Should I Buy a House in 2015?

No one can answer that question for anyone else, but it seems prudent to ask the question in the context of an Echo Bubble in valuations that appears to be deflating.

Readers often ask me if now is a good time to buy a house. This question has appeared in my inbox for the past nine years, as the Housing Bubble reached its climax, burst, and an Echo Bubble arose in its place.

It’s a tough question, as you know, for reasons that are inherent to buying and owning real estate, and to the uniqueness of every household’s finances and needs. So I always start by saying I can’t offer any advice or even suggestions, because everyone’s situation is unique.

In many cases, readers are seeking reassurance that it’s OK to buy a house for reasons other than financial: they’re having another child, their parents need them close at hand, and so on.

This is the dual nature of housing: it is both an enormous financial commitment and home/shelter.

The problem with being an enormous financial commitment is two-fold:

1. The size of the financial commitment outweighs every other expense and risk of capital. Mortgage, property taxes and maintenance typically consume more of the household budget than any other item.

2. Housing is illiquid and the transaction costs are high. If I want to sell $200,000 of Apple shares, the cost is a trivial sum and the transactions is completed in a few seconds, as Apple stock, like most large corporate shares, is highly liquid.

If I want to sell a $200,000 house, the process typically takes months and costs between 7% and 10% of the asking price in commissions, closing costs and fees.

Should I buy a house in 2015? Rather than seek a yes/no answer, let’s try to identify some key reference points to consider.

1. Length of occupancy. If somebody buys a house with a fixed-rate mortgage and has a realistic plan to live in the house for 20+ years, fluctuations in value and demand don’t matter much.

2. The potential consequences of a decline in value if the Echo Bubble pops. If, on the other hand, somebody is buying a house that they plan to sell in a few years to fund their retirement, that’s a very different set of risks.

If somebody buys a house for long-term shelter and location for $400,000, and it drops to $200,000 five years into their ownership, it hurts their net worth but has no real effect on their daily life. As long as they can continue to pay the mortgage, life goes on.

The person who has to sell to fund their retirement, on the other hand, is devastated by the decline from $400,000 to $200,000. Daily life is much harder after the loss of $200,000+ in irreplaceable capital.

3. What else could you do with the capital sunk into a house? One way to consider this question is to consider the relative value of housing in something other than dollars, for example, to price housing in alternative investment options such as gold and stocks.

The website Priced in Gold has some interesting charts reflecting the ratio of gold to housing, as measured by the Case-Shiller Index.

One way to think about this is to ask: how many ounces of gold does it take to buy the median-value home in my area?

As investors, we ideally want to buy assets at their relative bottom and sell them at their relative top, and switch out from fully valued assets into relatively cheap assets.

4. Can you pay all housing costs out of one paycheck? People naturally calculate their ability to pay on their present circumstances, but the possibility of global recession and financial instability should give us pause.

Rather than assume household income will remain stable or increase in the years ahead, it is prudent to consider the possibility that one earner loses their job and is unemployed for an extended period of time.

If the house cannot be paid for out of one income, the household is risking default and loss of all the invested capital should one wage earner lose their job.

This is the problem with the fixed costs of owning a house: the costs are inflexible. The county doesn’t care that you lost your job; the property taxes must be paid or the county will pursue auctioning off your property to pay the tax liability.

Renters can move much more easily than home owners, so one cost in buying a house is a loss of flexibility and the burden of fixed costs.

5. How is housing priced in terms of median household income? Another way of assessing the relative value of housing is to measure the price in terms of median household income. Yes, low mortgage rates means mortgage payments are smaller than they were in previous eras, but income is still the foundation of debt, including mortgages.

Courtesy of Market Daily Briefing, here is a chart of the case-Shiller Index and median household income:

By this measure, housing has never been more expensive. The reason why: household income has stagnated or declined for years while the price of housing has surged:

Meanwhile, home values rose in an Echo Bubble, which is now rolling over:

Home Prices See Biggest Monthly Drop Since Polar Vortex As Case-Shiller Declines For Second Month

Should I buy a house in 2015? No one can answer that question for anyone else, but it seems prudent to ask the question in the context of an Echo Bubble in valuations that appears to be deflating and household income that is potentially at risk of declining further in a global recession that eventually impacts the U.S. economy.


New Year’s Resolution: more rewarding career/job. Get a Job, Build a Real Career and Defy a Bewildering Economy,
a mere $9.95 for the Kindle ebook edition and $15.47 for the print edition.

