As you may recall, I aborted my plan to buy a house last year because a) the housing market was still FUBAR, b) prices were still going down, and c) Deflation looked like a real probability, meaning that the value of any house I bought would be declining from the moment I bought it even if the housing market got un-FUBAR'ed. So what's happened in the year since?
- California is still officially a "distressed market", but there's no longer a "distressed market" premium for mortgage insurance. Instead, the mortgage insurers simply require a very high credit score. (Not a problem for me, my credit score was 780 *before* I paid off my last credit card). This means that PMI is now 0.67% rather than 0.96% for a 5% down loan, which puts conventional loans back into play (at .96% an FHA loan was a better deal).
- The backlog of short sales is starting to break up because banks have resumed foreclosures. A house I looked at last year as a short sale was finally foreclosed on and is now for sale as a REO. (It still sucks just as badly now too, which is another issue).
- Banks are now starting to accept conventional loans again for their REO's rather than accepting cash-only offers for far below what they could get if they sold it to someone who needs a mortgage. They still prefer someone who has 10% down but if you have more than 5% but less than 10% you're still in the game, unlike last year when they weren't interested in talking to you.
- Some of these REO's are even halfway decent, unlike last year, when every REO I came across was utterly trashed with holes in the walls, gutted interior with no cabinets or bathroom fixtures, and so forth.
So, am I buying a house right now? Well... no. The reason is simple: I'm not seeing inflation, and without inflation, buying a house makes no (zero) sense because it means my debt will, instead of decreasing in real value over time, will instead *increase* over time. Remember, monetary deflation is the same thing as debt inflation. Without monetary inflation to reduce the value of my debt over time, it makes no sense to pump $40,000 cash into buying a $400,000 home (a typical suburban 3-bedroom home here in the Silicon Valley), because you'll never make the money back. You would need six years of 2% inflation to be able to recapture your investment in the home, and what I'm seeing is instead deflation.
At which point I hear you say "but... but... quantitative easing! Monetary base!" But as I pointed out, only money in the hands of people willing and ready to spend it actually counts as money insofar as the economy is concerned. Money under mattresses -- or stashed in the Fed's electronic vaults -- basically doesn't exist as far as money is concerned. So what's the supply of money actually in people's hands doing? Well... err.... Wal-Mart reports nine quarters of declining sales. And their competitors aren't doing a whole lot better. Uhm, not well, in other words, because if there isn't enough money for people to shop at Wal-Mart for cryin' out loud, people don't have money in their hands. And if money is under a mattress somewhere rather than in people's hands... well.
So, what's going to get me off the ledge and jumping into the housing market again? I need to see some inflation. Some real inflation, not producer price inflation caused by monetary deflation (a phenomenon which I discussed last year). Until I see that, it simply makes no sense to buy a home... and so my money will sit under a mattress, making me part of the problem, not part of the solution. Funny how what's good for the individual is bad for the economy. Paradox of thrift indeed, huh?
- Badtux the Thrifty Penguin