by
Carl Hampton
08/04/2006
With home sales slowing down and condo
prices slipping sellers all across the
country seem unable to get their asking
price.
Christopher Mayer, a Columbia University
economics professor said recently “If
you're expecting a short-term gain, you
should be looking elsewhere," he had
argued for many years that land shortages
and rising populations would translate into
ever-rising prices in the
"superstar" cities like New York
and San Francisco and LA.
With many of the real estate bulls now
waving the caution flag we have clearly
reached the time for a re-think on this
subject. Before we start going down the
“Doom and Gloom” road it should be
understood that owning your own home is
still the corner stone of the “American
Dream” and it will always be that way.
What does it take to fuel that dream, home
prices are normally driven by 3 things. The
first is low interest rates, the second is
the willingness of home buyers to pay for
their idea of the American Dream and lastly
the ability to attract 1st time buyers to
the market.
Let us take a look at Los Angeles as a
market place for home buyers, the average
home sells for 10 times the average salary.
Whatever way you look at it this is
unsustainable, no matter how creative the
banks and lenders become with their new
programs. As it becomes more difficult for
the 1st time buyer to enter the market it
starts to affect “Move Up” market.
The 1st time buyer will normally start with
a one or small two bedroom house or condo
with the hope that price rises will allow
then to “Move Up” to a bigger 3 bedroom
home in a better area within a short period
of time, say one to two years. Slower price
rises or higher interest rates will put the
loan repayments on a new larger home out of
the reach of the buyer and this leads to the
whole market getting weaker.
The Europeans have an interesting system in
place, credit scores have no bearing on the
way they calculate your ability to repay the
loan. Under the banking and home loan laws
you most provide proof of income, once this
is done they will offer you the chance to
finance up to 4 times your income. Most
programs will finance up to 90% of the loan
to value of the property this system seems
to ensure a steady supply of 1st time buyers
along with regular increases in house prices
with affordable loans.
LA and New York are the so called “Super
Star” markets and not really reflective of
the whole county, so your strategy will
largely depend on where you live. Local
markets are affected by many forces like
jobs, the new house market and inflation to
name but a few. Homeowners who hold on to
their homes for a number of years and pay
down their debt do far better than those who
refinance every two years taking out the
equity they have built up, this really is
the Number One Cardinal Sin for homeowners.
The TV and newspapers are jam packed with
advertising that is trying to convince you
to refinance, generally the only people
making any money out of this is the Broker
or Loan Officer.
