Watch the Dam Burst
I feel like going on a diatribe.
Housing prices have had an inflation rate of 52% in recent years. That means that if you purchased your house between five and ten years ago you can, theoretically, sell it for significantly more than you bought it for, paying off the original mortgage, and leaving you with plenty of money extra to purchase another home. The problem is that purchasing another home is going to be equally expensive and the money you make off of a home purchase can easily be consumed in purchasing another home leaving you, financially, right where you were originally.
On top of making money off of the sale of a home, the proceeds have to be reinvested in another property within 18 months or there are some pretty hefty taxes taken on the money. It seems, to me, that our entire economy has turned from rabid purchasing of the next great tech stock offering (make it rich, quick) to purchasing homes and driving up real estate prices.
Part of what causes this consternation, within me, is reading an article online yesterday where a couple spent in excess of $1,000,000 on a mobile home near Santa Cruz, CA with an ocean view. They don?t own property, they get to pay rent for letting there home sit there, and they paid one million dollars for something that, quite literally, may have originated as beer and soda cans and ended up as an affordable home for people who need a hand up in life. Not for people who have money to burn.
Can you honestly imagine having a million dollars, let alone the disposable income to spend that kind of money on nothing?
What makes me cringe is that there are investment bubbles. A bubble is a trend where many people begin to see that they can make money quick and easy and then begin to manipulate their finances and financing so that they can afford what they would never, in a realistic world, be able to afford. If you cannot afford the payments on a house now you are not going to be able to afford the payments on a house in three, five, or even ten years.
Yes, I understand that people get raises, they change jobs, they maneuver through the job marketplace and become hot commodities and eventually make more money; but if you can?t afford house payments now, you won?t be able to afford them in the future.
If, in the future, you are making more money, then you can purchase a home. But, right now, here, today, if you can?t afford payments now, you can?t afford them in the future.
Some people call the process overextending; others call this putting all of your eggs in one basket. Consider the job market of the past several years: How many people lost their jobs and had to start over in an entirely new industry? For how many was this a real blessing in disguise? Yet, how many are now making even close to what they were before the bubble burst?
These are important considerations. The problem with housing prices today is two-fold. First, the price of a home is growing beyond the ability of the median income family to comfortable purchase. Second, in order to purchase a home people may take interest only loans or to pay more than they can comfortably afford. The trend is very scary because this means that if the buyer gets sick, the buyers family gets sick, something happens, anything happens, and your financial situation will grow worse.
The problem with an interest only loan is that you are paying the interest, only. You are not paying on the principle of the house. In order to build equity (read ownership) you have to pay toward the principle of your home. If you are not paying toward the principle (read, only toward the interest) then by the time you start paying the principle down (three to five years later) you still don?t own that home.
If you don?t have equity in a home then if anything were to happen you could easily find yourself up the creek without, in this case, a place to call home. You can be forced to declare bankruptcy, you can be subjected to attorney?s fees and law suits, you can have your entire life flipped upside down simply by living the American dream, or by purchasing a home.
How does that feel?
Now consider the rise in housing prices and liken this rise (radical) to other variables that have deflated. The stock market (this is repeated over time) and the housing market during the past twenty years. There have been booms and busts. I recall my parents going through a bust and I am watching my siblings purchase during a boom.
When the cost of housing exceeds the ability of the average (mean) consumer to comfortable buy into a home then there is a serious issue. Housing prices, in New Hampshire, backwater, green, beautiful New Hampshire have gotten out of hand. All over the state. The same is true in almost every other state in the nation. There is a problem and there are also going to be a lot of people who owe more, soon, than their house is worth. Just watch it. The bust is coming.