phoenix, I believe). The bought the house mainly to turn it over and reap a profit. It was a newly constructed home and the price they paid was around $400,000.00. They talked a little bit about the financing they chose. They opted for a loan in which they just paid the interest. Their payments were $1,600.00 a month for just interest! Talk about having heads in the sand.

Many on that show are not looking to sell their homes. They want to be able to procure loans to finance things such as their children's education. And while talking about a loan on the value of the house, it comes down to taking out a second mortgage. Dressing it up as a home equity loan doesn't change that fact. And these loans are based on an already inflated value of the home.

There has been much speculation on the some of the programs out there in which a person can buy a home without having a down payment. Many states, such as Mississippi, help with the down payment. From my experience, these programs are beneficial. But certain factors must be met in order for them to work effectively. The lenders and realtors need to stop trying to insist that a potential home buyer can afford mortgage payments that are more than 30% of a person's gross income. Buyers must learn to budget within their means and build up a good credit rating.

Home ownership is one of the lasting dreams of American citizens. But when reality collides with fantasy, problems such as the current sub-prime crisis will occur. If your income is $80,000 a year, you cannot afford that $400,000.00 home. And a home equity loan is just dressed up words for a second mortgage.


Jack said...

I wish that houses out here were available for only $400k.

shira said...

California is a whole other market. On a couple of episodes of one show where home buyers look at three different houses, there have a been a couple from California. I still can't believe that houses around 1,100 sq feet and over 50 years old go for over $500,000.00

Maybe prices will start being more realistic in California.