The Housing Bubble - What Buyers Need To Know

By Author: Lawrence Roberts
Total Articles: 4762
Comment this article

During the decline of house prices in the deflation of the Great Housing Bubble, price levels will fall to fundamental valuations of historic levels of appreciation, price-to-rent ratios, and price-to-income ratios. The nominal price declines may be impacted by inflation and monetary policy of the Federal Reserve, but inflation adjusted prices will fall precipitously.

As people put less money toward housing payments either by choice or by tightening lender standards, prices will not be supported at inflated levels. The combination of unemployment, higher interest rates and the elimination or severe curtailment of exotic financing terms will make refinancing more difficult and the resulting unaffordable mortgage payments will put many borrowers into foreclosures adding large amounts of must-sell supply to the market, driving prices lower.

If prices follow their historical pattern, they will fall down to their fundamental valuations by 2011. There are a number of variables which will influence the depth and timing of the decline, and most of the risks are to the downside. There will likely be an overshoot of fundamental ...
... valuations at the bottom. Despite all the nuance and analysis, everything comes down to one simple indicator: to paraphrase James Carville and Bill Clinton, "It's the Foreclosures, Stupid!"

So what implication does all of this have on a future buying decision? Buyers should not count on appreciation. If a buyer needs to factor in appreciation to make the math work on a home purchase, she will buy too early, and she will pay too much. When the cost of ownership is equal to the cost of rental it is safe to buy. Even if prices drop further, which they might, buyers will not be hurt because they will be saving money versus renting. If buyers are counting on increasing rents or house price appreciation to get to breakeven sometime later, they will probably get burned.

Buyers should think about what terms and conditions a future buyer will face. During the bubble prices were bid up to unsustainable heights. Prospective buyers should not purchase when conditions are not favorable. If interest rates are low, debt-to-income ratios are high, and exotic financing is the norm, it is a bad time to buy. It seems counter-intuitive, but a wise buyer wants to purchase when credit is tight and values are depressed. Buyers should be patient and wait for the conditions to be right because a future buyer can pay more when credit is loose and prices are inflated. A house is only worth what a buyer will pay for it.
About Author:
Lawrence Roberts is the author of The Great Housing Bubble: Why Did House Prices Fall?
Learn more and get FREE eBooks at: http://www.thegreathousingbubble.com/
Read the author's daily dispatches at The Irvine Housing Blog: http://www.irvinehousingblog.com/ Visit The Housing Bubble - What Buyers Need to Know.