US Housing Crash Continues – Part 1
Classified as: Personal Finance
As we all can see that US housing crash still continues it is still not a good time to buy. Those who are thinking to buy a home are making a wrong decision they should wait till the prices falls more. I must tell you that falling house prices are the solution to your problems and not the problem itself.
House Prices are Still High
The prices are still dangerously high as compared to the incomes and rents due to this reason house prices will keep falling in most places. It is suggested by banks that a safe mortgage is a maximum of 3 times the buyer’s yearly income. Whereas the landlords suggest that a safe price is a maximum of 15 times the tenant’s yearly rent.
However both those safety rules are still being violated in coastal areas. Although recently the price has been decreased but buyers are still borrowing 6 times their income and sellers are still asking for 30 times annual rent.
Renting is a cash business that shows those rates what people can really pay, and it does not reflects how much they can borrow. It has been proved by the salaries and rents that the prices will keep falling for a long time. Anyone who bought a “bargain” this time last year is already been suffering from a great loss.
It is Better to Rent then to Own a House
It’s still much cheaper to rent a house than to own it. On the coasts, mortgage rates are 6% and yearly rents are less than 3% of purchase price, so to borrow money for a mortgage it costs twice as much than it does to borrow (rent) the house itself.
Worse is the case that, the cost of total ownership which includes taxes, maintenance, and insurance which will be almost about 9% of purchase price, which is equivalent to three times of the cost of renting.
So to purchase a house on the coasts is still a very bad deal for the buyer, but it would be a sensible deal to buy a house in Michigan and some other places where prices have fallen up to that level that they have come in line with the salaries of the people and rents of the houses at these places.
The person who is buying a house will gain some benefit if he is buying a house to rent out. This is the point where the buyer is justified to buy because rent can cover the mortgage and all expenses if necessary, and this will help to eliminate much of the risk.
Best decision is to Buy at Low Price with High Interest Rates
To buy a house when interest rates are low is a very bad decision, like now when interest rates are low. Realtors will never tell you about this fundamental fact which is very shameful. A given monthly payment covers a smaller mortgage at a higher interest rate due to this reason prices fall as interest rates rise.
As prices have fallen these days so interest rates have risen. The only way that you have way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. If you are buying a house at a time when the interest rates are very low then you are making a big mistake.
The better choice would be to buy a house at a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.
Benefits of Buying at Low Price with High Interest Rates
Following are the few benefits of buying at low price with high interest rates:
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First benefit is that with a low purchase price your property taxes will also become lower .
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Second benefit is that a low price makes you able to pay it all off instead of being a debt-slave forever.
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Third benefit that we get is that prices will definitely fall as interest rates rise — potentially trapping you “under water”. Then it will not be possible to sell without a loss or to refinance. Though you get a long-term fixed rate mortgage, then also when rates rises the value of your property will go down. With low price this possibility is minimized.
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