Facebooktwittergoogle_plusredditpinterestlinkedinmail
This entry was posted in General and tagged , , , , . Bookmark the permalink.
  • Not myself by any means!

    The U.S. Government Is Borrowing About 8 Trillion Dollars A Year By Michael Snyder, on September 29th, 2014

    I know that headline sounds completely outrageous. But it is actually true. The U.S. government is borrowing about 8 trillion dollars a year, and you are about to see the hard numbers that prove this. When discussing the national debt, most people tend to only focus on the amount that it increases each 12 months.

    http://theeconomiccollapseblog.com/archives/the-u-s-government-is-borrowing-about-8-trillion-dollars-a-year

    • Hey You

      The headline is outrageous as is the reality. The people who run governments are typically lacking in objectivity. Most are subjective and have difficulties in relating cause and effect.

  • Only if I could believe these folks would stop meddling and central planning our markets, but we know that will ‘NEVER’ happen!

    How The Democrats Caused The Financial Crisis Starring HUD Sec Andrew Cuomo Barack Obama

    https://www.youtube.com/watch?v=gpj4gcdm_JQ

    Barney Frank Does Not Believe a Housing Bubble Exists Although He Created it 2005

    https://www.youtube.com/watch?v=rgsxtbI9N68

  • Hey You

    Whether a person buys a house may depend upon how that person wants to live and where. With rents climbing and dollars losing value, it may be prudent to invest in a house if such is economically feasible. My wife and I bought a home about 6 months ago. We are happy because the location is right and the neighborhood is pleasant.
    Over our married life, we have owned 3 or 4 home because we felt that such were individual investments at the particular time and were probably more profitable than renting. Over the years, each such investment was timely. Admittedly, it’s difficult to sell a home, but a well chosen house in a good location is salable if priced at market.

  • Susan Walker

    Not sure why people think buying a house is a good investment. Although, it can be for some. Why buy a house if you are by yourself, not stable or not ready? I can see if it was for an investment, then it would make more sense. If you are ready, I would first think about what I can afford for years to come despite economic fluctuations. Numbermode.com is a great tool.

  • Renters can shift much more easily than home owners, so one charge in buying a house is a loss of versatility and the pressure of fixed costs.

    For house cleaning visit: JunkClearance.org

  • Patrick Trombly

    Houses are financed at high LTV and with 30 year amortization, and supply is by definition going to lap demand. All of these factors make home mortgages and home prices extremely sensitive to interest rates. Home values relative to income have risen in lockstep with the increased affordability that falling interest rates provided. When FFR fell faster than the 10 year T, ARM prices fell faster than FRM prices, and purchasers migrated to ARMs – then when ARM prices rose back up in line with FRM prices, there were re-sets, values temporarily dropped, and mortgage defaults rose. Over time, this was offset by the fact that the long term trend was for both ARM and FRM rates to fall, and the de-coupling of FFR vs 10 Year didn’t – until 2002-2006 – last long enough to inflate the refi market or spur a long-term increase in building. From 2002-2006, things were different. The fact that builders are financed at Prime, an FFR-based rate, with carried interest, exacerbated the 2002-2006 bubble on the supply side – – the crash was made worse by virtue of an increase in supply.
    The natural forces at work in the economy are largely deflationary, and have been since the 1980s. The technology revolution, opening up of the former Soviet bloc and China, and trade deals have all weighed against inflation – but they have caused disinflation rather than deflation. This is because the central banks have inflated to offset the deflation, toward a target rate of 2%. Wages are sticky. In a falling price environment, wages do not fall as fast as other prices. The benefit that synergies provide the 99% in a competitive market is real wage gains through nominal wages staying flat while prices fall. The central banks have inflated that benefit away, and instead of lifting real wages it has gone into asset values – stocks, bonds, real estate. That is how the 1% have taken all of the income over the last generation – the central banks’ “war on deflation” – based on the fear of a “deflationary spiral.”
    The basis for that fear is very suspect. Prior to the Depression, falling prices were viewed positively by anyone not long in commodities or real estate. The Depression involved prices falling from inflated levels, as well as very significant tariff hikes which choked off cross-border trade, and unprecedented government intervention in the economy under Hoover and FDR. There is no way to isolate falling prices and label that the cause of the malaise. And there is no other example to which the anti-deflationists point to make their case that deflation is bad.
    Once you accept that deflation is good, the rest of the puzzle falls into place.