The media really can spin just about anything. A CBS affiliate in Wichita recently reported that “with home values in Wichita and across the state climbing, more Kansans are ready to purchase a home.” Then the reporter proceeded to use a family who happened to be looking for a home as their example or perhaps “proof”. As someone who tracks this kind of stuff, I found it sort of ridiculous; it’s like saying “Hey, the price of this car just went up, are you ready to buy?” No! I’m not! They probably should have reported that “with home values in Wichita and across the state climbing, more Kansans are ready to sell a home,” and then interview a bunch of people living in apartments to find out why. At least that would make more sense.
Sure, house values are up an average of 4.6 percent in the Wichita area and up 4 percent statewide over the last year. Nationally, they are up as well. The CBS affiliate states that these increases “continue a trend over the last four years with home values up 11 percent since 2012 in Kansas, compared to 24.1 percent nationwide.” But that was it; no real investigation into why or what that really means.
Then they interviewed Dr. Stan Longhofer, director of WSU’s Center for Real Estate and Finance, who I’m sure had more to say than what was reported (because he’s a smart guy) but ultimately appears to agree with me by saying that “this could mean more homes for sale as the rising values mean more equity for homeowners.” He also thinks we could see more homes being built. I could see that and agree with both points. Increasing values will lure home-builders who hope for a solid return and homeowners wouldn’t mind the extra cash, but I am wondering who will buy?
I find it almost amusing that the reporter tried to spin this situation as “That means just for owning a $100,000 home in Wichita over the last 12 months you’re an average of $4,600 richer.” Sure, that is true, but why not consider inflation, debt or interest rates while we are at it? Since the election, mortgage rates have climbed roughly half a percentage point to a 16-month high. No doubt that this is playing into the list of reasons why some families might be in the mood to sell. These mortgage rate increases have added hundreds, sometimes thousands, of dollars to a home buyer’s yearly payments. So even if you were $18,400 richer on your $400,000 mortgage, your monthly payment may have risen almost $700 a month as well. I’m just guessing here but it seems you’re not richer if someone else is not buying and you’re going to want more money if you’re having money issues. What people need to understand is that an increase like this also means that a buyer would potentially be paying that increased amount as well; maybe more. High prices don’t put people into a buying mood normally.
Yes, average hourly wages have raised a little this year, but so have health premiums, energy prices, food prices, and credit card debt. For many, their wage increase will simply not cover the increase of their monthly obligations, let alone a higher mortgage. This creates strain because they have less money after each pay period and the market responds. For homeowners, this means potentially selling the home and moving into an apartment where they can often eliminate the mortgage, water, trash, and other similar costs.
Sometimes, people will just walk away from their home altogether when they can’t find a buyer. That’s not just speculation. In fact, the number of properties with a foreclosure filing, which includes default notices, scheduled auctions and bank repossessions, jumped 27 percent in October compared with September, according to a new report from Attom Data Solutions. Additionally, when the U.S. Census Bureau released its second-quarter estimate of the home-ownership rate, they had this to say: “Home-ownership rate falls to 62.9%, half a percent lower than a year ago and reaching lows not seen in half a century!” Add in the fact that since the beginning of the recession, the amount of rental households has increased by 22% and you have some serious contrast. Essentially, that’s 8.4 million new rental households along with 1.5 million fewer owner-occupied households. This tells me that there are a lot of sellers and fewer buyers; unless you happen to be buying the home to rent out.
The question that should be on everyone’s mind is “why?” SocGen (a multinational banking and financial services company) warned investors this week that the decade-long party in the debt markets “is over.” They are expecting some problems. “Prepare for a serious hangover,” SocGen wrote in a report on Monday.
An “unprecedented build-up of debt” over the past decade will likely worsen the pain and make any bond selloff “more dangerous,” the firm said. While stocks have soared to record highs, behind the scenes there’s been a “violent” wave of selling in the bond markets. The 10-year Treasury yield has skyrocketed to 2.34%, compared with 1.85% on Election Day. You might be asking yourself what this has to do with you. Well, it’s simple. This bond issue is bumping up borrowing costs and it has increased the price of other forms of credit, including mortgages. SocGen thinks this is just the beginning of a larger “unwinding.” I can see why.
That being said, I do agree with Dr. Stan Longhofer on the following: “Generally speaking it really doesn’t matter what the market is doing. If your personal life situation makes sense for you to be buying, it’s probably a good time to buy.” However, I would tell you that the opposite holds true as well. We are living in turbulent times (I don’t care how great the media tells you things are) and we continue to get hints of this truth. You need to make decisions based on your budget, tempered with a worst-case scenario. If you can only afford something with a special low introductory rate, it’s probably not a good idea to pull the trigger. We would all be wise to listen to reason rather than buy into the hype and put our families into a bad position.
Let me provide an example for effect. Back in September and October, I wrote about and mentioned on a few of my podcasts about the auto industry and the potential for a coming crisis. Loose lending practices, riskier borrowers, numerous discounts, low rates and so on, all suggested that the market was either saturated, tapped or primed for a fall. I spoke of the idea that most car purchases were financed and how over $1 trillion in household debt was wrapped up in auto loans (not too dissimilar from our coming credit card crisis). Well, just so that you are aware, automotive debt outpaced all other forms of debt in the second quarter of 2016, according to data from the Federal Reserve Bank of St. Louis. Mix that with higher taxes, wages that haven’t kept up with inflation, credit card debt, student loan debt, higher energy costs, higher food costs, and so on, then add a little projection to it, and it provides an opportunity for disaster. I said it would not shock me at all if a crash in that market were to occur. Unfortunately, I might have been right.
Today, new figures were released by the New York Federal Reserve saying that roughly six million auto borrowers with poor credit scores are at least 90 days late on making their loan payments. Evidently, the problem is growing and the slide has been significant. The Fed described it as a “notable deterioration” and called the problem a “significant concern.” I bring this up because we are talking about buying homes and this auto loan situation is reminiscent of the mortgage crisis.
My advice/opinion: Don’t buy things you cannot afford… this could be a house, a car, or something with a credit card. It’s not worth it. And don’t listen to media that tries to talk you into doing something that could hurt you financially. They will not be there to help you out when you misstep. It seems the media will spin anything these days; don’t let them get you dizzy too.
Just something to think about…