The Volokh Conspiracy - Home Buying Update:

I've run into a bunch of acquaintances and VC readers lately, many of whom have asked me, remembering previous posts on the subject, whether my wife and I have bought a house yet. The answer is no. We made one offer in May on a four-bedroom house a mile from the Ballston metro with a swimming pool, but lost it to a family that was willing to waive the home inspection contingency. Since then, we've been looking off and on, hoping that the market calms down meanwhile. Fortunately, it seems to be doing that. We've noticed that houses are staying on the market longer, and that they are often selling for prices below asking. Agents have told us that the $800,000+ market in Arlington has slowed to a crawl, many more sellers than in the Spring are lowering their asking prices, and an agent yesterday told us that housing prices in Northern Virginia are falling, "I see it every day." Hopefully, this means some sanity is returning to the market.

As much as I would like to see a major price decline before I buy a house, I don't know that the economy could stand it, so I guess we'd all better hope for a "soft landing." Following the news about the real estate market over the last few months is worrisome, because media reports seem to make it clear that many paople are buying houses they can't really afford; indeed, the family we lost our house put no money down (a 100% mortgage), only had $2,000 in earnest money, and asked for $12K in closing cost help. Quite remarkable for someone in such apparent financial condition to be buying a house in the mid-six figures. Worst of all is that some people are buying houses with no money down, interest-only, adjustable rate mortgages. When the rate adjusts, some of these folks aren't going to be able to afford their payments. Media reports suggest that their plan under those circumstances is to simply "flip" their house and buy a new one with the "profits" serving as a down payment. But what if there aren't any profits? And even if the rate never adjusts up much, or the owners have a fixed rate mortgage, if prices go down say, 15%, who is going to stay in a house that has, e.g., a 90K loss when they put no money down and have paid no principal? Better to just declare bankruptcy and walk away from the loss.

Near as I can tell, banks and mortgage companies wouldn't be making these crazy loans but for the fact that they can immmediately resell them to Fannie Mae, which somehow has persuaded itself that its charter of increasing home ownership allows it the luxury of purchasing and holding loans that no one with common sense, much less a decent actuary, would ever make. As I said, we all better hope for a soft landing, because if interest rate go up too much, or prices fall significantly, there are going to foreclosures everywhere. Already, a record percentage of mortgage or in default or behind on payment, and that's in a low-interest environment with rising prices. Shudder.

	[David Bernstein, November 8, 2004 at 5:27pm] Trackbacks Home Buying Update: I've run into a bunch of acquaintances and VC readers lately, many of whom have asked me, remembering previous posts on the subject, whether my wife and I have bought a house yet. The answer is no. We made one offer in May on a four-bedroom house a mile from the Ballston metro with a swimming pool, but lost it to a family that was willing to waive the home inspection contingency. Since then, we've been looking off and on, hoping that the market calms down meanwhile. Fortunately, it seems to be doing that. We've noticed that houses are staying on the market longer, and that they are often selling for prices below asking. Agents have told us that the $800,000+ market in Arlington has slowed to a crawl, many more sellers than in the Spring are lowering their asking prices, and an agent yesterday told us that housing prices in Northern Virginia are falling, "I see it every day." Hopefully, this means some sanity is returning to the market. As much as I would like to see a major price decline before I buy a house, I don't know that the economy could stand it, so I guess we'd all better hope for a "soft landing." Following the news about the real estate market over the last few months is worrisome, because media reports seem to make it clear that many paople are buying houses they can't really afford; indeed, the family we lost our house put no money down (a 100% mortgage), only had $2,000 in earnest money, and asked for $12K in closing cost help. Quite remarkable for someone in such apparent financial condition to be buying a house in the mid-six figures. Worst of all is that some people are buying houses with no money down, interest-only, adjustable rate mortgages. When the rate adjusts, some of these folks aren't going to be able to afford their payments. Media reports suggest that their plan under those circumstances is to simply "flip" their house and buy a new one with the "profits" serving as a down payment. But what if there aren't any profits? And even if the rate never adjusts up much, or the owners have a fixed rate mortgage, if prices go down say, 15%, who is going to stay in a house that has, e.g., a 90K loss when they put no money down and have paid no principal? Better to just declare bankruptcy and walk away from the loss. Near as I can tell, banks and mortgage companies wouldn't be making these crazy loans but for the fact that they can immmediately resell them to Fannie Mae, which somehow has persuaded itself that its charter of increasing home ownership allows it the luxury of purchasing and holding loans that no one with common sense, much less a decent actuary, would ever make. As I said, we all better hope for a soft landing, because if interest rate go up too much, or prices fall significantly, there are going to foreclosures everywhere. Already, a record percentage of mortgage or in default or behind on payment, and that's in a low-interest environment with rising prices. Shudder.