To Buy or Rent—Now That Is a Question

I remember when I was in my late twenties the one thing I wanted most was to own a home. My wife had always rented so she, while understanding, was somewhat ambivalent. I persisted and just after we turned thirty we bought our first home in… San Francisco. Yes, the small town on the west coast where home price are now totally and completely nuts. In fact the home we purchased in 1979 was recently sold for 11.66 times the price we paid—yes, totally insanity. (In fact, no improvements have been made to the house since we sold it in 1990, now that’s sad  on many levels.)

But we, like millions of other across the United States, have weathered the ups and downs and the vagaries of the housing marketplace and survived, and most have prospered. Much of our collective net worth is in that humble assembly of stick and stucco. Our hopeful retirement fund is not in some stack of bonds and stocks, but covered by a new composite roof. Such is the state of the financial world in the United States. Much of the rest of the world is confused by this American institution—considering that to pay rent is the norm—not home ownership.

So why aren’t home sales bursting through the roof? There are more potential buyers out there than at any time since the years following World War II. They are wealthier (or have access to family capital), they find that interest rates are incredible low (more than half what we paid in 1979), and depending on the region, reasonably priced.

Some say it’s the amount of debt that the under thirty crowd carries over from college. This may be true. Some say it’s the fear of what they and their families have just gone through during the Great Recession; this may also be true. And some say the culture has changed, ownership means being tied down, beholding to a bank and to sticks and bricks. This may also be true. My guess is it’s all of these and more.

There are changes in automobile ownership; reports are that some in the younger generation are opting out of buying a car. They rent one when they need one—other than that they take the bus or the train. For some this is a smart move—we all certainly know the costs of car ownership. In fact there is a growing trend of renting everything among the youth—thus reducing the baggage that we older types carry around with us. They may be into something here, but this also leads to not saving. And not saving leads to having little left at the end of the month and the end of the year, and most especially the start of retirement.

It is very hard to put your finger on the problem, as this Wall Street Journal article on renters pointed out yesterday. There it is stated that the real reason for not purchasing is lack of money (down payment), income, and debt. I’m shocked; in more than thirty years the reasons for not buying a home are exactly the same reasons we were faced with. Much of what happened in the Naughty Aughties when the government, banks, and builders foolishly messed with market forces and over built, over lended, and then over extended themselves and came very close to collapsing the economy, is now being averted. Steady pacing of construction, more prudent lending, more stringent controls for loan qualifications, and renting will do more to quite economic fears than any government program.

Stay tuned . . . . . . . . .

Musings and Random Thoughts

A few things have washed over the transom during the past few weeks that need to be addressed. While not earth shaking on their own they may prove in time to be significant and profound.

High Speed Rail:

Readers of this blog fully understand my thoughts regarding the high speed rail in California (and most places elsewhere as well). I have traveled thousands of miles on this transit system in Europe; I know what it can do. I also know that it has contributed to the financial problems that beset the European Union. Debt is not a wondrous thing as France, Spain and Italy now know.

Superior Court Judge Michael Kenny judge in California says that the High-Speed Rail Authority cannot spend the Proposition 1A funds until the funding plan is brought into compliance with statutory requirements. Many believe that this cannot happen without spending more money than is available – a viscous circle. But then again most government spending works this way. Spend, spend until you can't turn away. I'm reminded of the story that tells of Teddy Roosevelt demanding more money for his navy and being refused by congress. He sent the fleet to the Philippines with enough funding for a one-way trip, then said if you want the fleet back – fund my navy. You wonder if the same thing is happening here, let's build something that essentially is worthless on its own (29 miles of track in the middle on California that connects nothing to nothing) but then demands to be finished. For a good overview check this out (one minor typo re: billions and millions).  CLICK HERE

I am beginning to hope that the adults are returning to the argument and like the boy along the emperor's parade route who pointed out the deficiencies of the emperor's clothing allowance, we can only hope that the courts continue to lead in this open debate. It is now very obvious that the state senate and assembly  (who are following the emperor's footsteps) should check out their own toga allowance as well.

Housing:

Why is it that the feds continue to think that they need to meddle in housing? Since the post war years of the FHA and other later "Great Society" programs that have morphed into our current miasma of affordable housing, HOPE funds, non-profit do-gooders, Fannie and Freddie, and other anti-market housing groups, housing has been a cyclical disaster.

No other economic component of modern western society is as critical to the personal wealth of a citizen as the ownership of their home. This is true here in the USA as well as almost every other modern society that places value on the house as an asset and a security for the future of the owner. Sadly it is also seen as a safety valve by the owners for government inflation, as prices rise and money is devalued, the home acts as a buffer; that is until it isn't.

This we all have witnessed during the past fives years as a result of the shenanigans of the banks (and becoming more evident every day), the government and its housing policies of free homes for everyone (now even Barney Frank is contrite), and private speculation by builders and citizens alike. There was no hand on the throttle (even if there should have been in an open market). When the system is gamed for political purposes we all lose and this loss has been catastrophic for many.

And it seems that the timing is right to fiddle with the housing controls again. This article in today's WSJ 

has set my antennae tingling. Housing is seen as a playground by the politicians and unfortunately memories are short. If supply is restricted due to high costs of either construction or borrowing only the politically connected non-profits will be building. Eventually (and not too far away) all housing will be built by a non-profit agency sanctioned by the state and the feds that will control who lives there and the debt for the home will be held by federal institutions. Hold on tight, as I have said in previous blogs we are heading for increased housing prices, lack of availability, increased rates, and new federal regulations to fix the problem. Your new landlord will be a government agency.

Stay tuned . . . . . . . . .